In this article, Pradeep Dubbula, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses how to draft a corporate lease deed.
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.
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
|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
|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:
- 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.
- 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.
- 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.
- 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).
- 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.
- 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).
Here is a short template of a standard Lease Deed for setting up a small scale industry in an Industrial area.
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;
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.
NOW THIS DEED WITNESSETH AS FOLLOWS:
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 …………………………………. ]
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,
Here is a checklist of key elements to consider and include when drafting a lease deed for commercial purposes:
- 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.
- Term: The exact duration of the lease should be mentioned along with the commencement date and expiry date.
- 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.
- Lock-In Period to be mentioned if any.
- 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.
- 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.
- Security Deposit, if any.
- 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.
- 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.
- What are the permitted uses of the demised property?
- Whose obligation is it to ensure the maintenance and upkeep of the demised property and the procedure with repairs.
- Restriction of material alteration of the property without the express consent of the Lessor.
- 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.
- Inspection of the demised property should be permitted by the Lessee at reasonable hours and with prior notice.
- 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.
- Legal Charges: Whose obligation is it to pay the Stamp Duty, Registration Fee and other governmental and incidental charges in the transaction?
- 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.
- It is recommended that either of the parties get their own insurance cover on the demised property to protect against any unexpected event.
- 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.
- 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.
- 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.