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In this article, Pradeep Dubbula, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses how to draft a corporate lease deed.

Introduction

The laws pertaining to the transfer of property and/or the usage rights of property are covered under the Transfer of Property Act, 1882 (ToPA). It broadly covers various modes of transfer such as Sale, Mortgage, Exchange, Lease, Gift etc; Lease is covered in detail in Chapter 5 of the Transfer of Property Act.

What is a ‘lease’?

As per Section 105 of the Transfer of Property Act, the definition of ‘Lease’ can be understood as a transfer of a right to enjoy property for a certain time or in perpetuity; in consideration of a price paid or promised or of money, a share of crop, service or any other thing of value to be rendered periodically or on specific occasion to the Lessor by the Lessee who accepts the transfer on such terms.

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In this context,

  • Lessor is the absolute owner of the property which is the subject matter of the lease;
  • Lessee is the person acquiring the rights to use and enjoy the property on lease from the Lessor;
  • Duration is the term for or period for which the rights to use and enjoy the property is granted. The duration of the lease can be for a certain time, express or implied or can also be in perpetuity;
  • Premium or Rent is the consideration for granting the rights to use and enjoy the property can be in the form of a one-time price paid or promised i.e. Premium or on payment of money or any other thing of value, periodically or on specific occasions or intervals, known as Rent.

Therefore, by executing a Lease Deed, what is transferred by the Lessor to the Lessee is only his right to enjoy the property, subject to the terms agreed upon, and not the whole or any part of the absolute ownership rights, this type of transfer in conveyancing parlance is known as a ‘demise’.

A lease can be understood as the rightful separation of ownership and possession i.e. prior to the grant of the lease, the Lessor has the right to enjoy the possession of the land but during the concurrence of the lease, he excludes himself from that right (Anwarali vs Jaminilal Roy, AIR 1940 Cal. 89).

The usage of the term ‘demise’ in a Lease Deed or instrument of lease triggers the Lessor’s liability for the warranty of quiet enjoyment of the property the Lessee is entitled to remain in possession until the lease is terminated by due process of law (Jaswantsinh Mathurasinh & Anr. vs Ahmedabad Municipal Corporation & Ors., 1992 Supp. (1) S.C.C. 5, 12.).

Difference between Sale and Lease

Sale / Purchase

Lease
1. The Purchaser gets absolute ownership rights of the property The Lessee only gets a right to enjoy the property but not ownership rights
2. There is no logical end to the ownership of the property The Lessee’s right to possession and enjoyment of the property comes to an end upon the termination of the lease unless the lease is in perpetuity
3. The sale consideration is usually paid once at the time of purchase of the property The consideration can either be in the form of a one-time premium or as rent at periodic intervals
4. A sale grants the right to possession, enjoyment of benefits and the right of further sale Lease grants only the right to possession and use of the property. Although some arrangements do allow a sublease or transfer of lease but the rights of the Owner are always valid and subsisting
5. The overall cost of purchasing a property is usually higher than leasing. Leasing is a relatively cheaper mode of
6. The purchaser can enjoy the residual value of a property The Lessee cannot enjoy the residual value of a property
7. Documents involved are Agreement to Sell, Sale Deed, Transfer Deed, Deed of Conveyance etc. Documents involved are Agreement to Lease or Lease Deed

Difference between Lease and License

Lease

License
1. The Lessee gets a right to possession and enjoyment of the property but not ownership rights The Licensee gets a right use the property for a fixed time and for a predetermined consideration
2. Usually involves a long-term duration, can also be in perpetuity Involves a short-term duration, generally for 1 year but up to 5 years at maximum (in Maharashtra)
3. The consideration can either be in the form of a one-time premium or as rent at periodic intervals The consideration is usually in the form of a monthly license fee
4. The lease cannot be easily terminated by the Owner License can be easily terminated by the Owners considering the temporary nature of the arrangement
5. The maintenance and upkeep of the property is the duty/responsibility of the Lessee Although there is a level of care required the burden of maintenance and upkeep of the property falls on the owner
6. Relatively higher cost of the transaction A deposit involved in the costs involved are usually quite less
7. The preferred mode of transaction for long-term residential arrangements and commercial setups Preferred mode of the transaction is short-term residential arrangements
8. Documents involved are Agreement to Lease or Lease Deed Document involved is a Leave and License Agreement

