Breach of Lease Covenant Does Not Void Leasehold Mortgage: MIDC v. Union Bank of India

Introduction

This landmark decision of the Bombay High Court in Maharashtra Industrial Development Corporation (MIDC) v. Union Bank of India (2025 BHC-AS 22207-DB) clarifies the legal status of a leasehold mortgage executed without the lessor’s prior consent. The writ petition arose from a dispute over Plot No. D-9 in the Marol MIDC area, originally leased to M/s. Benelon Industries (BI) in 1979. Union Bank of India (UBI) extended finance to BI and took a leasehold mortgage without obtaining MIDC’s written consent, in breach of the lease covenant. The plot was later auctioned to Kalindi Properties Pvt. Ltd. (KPPL) after BI’s default. MIDC challenged (a) the validity of the mortgage and (b) the auction purchaser’s obligation to pay “subletting” charges it claimed under internal regulations.

Summary of the Judgment

The Bombay High Court dismissed MIDC’s writ petition, upholding the Debts Recovery Appellate Tribunal’s (DRAT) ruling. Key holdings:

A mortgage of a leasehold interest executed in breach of a “no assignment without consent” covenant is irregular but not void ab initio;
Since MIDC never invoked its contractual remedy of re-entry under Clause 4 of the lease, it cannot treat the mortgage as non-existent;
Subletting charges claimed by MIDC from the auction purchaser (KPPL) must be levied only between the date the breach was first noticed (18-Aug-2007) and the auction date (10-Oct-2008);
Any alleged fraud in the underlying recovery decree could not be re-litigated via writ jurisdiction when that issue was never pressed before the DRT or DRAT.

Analysis

Precedents Cited

State of Uttar Pradesh v. United Bank of India (2015 INSC 867): Held that certain mortgages on Nazul land without governmental sanction are void. The Court distinguished it because here the lease itself prescribes a remedy for breach, rather than a statutory prohibition rendering the transaction void.
State of Punjab v. Davinder Pal Singh Bhullar (2011 14 SCC 770): Emphasizes that a decree obtained by suppression of material facts may be voidable for fraud. The Court refused to apply this ratio because the MIDC never raised that contention in the debt recovery forums.
Prakash Fabricators Pvt. Ltd. v. MIDC (2010(3) Mh.L.J. 413): Invalidated an internal circular used to levy subletting charges where no statutory or regulatory power existed. The High Court followed this to deny MIDC’s sweeping charge demands outside the limited period.

Legal Reasoning

The Court applied standard principles of contract and property law:

Under Clause 2(t) of the lease, BI could not create any charge without MIDC’s prior written consent. Breach of that clause did not automatically void the mortgage; it triggered MIDC’s Clause 4 right to re-entry and determination of the lease.
MIDC never served a re-entry notice or terminated the lease, thus affirming that the mortgage remained valid as a contractual right between BI and UBI.
Upon BI’s default, UBI’s recovery proceedings were lawfully transferred to the Debt Recovery Tribunal. The auction purchaser, KPPL, stepped into UBI’s shoes and acquired the same rights UBI possessed.
Subletting charges must derive from a valid rule-making power. The Regulations of 1975 contained no charge-levying provision, and the 2007 circular lacked lawful authority—so only the limited period expressly upheld by DRAT stood.

Impact

This decision will guide:

Public bodies and private lessors in drafting and enforcing lease covenants: they must invoke contractual remedies promptly, or risk validating unauthorized encumbrances;
Banks and financiers dealing with leasehold land: mortgages in breach of lease covenants remain enforceable against defaulting lessees unless and until the lessor terminates the lease;
Auction purchasers under recovery proceedings: their rights mirror the enforcement bank’s rights, insulated from late-raised objections by the lessor.

Complex Concepts Simplified

Leasehold Mortgage: A bank’s charge on a tenant’s leasehold rights—different from fee simple land; lessor consent clauses are contractual, not absolute statutory bars.
Void vs. Irregular: Void means legally non-existent; irregular means enforceable until the contract-based remedy is exercised.
Re-entry Right: A lessor’s contractual power to terminate a lease if the tenant breaches specified covenants, after giving notice and time to cure.

Conclusion

The Bombay High Court has reaffirmed that a lessor’s failure to enforce a breach of a lease covenant does not automatically nullify subsequent mortgages by the lessee. The “no-assignment” clause, when breached, triggers only the lessor’s re-entry remedy; it does not render all downstream transactions void. The judgment promotes certainty in financing leasehold interests and underscores the necessity for landlords to act promptly under their own lease terms. Subletting-charge regimes must rest on clear regulatory authority—internal circulars are insufficient. Stakeholders in industrial land transactions should refine their lease documentation and enforcement practices to align with this principle.