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Civil Appeal No. 6‑P of 1971, decided on 13th December 1973.

(On appeal from the judgment and decree, dated 26‑5‑1969 passed b the Peshawar High Court in S. A. O. No. 35/3 of 1969).

---S. 13 and West Pakistan Relief of Indebtedness Ordinance (XV of 1960), S. 3‑Mortgage‑Simultaneous execution of mortgage and lease deeds by mortgagor‑Held: So‑called rent in lease deed in fact interest payable on mortgage amount‑No relationship of landlord and tenant by lease deed is such circumstance comes into existence -Such lease deed in fact a device under which unscrupulous person as mortgagee tries to recover interest on loan advanced at unconscionable rate‑No amount in excess of twice the amount of sum advanced as loan could be recovered‑Even if a mortgagee leases out mortgaged property to a third person, he is liable to account for sums received by him as rent and if rent charged is more than rate of interest permissible in law he would be required to pay excess amount to mortgagor or to let it off against the mortgage amount- Courts below directed to note observations made in judgment while dealing with cases of such nature.

M. Yunis Shah, Advocate Supreme Court instructed by M. Qasim Imam, Advocate‑on‑Record for Appellant.

Dr. Abdur Raheem, Advocate Supreme Court instructed by Amirzada Khan, Advocate‑on‑Record Peshawar for Respondents.

Date of hearing : 13th December 1973.

Respondents 1 to 4 own a small house in the city of Peshawar. On 8‑4‑1951 in extremely straitened circumstances they mortgaged it to Samandar Khan appellant for a sum of Rs.1500. The mortgage purported to be with possession and there was no stipulation for payment of interest on the principal amount. The real intention of the parties however was that the appellant will charge interest on the sum advanced as loan to respondents at the rate of 80 % per annum. To secure this exhorbitant rate of interest a device was adopted in the form of lease deed executed by the respondents simultaneously with the mortgage deed in favour of the appellant. The respondents undertook to pay rent of the house to the appellant at the rate of Rs.90, per month. One month's rent was deducted by the appellant from the principal amount which was to be accounted for at the termination of the tenancy.

It Is in evidence that possession of the mortgaged house has remained all along with the respondents. Between 1951 and 1954 they paid to the appellant Rs. 3300, as 'rent' at the rate of Rs. 90 per month. No further rent was paid by the respondents to the appellant whereupon he on 1‑4‑1959 filed an application in the Court of the Rent Controller under section 13 of the West Pakistan Urban Rent Restriction Ordinance, 1959 on the ground that they had committed default in payment as Rs. 4860, as rent.

The respondent contested the application for their eviction and maintained that they had already paid Rs. 3300, to the appellant by way of rent while he had advanced to them Rs. 1500, only as loan on the security of the house. The relationship of landlord and tenant was also denied by the respondents as the lease deed executed by them in favour of the appellant was in fact a device to enable him to charge interest on the principal amount at the rate of 80 % per annum.

The application was allowed by the Rent Controller by placing reliance on the lease deed which the respondents had admittedly executed and non‑payment of rent between 1954 to 1959. The respondents being in default of payment of rent their eviction was ordered. An appeal taken by the respondents to the District Judge was dismissed whereupon they filed a second appeal in the High Court.

The appeal was allowed by a learned Judge of the High Court on the finding that a simultaneous execution of the mortgage and the lease deeds showed that the so‑called rent was in fact interest payable on the mortgage amount. In support of this conclusion he placed reliance on a number of decisions from foreign jurisdiction including two judgments of the Privy Council in Panaganti Ramayanimgar v. Sri Raja Volugoti Govinda Krishana Vaehandra Bahadur Varu and others and K. S. Mian Feroz Shah v. Sohbat Khan and others. The application for eviction of the respondents was accordingly dismissed leaving the parties to bear their own costs.

Leave to appeal was granted to Samandar Khan to examine correctness of the conclusion reached by the learned Judge of the High Court that execution of the lease deed by the respondents simultaneously with the mortgage deed did not bring into existence relationship of landlord and tenant between the parties.

On examining the terms and conditions of the mortgage and the lease deed executed by the respondents on 8‑4‑51 we concur in the view formed by the learned Judge that the so‑called lease deed was in fact a device under which the appellant was enabled to recover interest on the loan advanced by him to the respondents at the unconscionable rate of 80 per annum. As such relationship of landlord and tenant did not exist between the parties within the purview of the West Pakistan Urban Rent Restriction Ordinance, 1959. We further find that the agreement of lease was hit by section 3 of the West Pakistan Relief of Indebtedness Ordinance XV of 1960. Section 3 of the Ordinance provides:‑

"3. Powers of Court to limit interest recoverable in certain cases Notwithstanding anything contained in any agreement or any law for the time being in force, no Court shall pass or execute a decree or give effect to an award in respect of debt for a larger sum than twice the amount of the sum found by the Court to have been actually advanced less any amount already received by the creditor."

The term 'debt' includes a loan secured by a mortgagor. Under the aforesaid provisions of section 3 the appellant could not recover from the respondents more than Rs. 2820, i.e., twice the amount advanced by him as loan under the mortgage deed but he had in fact received more when he filed the application for eviction of the respondents on the basis of default in payment of another sum of Rs.4,860.

When the provisions of section 3 of the West Pakistan Relief of Indebtedness Ordinance, 1960 were pointed out to the learned counsel for the appellant, the appellant readily agreed to give up his claim to recover the sum of Rs. 1500, under the mortgage deed dated 8‑4‑1951 as well as to give up his claim for arrears of rent under the lease deed dated 8‑4‑1951. In return the respondents gave up their claim for the excess amount received from them by the appellant as rent and agreed that the parties be left to bear their own costs throughout.

A written compromise incorporating the aforesaid terms has been filed which is subscribed to by Samandlar Khan appellant and Muhammad Masood Khan respondent No. 3 who also holds power of attorney from the remaining respondents. Mian Muhammad Yunus Shah counsel for the appellant and Dr. Abdur Raheem counsel for the respondents have also set their signatures to the written compromise. We have read out the terms of the compromise to the parties and they acknowledged it as correct.

We would have disposed of this appeal by short order in accordance with the terms of the compromise reached between the parties but it appeared expedient to set out the facts of the case in some detail so as to draw the attention of the Courts below to similar devices adopted by unscrupulous mortgagees to recover exorbitant rate of interest in the form of 'rent'. In dealing with the cases of this nature it should be kept in view that a lease deed executed simultaneously with the mortgage deed in fact provides a machinery under which the mortgagee receives interest on the principal amount advanced as loan to the mortgager. More than one legal incidents flow from this situation. For example relationship of landlord and tenant does not thereby come into force in the sense in which these terms are ordinarily understood. Courts have therefore, to be vigilant that in decreeing suits for arrears of rent or giving effect to agreements of lease which are devised to defeat the provisions of law which provides maximum rate of interest which may be charged in secured loans. Even if a mortgagee lease out the mortgaged property to a third person he is liable to account for the sums received by him as rent. If the rent charged is more than the rate of interest permissible in law the mortgagee will be required to pay the excess amount to the mortgagor or let it off against the mortgage amount.

"The appeal is disposed of in terms of the compromise set out above leaving the parties to bear their own costs throughout.

Appeal disposed of in terms of compromise.

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