Lease and licence are legal modes in which right to enjoy or do something in an immovable property are granted by a person to another person. Both have many similarities and are used interchangeably in the normal course. However, there are many features, which differentiate them and make them distinct.
What is a Lease?
A lease of immovable property is a transfer of a right to enjoy such property in consideration of a price paid. By way of lease, a right and interest are created on the property, by the lessor, which stands transferred in favour of the lessee.
A lease creates a right or an interest in the enjoyment of the demised property and a tenant or a sub-tenant is entitled to remain in possession thereof until the lease is duly terminated, and eviction takes place in accordance with law.
Section 105 of the Transfer of Property Act, 1882 (TP Act) defines lease as follows:
“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.”
This section defines a lease as a partial transfer, i.e. a transfer of a right of enjoyment for a certain time. When the agreement vests in the lessee a right of possession for a certain time, it operates as a conveyance or transfer and is a lease. The essential elements of a lease are:
- The parties;
- The subject-matter, or immovable property;
- The term, or period;
- The consideration, or rent.
The rights and obligations of the lessor as contained in the TP Act are also subject to the contract to the contrary. Even the right of assignment of leasehold property may be curtailed by an agreement.
An agreement to lease or an agreement merely defining the terms of the tenancy, is not a lease; nor is it a licence.
A licence is defined in Sec. 52 of the Indian Easements Act 1882 as 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. A mere licence does not create any interest in the property. A licence creates a right in the licensee to enter into a land and enjoy it. A lease, on the other hand, would amount to the transfer of property. The distinction between a licence and a lease is marked by the last clause of the definition, for a licence does not create any estate or interest in the property to which it relates.
A licensee is not entitled to notice to quit before eviction.
Accordingly, a licence-
- Is not assignable (Sec.56, Indian Easements Act 1882);
- Does not entitle the licensee to sue strangers in his own name;
- Is revocable by the grantor (Sec. 60, Indian Easements Act 1882);
- Is determined when the grantor makes an assignment of the subject-matter.
Lease or licence-Distinguished
In The Law of Landlord and Tenant (4th Edition) Evans and Smith states as under:-
“A lease, whether fixed-term or periodic, confers a right in property, enabling the tenant to exclude all third parties, including the landlord, from possession, for the duration of the lease, in return for which a rent or periodical payment is reserved out of the land. A contractual licence confers no more than a permission on the occupier to do some act on the owner’s land which would otherwise constitute a trespass.”
In Halsbury’s Laws of England, Volume 23, pages 427, 428 and 429, the crucial considerations in a lease versus licence situation have been stated as follows:
“PRINCIPLES FOR DETERMINING WHETHER AGREEMENT CREATES LEASE OR LICENCE. In determining whether an agreement creates between the parties the relationship of landlord and tenant or merely that of licensor and licensee the decisive consideration is the intention of the parties. The parties to an agreement cannot, however, turn a lease into a licence merely by stating that the document is to be deemed a licence or describing it as such. The relationship of the parties is determined by law on a consideration of all relevant provisions of the agreement; nor will the employment of words appropriate to a lease prevent the agreement from conferring a licence only if from the whole document it appears that it was intended merely to confer a licence. In the absence of any formal document the intention of the parties must be inferred from the circumstances and the conduct of the parties.
NATURE OF GRANT OF EXCLUSIVE POSSESSION. The fact that the agreement grants a right of exclusive possession is not in itself conclusive evidence of the existence of a tenancy, but it is a consideration of the first importance. In deciding whether a grantee is entitled to exclusive possession regard must be had to the substance of the agreement. To give exclusive possession there need not be express words to that effect; it is sufficient if the nature of the acts to be done by the grantee requires that he should have exclusive possession. The grant of an exclusive right to a benefit can, however, be inferred only from the language which is clear and explicit. If an exclusive right of possession is subject to certain reservations or to a restriction of the purposes for which the premises may be used, the reservations or restriction will not necessarily prevent the grant operating as a lease.
WHEN GRANT CONFERRING EXCLUSIVE POSSESSION OPERATES MERELY AS LICENCE. A grant which confers the right to exclusive possession may operate as a licence in the following circumstances which negate the intention to create a lease:
INSTANCES OF AGREEMENTS CREATING LICENCES. A licence is normally created where a person is granted the right to use premises without becoming entitled to exclusive possession thereof, or the circumstances and conduct of the parties show that all that was intended was that the grantee should be granted a personal privilege with no interest in the land. If the agreement is merely for the use of the property in a certain way and on certain terms while the property remains in the possession and control of the owner, the agreement will operate as a licence, even though the agreement may employ words appropriate to a lease”.
