This article has been written by Muhammad Jahangir Hossain, pursuing a Certificate Course in Real Estate Laws, and edited by Oishika Banerji (Team Lawsikho).
It has been published by Rachit Garg.
Suppose, Mr. X has some property. But he lacks the time and resources to get benefit out of the property. He wants someone who will properly utilise the property without hampering anything regarding ownership of Mr. X. In return, that man will share the profit, earned by utilising that property, to Mr. X. This type of contractual agreement can be done in various ways. Lease and licence are two of such ideal ways. The terms and conditions of a lease or licence agreement should be drafted in such a way so that it reflects the actual intention of the parties whether they want the deed to be a lease agreement or licence agreement. So, knowing the similarities and discerning differences between the lease and licence is very much crucial for a lawyer. Sometimes people get confused over the two terms. This article aims to eliminate such confusion.
Statutory definition of lease and licence
Before going into the details, it would be appropriate to see what the Indian law talks about lease and licence. The term ‘lease’ and ‘licence’ are defined under Section 105 of the Transfer of Property Act, 1882 and Section 52 of the Indian Easements Act, 1882 respectively. Section 105 of the Transfer of Property Act, 1882 states that,
“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 specific occasions to the transferor by the transferee, who accepts the transfer on such terms.”
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 rendered is called the rent. The incident mentioned in the starting is the example of lease.
Further, Section 52 of the Easements Act, 1882 provides that,
“Where one person grants to another, or to 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 licence.”
The party who grants the licence is called the licensor and the party who gets the licence is called the licensee. For example, the government of a country issues a licence to the Bar owner to do his liquor business. Here the government is the licensor and the bar owner is the licensee. Without a licence one is not permitted to do liquor business. If we dissect the above two statutory definitions of lease and licence we can find the components of which these are made of.
Components of lease
A lease is a transfer of ‘right to enjoy’ thereby creating an interest of the lessee. This is not a mere permission as like a licence, but it creates a kind of possession and ownership for a certain period of time or in perpetuity, as determined by the parties. However, the actual right, title, ownership always remains with the lessor and the lessor can regain his possession and full control if the lease is duly terminated or lessee is restrained by his wish or as per law.
To constitute a lease there must be a ‘consideration’, which can be paid to the lessor by the lessee at the time of transfer or promised to pay to the lessor by the lessee periodically or on specific occasions, as determined by the parties.
This consideration can be by way of money or by share of crops grown out of cultivation of the lease-hold land, by rendering service, or by any other valuable things. Whatever is the nature of the consideration, there must have been a consideration to form a lease. A lease without a consideration is invalid. The components of lease have been provided hereunder:
- Transfer of a right to enjoy such (immovable) 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 specific occasions to the transferor by the transferee,
- Who accepts the transfer on such terms.
Components of licence
A licence is a kind of grant or permission, but not any transfer of interest or possession. After getting a licence, a licensee can do his business anywhere according to the nature of business. Suppose, a bar owner does his business in his space, on the other hand a customs agent licence entitles the licensee to do work in the concerned offices. A land-owner can give permission to anybody or a definite number of people to enter into his premises and do his job subject to paying fees or charges as determined by the landowner. This permission is a kind of licence. If any person does the respective work without licence, that would be an unlawful activity. The components have been stated hereunder:
- One person grants to another, or to 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 licence.
Similarities & differences between lease and licence
Nature of transfer:
A lease is a transfer of interest in respect of the property. The lessor transfers the right to use or occupation in favour of the lessee upon some conditions like period of time or mode of payment. Therefore, the lessee gets the right to defend his possession in the leasehold property. In case of licence, the licensee also gets some rights of use of the licensed property or may enter into the area of possession of the licensor. The subtle difference is that in licence the whole property, permitted for licence, does not transfer for the exclusive occupation of the licensee. He just gets permission to use the property as per jurisdiction of the licence.
