The query regarding the feasibility of a lease and leave and license is often answered through commercial feasibility in terms of the applicable stamp duty, particularly in Maharashtra. However, it is necessary to comprehend the intention of the parties vis-à-vis a property to arrive at the necessary documentation.
Lease and leave and license are the two broad types of contractual relationships that can exist between the owner i.e landlord of the property and the person who desires to use such property or premise for residential or commercial use.
A lease is defined under the Transfer of Property Act, 1882 and gets its validity thereunder. Whereas a license, is essentially a license to use a premise as governed under the Indian Easement Act, 1882. In the State of Maharashtra, a leave and license is recognized as a contractual relationship between two parties in respect of a property and is regulated under the Maharashtra Rent Control Act, 1999.
To appreciate the unique concept of “leave and license” as applicable in Maharashtra, it would be necessary to discern first the general legal distinctions between a lease and license.
Right to enjoy v. right to use
The Transfer of Property Act defines a lease as a express or implied transfer of right to enjoy such property in consideration of a price, to be rendered periodically to the transferor by the transferee, who accepts the transfer on such terms. A lease may be made for a certain time period or in perpetuity.
A license is defined under the Easement Act, as a specific right to a person or a certain number of other persons to do, or continue to do, in or upon the immovable property of the grantor, something which would, in absence of such right be unlawful and where such right does not amount to an easement or an interest in property.
Transfer of Interest
The principal dissimilarity between a lease and a leave and license is that in a lease there is a transfer of interest in the property in the former while in the case of the latter there is no such transfer.
Nature of Right
A lease creates a heritable right under the Transfer of Property Act. A license will come to an end on the death of a licensee. On the death of a licensee, his heirs will not inherit the right to continue to use the premises.
A lease is assignable but a license is generally non-transferable.
A license is a personal right granted to a licensee or other definite persons and is exclusive to the licensee. The Easement Act provides specific circumstances in which a license may be transferred but the general rule is that a licence cannot be transferred by the licensee or exercised by his servants or agents. Hence, it is necessary to provide explicitly in a license agreement certain specific rights of use / enjoyment of a residential / commercial property. For example, in an agreement related to the license of a commercial property, a specific right to allow ingress and egress of persons working in the establishment and others who are connected with the business of the establishment, is provided.
When premises are given out on lease basis the legal possession of the premises in these cases is also deemed to be transferred to the lessee. The licensee does not get possession of the premises.
Assignment of underlying property
A lease is not determined by the grantor making an assignment. Any assignment of the property is subject to the rights of the lessee and the lessee will continue to have his rights to the concerned property. A license however may not survive. The Easement Act provides that when the grantor of the licence transfers the property affected thereby, the transferee is not as such bound by the licence. It is quite common therefore, for persons entering into a leave and license to provide specifically that any further sale or other disposal by the licensor shall be subject to the rights of the licensee and that the licensee shall be entitled to continue in the premises. However this is a matter of negotiation and offers a contractual right, not a statutory one.
Registration and Stamping
An instrument of lease i.e. a lease deed requires to be compulsorily registered under the Indian Registration Act 1908 where the value of immoevable property exceeds INR 100 or the duration of the lease exceeds 11 months. No compulsory registration is generally required in India for a license as it does not amount to a transfer of interest in a property. (This is not the case in Maharashtra. A leave and license for a property whether for residential purpose or commercial purpose, is compulsorily registrable. Please see the section below on the concept of leave and license in Maharashtra.)
Under the Maharashtra Stamp Act, any license having tenure in excess of 5 years is required to be stamped as a lease. The stamp duty for a lease depending on the duration of the lease is calcualted on the market value of the property. However, the stamp duty for a license is calculated on the quantum of the license fee and deposit pursuant to the license agreement in accordance with a formular provided under the Stamp Act.
The Transfer of Property Act provides detailed rights and obligations of the lessee and lessor. Under the Easement Act, where a licence has been granted for a consideration, and the non-defaulting licensee, is evicted by the grantor before he has fully enjoyed, under the licence, the right for which he contracted, he is entitled to recover compensation from the grantor. But there is no right to continue to be in possession of the property.
Considerations specific to Maharashtra
It would be fair to say that in Maharashtra, the law creates a new genus of contractual relationships pertianing to property by way of the highly regulated leave and license contract. A leave and license contract is given a special legal status pursuant to the Maharashtra Rent Control Act, 1999.
In Maharashtra, a leave and license is compulsorily required to be registered, irrespective of the tenure which may be one month or five years. It is a common misconception that a leave and license is required to be registered only where the tenure exceeds 11 months.
The responsibility of ensuring that the license deed is registered lies entirely on the Licensor or the property owner. In the absence of a written registered agreement, contentions of the tenant regarding the terms and conditions on which the premises have been given either on leave and license or even let out shall prevail.
The Licensee is required to deliver possession of the premises to the Licensor on expiry of the license deed. An express stipulation is made under the Maharashtra Rent Control Act, in Section 24 to the effect that the licensor is entitled to recover the possession of premises given on license on expiry. The remedy of eviction is therefore a statutory right of the licensor. In order to protect themeselves from the perils of eviction, licensees often insert contractual rights such as lock-in periods prior to which the agreement may not be terminated and requirement of prior notice of termination.
A lease is a civil dispute for which the remedy is under the Transfer of Property Act and the tenancy laws of a particular state where the property is situate. Each state has its own hierarchy of courts which deal with such matters. A license is a purely contractual relationship and there are only civil remedies available to the licensee depending on the value of the claim. As stated earlier for wrongful termination the licensee can only sue for damages and not for possession.
A leave and license in Maharashtra, however is governed by the dispute resolution mechanism provided under the Maharashtra Rent Control Act, which refers to the appointment of a competent authority for adjudicating the dispute. The licensor has rights of eviction and other such rights which can be enforced through applications made to the competent authority in the manner prescribed therein.
Considerations for documentation
As to whether or not a leave and license is preferable over a lease, the answer depends on the circumstances as well as the intention of the parties.
As a landlord, a leave and license of a property would be preferable as no interest in the property is transferred and the licensee does not have the right to continue in possession of the property. From the perspective of a licensee where the licensee requires the use of a property for long term or desires to make investments in the property, a lease would be preferable. However, the licensee would need to weigh in the issue of the increased stamp duty payable in such a case versus the dual benefits of greater rights and interest in the enjoyment of the property with diminshed risk of eviction.
Originally published 28 July, 2014
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.