The Supreme Court (SC) has ruled that tenants cannot invoke protection under the Sarfaesi Act unless they can establish that their tenancy existed before the property was mortgaged. This decision, marks a significant clarification in the legal landscape governing the conflict between tenancy rights and the enforcement powers of lenders.

This ruling came in a case where PNB Housing Finance took over a property after the borrower defaulted. A man claimed he’d been living there since 1987, but failed to prove his claim of occupancy before the mortgage was created.

An earlier Calcutta High Court verdict had restored possession of the home to the man. A  bench comprising Justices PS Narasimha and Joymalya Bagchi reversed the High Court’s decision after PNB Housing Finance contested its ruling.

The respondent in the case claimed he had been residing in the disputed property since 1987, based on an unregistered five-year lease. However, the property later came under the ownership of a borrower who mortgaged it to PNB Housing in 2017. When the borrower defaulted on the loan, the lender invoked its rights under Section 13(4) of the Sarfaesi Act, 2002, taking possession of the property—first symbolically, then physically.

The respondent challenged the possession move, citing protections under the West Bengal Premises Tenancy Act, 1997, and the High Court initially sided with him. But the apex court took a different view.

The Sarfaesi Act (short for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) is a law from 2002 that helps banks and financial institutions recover loans quickly and reduce bad debts (known as non-performing assets or NPAs).

The lender doesn’t need to go to court to do this. They can auction or sell the property to recover the unpaid loan. The Act also supports the restructuring of distressed loans and allows banks to bundle and sell bad loans (called securitisation) to asset reconstruction companies.

The bench referred to the precedent set in Bajarang Shyamsunder Agarwal v Central Bank of India (2019), which made it clear that a tenant must furnish documentary evidence such as rent receipts, utility or property tax bills to claim protection under tenancy laws when a property is subject to mortgage.

The court also said that verbal agreements or unregistered leases do not offer long-term protection, especially after the bank issues a notice under the Sarfaesi Act.