Hence, a licensee does not own any interest or right to defend his possession with the licensed property. He just gets the permission to do something or to continue doing something as per the intention of the licensor or as referred in the licence paper. Like, when we buy a ticket from the railway station, we get a licence to enter the platform and go anywhere using the train, which is owned by the railway authorities. But we do not get any right to occupy the area of railway or train exclusively as we wish. On the other hand, the lease-hold property remains with the lessee under his full control, though the lessor is the actual title-holder of the property.
Suppose, the government gives someone a plot by way of lease for some years. The lease-holder can do any construction over the land and get benefit out of them. However, the lessee is bound to comply with all the rules of the government in respect of the lease-hold property.
A lessee can transfer the lease by way of sublease or lease can be transferred to the inheritor upon death of the original lessee. Changes of the lessor or the lessee does not affect the lease, if other conditions remain the same. Similarly, if the lessor transfers the property by way of sale in favour of any third party, the right of the lessee shall not be bothered anyway. The new owner of the land has to wait to get the possession until the lease expires.
But the licence cannot be transferred by way of sub-let or inheritance. Licence is always granted by a specific person or body to another specific person or body, who is the only authorised to do the work as per the licence. With the death of the licensor or the licensee, the licence comes to an end immediately. Similarly, if the licensor or the licensee is changed, the licence agreement shall not be valid anymore. As the licence agreement is always granted by a specific person or body to another specific person or body.
In respect of the property, the property which has been selected for the lease cannot be altered by way of exchange with any other property. But in the case of a licence, depending on the nature of the business it can be used in any place, because in the licence there is no actual transfer of possession of the property.
The licensor can anytime cancel or revoke the licence at his own discretion. But in case of lease, the lessee gets exclusive rights over the property even against the lessor who is the original owner. Therefore, a lease cannot be terminated by the lessor, unless it is conditioned by the clauses of the agreement or ordered by court.
Judicial precedents on distinction between lease and licence
Some of the judicial decisions which have been able to structure out the distinctions between lease and licence have been laid down hereunder.
Associated Hotels of India Ltd. vs. R.N. Kapoor (1960)
In the case of Associated Hotels of India Ltd. vs. R.N. Kapoor (1960), Justice Subba Rao had observed that a clear distinction between lease and licence do exist and the same can be understood in the following ways:
- In order to ascertain whether a document creates a licence or lease, the very the substance of the document needs to be preferred to the form;
- The actual test rests with the intention of the parties as to whether they intend to create a lease or a licence;
- Lease is said to be created when the document reflects interest between the parties. Whereas, licence implies permitting another to make use of a property whose original owner continues to have legal possession on the same.
- If at all under the provided document, a party is vested with exclusive possession of the concerned property, he will be considered to be a tenant. In all other cases the document reflects a licence agreement.
Delta International Ltd vs. Shyam Sunder Ganeriwalla And Anr (1999)
The Supreme Court of India while deciding the case of Delta International Ltd vs. Shyam Sunder Ganeriwalla And Anr (1999) which involved an ambiguous document that could not distinguish between lease and licence, have stated that the true intent or purpose of the document is required to be made out so as to distinguish between lease and licence. In the present case, the Apex Court determined the document to be a leave and licence instead of lease because on the basis of the following grounds:
- No pleading by the defendants in the present case was provided so as to state that the document concerned was a camouflage that defeated the tenant’s rights.
- The alleged document had contemplated three different types of agreements, one, that of a leave and licence; execution of a sub-lease if consent could be obtained from the tenant and purchase of equipment in case of sub-lease.
- The second and the third part of the concerned agreement had never seen the light of the day because of which the Court had concluded that the concerned agreement is a deed of `leave and licence’ and not a `lease’.
Lease and licence are the two forms of regular business in our day-to-day life. When a lawyer intends to draft an agreement on lease or licence, he/she must be concerned that the clauses of the agreement must comply with the discerning facts of the lease or licence. So that the actual intention of the parties does not get hindered.
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