Dated 24th August, 2020
Lease and License are used interchangeably and are considered as synonyms in layman’s terms albeit in actuality they have different legal meanings which we will deal with within this article. Lease and License can be for immovable and moveable property; however, in this article, we are restricting our views/discussions on immoveable property alone.
As the name suggests that License is merely a right to use and enjoy the immovable property as the case may be, whereas, a Lease is more of a transfer of a legal right to enjoy a specific immovable property coupled with the transfer interests made for a fixed amount of time, in favor of transferor by the transferee. Hence it is the intention of the parties which establishes whether the instrument is Lease or License.
BASIC DIFFERENCES BETWEEN LEASE AND LICENSE
- GOVERNING LAWS
A Lease is governed by the provisions of The Transfer of Property Act, 1882. Wherein Section 105 of the Act defines a Lease of immovable property as a
“transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”
Wherein a License as defined by Section 52 the Indian Easements Act, 1882 as where
“one person grants to another, or a definite number of other persons, a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a License.”
- PARTIES TO THE AGREEMENT
The parties to a Lease are the Lessor who is the transferor or the landlord and is the person who grants the Lease, he could be the absolute owner of the land or could be a Lessee entitled to sub-Lease by virtue of interest generated and Lessee, the person who accepts the Lease.
Whereas, the parties to a License are Licensor and Licensee, the Licensor is a grantor of License and Licensee is the person to whom the License is granted.
- DISTINCTION WITH RESPECT OF TRANSFER OF INTERESTS
In a Lease, there is a transfer of an interest in the entire property or any part thereof, or the Lessor transfers any part of his interest, on such terms and conditions as agreed between the parties. Subsequent to the transfer the transferee, comes to possess all the rights on the property in the absence of a contract to the contrary according to Section 109 of Transfer of Property.
Whereas, a License confers a right to do or continue to do something in or upon immovable property of grantor, however it creates no estate or interest in the property (As held in the case of Sohan Lal Naraindas vs Laxmidas Raghunath Gadit on 8 January, 1971).[1]
- TRANSFER OF POSSESSION IN LEASE AND LICENSE
It has been held in the case of Mrs. M. N. Clubwala And Anr vs Fida Hussain Saheb And Ors [1965 AIR 610, 1964 SCR (6) 642][2] In determining whether the agreement creates a Lease or a License the test of exclusive possession, though not decisive, is of significance. What this necessarily implies is that there is a very clear distinction in terms of Lease and License Agreement when we consider the transfer of possession.
In a Lease, a right of exclusive Possession is created upon transfer. Whereas, in a License the actual possession remains with the Licensor, he obtains only the right or the License to use and enjoy the property
- PAYMENT/ CONSIDERATION AGAINST THE RIGHT OBTAINED
In a Lease the consideration paid for the transfer is the premium and or security deposit, depending on the commercial understanding and or payment at regular interval may be annual or monthly payment and the money to be subsequently rendered is called Lease rent, the Lessee is bound to tender at the proper time and place the premium or rent to the Lessor or his agent [Section 108 (i)].
According to (f) and (g) of Transfer of Property Act, the Lessor if defaults in making any payment he is bound to make the Lessee even is entitled to deduct the same from Lease rent after making payment.
Whereas in a License a security deposit is given by the Licensee to the Licensor for the due performance of the terms and conditions of the contract, and the compensation to be paid for the License can be called compensation, License charges, fees, etc.
- MINIMUM PRESCRIBED TIME PERIOD OF AGREEMENT
There is a myth that the License can be only for short term whereas Lease is for the long term which is misleading. There is no prescribed minimum or maximum prescribed time period for both the agreements, a License can also be for a period of 30 years or more and Lease maybe for 11 months as well, the only difference between the two agreements is despite of the fact that agreement is entered into for a considerable long period of time, it can be terminated as per the pleasure of Licensor in a License Agreement but in the case of a Lease Agreement a right on part of Licensee is created and can be terminated in accordance with the terms of the agreement.
- REGISTRATION
Registration of any legal is necessary for two reasons. First, is to ensure the admissibility of such agreement in the court of law if a dispute arises and secondly to validate the creation of rights in favor of the parties to an agreement.
