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Lease and Licence
According to Section 52 of the Easements Act, if a document grants only the right for another person to access or utilize land or premises while remaining under the possession and control of the owner, it constitutes a license.
Without this permission, the occupation or use would be deemed unlawful. Importantly, a license does not confer any estate or interest in the property upon the licensee. A distinct line separates a lease from a license, although at times it may appear quite delicate, given their shared elements.
Differences between Lease and Licence
Ordinarily, a ‘lease’ is a grant of property, for a time, by one who has a greater interest in the property, the consideration being usually the payment of rent. A ‘licence,’ on the other hand, is governed by the Indian Easement Act, and is a permission to do some act which, without such permission, would be unlawful.
In both, certain rights are conferred on the lessee or licensee. Both have several elements in common, but the following are the points of difference between the two:
Classification | Lease | Licence |
Nature of Grant | A lease is a transfer of property for a specified period, typically in exchange for rent. It grants the lessee exclusive possession and control over the property for the lease duration. | A license, as per the Indian Easement Act, is a mere permission to perform an act that would otherwise be unlawful. It does not transfer any property interest or confer exclusive possession. |
Governance | Lease agreements are governed by contract law, as well as relevant property and landlord-tenant laws | Licenses are regulated by the Indian Easement Act, which defines the rights and obligations of the licensor and licensee. |
Consideration | The consideration in a lease agreement is typically the payment of rent by the lessee to the lessor in exchange for the use of the property. | Licenses may involve payment of fees or other considerations, but this is not a defining characteristic. The key aspect is the permission granted by the licensor to the licensee. |
Exclusive Possession | A lessee typically enjoys exclusive possession of the leased property during the lease term, barring any specific provisions in the lease agreement. | A licensee does not have exclusive possession of the property. The licensor retains control over the premises and may grant similar permissions to others. |
Creation of Interest | A lease creates a property interest in favor of the lessee, granting them certain rights akin to ownership for the lease duration. | A license does not create any property interest in the licensee's favor. It merely permits them to perform a specific act on the licensor's property. |
Termination | A lease typically lasts for a fixed term, and termination requires adherence to specific legal procedures or provisions outlined in the lease agreement. | A license can be revoked or terminated by the licensor at any time, subject to any contractual agreements or legal limitations. |
In summary, while both leases and licenses confer certain rights to the lessee or licensee, they differ fundamentally in their nature, governance, consideration, possession, creation of interest, and termination procedures. These differences are essential for understanding the legal implications and obligations associated with each type of agreement.
Factors to be taken into account
When discerning between a lease and a license, several factors warrant consideration:
Exclusive Possession: Exclusive possession typically indicates a lease, though it may be subject to reservations or usage restrictions.
Lease-like Terms: The presence of terms commonly associated with leases, such as limitations on assignment or subletting, can suggest a lease arrangement.
Considering these factors collectively aids in discerning the true nature of the arrangement, whether it constitutes a lease or a license.
Leading Case Laws
In the case of Associated Hotels of India v R.N. Kapoor (AIR 1956 SC 1262), the Supreme Court established key principles for distinguishing between a lease and a license:
Substance Over Form: The intention of the parties, as reflected in the substance of the agreement, determines whether it creates a lease or a license.
Exclusive Possession: While exclusive possession is a significant factor, it is not conclusive. The decisive consideration is whether exclusive possession is coupled with an interest in the property.
Transferability: A lease typically allows for the transfer of interests, whereas a license is generally non-transferable, being a personal privilege.
Intention of the Parties: The parties' intention is paramount, discerned from the language, object, and circumstances of the agreement.
Description and Recitals: The description given by the parties and recitals in the agreement may serve as evidence but are not decisive. The crucial test is whether the agreement creates an interest in the property.
Use of Terms: Merely using terms like "rent" or stating that the agreement does not create a tenancy does not conclusively determine its nature.
Test of Exclusive Possession: While not conclusive, the test of exclusive possession remains significant in determining whether an agreement constitutes a lease or a license.
These principles were further emphasized and expanded upon in subsequent cases such as M.N. Clubwals v Hida Hussain Saheb (AIR 1965 SC 610) and G. Cariappa v Mrs. Leila Sinha Roy (AIR 1984 Cal 105), reaffirming the importance of discerning the parties' intention and considering all relevant factors in determining the nature of the agreement.
2.QUALITY CUT PIECES v M. LAXMI & CO.[AIR 1986 BOM. 359]: In this case, the court deliberated whether the arrangement between a departmental store operator and traders constituted a lease or a licence.
Facts and Issue: The departmental store, operated by DSS (Departmental Services Stores), provided stalls to traders for displaying and selling goods. Traders were granted permission to use the stalls but did not have ownership rights. Disputes arose over the nature of this agreement: whether it constituted a lease or a licence.
