Leave and License Agreement Procedure in India

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Leave and License Agreement

A leave and license agreement is synonymous with a rental arrangement. Simply put, a leave and license is an understanding, where one party (the owner, called the ‘licensor’) gives a limited right to use his premises to the other party (called the ‘licensee’) for a rent. This arrangement is popular since it creates no lasting legal rights in favour of the licensee. Compared to a lease agreement a leave and license agreement has limited authority with regards to the property.

A property owner wishes to generate income from the asset by letting it out on rent. At the same time, the owner may also be concerned about implications under the tenancy laws. These laws, in certain cases, give legal rights in the premises to the licensee. Leave and license is a way in which the owner can put the premises to good use without the fear of losing it. However, for this, it is necessary that the leave and license agreement is drafted carefully and is registered with the government. If this is not done properly, legal rights in the property may be claimed by the licensee and the property may be locked up in litigation for a number of years.

"...Both Leave & License and lease, are lucrative and have their own benefits. For understanding your specific needs better and to have a well drafted agreement made, consulting a professional lwayer would be smart choice rather than deciding things yourself... "
- Adv Najma Shaikh, Bombay High Court

What are the essential elements of a leave and license agreement?

These are the general provisions to be included in a leave and license agreement. These features are not exhaustive, and not all of these features may be present in an agreement. It depends on the terms agreed between the licensor and the licensee.

    • Definition of the licensor and the licensee-The agreement should clearly identify the licensor and licensee.
    • Title of the licensor- The authority of the licensor to enter into the agreement must be shown. The licensor may enter into the Agreement as an owner or as a person properly authorized by the owner.
    • Title of the licensee- Where the licensee has entered into the agreement on behalf of a firm or a company, the source of authority of the licensee (board resolution, etc.) to enter into the contract should be stated in the agreement.
    • Definition of the premises- The agreement should identify the premises being let out and should demarcate the actual portion of the premises that is being given on leave & license basis. This helps avoid confusion about the entitlement of the licensee.
    • Term of the license- The agreement must be clear about the duration of the license. After completion of the term of the license, the relationship between the licensor and the licensee comes to an end. Generally, a provision for renewal of the term on completion of the initial period by mutual consent of the parties is included for convenience.
    • Use of the premises- The licensor may wish to restrict the manner of use of the premises. Accordingly, the agreement can specify whether the premises are to be used for residential or commercial purposes exclusively.
    • Consideration for the license- The amount of rent payable, the date and mode of payment and interest in case of delayed payment should be clearly stated. Rent is generally agreed to be payable in advance on monthly or quarterly basis.
    • Security Deposit- In most cases, the licensee is required to maintain an interest-free security deposit with the licensor. This deposit protects the licensor’s interest in case of non-payment of rent by the licensee. In some cases, the licensee may also be required to deposit rent for a few months in advance. The amount and terms of use and refund of such deposit and advance should be clearly stated in the agreement.
    • Increase in rent- For license periods of over 1 year, the licensor may require that the rent will increase for each of the subsequent years. This increase is usually stated as a percentage of the rent paid in the previous year.
    • Other costs and charges- The agreement must specify who among the licensor and the licensee is to bear the cost of utilities such as electricity, water and maintenance. Generally, these costs are borne by the licensee.
    • Common facilities- If the premises has certain common facilities attached with it, such as use of common passage, roof, park, swimming pool, car parking, library, club, gymnasium etc., the agreement should specify whether the licensee is entitled to these facilities and the additional charges payable, if any, by the licensee for such facilities.
    • Furniture and fixtures- Many times, premises are rented along with furniture and miscellaneous electrical appliances. It is advisable to record a complete list of all furniture and appliances that are agreed to be licensed along with the premises. The provisions for replacement or costs for damage to such accessories can be provided for in the agreement.
    • Right to sub-license- Unless the agreement specifies, the licensee does not have a right to sub-license the premises to a third-party.
    • Termination of the license- It is necessary to decide the events at which the license can be terminated. This provision acts as a guideline for the licensee and also ensures the security of the licensor.