Registration of Lease is provided in provisions under Registration Act, Section 17 of the Registrations Act states that Leases of immovable property made from year to year, for a term exceeding a year or for a period of one year is to be compulsorily registered, section 106 of the Transfer of Property Act also states that in absence of a written contract Lease shall be deemed to be provided from month to month, and could be terminated by Lessor or Lessee through a mere fifteen days notice, which again highlights the importance of a registered Lease Agreement
While the registration of License is provided through various State Rent Control acts, and non registration bears the same legal repercussions
- INHERITANCE AND TRANSFERABILITY
A Lease is a transferable and heritable right; a License on the contrary is purely a personal right and can neither be transferred nor inherited by a person. It extinguishes with the death of the Licensee.
Effect of death of either of the parties on the Agreement
Death of either party does not affect a Lease, it being a heritable right, the same is also generally guaranteed by an express provision in the Lease Deed. However, the parties can decide contrary to the same. Privy Council in ILR 3 Cal 210[3] decided that any words indicating that the interest shall pass on to the heirs would suggest that the Lease was not to come to an end on the death of the Lessee but it was to ensure permanently.
Whereas, a License cannot be inherited and is terminated by the death of either party normally, and if the parties intend to continue such License, the inevitable conclusion drawn is it was an agreement of tenancy. However, again a contrary stand may be warranted by agreement between the Licensor and Licensee and the general rule stays revoked.
Transfer of interests to a third party
The transfer of interests in Lease empowers the Lessee to sub-Lease or assign the property to a third party subject to the condition imposed by (o) of Section 108 which prevents the Lessee to both use or permit any third party to use the property provided.
A Licensee, however, cannot Sub-let his property since it is strictly personal in Nature. A License is simply a permission to use the land for an agreed purpose. It is an authority that justifies what would otherwise be a trespass and does not confer any interest inland. Section 57 of the Indian easement Act, 1882 states the same.
Effect of sale of the property
The sale of the property does not affect the rights of Lessee until the Lease Agreement comes to an end. The buyer of the property obtains the possession of it, upon the termination of the Lease period.
Whereas, in case of the License Agreement, the right of enjoyment and use of property by the Licensee comes to an end upon a sale of the property to a third party.
- MORTGAGE
As per Section 65 A buildings whether to be Leased with or without the land, if the property is already mortgaged, the maximum time period of the Lease the owner can enter into shall in no case be for more than three years, As far as the rights of Lessee are concerned to transfer or mortgage his interest is concerned as per Sec 108 (j) of Transfer of Property Act, 1882 the Lessee according to his wish may do so. However, it has also been specified that the Section in no way empowers the Lessee to transfer his un-transferable right of occupancy and only has the right to transfer the interest.
There is no conditions precedent to provide a mortgaged property in License since the same cannot create any interest in favor of the Licensee and he for the same reason has no right to mortgage his interest in the property.
- REVOCATION OF AGREEMENT-
A Lease determines in the eight ways expressly mentioned in Section 111 of The Transfer of Property Act, 1882. It is not revocable at the Pleasure of Lessor and can be withdrawn only by the terms and conditions that have been stipulated in the agreement.
A License can be revoked both upon breach of obligations by the Licensee as well as without a cause upon giving written notice for such number of days as decided upon by the parties or with efflux of time.
The nature of rights created plays a defining role as to the type of agreement a person should enter into for occupation of premises for temporary period. In situations where the occupier needs to use the property and the interests obtained thereof, and have more control over the use of property in general without any unnecessary interference it is more advantageous for him to enter into Lease Agreement However, the owner would automatically be inclined to rather enter into a Leave and License Agreement to maintain control over his property and hence both the Instruments have their own advantages and applicability depending on the terms on which the individuals want to enter into the agreement.
References
[1] 8 January, 1971, https://indiankanoon.org/doc/1179086/
[1] 1965 AIR 610, 1964 SCR (6) 642, https://indiankanoon.org/doc/1679568/
[1] Privy Council in ILR 3 Cal 210, https://indiankanoon.org/doc/1441330/
“Article by Ms Damini Srestha under internship of Adv Shankarlal Raheja
The Views herein are personal and while careful attention has been given to ensure that the information is accurate and assume no liability or responsibility for any reliance thereon. This article is merely information and knowledge sharing activity and is not a substitute to legal advice. We shall not be liable for any loss or damage caused due to any reliance thereof”.