Versus: Efore Anjiv Hanna

SCC Online Web Edition, Copyright © 2020
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2010 SCC OnLine Del 3842 : (2010) 175 DLT 212 : (2011) 161 Comp Cas 382 :
2011 CLC 823
Delhi High Court

BEFORE SANJIV KHANNA, J.
Manju Bagai … Petitioner;

versus
Magpie Retail Ltd. … Respondent.
Company Petition No. 193 of 2007
Decided on November 2, 2010
Page: 213
JUDGMENT
SANJIV KHANNA, J.— Manju Bagai, the petitioner seeks winding up of M/s. Magpie
Retail Limited, the respondent company under Section 433(e) of the Companies Act,
1956 (hereinafter referred to as Act, for short).
2. It is stated that the petitioner is the owner landlady and had rented out
commercial space No. UGF-1, Wedding Souk (now known as Gold Souk), Local
Shopping Centre, Sharda Niketan, Pitampura, Delhi (hereinafter referred to as the
premises, for short) to the respondent company on a monthly rent of Rs. 1,29,580/-
excluding water, electricity charges. The respondent company started paying rent with
effect from 1st November, 2006 and while the same was continuously paid till the end
of February, 2007, the respondent company did not pay the agreed rent for the
months of March, April and May, 2007 and handed over the possession of the premises
on 31st May, 2007. Thus the respondent company is liable to pay rent from March,
2007 to May, 2007 of Rs. 3,88,740/-.
3. The petitioner relies upon Clause 5 of the “Agreement to Lease”’ dated 5th
September, 2006 and submits that the respondent company is liable to pay liquidated
damages in form of rent for a period of 29 months i.e. unexpired portion of the lease of
three years starting with effect from 1st November, 2006. For the sake of convenience,
the said clause is reproduced below:
“5. That this Agreement to Lease shall not be cancelled before the lock-in-period of
3 years. A monthly rent will be liable to be enhanced by 15% of the last paid rent
after every 3 years. In case Tenant surrenders the Unit/Shop/Space before the lock-
in-period then the Landlord/owner will be entitled to the liquidated damages from
Tenant at the rate of rent for the balance period of 3 years' lock-in period. To
illustrate, if Tenant surrenders the Unit/Shop/Space, after 6 months from the date
of offer of the possession of the said Unit/Shop/Space, then he will have to pay the
liquidated damages at the rate of rent for the period of remaining 30 months.”
4. Thus in all, the petitioner claims that the respondent company is liable to pay Rs.
3,88,740/- towards arrear of rent and liquidated damages of Rs. 37,57,820/-; total Rs.
41,46,560/- and interest.
5. Agreement to Lease dated 5th September, 2006 is an unregistered document
and is stamped on Rs. 100/- stamp paper. The contention of the petitioner is that the
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said document is an Agreement to lease and not an Agreement of Lease. The
distinction between the two is well known. Agreement of Lease has the effect of
demise of the property in praesenti. An agreement for/to lease merely entitles the
parties to execute another deed or agreement in future. It does not create any right in
praesenti. It is only an executory agreement in form of a promise to enter into a future
agreement. An agreement of lease requires registration but agreement to lease in
future does not require registration. It does not create any interest in an immovable
property as has been observed by the Supreme Court in Food Corporation of India v.
Babulal Agrawal, (2004) 2 SCC 712.
6. In State of Maharashtra v. Atur India (P) Ltd., (1994) 2 SCC 497 it has been
observed as under:
“24. The facts mentioned above are clearly indicative of an agreement to lease and
not an agreement of lease. The distinction between the two may be
Page: 214
seen first with reference to English law. Woodfall in Law of Landlord and Tenant, Vol. I,
28th Edn., 1978 at page 127 states as under:
‘A contract for a lease is an agreement enforceable in law whereby one party

