AMITY LAW SCHOOL NOIDA

LAW OF PROPERTY
LEASE AND IT’S TYPE

Submitted to:-

Dr. Sheetal Singh

(Faculty incharge)

Submitted by:-

Shubhankar Negi

(A3221517092)
Leasing Property Law and Legal Definition

A lease is a contract between an owner and a user of property. In business lease agreements, the owner
(lessor) receives financial compensation and in exchange, the tenant (lessee) is given the right to
operate his or her business on the property. There are many different types of property lease
arrangements and many different considerations that business owners should weigh before entering
into such a contract. But leasing is very popular with small business owners: such arrangements allow
new or financially-strapped businesses to divert their capital to other business needs. Indeed, many
small businesses operate in leased facilities for their entire existence. Leasing property, of course, may
itself be a small business activity.

It is an agreement by which the owner of the property or the lessor transfers his right of possession to
the lessee. It is not an absolute transfer of all rights in the property. It is merely a partial transfer. what
is transferred is merely the right of possession and the use of the property. It separates ownership from
property. Ordinarily, a lease is with respect to land. However, every right that can be possessed can be
made the subject of a lease. Thus there can be a list of Copyright, a patent, right of way, right to receive
interest on government promissory notes.

Section 105 of the Transfer of Property Act, 1882 defines "Lease". According to Section 105 of the said
Act, "A lease of immovable property is 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.

Lessor, lessee, premium and rent defined: The transferor is called the lessor, the transferee is called the
lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is
called the rent.

In a lease, the transfer of immovable property is not absolute transfer like a Sale. The ownership and
possession get separated from the certain period but after the expiry of the specified period possession
again get merged into ownership.

Essentials of the Lease -

1) Competency-

The lessor (The transferor, who is able to make a lease) and the lessee (The transferee) must be
competent. A lease to a minor is void.

2) Subject Matter-

The subject matter of the lease must be immovable property.

3) The Immovable property must be Transferable property.

4) There must be a transfer of right to enjoy such property

5) The lease must be made for the specific period (a certain time), express or implied or in perpetuity.
6) The consideration which may be premium or rent or both.

7) The lessee must accept the transfer.

8) In lessee, there is a separation of ownership and possession.

9) The lease must be created as per the provision prescribed in section 107 of the Transfer of Property
Act, 1882.

The person who transfers the property (transferor) is known as the lessor. The person to whom the
transfer is made(transferee) is known as the lessee. The price here is known as the premium and the
money, share, service or any other thing so rendered in known as the rent.

Hence, the essential conditions for lease according to Section 105 of the Transfer of Property Act, 1882
are :-

1. There must be an immovable property

2. The transfer of right must only involve the right to use the property i.e. possession and not
ownership.

3. The consideration for lease shall be periodical payment which is either rent or premium or both.

A lease that extends for a period of more than a year can only be made through a registered document.

The different types of lease –

Financial lease

In this type of lease, the lessor transfers all the risks and rewards substantially related to the asset to the
lessee.[iv] This is a long-term lease and is irrevocable in nature. The lessee pays more than the total cost
of the property or equipment which is known as lease charges. The entire burden of maintaining the
property is on the lessee and the lessor does not render any service from his end. [v]

Operating lease

In this type of lease, the lessor does not transfer all the risks and rewards of the asset to the lessee.[vi]
The lessee uses the asset for a limited time and it is the lessor who bears the cost of maintaining the
property and any other costs which arise related to the property.[vii]

Sale and Lease Back Leasing

In this type of lease, the lessee sells the asset to the lessor with an advance agreement between the two
of leasing the asset back to the lessee for a fixed lease rental per period. Such a lease is also known as
Bipartite lease.[viii]

Direct Lease:

This is a simple type of a lease where the asset is owned by the lessor or he acquires it. In this type of
lease, there are three parties, namely, equipment supplier, lessor and lessee and hence, a direct lease is
termed as a tripartite lease.[ix]
Single Investor Lease:

In his type of lease, the lessor has to arrange for money in order to finance his asset by way of debt or
equity. The lender cannot recover anything from the lessee, in case the lessor defaults in payment.[x]

Leveraged Lease:

There are three parties in this type of lease – the lessor, the lessee and the financier/lender. Here, lessor
arranges for the equity and the financier has the responsibility to finance the debt. The link between the
lessee and the lender is direct if in case the lessor defaults.

Domestic Lease:

As the name suggests, when the parties to the lease reside within the same country, the lease is known
as a domestic lease.

