In common parlance, a lease of immovable property is vesting of property to a lessee in lieu of rentals and premium for a particular term, with residuary power of ownership vesting in the owner of the immovable property. By its connotation and legal effect, leases are omnipresent, globally existing and encompass the entire spectrum from smaller premises to huge campuses, industrial units and large tracts of land for lawful use and utilization in consonance with the governing law and lease contract.
'Instruments of lease', inter alia, defining the rights and obligations of the lessor and the lessee, contingencies, and exigencies, are, by implications of law and necessity, necessary concomitant to a lease and have grown to be acknowledged as complicated, convoluted documents. In India, the leases are contractually driven, in consonance with the Transfer of Property Act, 1882 (ToPA) and the various rent legislations. However, a multitude of situations arise wherein the lease instruments lead to interpretative issues and inconsistencies stemming from improper structure, convoluted crafting and lack of provisions to tackle all contingencies and exigencies, which often results in multifarious litigations. These limitations were further exposed by the inability of these instruments of lease in adequately addressing the spate of challenges thrown up by the Covid-19 pandemic.
To alleviate some of these concerns, lease deeds should be skilfully crafted, preceded by effective negotiation and should essentially capture and address the following aspects:
- Clear delineation of terms of the lease, particularly with reference to rentals, duration, premium, security deposits, mutual rights and obligations, etc., all to meet the intent of the parties of a lease deed. The objective, inter-alia, should be to safeguard the value of the underlying asset, prevent its diminution, safeguard the investment of lessee and to encapsulate sufficient deterrents, covenants and undertakings.
- Any other arrangement or contract pertaining to the lease such as maintenance or fixture or fitting agreements, to be in absolute sync with the principal lease, existing and terminating with the mother lease deed. The commercial aspects of leases should not get embroiled in controversies.
- Dispute resolution clauses should not only be convenient but also in accordance with the prevailing law. Regarding lease deeds and arbitration, in a recent judgement in the matter of Vidya Drolia and Others Versus Durga Trading Corporation, the Hon'ble Supreme Court overruled the Himangni Enterprises case by ruling that Landlord-Tenant disputes are arbitrable except when they are covered by a specific forum created by rent control laws. It is to be noted that prior to this overruling by the recent judgement, the Supreme Court was of the view that eviction and tenancy matters were governed by special statutes where the tenant enjoys statutory protection against eviction. However, pursuant to the judgement in the Durga Trading Corporation Case, it was observed that, although Landlord-Tenant matters are subjects of Public Policy, there is no bar on the arbitrability of such disputes. The aforesaid decision was based on the principle that Landlord-Tenant disputes are not 'rights in rem' but pertain to subordinate 'rights in personam' that arise from the rights in rem. This conceptualisation led the Court to propound a four-fold test for determining the arbitrability of a subject matter. This case stands tall as a landmark judgement and removes the confusion and uncertainty that earlier permeated Landlord-Tenant disputes.
- Important contractual provisions such as lock-in period, commercials and payments, insurance, terms of contract, covenant on uses, etc., should be categorically synchronized with events of default, the consequences, mitigation. Clauses pertaining to damages/indemnity need to be ably negotiated and crafted.
- Clauses such as Force Majeure, termination, etc., must be well articulated in a watertight progression to clearly encapsulate the understanding of the parties relating to various exigencies and to ensure that the instrument is bereft of any inconsistencies, suitably adhesion issues through cross reference of clauses.
- Adequate attention has to be paid to the boiler plate clauses, so that the agreement/contract is in absolute synchronization.
The ongoing debate regarding the deficiencies and omissions that typically afflict the instruments of lease essentially revolves around the need for crafting lease deeds that deliver watertight and comprehensive lease arrangements. Quite unsurprisingly, clauses of Force Majeure, indemnity and termination, to name a few, are on the drawing boards, undergoing recalibration. The renewed focus on pertinent aspects of a lease deed will help achieve the underlying objective of safeguarding the stakeholder's interest from such exigencies and contingencies and avoid the agreement to be marred with inconsistencies, drafting errors and ambiguous provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.