Stages of a Lease Deed

The entire transaction executing the Lease Deed can be broken down into the following stages:

  1. Negotiation Stage: This is the very first stage of the transaction and it comes into effect right after the Lessee has identified a property suitable for his use. The parties involved shall need to discuss the various commercial aspects of the deal such as duration of the lease, consideration, mode of payment etc. The focus at this stage is more on the commercial aspects rather than the legal aspects.
  2. Preliminary Documentation Stage: Once the commercial aspects of the transaction have been agreed upon, the parties involved can get into an Agreement to Lease or preferably a Memorandum of Understanding recording the commercial aspects of the deal and the broad duties and obligations of the respective parties. This creation of an Agreement to Lease or Memorandum of Understanding is to place on record the intention of the parties and thus allow the next stage of the process.
  3. Title Investigation or Due Diligence Stage: The focus of this stage is to verify the Lessor’s title to the property and the Lessor’s ability to demise the property by way of the lease in favour of the Lessee. This typically involves a thorough reading of the title deeds, verification with the Government records by way of a Title Search at the respective office and finally the issuance of Public Notices inviting objections. The issuance of Public Notice is not mandatory and can be avoided based on the situation. At this stage, it is also necessary to see what permission are mandatory and the steps required to obtain the same.
  4. Drafting and Payment of Stamp Duty Stage: The lease can be demised by way of an Agreement to Lease however the preferred mode is a Lease Deed as it is not contingent upon a future instrument. Once the document has been drafted taking into consideration the various terms of the transaction and the draft approved by the parties; the payment of stamp duty can be undertaken on the Lease Deed. Since Stamp Duty is a State subject, let us consider an example of Maharashtra; an Agreement of Lease needs to be stamped as per Article 25 of Schedule I whereas a Lease Deed can be stamped as per Article 36 of Schedule I of Maharashtra Stamp Act (Schedule I of The Maharashtra Stamp Act, 1958).
  5. Execution and Registration Stage: This stage involves the payment of premium by the Lessee to the Lessor. The parties can simultaneously exchange the consideration amount, take possession of the property and execute the Lease Deed. Though not mandatory, it is accepted practice for two people to record their signature as witnesses to the execution of the Lease Deed. Once the instrument has been executed it can be put up for registration at the Office of the applicable Sub-Registrar of Assurances having suitable jurisdiction over the property.
  6. Post Registration Stage: Once the registration of Lease Deed is done and the property is in possession of the Lessee, it is advisable that the various governmental and semi-governmental bodies having jurisdiction over the property be notified in writing about the change of holder. This would ensure a smooth transition and make the process of making applications and acquiring Licenses relatively easy.

It is important to note that as per Section 107 of the Transfer of Property Act, 1882 and Section 19 (1) (d) of the India Registration Act, 1908 it is mandatory to register the lease of an immovable property for a term exceeding one year or system of yearly payment of rent.  (The Transfer of Property Act, 1982) (The Registration Act, 1908). A lease deed that needs to be mandatorily registered is void if not registered (Usha Ranjan Ray Burman vs Sova Das, AIR 1990 Cal I).

Template

Here is a short template of a standard Lease Deed for setting up a small scale industry in an Industrial area.

LEASE DEED

THIS DEED OF LEASE entered into at Mumbai on this ____ day of ________ March 2018 between MR. ABC residing at ________________________________________________________ Mumbai – __________. hereinafter referred to as ‘THE LESSOR’ which expression unless be repugnant to the meaning or context thereof will mean and include his heirs, survivors and legal assigns of the ONE PART;

AND

M/S. XYZ PVT. LTD. represented herein by its Director MR. ___________ having its address at _________________________ ____________________________ Mumbai – _______________ hereinafter referred to as ‘THE LESSEES’ which expression unless be repugnant to the meaning or context thereof will mean and include the said Company, its Directors, Managers, Subsidiaries and Permitted Assigns if any of the OTHER PART.

