The laws pertaining to the transfer of property and/or the usage rights of property are covered under the Transfer of Property Act, 1882 (ToPA). It broadly covers various modes of transfer such as Sale, Mortgage, Exchange, Lease, Gift etc; Lease is covered in detail in Chapter 5 of the Transfer of Property Act.
As per Section 105 of the Transfer of Property Act, the definition of ‘Lease’ can be understood as a transfer of a right to enjoy property for a certain time or in perpetuity; in consideration of a price paid or promised or of money, a share of crop, service or any other thing of value to be rendered periodically or on specific occasion to the Lessor by the Lessee who accepts the transfer on such terms.
In this context,
Therefore, by executing a Lease Deed, what is transferred by the Lessor to the Lessee is only his right to enjoy the property, subject to the terms agreed upon, and not the whole or any part of the absolute ownership rights, this type of transfer in conveyancing parlance is known as a ‘demise’.
Therefore, by executing a Lease Deed, what is transferred by the Lessor to the Lessee is only his right to enjoy the property, subject to the terms agreed upon, and not the whole or any part of the absolute ownership rights, this type of transfer in conveyancing parlance is known as a ‘demise’.
The usage of the term ‘demise’ in a Lease Deed or instrument of lease triggers the Lessor’s liability for the warranty of quiet enjoyment of the property the Lessee is entitled to remain in possession until the lease is terminated by due process of law (JaswantsinhMathurasinh&Anr. vs Ahmedabad Municipal Corporation &Ors., 1992 Supp. (1) S.C.C. 5, 12.).
Sale / Purchase | Lease | |
---|---|---|
1. | The Purchaser gets absolute ownership rights of the property | The Lessee only gets a right to enjoy the property but not ownership rights |
2. | There is no logical end to the ownership of the property | The Lessee’s right to possession and enjoyment of the property comes to an end upon the termination of the lease unless the lease is in perpetuity |
3. | The sale consideration is usually paid once at the time of purchase of the property | The consideration can either be in the form of a one-time premium or as rent at periodic intervals |
4. | A sale grants the right to possession, enjoyment of benefits and the right of further sale | Lease grants only the right to possession and use of the property. Although some arrangements do allow a sublease or transfer of lease but the rights of the Owner are always valid and subsisting |
5. | The overall cost of purchasing a property is usually higher than leasing. | Leasing is a relatively cheaper mode of |
6. | The purchaser can enjoy the residual value of a property | The Lessee cannot enjoy the residual value of a property |
7. | Documents involved are Agreement to Sell, Sale Deed, Transfer Deed, Deed of Conveyance etc. | Documents involved are Agreement to Lease or Lease Deed |
Lease | License | |
---|---|---|
1. | The Lessee gets a right to possession and enjoyment of the property but not ownership rights | The Licensee gets a right use the property for a fixed time and for a predetermined consideration |
2. | Usually involves a long-term duration, can also be in perpetuity | Involves a short-term duration, generally for 1 year but up to 5 years at maximum (in Maharashtra) |
3. | Involves a short-term duration, generally for 1 year but up to 5 years at maximum (in Maharashtra) | The consideration is usually in the form of a monthly license fee |
4. | The lease cannot be easily terminated by the Owner | License can be easily terminated by the Owners considering the temporary nature of the arrangement |
5. | The maintenance and upkeep of the property is the duty/responsibility of the Lessee | Although there is a level of care required the burden of maintenance and upkeep of the property falls on the owner |
6. | Relatively higher cost of the transaction | A deposit involved in the costs involved are usually quite less |
7. | The preferred mode of transaction for long-term residential arrangements and commercial setups | Preferred mode of the transaction is short-term residential arrangements |
8. | Documents involved are Agreement to Lease or Lease Deed | Document involved is a Leave and License Agreement |
The entire transaction executing the Lease Deed can be broken down into the following stages:
It is important to note that as per Section 107 of the Transfer of Property Act, 1882 and Section 19 (1) (d) of the India Registration Act, 1908 it is mandatory to register the lease of an immovable property for a term exceeding one year or system of yearly payment of rent. (The Transfer of Property Act, 1982) (The Registration Act, 1908). A lease deed that needs to be mandatorily registered is void if not registered (Usha Ranjan Ray Burman vs Sova Das, AIR 1990 Cal I)
Here is a short template of a standard Lease Deed for setting up a small scale industry in an Industrial area.