agrees to grant and another to take a lease. The expressions ‘contract for lease’
and “agreement for lease” is to be preferred as being more definite, agreement
frequently means one of many stipulations in a contract. A contract for a lease is
to be distinguished from a lease, because a lease is actually a conveyance of an
estate in land, whereas a contract for a lease is merely an agreement that such a
conveyance shall be entered into at a future date.’ (Emphasis supplied)
In contradistinction to this, in the case of a lease, there must be words of demise.
On this Woodfall states at page 184 as under—
‘The usual words by which a lease is made are ‘demise’ and ‘let’; but any words
which amount to a grant are sufficient to make a lease. Whatever words are
sufficient to explain the intent of the parties, that the one shall divest himself of
the possession and the other come into it, for any determinate time, whether
they run in the form of a licence, covenant or agreement, are sufficient, and will
in construction of law amount to a lease for years as effectually as if the most
proper and pertinent words had been used for that purpose; for if the words used
are sufficient to prove a lease of land, in whatsoever form they are introduced,
the law calls in the intent of the parties, and moulds and governs the words
accordingly.’
Again at page 185, it is stated—
‘Although no specific words are necessary to create a lease, yet there must be
words used which show an intention to demise, therefore, where, on the letting
of land to a tenant, a memorandum was drawn up, the terms of which were, that
he should on a future day bring a surety and sign the agreement, neither of
which he ever did; it was held, that the memorandum was a mere unaccepted
proposal, and did not operate as a lease. (Doe d. Bingham v. Cartwright)’
25. Hill & Redman in Law of Landlord and Tenant, 17th Edn., Vol. 1 at page 100
dealing with this aspect of the matter states as under—
“DISTINCTION BETWEEN LEASE AND AGREEMENT FOR LEASE
40. (1) A lease is a transaction which as of itself creates a tenancy in favour of the
tenant.
(2) An agreement for a lease is a transaction whereby the parties bind themselves,
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one to grant and the other to accept, a lease.

(3) If the agreement for a lease is one of which specific performance will be granted
the parties are, for most but not all purposes, in the same legal position as
regards each other and as regards third parties as if the lease had been granted.
(4) Whether an instrument operates as a lease or as an agreement for a
Page: 215
lease depends on the intention of the parties, which intention must be ascertained
from all the relevant circumstances.
50. An instrument in proper form (a); by which the conditions of a contract of