WHEREAS:

  1. The Lessor is the exclusive owner of a plot of land, admeasuring _______ Guntas at Village _______, Survey No. _____________, Bhiwandi, Thane more particularly described in the Schedule A. The Lessor has acquired this premises vide a Deed of Conveyance dated 29th September 2011 bearing Registration Serial No. BVD1 – ________ – 2011 from MR. _________________ and MRS. _________________, for the sake of brevity and convenience, hereinafter referred to as ‘THE LAND’.
  2. The Lessee is in business of Textiles and is already having manufacturing facilities at ______________________ Mumbai. In course of expansion of their existing business, the Lessee have requested the Lessor to grant on lease basis a part of the land for the purpose of setting up a textile manufacturing unit thereon which will be used for their industrial and manufacturing purpose of carrying on Textile Weaving, Dyeing, Bleaching, Printing and other related activities.  The area to be given on lease is more particularly described in the Schedule and herein after referred to as ‘The Leased Land’.
  3. The Lessor has agreed to grant lease of the Leased Land for a period of 10 years subject to terms and conditions hereinafter appearing.
  4. The Lessor has made out his marketable title to the leased land free from all encumbrances, claims or reasonable doubts.

NOW THIS DEED WITNESSETH AS FOLLOWS:

  1. The Lessor agrees to give on lease and the Lessee agree to take on lease a plot of land admeasuring ________ Guntas or __________ sq. mtrs. at Village _________, Bhiwandi, Thane more particularly described in the Schedule hereunder written, for a period of 10 years.
  2. The Lessee shall pay a lease rent of Rs. 1,10,000/- (Rupees One Lakh Ten Thousand Only) per annum starting from 1st April 2018. Such annual lease rent shall be payable by the first month of the year.  The time shall be an essence of this contract. Upon failure of the Lessee to make such payment by end of the first month, the Lessee shall be liable to pay interest thereon at 2% per month, however, in no case such payment shall be delayed by six months thereafter.  Upon failure of the Lessee to pay the amount even by the extended time limit, the Lessor shall have right to terminate this agreement, apart from any other course of action available to him.
  3. The Lessees Hereby Agree To The Following Covenants:
    1. To develop the land and construct the powerloom shed under Group Work Shed Scheme, to sub-let the powerloom shed under Group Shed to the members of the group for purpose of powerloom unit activity.
    2. To pay all taxes, cess, impositions, assessments, dues and duties payable in respect of the leased land to the Government of Maharashtra or the M.M.R.D.A. or any other local authority or public body. If any of such liability is discharged by the Lessor, the same shall be reimbursed to the Lessor by the Lessee immediately.
    3. Not to sell or dispose the said leased land or act in any manner which may adversely affect right title and interest of the Lessor over the lease land.
    4. Not to sell, dispose of, unit to be set up by the Lessee on the leased land which may adversely affect the rights, title and interest of the Lessor over the lease land, without the prior consent of the Lessor in writing.
    5. To insure and to keep insured the constructed buildings /plant /machineries / equipment on the leased land against the loss or damages by fire, earthquake, riot or affray with a reputed insurance company approved in writing by the Lessor in the joint names of Lessor and Lessee.
    6. To use the leased land for the said Industrial and commercial purposes i.e. for manufacturing and processing of textiles only. Usage for any other purpose would be only by prior written consent of the Lessor.
    7. To construct, occupy, maintain and use the leased land and all the buildings, machineries and equipment thereon in strict conformity with all applicable laws, rules and regulations.  If any liability is required to be discharged by the Lessor on this account, the same shall be reimbursed by the Lessee immediately.
    8. To permit the Lessor or his duly authorized agent / agents to enter upon the leased land and constructed buildings at reasonable hours to inspect the same, provided the Lessor shall not thereby unreasonably interfere with the Lessee’s business on the leased land and constructed buildings.
  4. The Lessor Hereby Agrees To The Following Covenants:
    1. The Lessor is absolutely seized and possessed of or otherwise well and sufficiently entitled to the leased land and is having full power and absolute authority to demise unto the Lessees the leased land.
    2. The Lessees shall peacefully and quietly hold, possess and enjoy the leased land, during the term of lease without any interruption, disturbance, claims or demand whatsoever by the Lessor or any person or persons claiming under him subject however, the Lessee observing and performing the covenants, conditions and stipulations herein contained and on his part to be observed and performed.
    3. If any permission or no objection certificate is required to be obtained from the Government or local authority for granting the lease of the leased land, the Lessor shall obtain the same at his own costs.
  5. It is hereby agreed that if default is made by the Lessee in observance and performance of any of the covenants and stipulations hereby contained and on the part to be observed and performed by the Lessee, then on each such default, the Lessor shall be entitled in addition to or in the alternative to any other remedy that may be available to him at his discretion, to terminate the lease and from the textile manufacturing unit that may have been constructed thereon and to take possession thereof as full and absolute owner thereof; provided that a notice in writing shall be given by the Lessor to the Lessee of his intention to terminate the lease and to take possession of the leased land and constructed building and the Lessee fails to correct, comply with or carry out the covenants and conditions or stipulations within fifteen days from the service of such notice.  In such an event, the entire security deposit shall stand forfeited.
  6. And It Is Hereby Agreed Between The Parties As Follows:
    1. The Lessee shall have the option to terminate the lease agreement by giving six months prior notice in writing to the Lessor.
    2. On the expiry of the term hereby created or earlier determination under clause (a) hereinabove, the Lessee will hand over peaceful and vacant possession of the leased land in good condition. The Lessor shall refund the security deposit, after adjusting the amount of any liability / likely liability remaining unpaid/undischarged by the Lessee as on that day. The Lessee shall settle and discharge all the Government Liabilities, if any, at the point of termination of this Lease Deed, however, if any liability remains undischarged then it shall be settled by the Lessor, which cost shall be reimbursed by the Lessee to the Lessor. The constructed building shall be taken over by the Lessor at the time of termination of this Lease Deed at the depreciated book value.
    3. In the event mentioned at Clause (b) hereinabove, the Lessor will have the first right regarding purchasing from the Lessee the buildings / plant / machineries / equipment thereon at a mutually agreeable price.
    4. The Lessor shall have a right to sell, assign or encumber the land during the subsistence of the lease period; provided, however, such act shall not affect the right of the Lessee under this agreement. In case of sale of the leased land on the payment to the Lessor, a consideration to be mutually agreed upon between the Lessor and Lessee and the Lessor shall execute a conveyance in respect of the reversion of leased land purchased by the Lessee in favour of the Lessee.  However, the Lessor shall have full right and authority to deal with the rest of the land in any manner.
  7. This Lease Deed shall be executed in duplicate. The original shall be retained by the Lessor and the duplicate by the Lessee.
  8. The Lessee shall bear the stamp duty, registration charges and other expenses in respect of this Lease Deed. The Lessor shall bear and pay all other costs incurred by him including his Advocate’s fees.
  9. This Agreement shall be governed by and will be construed in accordance with the laws of the State of Maharashtra. If any part of this Agreement is not enforceable, the remaining provisions will remain valid and enforceable.
  10. If the Lessor or the Lessee disagree as to any matter governed by this Agreement, the parties shall promptly consult with one another in an effort to resolve the disagreement. If such effort is unsuccessful, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Arbitration and Conciliation Act, 1996, except that equitable relief may also be sought in Courts of Law at Mumbai.