What is the stamp duty payable on leave and license agreement?

In Maharashtra it is mandatory to register the agreement and it is the responsibility of the Licensor to pay the adequate Stamp Duty under the Bombay Stamp Act, 1958. However the Stamp duty can be borne either by the licensor or the licensee, as may be agreed among them. Stamp duty can be paid by way of e-challan, franking, stamp paper, e-stamp, e-SBTR, etc. Further, in the State of Maharashtra, leave and license agreements are required to be compulsorily registered.

Computation of Stamp Duty

For premises let out on leave & license in Mumbai, Article 36A of the Bombay Stamp Act, 1958 prescribes that the amount of stamp duty is 0.25% of the sum of (Total amount of rent payable for the period of the leave & license + amount of non-refundable security deposit + [10% of the refundable deposit x no. of years (or part thereof) of agreement]). This amount is to be rounded off to the nearest Rs 100. An illustration can help understand the computation better.

    Let’s us consider a hypothetical leave & license agreement as under:

    • Term: 2 years.
    • Monthly rent: Rs. 20,000 for the first year; Rs. 21,000 for the second year.
    • Refundable deposit: Rs. 1,20,000.
    • Non-refundable deposit: is Rs 20,000.

The stamp duty on this agreement will be computed as follows.

  1. Total amount of rent payable for the period of the leave & license

= (20,000 x 12) + (21,000 x 12)

= 492,000

  1. 2. Non-refundable deposit

= Rs. 20,000

  1. 3. 10% of refundable deposit for 2 years

= (Rs. 120,000 x 10%) x 2

= 24,000

  1. 4. Stamp Duty

= 0.25% of (A + B + C)

= Rs. 1,340, rounded off to the nearest 100

= Rs. 1,300

The amount so arrived at can be verified using the calculator provided by the e-filing website of the  Maharashtra Department of Registration & Stamps.

Why should I register a leave and license agreement?

Many licensors mistakenly believe that signing a leave and license agreement is sufficient to give them legal protection. Some others get the agreement attested by a notary. Legally, this is not adequate. It is mandatory to register a leave and license agreement (Section 17 of the Registration Act, 1908). The agreement has to be registered with the sub-registrar's office. Signatures of two witnesses are required while registering the agreement. It is the responsibility of the licensor to register the leave and license agreement with the government; in addition to the risk of pushing the premises into litigation, non-registration of a leave & license agreement also makes the licensor liable for a monetary fine or imprisonment. The registration fees payable on leave and license agreement is Rs. 1000.

What is e-registration?

In order to make the process of registration of leave and license agreement easier, the Government of Maharashtra has recently come up with e-registration of leave and license agreements. This allows registration of leave and license agreement at the licensor’s doorstep. Citizens can prepare the agreement online using the templates provided by the department, and pay the stamp duty and registration fees online. Identification of the parties is done automatically by use of the Unique Identification Number (UID Number, also commonly called ‘Aadhar Number’) details.

What is police verification, when giving premises on license?

For leave & license of premises located in Mumbai, the licensor has to submit certain details to the local police. The information required comprises name of the licensor, address of the premises, name and previous address of the licensee, office address of the licensee, reference of any 2 persons, the tenure of the agreement and the details of the realty agent involved, if any.

What are the formalities when licensing premises in housing society?

The housing society in which the premises are located may require the licensor to complete certain formalities before allowing the licensee to occupy the premises. Housing societies generally require submission of Form 11 (application for Nominal Membership by the licensee) and Form 29 (application for permission to give the premises on leave & license basis by the licensor). These forms can be downloaded from this page. Some societies charge the tenant a fee for moving in.

It is essential that you engage a good lawyer to carefully draft your leave and license agreement and guide you with payment of stamp duty and registration. If the agreement is not drafted well then there are chances the licensee may play mischief by claiming legal right over your property and this may lead to the property be locked up in litigation for a number of years.

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