letting are finally ascertained, and which is intended to vest the right of exclusive
possession in the lessee—either at once, if the term is to commence immediately,
or at a future date, if the term is to commence subsequently—is a lease which takes
effect from the date fixed for the commencement of the term without the necessity
of actual entry by the lessee (b). An instrument which only binds the parties, the
one to create and the other to accept a lease thereafter, is an executory agreement
for a lease, and although the intending lessee enters, the legal relation of landlord
and tenant is not created.”
7. I have examined and read Agreement to Lease dated 5th September, 2006. The
said document cannot be regarded as Agreement to Lease in spite of the nomenclature
or the heading given to the document. The petitioner has placed reliance on the
introductory clauses which refer to the discussions between the parties prior to
execution of the documents. On reading of the main or recital clauses it is apparent
that the said document is a lease deed in itself in praesenti which was executed on 5th
September, 2006 but the lease was to begin with effect from 1st November, 2006.
Clause 13 no doubt refers to execution of another document but this clause is not to
be read in isolation. Other clauses indicate that the document dated 5th September,
2006 is a lease deed. No other document was executed between the parties. It is well
settled that the document has to be read as a whole in entirety to find out the
character/nature of the said document. The main clauses of the lease refer to the rent,
the date of payment of rent, the security deposit, the right to terminate the rent
agreement, subletting, maintenance charges and interest. It also talks about the
method of termination i.e. how notice of termination was to be issued.
8. The petitioner had written a letter dated 11th April, 2007 to the respondent
making allegation that the respondent company being a tenant as per the rent
agreement dated 5th September, 2006 was in arrears of rent in violation of Clause 2 of
the agreement and asking for the rent for March and April, 2007 within ten days. The
respondent company neither paid the rent nor replied to the said letter. Legal notice
dated 19th May, 2007 was issued on behalf of the petitioner. This notice referred to
Clause 5 of the agreement and has described the agreement as a lease agreement. It
is also stated that there was violation of Clause 12 of the agreement due to non-
payment of the rent and other charges for two months and, therefore, the petitioner
had right to terminate the agreement and claim liquidated damages. Notice under
Section 434(1)(a) and 433 of the Act issued by the petitioner dated 25th June, 2007
states as under:
“(2) The premises were let out to you for commercial purpose at the monthly rent of
Rs. 1,29,580/- (Rupees One Lakh Twenty Nine Thousand Five Hundred & Eighty
Only) per month excluding water, electricity charges, etc. for a initial period of
three years commencing from 1.11.2006 by means of agreement dated
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5.9.2006.
Page: 216
(3) The above said agreement of lease which was duly acted upon by you and our
client inter-alia contained the following clause—
‘para 5: ……………………………………………………………………………..’
(4) That you in violation of the above said clause and without any default
attributable to our client, unilaterally vacated the premises and handed over the
possession on 31.5.2007, without complying with requirements of the above said
clause viz. that you will not terminate the lease or vacate the premises until
expiry of term of 3 years of lease and in case you do so during this period, you
will be liable to pay as a result of violation of the above said amount of Rs.
37,57,820.00 (Rupees Thirty Seven Lakhs Fifty Seven Thousand Eight Hundred &
Twenty Only) which have incurred by you as debt to our client. You have also
defaulted in the payment of monthly rent of premises from March 2007 to May
2007 amounting to Rs. 3,88,740.00 (Rupees Three Lakhs Eighty Eight Thousand
Seven Hundred & Forty Only).”
9. Thus the petitioner did not regard the said document as an agreement to lease
but a lease deed in itself. The document dated 5th September, 2006 being an
unregistered lease deed cannot be relied upon by the petitioner. The tenancy in
question was a monthly tenancy and nothing more. The petitioner cannot rely upon
Clause 5 of an unregistered document. In these circumstances, reliance placed by the
Counsel for the petitioner on the decision of the Supreme Court in Food Corporation of
India (supra) is misplaced and cannot be accepted.
10. Even otherwise the claim for ‘liquidated’ damages is not sustainable. It may be
noted that Clause 5 relied upon by the petitioner uses the term ‘liquidated’ damages
in case the tenant vacates the property during the lock-in period of first three years. It
is a contention of the petitioner that the respondent company, as a tenant, is liable to
pay the balance rent for the unexpired period of the lease of three years. The
distinction between ‘liquidated’ and ‘un-liquidated’ damages is well settled. Mere use
of the term ‘liquidated’ damages in a document cannot be the criteria to determine
and decide whether the amount specified in the agreement is towards ‘liquidated’
damages or ‘un-liquidated’ damages. Amount specified in an agreement is liquidated
damages; if the sum specified by the parties is a proper estimate of damages to be
anticipated in the event of breach. It represents genuine covenanted pre-estimate of
damages. On the other hand ‘un-liquidated’ damages or penalty is the amount
stipulated in terrorem. The expression ‘penalty’ is an elastic term but means a sum of
money which is promised to be paid but is manifestly intended to be in excess of the
amount which would fully compensate the other party for the loss sustained in