SCHEDULE OF THE DEMISED PROPERTY

Land Admeasuring _____ Guntas or ______ sq. mtrs. craved out of the total Land owned by the Lessor.

Term of Lease – 10 years.

Lease Rent – Rs. 1,10,000/- per annum.

IN WITNESS WHEREOF, THE LESSOR AND THE LESSEES HAVE PUT THEIR RESPECTIVE HANDS ON THE ORIGINAL AND DUPLICATE THEREOF THE DAY AND YEAR FIRST HEREINABOVE WRITTEN.

SIGNED AND DELIVERED                                 ]

BY WIHINNAMED ‘THE LESSOR’ ]

MR. ABC ]

In the Presence of ………………………….. ]

SIGNED AND DELIVERED                  ]

BY WIHINNAMED ‘THE LESSEE’        ]

M/S. XYZ PVT. LTD. ]

Represented herein by ]

MR. ___________________ ]

In the presence of ………………………………….         ]

]

RECEIPT

Received with thanks from M/S. XYZ PVT. LTD. a sum of Rs. 1,10,000/ being the annual lease rent for the 1st year of the lease of the Scheduled premises by way of __________________ ___________________________________________________________________________

I say Received,

(MR. ABC)

Checklist

Here is a checklist of key elements to consider and include when drafting a lease deed for commercial purposes:  

