Unit 4

INTRODUCTION OF LEASE
In India, transfer of property is not possible for every individual because of financial issues. The
permanent or absolute transfer is a luxury for some people, but a temporary transfer is
something that has given every citizen the right of enjoying any property. One of the modes of
transferring
property for a particular period of time is Lease.
MEANING OF LEASE
Lease is a transfer of an interest in the property for a stipulated period of time without
transferring the ownership of that property. In a lease, right of possession is transferred instead
of the right of ownership. Transferor here is called the
lessor and the transferee i.e. the one enjoying the property for a period is called lessee. Lease
is governed by the Transfer of Property Act, 1882 and it is given from Sections 105 to 117
DEFINITION OF LEASE
A Lease can be defined as a contract where a party being the owner (lessor) of an asset
(leased asset) provides the asset for use by the lessee at a consideration (rental), either fixed or
dependent on any variables, for a certain period (lease period), either fixed or flexible, with an
understanding that at the end of such period, the asset, subject to the embedded options of the
lease, will either be returned to the lessor or disposed off as per the lessor’s instructions
What are the essentials of a lease?
o Parties must be competent: The parties in a lease agreement should be
competent to enter into a contract. Lesser should be entitled to a property
and have absolute rights over that property.
o Right of possession: Ownership rights are not transferred in a lease, only the possession of
the property is transferred.
o Rent: Consideration for a lease can be taken in the form of a rent or
premium.
o Acceptance: Lessee, who is to get the interest in the property after lease,
has to accept the lease agreement along with the time period and terms &
conditions imposed on the transfer.
o Time Period: Lease always takes place for a particular time period which is
to be specified in the lease agreement. It can be relaxed at the option of the
lessor.

KINDS OF LEASE
1)Finance Lease
A finance lease is a lease in which the lessor passes nearly all the risks & benefits of asset
holding to the lessee in exchange for lease rents. In other terms, it places the lessee in a similar
position as if they have bought the asset. Finance leases are divided into two stages: The first is
the primary phase. This is a non-cancellable period during which the lessor recoups his entire
investment via lease rental. The main phase might last an unlimited amount of time. The lease
rental during the second term is significantly lower than that for the introductory period.
2)Operating Lease
The lessee utilises the property for a specified time under an operational lease. After providing
notice, any party has the opportunity to cancel the lease. In this kind of lease:
-The lessor bears all costs.
-The lessor would not be able to recover the entire item cost.
-The lessor provides specialised services.
  It is preferable when the equipment is expected to become obsolete.
3)Leveraged Lease
A leveraged lease is one in which the lessor loans a part of the purchase cost from lenders or
financial firms. The assets and lease rents serve as collateral for this loan, and the debt is paid
straight from lease rents by either a lessee or a lessor.
The excess (the gap between the lease contract and the payback part) is subsequently
delivered to the lessor. Thus, under a leveraged lease, the lessor operates as an ownership
participant, providing only a portion of the price of the properties while the lender provides the
remainder
4)Conveyance Lease
The lease under a conveyance kind would be for a lengthy period with the explicit goal of
transmitting property ownership to the lessee.
5)Sale and Leaseback
A corporation that owns the property sells it all to the lessor in such a sale & leaseback
transaction. The lessor pays for the property instantly but leases it to the seller. As a result, the
asset's seller turns to the lessee. The investment is retained by the seller, who seems to be a
lessee, while ownership is owned by the lessor, who is the purchaser. This agreement is made
so that the owning firm may acquire financing to manage the company and the asset.
6)Complete and Non-Pay-Out Lease
A complete pay-out lease is the one where the lessor leases the entire worth of the leased
property. In a non-pay-out rental, the lessor repeatedly rents out the same property.
7)Specialised Service Lease
The lessor or holder of the property is an expert in the asset he is renting out. He not just leases
out but provides the tenant with customised personal attention. Electronics, autos, air
conditioners, and other such items are examples.
8)Net and Non-Net Lease
The lessor is responsible for maintenance, insuring, plus other incidental expenditures under a
non-net lease. As mentioned earlier, the lessor is unconcerned with the upkeep costs under a
net lease. The lessor solely provides financial services.
9)Sales Aid Lease
When the lessor joins an advertising alliance with a producer, this is referred to as a sales
assistance lease.
Cross Border Lease
10)Cross-border leasing refers to leasing across national borders. Shipping, aviation service,
and other services fall within this category.
11)Tax Oriented Lease
A tax-oriented lease is not borrowing on collateral but counts as a lease.
12)Import Lease
The firm offering the material for lease under an import lease might be situated in a foreign
nation, yet the lessor & lessee may be from the same country. The majority of the gear is
imported
13)International Lease
In this case, the participants in the leasing transactions may be from different nations, which is
analogous to a cross-border lease.
What happens when the lease agreement does not prescribe the time period of the lease?

