Rent Control Act implication on Mergers
As Merger transactions generally involve transferring of all the assets & liabilities of Transferor Companies. This generally includes land, buildings, machinery, debtors, stock, workers, creditors, borrowings and so on.
In some cases assets transferred include Tenancy Rights, which are transferred to the merged company by the transferor company on a going concern basis. This can create some issues when there is assignment of tenancies, as part of the scheme in merger transaction.
Implication of Assignment of Tenancies
Under the Indian Constitution, provision of housing is a state subject. Thus, the enactment and enforcement of rent control laws is the responsibility of the individual states.
Though the “National Company Law Board ” order judgment in rem, but, the sanctioning of such transfer has no powers to override the provisions of the state laws relating to tenancy.
Therefore, tenancy rights cannot be transferred without the permission of the landlord. If such a transfer is made, the landlord may be legally entitled to evict the tenant.
In conclusion, the consent of the landlord is necessary to continue to use the tenanted premises of the amalgamated company.
So, the best way to avoid any legal hassles in Rent Control issues in amalgamation is to take NOC from the landlord.
Case Law: General Radio and Appliances Co Ltd vs MA Khader (1986) 60 Com Cases 1013 (SC)
But, at the same time “High Court” or “Company Law Tribunal” is not bound to hold back its sanction for the prior approval of the Landlord. This was observed in the scheme of merger before the Hon’ble High Court, which did not hold back sanction merely because the prior permission of the landlord was not obtained. It held was held that – so long there was no other problem, it will sanction it and thereafter, it would be a matter between the landlord and the transferor/ transferee (merged) companies.
Case Law: Brooke Bond Lipton India Ltd, Re, (1998) 15 SCL 81 (Cal)
So, assignment of tenancy rights is not automatic but a deed of assignment of leasehold rights will have to be executed as Transferee entity (merged company) will be different from Transferor entity.
There are some peculiar cases where the Company (Transferor Company) engaged in hotel business, was being restructured whereby the acquirer (transferee/ merged company) would undertake necessary acts to revive the company. This included getting the premises vacant as a part of the scheme. In other words, the tenant was to be evicted. Protected by the tenancy law, it would be difficult to achieve this. However, the court held despite the provisions of the state Rent Act, the tenant could be asked to vacate the premises and it was accordingly so ordered.
Case law: Hotel Kandath International Pvt Ltd vs Official Liquidator (1997) Comp LJ 416 (Ker)
Issues to be considered before filling scheme of merger or Amalgamation
- Whether the lease & license agreement provides for transfer of tenancy rights in case of arrangements of merger?
- Options & Alternatives available to the tenant, if the scheme is not ratified by the Land Lord or the Owner of the property?
You can consult us for solution addressing the above issues. And in addition to these we can help you secure business interests & objectives, considering not only the current requirements but also anticipating future business dynamics.