Complete legal guide for Lease of Property in India

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A lease of an immovable property means, when the Lessor (Landlord) transfers an exclusive right to the Lessee (Tenant) to occupy and enjoy a specific immovable property for a certain period of time in exchange for certain consideration to be rendered periodically or on specified occasions. The lessee is only granted temporary rights and the ownership of the property lies with the Lessor for all intents and purposes. By a deed of lease signed between the Lessor and Lessee, what is transferred by the Lessor is his right to enjoy the property (subject to the terms of lease) but not any part of the rights of the ownership of the Lessor.

How is Lease different from Leave and License?

Where license encompasses only a limited permission to use a certain property without any transfer of interest, lease is a transfer of interest in the property in favor of the Lessee

The basic difference between lease and leave and license is that under lease, the Lessee generally has exclusive possession of the leasehold property. Whereas in leave and license, the Licensee acquires only right to occupy and use the premises for a fixed period of time and the legal ownership and possession of the property continues to remain with the Licensor. In other words, a license does not create any interest in the property in favor of the licensee.

What are the essential features of a lease agreement?

    The essential features of a lease agreement are as follows:

    • Definition of the lessor and lessee - The agreement should clearly identify the lessor and lessee.
    • Title of the lessor - The authority of the lessor to enter into the agreement must be shown. The lessor may enter into the lease agreement as an owner or as a person properly authorized by the owner.
    • Title of the lessee - Where the lessee has entered into the agreement on behalf of a firm or a company, the source of authority of the lessee (board resolution, etc.) to enter into the contract should be stated in the agreement.
    • Definition of the property - The agreement should identify the property being leased out and should demarcate the actual portion of the property that is being given on lease. This helps avoid confusion about the entitlement of the lessee. The subject matter of lease can only be an immovable property as defined under the Transfer of Property Act, 1882.
    • Term of the lease - The agreement must be clear about the duration of the lease. After completion of the term of the lease, the relationship between the Lessor and the Lessee comes to an end. The Lease should be entered into for a specified period of time and the dates of commencement and termination of the lease needs to be unambiguously mentioned in the lease deed. During the term of the lease the Lessee has exclusive possession and obligation to pay rent for the leasehold premises. At times Lessee makes capital investments in making the leased space operational e.g. setting up manufacturing units, etc. in such cases the lease is generally for a longer term. This should be addressed in the lease deed and in the event the Lessor wants to prematurely terminate the lease, the agreement shall make provision for loss that may be suffered by the lessee. Also, when the term of the lease is not clearly mentioned in the lease deed then the lease of an immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year basis. A lease of immovable property for any purpose other than the purposes stated above shall be deemed to be a lease from month to month basis.
    • Use of the property - The Lessor may wish to restrict the manner of use of the property. Accordingly, the lease agreement can specify whether the premises are to be used for residential or commercial purposes exclusively.
    • Written agreement - It is essential to have a registered written agreement to transfer the leasehold rights in an immovable property. But, a lease of an immovable property may be made by an oral agreement if it is made for a term which does not exceed one year and does not reserve a yearly rent and the same is accompanied by delivery of possession.
    • Lease rent - The amount of lease rent payable by the Lessee, the date and mode of payment and interest in case of delayed payment should be clearly mentioned in the lease deed. The lease rent is generally agreed to be payable monthly, quarterly or at times on yearly basis. The agreement should specifically mention any escalations in the rent amount. Usually there is increase in the amount of rent payable, if the period of lease is more than one year.
    • Security deposit - The amount of security deposit to be paid should be clearly mentioned in the lease agreement alongwith the interest to be paid on it, if any.
    • Miscellaneous expenses –The agreement should provide for payment of miscellaneous expenses/outgoings such as the maintenance on the property, taxes, electricity charge, water charge, parking fees etc.
    • Termination - Grounds for termination of lease should be mentioned in the agreement making it easier for either of the parties to terminate the agreement at their convenience. Notice period should be clearly mentioned in the lease agreement. A notice period should provide the licensor and licensee enough time to make alternative arrangements in case either party wishes to terminate the lease.
    • Sub-lease – The Lessee of a leasehold property can further lease out the property by creating sublease, if the original lease deed allows it. The Lessee can sub-lease his interest in the property either for the whole of the remaining term or for any shorter period. A sub-lease can also be created for a part of the leasehold property and there can be different sub-leases for different parts of the leasehold property but all of this is subject to the terms of the lease deed.
    • Sale of Property – Sale of the leasehold property does not affect the rights of the Lessee and the lease continues according to the terms of the agreement
    • Improvement made to the Property – The Lessee has the right to make improvement and minor changes to the property, as may be allowed under the lease agreement.
    • Heritability – A lease agreement does not come to an end on the death of the Lessor or the Lessee, making the agreement heritable and transferable, this makes the tenancy of the leasehold property inheritable to the heirs of the Lessee.
    • Stamp duty – In Maharashtra, lease deed is subject to stamp duty in terms of Article 36 of Schedule 1 of the Bombay Stamp Act, 1958. The stamp duty is payable on the basis of the annual rent and the number of years of the lease or on premium, as the case may be.
    • Registration – A lease deed is required to be compulsorily registered before the Sub-Registrar, if the lease is from year to year basis, or for a term exceeding one year, or it reserves a yearly rent. Thus a lease for a period not exceeding one year need not be compulsorily registered.

When can lease be determined?

    A lease can be determined only in one of the following modes:

    • By efflux of time - When the lease deed itself specifies the time when the lease is to expire, then on the expiration of such time.
    • Where the time for expiry of lease is limited conditionally on the happening of some event, then by the happening of such event.
    • Where the lessor’s interest in the property terminates or his power to dispose of the same extends only to the happening of any event, then by the happening of such event.
    • Merger - When the interest of the Lessor or the Lessee in the whole of the property becomes vested at the same time in one person at the same time.
    • Express Surrender - Where the Lessee gives up his interest under the Lease to the Lessor as per the terms of the lease or mutually.
    • Implied Surrender - When during the subsistence of an existing relationship between the Lessor and the Lessee in respect of a subject matter, a new relationship comes into existence between the same parties and with respect to the same subject matter such that the two set of relationships cannot exist together and the latter can come into effect only on the termination of the former, then in such a case the former relationship would be deemed to have been terminated to give effect to the latter relationship.
    • By Forfeiture – A lease can be forfeited by the Lessor
    • If there is breach of any condition which provides that on breach thereof of the Lessor may terminate the lease;
    • If the lessee is judged insolvent and the lease provides that the Lessor may re-enter upon the happening of such event.
    • On expiration of notice to quit duly given by one party to the other.

What are the legal remedies available?

    • Recovery of possession – A suit for recovery of possession and lease rent by the Lessor shall lie in Small Cause Court, under whose jurisdiction the leasehold property is situated.
    • Breach of terms - If the Lessor and/or Lessee breaches any of the terms of lease agreement, then the party committing the breach will be liable to pay damages as per terms of lease agreement. In absence of provisions for damages in the lease deed, the court shall decide the quantum of damages as per the provisions under the Indian Contract Act.

It is essential that you engage a good lawyer to carefully draft your lease agreement and guide you with payment of stamp duty and registration. In India, legal disputes involving property tend to be a very complicated and frustrating process; therefore having a well drafted and registered lease deed is indispensable to protect your interest in the leasehold property.

"...The legal dispute in India are mostly for the rights related to immovable properties These tend to be expensive as well as frustrating. hence, one needs to be very careful while drafting and signing a lease... "
- Adv Manish Acharya, Bombay High Court

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