How is a lease executed?

Section 107 states about lease how made. This section covers three aspects:
1. When there is a lease of Immovable property for a term of 1 year or more – This can only be
made by a registered deed.
2. All other leases of Immovable property – Can be either made by a registered deed or an oral
agreement or settlement along with the transfer of possession of that property.
3. When the lease is of multiple properties that require multiple deeds, it will be made by both
the parties of the lease.
In the case of Punjab National Bank v. Ganga Narain Kapur (1.), Court held that if the lease
is done through an oral agreement, then the provisions of Section 106 will apply.

Rights and liabilities of Lessor and lessee

Rights of the lessor are
1. A lessor has a right to recover the rent from the lease which was mentioned in the
lease agreement.
2. Lessor has a right to take back the possession of his property from the lessee if the
lessee commits any breach of condition.
3. Lessor has a right to recover the amount of damages from the lessee if there is any
damage done to the property.
4. Lessor has a right to take back the possession of his property from the lessee on
the termination of the lease term prescribed in the agreement.

Liabilities of the lessor

1. The lessor has to disclose any material defect relating to the property which the
lessee does not know and cannot with ordinary supervision find out.
2. Lessor is bound by the request of the lessee to give him the right of possession over his
property.
3. Lessor can enter into a contract with the lessee if he agrees to abide by all terms and
conditions prescribed in the agreement, he can enjoy the property for the rest of the time period
without any interference with an obligation to pay the rent later on.

Rights of the lessee

1. During the period lease is in effect if any alteration is made (alluvion for the time
being in force) then that alteration will come under that same lease.
2. If a significant part of the property that has been leased is destroyed wholly or partly by fire,
by flood, by war, by the violent acts of the mob or by any other means resulting in its inefficiency
of being a benefit for the lessee. If this happens, the lease Is voidable at his option.
There is a proviso to this section that states if the damage is done due to any act of the lessee
himself, this remedy will not be available for him.
1. Lessee has the right to deduct any expenses he has made for repairs in the property from the
rent if the lessor has failed to in reasonable time.
2. Lessee has a right to recover any such payment which a lessor is bound to make by can
deducting it from the interest of the rent or directly from the lessor. He has this
right when the lessor has neglected to make that required payment.
3. Lessee has a right to detach all things that he may have attached in the property or earth. His
only obligation is that he has to leave the property in the same condition as
he received it.
4. When a lease is of unspecified duration in the lease agreement, lessee or his legal
representative have a right to collect all the profits or benefits from the crops which
were sown by the lessee at that property. They also have a right of free ingress and
egress from such property even if the lease ends.
5. Lessee has a right to transfer absolutely the property or any part of his interest in that
property by sub-leasing or through mortgaging. Lessee is not independent of the terms and
conditions mentioned in the lease agreement.