International Lease:

There are two kinds of International Lease – Cross border lease and Import lease. An import lease occurs
when the lessor and the lessee reside in the same country and the equipment supplier resides in a
different country. On the contrary, when the lessor and the lessee reside in two separate countries ‘X’
and ‘Y’ then the lease is known as a Cross border lease. It doesn’t matter where the equipment supplier
resides.

Triple Net Lease

The triple net lease comes with three expense categories associated with it: insurance, maintenance,
and real property taxes. Such expenses are also known as pass-through or operating expenses because
the property owner passed them all to the tenant in the form of rent excesses. In some cases, the
excesses are referred to as taxes, insurance, and common area (TICAM).

Often referred to as NNN, triple net agreements are the norm in single-tenant, as well as multi-tenant,
rental units. Under a single-tenant lease, the tenant exerts control over landscaping and exterior
maintenance. In short, the tenant decides what the property looks like as long as the tenancy is in effect.

A multi-tenant arrangement gives the property owner total control over a property’s appearance. In
such a way, no tenant can ruin the overall appearance of a building. In addition, a multi-tenant
arrangement requires the tenant to pay a regular pro-rata towards operating costs. The net lease is the
most ubiquitous of the various lease contract types. Under the terms of a net lease, the tenant pays the
landlord a base rent plus an additional sum that covers the tenant's share of property taxes. When taxes
increase, it is the tenant's responsibility to cover those costs. The obligations of each tenant are figured
by determining what percentage of the total facility is occupied by each tenant; thus a tenant occupying
20 percent of the facility pays 20 percent of the increase.

Variations of the basic net lease include the "double-net" and "triple-net" lease. Under a double-net
lease, the tenant is responsible for picking up added insurance premiums as well as tax increases; under
triple-net leases, tenants are responsible for covering insurance premiums, tax increases, and costs
associated with maintenance and/or repairs of the building, the parking lot, and other areas used by the
lessee. The triple-net lease is popular with landlords for obvious reasons; small business owners should
note that such arrangements sometimes make landlords less attentive to upkeep in these areas than
they might be if they had to foot the bill themselves.

For that reason, tenants obtain the right to audit the building’s operating costs. A triple net lease
precludes the property owner from hiring a janitor. Each tenant contributes to janitorial and interior
maintenance expenses.

Modified Gross Lease

The modified gross lease transfers the entire burden onto the property owner. Based on the terms, the
owner pays all the insurance, property taxes, as well as the common area maintenance. On the other
hand, the tenant shoulders janitorial, utility, and interior maintenance costs.

The tenancy arrangement also stipulates that the roof and other structural aspects of the building are
the owner’s responsibility. However, because the owner takes care of a large portion of the tenancy’s
costs, the monthly rates are higher compared to other types.

The modified lease type is advantageous to the tenant because the owner takes care of associated risks
such as operating costs. The tenant’s rates are relatively the same all year, and he plays no part in the
affairs of the property. Unfortunately, the owner may choose to charge a premium each month to cater
for the cost of managing the building.

Under the terms of a gross lease contract, the lessee pays the lessor a gross amount for rent (as well as
sales tax when applicable). Property costs such as property taxes, insurance, and maintenance are the
landlord's responsibility; the tenant is responsible for utilities. Sometimes the lease contract will include
provisions that require the tenant to cover property costs that go over a certain specified level.

Variations of this basic lease arrangement include the flat lease and the step lease. The flat lease is the
most basic type of agreement and generally the most popular with small businesses. It calls for the
lessee to pay a flat set price for a specific period of time. The step lease, on the other hand, calls for a
gradual escalation of the base rent payment over time in recognition of the likely rise in owner expenses
in such areas as taxes, insurance premiums, and maintenance. A related lease contract, usually known
as the cost-of-living lease, includes rent increases based on general inflation figures rather than
increases in specific expenses.

Full Service Lease

As the name suggests, the full service lease takes care of most of the cost of operating a building.
Nonetheless, there are a few exceptions, such as data and telephone costs. Otherwise, the rest of the
cost is on the property owner, including common area maintenance, taxes, interior, insurance, utility,
and janitorial costs. As a result, the monthly rate is slightly high, and such leases are common in huge
multi-tenant units where it is impractical to partition a building into smaller spaces.

