The main and foremost concerns for property owners in India, before they let out their property are: Will their right of ownership remain secure? Is it safe to rent property ? Who are the right tenants? If I am located in another city or country, what are safe documentation options available to me?
We have encountered these questions scores of times, through the many years as lawyers advising NRIs property owners with vacant properties which are lying locked up and receiving little or no care. These investment properties can not only become efficient monthly income-generating realty assets, but also appreciate in value because of the care they receive on a daily basis from the right occupants.
Meaning of Rental Agreement:
A rent or lease agreement causes transfer of interest from the owner to tenant, or lessor to lessee. A rent agreement is governed by the Rent Control Act. The rent control court has to be approached in the event of a dispute. The amenities provided to the tenant cannot be disrupted or withdrawn even on failure to pay the rent. The Rent Control Act is considered to be strongly in favour of the tenants and limiting the power of the landlord to reclaim the property. Section 105 of the Transfer of Property Act, 1882 defines lease to be an agreement drafted in case of renting property. Usually renting property implies that the owner has given his rights to enjoy his property to the tenant for a certain period of time, and the tenant can enjoy the said property without interference. The interests of the property are transferred to the tenant. The tenant can defend his rights over the property as his own because transfer of interest has taken place. The agreement comes to an end based on the terms and conditions of the contract. A lease is both transferable and inheritable since the interest lies with the tenant. A lease is unaffected by the sale of the property to the third party as the third party cannot claim rights till the agreement comes to end. Most importantly, since there is transfer of interest along with property, if the tenant occupies the said property longer than mutually accepted time, it isn’t deemed to be unlawful on part of the tenant.
Meaning of Leave and License Agreement:
Leave and license on the other hand is governed by the Easement Act, 1882. Section 52 of the Easement Act talks of licencing property and the agreement drawn with respect to licence is known as leave and license agreement. Leave and licence means that the owner has given mere permission to the licensee without the transfer of interest of property by the owner. In case the property is sold to the third party the agreement comes to an end immediately. If the licensee tends to occupy the property longer than the time mutually accepted by the parties, they are believed to be unlawful occupants of the property. The “Leave and License”, which is an easement right and is defined and governed by the Indian Easements Act, 1882. A leave and license ensures that there is no transfer of interest from the licensor to the licensee. It is license to occupy and use the premises in the mentioned duration on mutually agreed terms. If the licensee continues to occupy the property upon the cessation of the license or upon the prescribed notice period, they will be considered as unlawful occupants and action initiated against them for immediate eviction.
Some crucial differences between a lease agreement and a license agreement:
- Under leave and license agreements, the legal ownership and the possession of the property remains with the licensor. Under a lease or rent agreement, the tenant generally has exclusive possession with respect to the property. In other words, a license does not create any interest in the premises in favour of the licensee.
- A licensee cannot give the premises on rent to a third party under any circumstances. On the other hand, a tenant can sub-let the premises to a third party, unless the rental agreement expressly provides otherwise.
- A leave and license agreement is easier to terminate and enforce compared to rent agreement.
- In the case of a lease agreement, if the agreement is for a period of less than 12 months, it does not have to be registered. However, a lease agreement for 12 months and beyond has to be compulsorily registered. In many states, a license agreement does not have to be registered.
Keeping the above in mind, it is importance that the terms and clauses of the Leave and License be drafted diligently. A clearly worded agreement provides no ambiguity about the intention of the signing parties and executes the double-role of a support as well as a deterrent, depending on the situation.
Our Take:
For renting property, our take is that you’re better executing a leave and license agreement compared to a lease agreement. This is due to the following reasons:
- The Rent Control Act is considered to be strongly in favour of the tenants and limiting the power of the landlord to reclaim the property;
- The interests of the property are transferred to the tenant;
- Most importantly, since there is transfer of interest along with property, if the tenant occupies the said property longer than mutually accepted time, it isn’t deemed to be unlawful on part of the tenant.
- On the other hand in case of leave and licence, the owner has given mere permission to the licensee without the transfer of interest of property by the owner
- If the licensee continues to occupy the property upon the cessation of the license or upon the prescribed notice period, they will be considered as unlawful occupants and action initiated against them for immediate eviction.
Your property manager or lawyer handling your property should be talking the leave and license route. Their office should refrain from using the words landlord, owner, tenant or rent in the agreement, and not have you sign receipts for rent received. The words rental agreement and leave and license do not imply the same thing and cannot be used to substitute each other. You are now, a licensor, when the occupant who is paying you monthly compensation is the licensee and the rent is termed as license fee.