In Associated Hotels of India v RN Kapoor, the Supreme Court set out the following propositions as well established for ascertaining whether a transaction is a lease or licence:
- To ascertain whether a document creates a lease or a licence, the substance of the document must be preferred to its form;
- The real test is the intention of the parties – whether they intended to create a lease or a licence;
- If the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which legal possession continues with the owner, it is a licence; and
- If under the document a party gets exclusive possession of the property, prima facilities, he is considered to be a tenant; but circumstances may be established which negate the intention to create a lease.
There is no simple litmus test for distinguishing a lease from a licence. The character of the transaction turns on the operative intent of the parties. If permission to use the land without the right to exclusive possession is alone granted, the transaction is a licence. The test of exclusive possession, though not decisive, is of significance. Exclusive possession coupled with the transfer of a right to enjoy the property is an important test and indicates an intention to create a lease. It may create a lease even though the sum is described as a ‘licence fee.’
A finding on the question whether the defendant is a tenant or a licensee is a finding of fact. The Supreme Court has held that exclusive possession would not be conclusive evidence of the existence of a tenancy though that would be a consideration of first importance. It has further been held that exclusive possession itself is not decisive in favour of a lease and against a mere licence, for, even the grant of exclusive possession might turn out to be only a licence and not a lease where the grantor himself has no power to grant the lease. Exclusive possession of the premises in the hands of a party is always crucial for ascertaining as to whether a lease has been created, but even in the case of exclusive possession, sometimes, the court may upon consideration of the terms and conditions of documents and conduct of the parties, hold that the parties never intended to create a lease, and only leave and licence was granted. Thus, exclusive possession by itself will not amount to the creation of interest, and it will not militate against the concept of a licence if the circumstances negates any intention to create any interest.
Interest in the property
It is the creation of an interest in immovable property or a right to possess it that distinguishes a lease from a licence. For the purpose of deciding whether a particular transaction is a lease or a licence, the question of intention of the parties is to be determined, and the intention has to be inferred from the circumstances of each case. It is essential, therefore, to look to the substance and essence of the agreement, and not merely to the form.
The crucial test in each case is whether the instrument is intended to create or not to create an interest in the property and the subject-matter of the agreement. If it is in fact intended to create an interest in the property it is a lease, if it does not, it is a licence.
Intention of the Parties
In cases where courts are required to consider the nature of transactions and the status of parties thereto, one cannot go on mere nomenclatures. In order to ascertain the substance of the transaction, one has to ascertain the purpose and substance of the agreement. In such cases, the intention of the parties is the deciding factor. In order to ascertain the intention, the surrounding circumstances including the conduct of the parties have be to examined. In case of determining whether the transaction is a lease or licence, an effort should be made to find out whether the deed confers a right to possess exclusively coupled with transfer of a right to enjoy the property or what has been parted with is merely a right to use the property while the possession is retained by the owner. The conduct of the parties before and after the creation of relationship is of relevance for finding out their intention. The line between lease and licence is very thin. Mainly the intention is to be gathered from the meaning and the words used in the document, except where it is alleged and proved that the document is a camouflage. If there be a formal document, the intention is inferred from its terms. If the document is ambiguous, the question is to be decided with reference to evidence and attendant circumstances. However, parties to an agreement cannot contract out of the Rent Acts, as if they were able to do so, the Acts would be a dead letter. A document which expresses the intention genuine, or bogus, of both parties or of one party to create a licence will nevertheless create a tenancy if the rights and obligations enjoyed and imposed satisfy the legal requirements of tenancy. Whether a transaction is a licence depends on the intention of the parties, and the nature of the possession granted.
The following circumstances, were held to establish the transaction as a lease:
- Exclusive possession of the premisespecially;
- The grantor had no access to the portion of the premises occupied by the person in possession;
- The portion occupied by the person in possession was provided with a sub-meter for electricity;
- The monthly payment, though termed as ‘compensation and commission’, was, in reality, rent for the premises occupied by person in possession;
- The demise was for a fixed term of five years;
- No power was reserved for cancelling the contract before the expiry of the fixed term;
- Provision was also made for extending the term of the contract by mutual agreement;
- Penal provisions were incorporated, providing for enhanced payment of rent in case the person in possession continued after the term of five years.
However, in the following circumstances, the transaction is held as a license:
- Premise was to be run only for sale of a particular product;
- Premise was to cater to the needs of a particular group of people;
- License would not be heritable and assignable;
- On expiry of two years and on expiry of any renewed period, possession was to be handed back;
Where the question arises as to whether an agreement is a lease or a licence, the intention of the parties must be gathered from the terms of the agreement, examined in the light of the surrounding circumstances. The description given by the parties may be evidence of the intention, but is not decisive. The mere use of words appropriate to the creation of a lease will not preclude the agreement from operating as a licence. A recital that the agreement does not create a tenancy is also not decisive. The crucial test in each case is, whether the instrument is intended to create an interest in the property, is a lease; if it does not, it is a licence.