Liabilities of the lessee

1. Lessee is under an obligation to disclose all related material facts which are likely to
increase the value of the property for which the lessee has an interest in and the lessor
is not aware of.
2. Lessee is under an obligation to pay the rent or premium which is settled upon in the
agreement to the lessor or his agent within the prescribed time.
3. Lessee is under an obligation to maintain the property in the condition that he initially
got the property on commencement of the lease and he has to return it in the same
condition.
4. If lessee gets to know about any proceedings relating to the property or any
encroachment or any interference, then lessee is under an obligation to give notice to the lessor
5. Lessee has a right to use all the assets and goods which are on the property as an
owner would use which is preserving it to the best of its nature. He is although under
obligation to prevent any other person from using that asset or good for any other
purpose from what was prescribed in the lease agreement.
6. The lessee cannot attach any permanent structure without the consent of the lessor
except for the purpose of agriculture.
7. Lessee is under an obligation to give the possession of the property back to the lessor after
the expiry of the prescribed term of the lease.

DISTINCTION BETWEEN LEASE AND LICENCE

What is “Lease” and “License”?
The Transfer of Property Act, 1882 defines lease. It is defined as “a transfer of immovable
property for a specific amount of time for consideration for which the transferee accepts the
terms of the agreement”.
According to Section 52 of the Indian Easement Act of 1882, a license is a right granted by one
person to another, or to a specific number of persons, to do or continue to do something in or on
the grantor’s immovable land.
1)Rights available
LEASE- A transfer of the right to enjoy the property for a certain period of time or forever
Licence -A license is a specific right to use given to a tenant to do something in or on the
landlord’s property for a temporary period of time
2)Example
LEASE -XYZ is given a two-year lease on ABC’s house. XYZ will pay monthly rent in exchange
for having sole possession of that home.
LICENCE -For a period of 11 months, Sam permits Roop to occupy the property and reside
there
3)Transfer of Interest
LEASE -When the property is given to the lessee for possession. Therefore, the interest in
property is transferred to the lessee. During the time of the lease, the lessor gives up his right to
use the property, and the lessee receives that right.
LICENSE- However, there is no such transfer of interest in this case.
4)Transfer of right
LEASE -As per the Transfer of Property Act, the lease is heritable or transferable such as
leasing property management
LICENSE -But, a license is non-transferrable
5)What happens when there is a sale of property or death of the party/parties
LEASE-Lease is not affected by it In these LICENSE-the license will be terminated

WHICH OPTION IS BETTER?

The choice between a Lease or Leave and Licence agreement depends on the situation. It also
depends on the intentions of the parties.
As a landlord, it would be preferable to consider Leave and licence agreement as there is no
transfer interest in the property. Also, the licensee does not have the right to keep using it.
A lease might be advantageous from the perspective of a licensee if he needs to utilize the
property for a long time or wants to invest in it.
The licensee, in this situation, has the advantage of having more rights and interest in using the
property while also reducing the danger of being evicted. So, the decision of whether to opt for
Lease or Leave and Licence agreement, it all depends on the parties and their preferences.