Observations and Decision: The court determined that legal possession remained with DSS, and traders had only permission to use the premises. Thus, the arrangement was classified as a licence, not a lease. This distinction was crucial as a possessor or stall holder was considered a licensee for reward.
Precedent: The court referred to Shell-Mex and B.P. Ltd. v Manchester Garages Ltd., where exclusive possession alone did not dictate a tenancy. Lord Denning emphasized assessing the transaction's nature rather than exclusive possession.
Analysis: The court dismissed the traders' argument that the agreements were "sham and bogus." It emphasized the legality of granting licences even in ordinary housing situations. The court scrutinized whether traders had a stake in the stalls or merely personal occupancy rights.
It concluded that the surrounding circumstances, including lack of stall-locking facilities, management control over business hours and merchandise, non-assignability of interests, and commission agreements, indicated a licensee arrangement.
Conclusion: The court's comprehensive analysis revealed the traders' status as licensees, considering various factors like control, assignability, and payment agreements. This decision clarified the distinction between lease and licence arrangements in similar contexts.
3. B.V. D’SOUZA v ANTONIO FAUSTO FERNANDES (AIR 1989 SC 1816)
Facts and Issue: The document in question was labeled as an agreement of leave and licence, where the parties were termed as the licensor and the licensee. However, it stipulated that the grantee would be let in as a tenant on a monthly rent basis, with additional charges for water and electricity.
The agreement also prohibited subletting or keeping the premises vacant without consent. The issue before the Supreme Court was whether the document constituted a lease or a licence.
Observations and Decision: The court emphasized that the substance of the document must prevail over its form in determining whether it creates a lease or a licence. While exclusive possession is relevant, it is not conclusive.
The key considerations include the intention of the parties and whether an interest in the property is established.
Referring to Associated Hotels of India Ltd. v R.N. Kapoor, the court reiterated that if the deed grants an interest in the property, it constitutes a lease; otherwise, it is a licence.
The court ruled that the document in question created a lease, as evidenced by the prohibition against subletting, which is characteristic of a lease.
Moreover, the terms allowing renewal and notice for termination indicated an interest in the property. The surrounding circumstances, such as the long duration of occupancy and the transaction's commercial nature, supported the conclusion that it was a lease.
The description of the parties and the rent as compensation were not decisive factors in this context.
4. SAMIR KUMAR CHATTERJEE v HIRENDRA NATH GHOSH (AIR 1992 CAL. 129)
Facts and Issue: The owner of a house rented it out to a tenant who later sold the property to the tenant. Subsequently, the tenant inducted another person into the premises, granting exclusive possession of a room to him.
The tenant, now the owner, filed a suit for eviction against the sub-tenant, claiming that the sub-tenant was merely a licensee and should vacate the premises as the licence had been revoked.
Observations and Decision: The court emphasized that determining whether the arrangement constitutes a tenancy, sub-tenancy, or licence depends on the nature of occupation granted. The plaintiff asserted that the defendant was a licensee, while the defendant claimed to be a tenant.
Initially, the burden of proof rested on the plaintiff to demonstrate that the defendant was a licensee. However, once evidence was presented, the onus shifted to the defendant to establish his status as a tenant.
Despite the absence of a formal lease agreement, the defendant was given exclusive possession of a room, kitchen, and other facilities, indicating a tenancy relationship.
There was no evidence to suggest that the plaintiff retained legal possession, and the defendant had been residing with his family before the induction as a licensee.
The court concluded that a sub-tenancy had been created by the plaintiff, even though no rent receipt was issued, as it was an attempt to circumvent legal requirements.
Comments: The Calcutta High Court's stance that an initially incompetent tenant could create a valid sub-tenancy was later overturned by the Supreme Court.
5. DELTA INTERNATIONAL LTD. v SHYAM SUNDER GANERIWALLA (AIR 1999 SC 2607)
Facts and Issue: The appellant, a monthly tenant, executed a 'leave and licence' agreement with the respondent to operate a petrol service station on the premises. The appellant later filed a suit for eviction and damages against the respondent. The main issue was whether the agreement constituted a lease or a licence.
Observations and Decision: The court emphasized that the true test is to ascertain the intention of the parties, considering that the distinction between a lease and a licence becomes thin when exclusive possession is granted.
The substance of the agreement prevails over its form. The court cited various principles, including the importance of exclusive possession, the construction of the document, and the intention of the parties. Despite the grant of exclusive possession, the court noted that mere possession does not always establish a lease.
The court highlighted that the document's language and the parties' conduct are crucial in determining the nature of the agreement.
The court concluded that the agreement, in this case, was a 'leave and licence' based on the express terms of the document, which specifically stated that it should not be construed as a lease.
Additionally, provisions regarding sub-leasing indicates an understanding that the document was not intended to create a lease.
Decision: The court held that the agreement was a 'leave and licence' and not a lease, based on the express terms of the document and the parties' intentions.