consequence of the breach. Whether a clause is a penalty clause or a clause for
payment of liquidated damages has to be judged in the facts of the each case and in
the background of the relevant factors which are case specific. Looking at the nature of
the Clause and even the pleadings made by the petitioner, I am not inclined to accept
the contention of the petitioner that Clause 5 imposes liquidated damages and is not a
penalty clause. No facts and circumstances have been pleaded to show that Clause 5
relating to lock-in period was a
Page: 217
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genuine pre-estimate of damages which by the petitioner would have suffered in case
the respondent company had vacated the premises. No such special circumstances
have been highlighted and pointed out.
11. The decision in the case of Food Corporation of India (supra) is distinguishable.
In the said case a civil suit was filed and there was evidence to show that the plaintiff
therein had performed his part of the contract and altered his position, having
constructed the plinths according to specifications of the defendant i.e. FCI. The
defendant had promised to plaintiff that on completion of the construction, they would
hire the premises for a period of three years but later on backed out. The trial Court
and the finding of the Supreme Court was that the construction was made in
accordance with the design and specification prescribed by the defendant. Therefore, it
was held that the defendant cannot back out from the promise held out and escape
from the liability.
12. It may be also noted that the Doctrine of Unavoidable Consequence or
Mitigation of Damages is applicable in cases of un-liquidated damages. It was
observed in Murlidhar Chiranjilal v. Harishchandra Dwarkadas, (1962) 1 SCR 653, as
under:
9. The two principles on which damages in such cases are calculated are well-
settled. The first is that, as far as possible, he who has proved a breach of a bargain
to supply what he contracted to get is to be placed, as far as money can do it, in as
good a situation as if the contract had been performed; but this principle is
qualified by a second, which imposes on a plaintiff the duty of taking all reasonable
steps to mitigate the loss consequent on the breach, and debars him from claiming
any part of the damage which is due to his neglect to take such steps: (British
Westinghouse Electric and Manufacturing Company Limited v. Underground Electric
Railways Company of London). These two principles also follow from the law as laid
down in Section 73 read with the Explanation thereof. If therefore the contract was
to be performed at Kanpur it was the respondent's duty to buy the goods in Kanpur
and rail them to Calcutta on the date of the breach and if it suffered any damage
thereby because of the rise in price on the date of the breach as compared to the
contract price, it would be entitled to be reimbursed for the loss. Even if the
respondent did not actually buy them in the market at Kanpur on the date of breach
it would be entitled to damages on proof of the rate for similar canvas prevalent in
Kanpur on the date of breach, if that rate was above the contracted rate resulting in
loss to it. But the respondent did not make any attempt to prove the rate for similar
canvas prevalent in Kanpur on the date of breach. Therefore it would obviously be
not entitled to any damages at all, for on this state of the evidence it could not be
said that any damage naturally arose in the usual course of things.”
(Emphasis supplied)
13. A person, therefore, must take reasonable steps to minimize the loss and
refrain from taking unreasonable steps which would increase the loss. Defence cannot
be held liable to pay a loss which the claimant could have avoided or which arises due
to the neglect and failure of the claimant to take such reasonable steps. Damages is
compensation for the wrong suffered by the claimant and the loss
Page: 218
incurred by him but this is subject to the rule that the claimant must take reasonable
steps to avoid their avoidable accumulation. It is difficult to accept that the petitioner
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was unable to rent out the premises for the lock-in period of three years despite the
highly commercially viable location of the premises. Decline in the rate of rent is not
pleaded. The onus in this regard is on the petitioner and no evidence and material has
been placed on record to show that the premises could not be rented out. Even the
date on which the premises was subsequently rented out has not been stated.
14. It is accepted by the petitioner that they had security deposit of Rs. 3,88,740/-.
In the petition and the two legal notices dated 19th May, 2007 and 25th June, 2007 it
is not alleged that the security deposit was required to be adjusted on account of
arrears towards electricity, water or damages caused to the premises. There are no
such allegations or averments. In these circumstances, the security deposit given by
the respondent company to the petitioner can be adjusted towards the rent for the
months of March to May, 2007. No further amount is due and payable by the
respondent company to the petitioner towards admitted liability or debt due and
payable, for the purpose of Section 433(e) r/w Section 434(1(a) of the Act.
15. In view of the aforesaid, I do not find any merit in the winding up petition and
the same is dismissed.
Petition dismissed.
———
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SCC Online Web Edition, Copyright © 2020

Page 1 Tuesday, July 14, 2020

Delhi High Court

Manju Bagai … Petitioner;

‘A contract for a lease is an agreement enforceable in law whereby one party

one to grant and the other to accept, a lease.

50. An instrument in proper form (a); by which the conditions of a contract of

© EBC Publishing Pvt.Ltd., Lucknow.

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