Such an arrangement is advantageous to the tenant because there are no extra costs over and above
the usual monthly rate. The disadvantage is that the owner may decide to charge a little premium on top
of the monthly rate to cover the cost of the tenancy. Most proprietors prefer the full service
arrangement because it allows total control over a building’s overall appearance.
A lease is a contract between an owner and a user of property. In business lease agreements, the owner
(lessor) receives financial compensation and in exchange, the tenant (lessee) is given the right to
operate his or her business on the property. There are many different types of property lease
arrangements and many different considerations that business owners should weigh before entering
into such a contract. But leasing is very popular with small business owners: such arrangements allow
new or financially-strapped businesses to divert their capital to other business needs. Indeed, many
small businesses operate in leased facilities for their entire existence. Leasing property, of course, may
itself be a small business activity.

This type of lease is used primarily in multi-tenant office buildings. In essence, lessees who agree to such
arrangements pay a single lump sum for a wide range of supplementary services in addition to the lease
payment. Under the terms of full-service leases, the landlord is responsible for providing a number of
different services for his or her tenants, including security, maintenance, janitorial, and various utilities
(water, electricity, air conditioning, heat).

Percentage Lease

This arrangement calls for tenants to pay a base rent and/or a percentage of the lessee's gross revenue.
This percentage, which can run as high as 10-12 percent in some contracts, is paid on an annual,
semiannual, or quarterly basis (some malls and shopping centers, however, call for even more frequent
payments). This arrangement is a favorite of lessors with property in coveted retail areas; tenants are
less favorably inclined, but the laws of supply and demand often make it possible for owners of desirable
property to insist on it. Small business owners should fully understand what the contract defines as
"gross revenue." "Be specific in how you define gross sales," wrote Fred Steingold in Legal Guide for
Starting & Running a Small Business. "Depending on your type of business, certain items should be
deducted from gross sales before the percentage rent is determined. Here are some possibilities:

returned merchandise

charges you make for delivery and installation

sales from vending machines

refundable deposits

catalog or mail-order sales

sales tax

ADVANTAGES AND DISADVANTAGES OF LEASING

The Small Business Administration (SBA) counsels small business owners to consider a variety of factors
when weighing whether to lease or buy property. These considerations include:

Operating requirements—if the business's operating requirements are expected to change significantly
over the next several years, leasing would probably be preferable, since it allows businesses to move
more easily.
Capital supply and capital needs—leasing frees up a greater percentage of a small business's capital for
other operating needs (advertising, production, equipment, payroll, etc.). If the business does not have a
lot of extra cash on hand (and few small businesses do), then leasing may be the more sensible choice.
This is probably the biggest reason why small companies lease.

Financing and payment flexibility—It is generally easier to secure financing to lease rather than
purchase a property. In addition, leases can be spread out over longer periods than loans and can be
structured to compensate for cash flow variations (the latter can be an important factor for seasonal
businesses).

Resale value—Is the value of the property likely to increase? If so, how much? Many small business
owners choose to purchase rather than lease—even if they have to accrue significant debt—if they
decide that the asset is a worthwhile long-term investment.

Equipment—Many lease agreements include stipulations that provide lessees with increased flexibility
in terms of upgrading and/or maintaining equipment.

Taxes—Property owners enjoy tax benefits such as depreciation and investment tax credits that are not

OTHER LEASE TERMS

In addition, there are other elements of a lease agreement that can weigh heavily on a contract's overall
acceptability. Details of lease contracts can vary enormously. "In theory," noted Steingold, "all terms of a
lease are negotiable. Just how far you can negotiate, however, depends on economic conditions. If
desirable properties are close to full occupancy in your city, landlords may not be willing to negotiate
with you over price or other major lease terms. On the other hand, in many parts of the country where
commercial space has been over-built, landlords are eager to bargain with small businesses to fill empty
units."

Leasehold Improvements
Leases typically cover any remodeling that needs to be done to the property and specify who will pay for
it. Most such work falls under the category of "leasehold improvements": carpeting, insulation,
plumbing and electrical wiring, lighting, windows, ceiling tiles, sprinkler and security systems, and
heating and air conditioning systems. The lease should specify each improvement and when they will be
made—ideally before move-in. A landlord will be more willing to make such improvements if the lease
duration is long and/or the space taken is substantial, and the improvements are general in nature.
However, as Steingold noted, "if you [the small business owner] have specialized needs—for example,
you're running a photo lab or a dance studio—and your darkroom or hardwood floor would be of
limited value to most future tenants, don't expect the landlord to willingly pick up the costs of the
improvements. The landlord may even want to charge you something to cover the cost of remodeling
the space after you leave." Some leases provide tenants with the option of making improvements
themselves provided that they adhere to certain guidelines and restrictions.