THIS DEED OF LEASE entered into at Mumbai on this ____ day of ________ March 2018 between MR. ABC residing at _______________________________ Mumbai – __________. hereinafter referred to as ‘THE LESSOR’ which expression unless be repugnant to the meaning or context thereof will mean and include his heirs, survivors and legal assigns of the ONE PART;
AND
M/S. XYZ PVT. LTD. represented herein by its Director MR. ___________ having its address at _____________________________________________________ Mumbai – _______________ hereinafter referred to as ‘THE LESSEES’ which expression unless be repugnant to the meaning or context thereof will mean and include the said Company, its Directors, Managers, Subsidiaries and Permitted Assigns if any of the OTHER PART.
WHEREAS:
NOW THIS DEED WITNESSETH AS FOLLOWS:
Land Admeasuring _____ Guntas or ______ sq. mtrs. craved out of the total Land owned by the Lessor.
Term of Lease – 10 years.
Lease Rent – Rs. 1,10,000/- per annum.
IN WITNESS WHEREOF, THE LESSOR AND THE LESSEES HAVE PUT THEIR RESPECTIVE HANDS ON THE ORIGINAL AND DUPLICATE THEREOF THE DAY AND YEAR FIRST HEREINABOVE WRITTEN.
SIGNED AND DELIVERED
BY WIHINNAMED ‘THE LESSOR’
MR. ABC
In the Presence of …………………………..
SIGNED AND DELIVERED
BY WIHINNAMED ‘THE LESSEE’
M/S. XYZ PVT. LTD.
Represented herein by
MR. ___________________
In the presence of ………………………………….
RECEIPT
Received with thanks from M/S. XYZ PVT. LTD. a sum of Rs. 1,10,000/ being the annual lease rent for the 1st year of the lease of the Scheduled premises by way of _____________________________________________________________________________________________
I say Received,
(MR. ABC)
Here is a checklist of key elements to consider and include when drafting a lease deed for commercial purposes:
1. Property Description: A detailed description of the property should be provided along with the area, the exact location, respective Survey No.(s) etc. It is also advisable to include a description of all the structures standing on the property along with the list of all the fittings and fixtures thereon.
2. Term: The exact duration of the lease should be mentioned along with the commencement date and expiry date.
3. Title Search: Proper Title Search should be conducted and public notices issued to ensure that the Lessor is entitled to give the property on lease and that there is no legal impediment in the property being demised in favour of the Lessee.
4. Lock-In Period to be mentioned if any.
5. Termination: The grounds for termination of lease like breach, non-payment of rent, force majeure, failure to pay rent etc., to be included along with the agreed process for termination by the parties and the notice period.
5. Rent Payment: The quantum of rent, the mode of payment, due dates, the procedure for delay, rent escalation etc., to be discussed and reduced to writing.
6. Security Deposit, if any.
7. Maintenance Charges and Land Taxes: Who is responsible for payment of maintenance charges, society charges, land taxes and other government charges? Effect of non-payment and the process for dealing with that.
8. Utility Charges: It should be clearly defined whose obligation it is to pay for the utilities such as water, electricity, telephone, internet etc and in whose name the receipts are to be generated.
9. What are the permitted uses of the demised property?
10. Whose obligation is it to ensure the maintenance and upkeep of the demised property and the procedure with repairs.
11. Restriction of material alteration of the property without the express consent of the Lessor.
12. Sub Letting: Whether sub-letting of the demised property is permitted and if so then under what terms and only with the express approval of the Lessor.
13. Inspection of the demised property should be permitted by the Lessee at reasonable hours and with prior notice.
14. Study the applicable law pertaining to the payment of Stamp Duty and Registration of the Lease Deed and ensure that adequate payments are made and the correct forum followed.
15. Legal Charges: Whose obligation is it to pay the Stamp Duty, Registration Fee and other governmental and incidental charges in the transaction?
16. Procedure for the handover of possession at the end of the lease and the execution of a Deed of Surrender of Lease, if applicable should preferably be mentioned in the Lease Deed itself.
17. It is recommended that either of the parties get their own insurance cover on the demised property to protect against any unexpected event.
18. Clearly identify the jurisdiction of the relevant Court and the dispute redressal mechanism in the event of a dispute arising between the Lessor and Lessee.
19. Respective Indemnities: Ensure that there are adequate Indemnity clauses in the Lease Deed to cover foreseeable incidents like defaults in payment of rent, damage to property, breach of terms, wrongful representations and warranties, defect in title etc.
The aforementioned is a basic outline of the process of drafting a legally competent and balanced Lease Deed concerning commercial lease deed with a corporate purpose in mind.
A corporate lease deed needs to be drafted and scrutinized more thoroughly than a lease of residential premises or tenancy as there are various aspects of commercial transactions of commercial use of a property which are not present or do not have a very large role to play in non-commercial transactions.