  1. Property Description: A detailed description of the property should be provided along with the area, the exact location, respective Survey No.(s) etc. It is also advisable to include a description of all the structures standing on the property along with the list of all the fittings and fixtures thereon.
  2. Term: The exact duration of the lease should be mentioned along with the commencement date and expiry date.
  3. Title Search: Proper Title Search should be conducted and public notices issued to ensure that the Lessor is entitled to give the property on lease and that there is no legal impediment in the property being demised in favour of the Lessee.
  4. Lock-In Period to be mentioned if any.
  5. Termination: The grounds for termination of lease like breach, non-payment of rent, force majeure, failure to pay rent etc., to be included along with the agreed process for termination by the parties and the notice period.
  6. Rent Payment: The quantum of rent, the mode of payment, due dates, the procedure for delay, rent escalation etc., to be discussed and reduced to writing.
  7. Security Deposit, if any.
  8. Maintenance Charges and Land Taxes: Who is responsible for payment of maintenance charges, society charges, land taxes and other government charges? Effect of non-payment and the process for dealing with that.
  9. Utility Charges: It should be clearly defined whose obligation it is to pay for the utilities such as water, electricity, telephone, internet etc and in whose name the receipts are to be generated.
  10. What are the permitted uses of the demised property?
  11. Whose obligation is it to ensure the maintenance and upkeep of the demised property and the procedure with repairs.
  12. Restriction of material alteration of the property without the express consent of the Lessor.
  13. Sub Letting: Whether sub-letting of the demised property is permitted and if so then under what terms and only with the express approval of the Lessor.
  14. Inspection of the demised property should be permitted by the Lessee at reasonable hours and with prior notice.
  15. Study the applicable law pertaining to the payment of Stamp Duty and Registration of the Lease Deed and ensure that adequate payments are made and the correct forum followed.
  16. Legal Charges: Whose obligation is it to pay the Stamp Duty, Registration Fee and other governmental and incidental charges in the transaction?
  17. Procedure for the handover of possession at the end of the lease and the execution of a Deed of Surrender of Lease, if applicable should preferably be mentioned in the Lease Deed itself.
  18. It is recommended that either of the parties get their own insurance cover on the demised property to protect against any unexpected event.
  19. Clearly identify the jurisdiction of the relevant Court and the dispute redressal mechanism in the event of a dispute arising between the Lessor and Lessee.
  20. Respective Indemnities: Ensure that there are adequate Indemnity clauses in the Lease Deed to cover foreseeable incidents like defaults in payment of rent, damage to property, breach of terms, wrongful representations and warranties, defect in title etc.

The aforementioned is a basic outline of the process of drafting a legally competent and balanced Lease Deed concerning commercial lease deed with a corporate purpose in mind.

A corporate lease deed needs to be drafted and scrutinized more thoroughly than a lease of residential premises or tenancy as there are various aspects of commercial transactions of commercial use of a property which are not present or do not have a very large role to play in non-commercial transactions.

Bibliography

  • The Transfer of Property Act, 1982. (n.d.). Retrieved from http://dolr.nic.in/Acts&Rules%5CTransferOfPropertyAct%281882%29.htm
  • Anwarali vs Jaminilal Roy, AIR 1940 Cal. 89.
  • Jaswantsinh Mathurasinh & Anr. vs Ahmedabad Municipal Corporation & Ors., 1992 Supp. (1) S.C.C. 5, 12..
  • The Registration Act, 1908. (n.d.). Retrieved from http://dolr.nic.in/Acts&Rules/RegistrationAct%281908%29.htm
  • Schedule I of The Maharashtra Stamp Act, 1958. (n.d.). Retrieved from http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/Schedule/Maharshtra%20Stamp%20Act%20Shulde.pdf
  • Usha Ranjan Ray Burman vs Sova Das, AIR 1990 Cal I.

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2 COMMENTS

  1. […] This deed is used to transfer a right to enjoy property for a certain time or in perpetuity in consideration of a price paid or promised or of money, or any other thing of value to be rendered periodically or on specific occasion to the Lessor by the Lessee who accepts the transfer on such terms. You can read more about it here. […]

  2. […] can learn how to draft a lease deed by reading more about it. You can refer the sample agreement […]

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