Length of Lease
Negotiations between tenants and landlords often snag on the question of lease length unless the small
business owner has a clear picture of the future. Lessors normally want long leases, lessees short leases
with rights of renewal. Generally, small business owners try to secure leases with mid-range lengths.
Leases of less than a year can leave them more vulnerable than they would like, but multi-year terms
can be dangerous as well, especially if the business is new and unproven. A common compromise is to
include an "option clause" in the contract so that the lessee can stay if he or she wishes at the
conclusion of the original lease period.

Exclusivity
Many small business owners quite reasonably insist that any lease agreement they sign contain what is
commonly known as an "exclusivity clause." This clause provides the tenant with an exclusive right to
sell his or her product or service on the property, obliging the lessor to prevent such sales by other
tenants.

Insurance
Landlords often ask lessees to secure insurance in the event that 1) the tenant damages the leased
property, or 2) customers or others suffer injuries on the premises. Such clauses may be absent if the
space rented is strictly for office use. When insurance is required by the tenant, the landlord frequently
sets the amount.

Use of Premises
Shopping center/strip mall landlords typically include language in the lease contract providing specific
details on approved uses of the premises that are being rented. Such stipulations often serve to protect
the businesses of other tenants. For example, the owner of a cafe in a strip mall may be quite unhappy if
his neighbor, who formerly ran a quiet sports memorabilia shop, decides to change gears and launch a
tattoo parlor.

In addition, lease contracts provide stipulations and regulations on many other issues of interest to both
lessors and lessees. These include:

Signage (regulates the size, style, and brightness of tenant advertising signs)

Compliance with various zoning laws, permits, and restrictions on use of space

Compliance with other local, state, and federal laws

Subletting or assigning the lease

Definition of the space being leased

Security deposit

Landlord's right to enter leased space

Relocation (wherein the landlord relocates a tenant to another space because of remodeling or
expansion by a neighboring tenant)

Default provisions

Hours of operation
Incidents of damage or destruction from natural causes

Repairs

Indemnification provisions

Abandonment (by the tenant, either through outright abandonment, diminished hours of operation,
etc.)

Condemnation (cases where all or part of the property is taken by city, county, state, or federal
government for other use, such as road, right-of-way, or utility easement)

Bailout clauses (in the event of catastrophic developments—tornadoes, riots, wars, floods, droughts,
etc.)

Cotenancy clauses (allows the business owner to break the lease if an anchor store closes or moves)

Recapture clauses (also known as a cancellation clause, this allows landlords to evict tenants for breach
of contract if the tenant is unable to meet minimum rent requirements)

PROPERTY LEASING AS A BUSINESS

Buying, holding, and leasing property is also a common small business practice. It may begin modestly
when a couple has difficulty selling a residence and chooses instead to rent it out. Then, with experience
gained, they expand the activity business by buying, restoring, and leasing other properties. The small
business owner, now a lessor, will be guided by those principles which favor the lessor, already indicated
above. Leasing commercial property is sometimes the start and sometimes the culmination of such
ventures. While most of the fundamentals of leasing are well-established and traditional, innovation is
still possible in marketing such properties. An example is reported by Brandice Armstrong, writing in the
Journal Record (Oklahoma City). Armstrong writes about the success of an Oklahoma City couple
engaged in home and commercial leasing in leasing a commercial building. The owners hit upon the idea
to hold an "open house," virtually unknown in the commercial field. They offered refreshments and door
prizes. They immediately garnered 14 meaningful leads.

CHOOSING BETWEEN EXISTING AND PLANNED BUILDINGS

Most start-up businesses move into already existing facilities. Many small business owners with the
means to do so choose new facilities for the features or the prestige and take out leases while the
facility is still in its planning stages. The savvy small business owner will consider the potential benefits
and drawbacks of both choices before deciding. "Leasing in an existing building provides the Lessee …
with more [knowledge about the place] at the time new space is occupied than any other facility
option," said Wadman Daly in Relocating Your Workplace. "More so than in any other circumstances,
the [lessee] is in a position to closely inspect both the facility and the terms of proposed leases in a
number of competing locations. However, the nature of the lease in an existing building signifies
minimum tenant control over the potential variables in either lease or facility. Rental rates, maintenance
and escalation costs, utilities and building features are fixed or relatively non-negotiable. Landlords may
vary in their abatements and finish-to-suit clauses, however their basic price structure, like that of the
building and mechanical systems, remains unchanged. Of course, there are no investor implications with
this option."