DETERMINATION OF LEASE
1)By Lapse of Time
At the expiration of the time period a lease of immovable property comes to an end. This is
known as determination by lapse of time. There is no requirement of any notice or formality for
the determination of the lease. A lease made for an indefinite period does not mean that his
heirs will have interest in the property unless the agreement has words that indicate a hereditary
interest.
2)By happening of Specified Event
If the term of the lease is dependent on the happening of certain event and if any part of the
term fixed remains unexpired, it is of no consequence. In the case, Juthika Mulick v. MY Bal, it
was held that it is not necessary that the term ‘certain’ need not be certain on the date of the
lease.
Illustration
A lease shall come to an end if the lessee dies before the expiry of ten years, the time till which
the lease was made.
3)By termination of Lessor’s Interest
When the lessor has a limited interest in the property then with the termination of the lessor’s
interest, the lease also comes to an end. If a lessee sublets the property, the sublease comes to
an end upon the death of the lessee.
In the case, Atyam Veeraju v. Pechettti Venkamma, the Supreme Court held that the lease
granted by the manager of the temple comes to an end with the expiry of the office of the
manager or his successor.
4)By Merger
In simple terms, in a merger, a greater estate coincides with a lesser estate (the lesser estate is
said to be merged in the greater) and meets in one and the same right and in the same person,
without any intermediate estate. This doctrine is applicable only when the entire interest of both
the lessor and the lessee becomes vested in the same person.
In Parmeshwar Singh v. Sureba Kuer, it was held that the doctrine of merger is only applicable
in the case where the entire interest of the lessor and the lessee becomes vested in the same
person and in the same time.
5)By Express Surrender
In surrender, the smaller interest unites with the larger interest. It becomes effective at once and
the lease is determined immediately. The surrender of the estate may be express or implied.
The lessee’s right to enjoyment of the property reverts back to the owner when he vacates the
property before the expiry of the month.
6)By Implied Surrender
In simpler words, it means that when a lessee accepts the same property already leased to him
by the lessor, there is implied surrender of the former lease. If the surrender takes place by the
operation of law, it is implied surrender.
7)By Forfeiture
It is another mode for the determination of the lease. If the lessee losses the right to use the
property by his own fault, forfeiture is said to take place. Notice is mandatory for the forfeiture.
This clause provides that a lease terminates by forfeiture in the following circumstances:- (a) in
the case lessee breaks on express condition which provides that on breach of it, the lessor may
re-enter the property, or (b) in case the lessee renounces his character as such by setting up a
title in a third person or by claiming title in himself, or (c) the lessee is adjudicated an insolvent
and the lease provides that the lessor may reenter on the happening of such event.
8)By expiry of notice to quit
When there is a requirement to terminate the lease, then the lease is determined after the expiry
of the notice to quit. When the lease is for year to year, the notice expires after six months and
when it is for month to month, the notice expires after 15 days. It is not mandatory to state any
ground for the notice to quit.

MODES OF CREATION OF LEASE

A. Parol/Oral Lease
This is an agreement of mere words. Under the law, it is permissible as having of a lease at will.
It must however have the following elements in order for it to be valid;
1. It must reserve the best rent obtainable (not premium or rack rent);
2. It must be for a period not exceeding three years; and
3. It must confer exclusive possession.
While parol/oral leases are permissible, they usually present difficulties in proving the essential
terms agreed to by the parties; for a party alleging an oral agreement is duty bound to prove
such an agreement to the hilt. Where there is a breach in oral agreement, the aggrieved party is
only entitled to part performance.

B. Written Lease (Formal Lease)

This is a mere agreement in writing, and applicable to leases not exceeding three years. It is
signed by the parties to it only, and binding on them as a contract and it is enforceable. The
advantage of a lease in writing over oral lease is that a lease in writing is easily ascertainable
and enforceable. Aggrieved parties are entitled to specific performance in addition to the
remedy of part performance and there may be award of damages (if claim for specific
performance fails). Part performance is where the plaintiff alters his position on the faith of the
contract. He acquires an equity against the defendant which the court may enforce. Part
performance is an exception to the Statute of Fraud 1677, which prohibits the enforcement of
contract respecting lands that are not in writing.

C. Lease by Deed or Under Seal

It is mandatory and not conditional for a lease alease above three years to be by deed. It
mlease above three years to be by deed. It must be Signed, Sealed and Delivered. Under
Section 3 of Statute Fraud Act of 1677; and Section 77(1) of Property and Conveyancing Law
(PCL), a lease which is required to be in writing is void for the purpose of conveying or creating
a legal estate unless made by deed.

In Anwasi v. Chabasaya, the Court held that a contract under seal is a written document, which
is required to be signed as well as sealed by the party bound thereby and delivered by him, to or
for the benefit of the person to whom the liability is incurred. However, by the rule in the old case
of Walsh v. Lonsdale, an agreement to create a lease (with all the essential elements) will still
operate as a lease, notwithstanding that it is not created under seal. This is based on the maxim
that “equity looks at the intention of the parties and not the form” and “equity regards as done
that which ought to be done.”