The house rent agreement of a property is one legal document that almost no-one can avoid. You may have to negotiate (if at all you know how to) or at least sign one either for personal or business use. However it’s surprising as to how few people take the opportunity to negotiate or even understand these agreements – property owners and occupiers included. Most people in India have little idea as to what to look out for in these agreements. Hence, we decided to write this comprehensive guide to negotiating and understanding legal agreements dealing with leasing, renting or leave and license arrangements for residential and commercial properties. This is a must read if you own property that you want to rent out, or even if you are staying or working from a rented premises.
While each house rent or lease agreement has its unique situations that can merit unique terms and conditions to be inserted in a contract, there are some crucial terms that should almost always be included in agreements to protect their interests and prevent future misunderstandings that could potentially lead to trouble, disputes, financial losses or litigation.
First let us see what are the most common legal relationships you may enter into while renting a house or a commercial property .
A lease is a transfer of the right to use the property in question which may be for a specified period, or even for perpetuity provided that a price is paid for the same. If the landlord does not want to create a lease in perpetuity, it would be better to specify a time period in the lease agreement. It is not possible to evict the leaseholder while the lease is in existence – unless there is a provision for terminating the lease agreement provided in the lease agreement itself.
What if a lease amounts to a tenancy?
Most Indian states have enacted tenancy laws or rent-control legislations, which place a ceiling on the rent that can be charged on leased properties, and also severely restrict the grounds on which the tenancy can be terminated. The lessee is called a ‘statutory tenant’ in such cases. Properties in premium locations in Mumbai and other cities have been leased on what is today considered to be a nominal rent – as the pace of inflation and increase in property prices was many times higher than the corresponding increase in rent permitted under tenancy law. This causes severe financial loss to the owner of these properties. While the owners have very valuable property in their ownership, they can not enjoy the value of the same as they can neither charge market rate of rent, nor can they evict the existing tenants.
Therefore, persons leasing their property must ensure that the letting of property on rent does not qualify as a tenancy under rent control legislation, and this has to be done through careful legal drafting.
Leave and License
A leave and license agreement is one of the most popular ways adopted by parties to ensure that the letting of property does not amount to a lease under tenancy related legislation. Unlike a tenancy or lease, a leave and license agreement does not create any property rights in favour of the person who occupies the house (licensee).
In case of tenancy as well as lease, the right to use the property gets transferred from the owner to the person who is renting out the place. However, no such transfer of right to use takes place in leave and license agreements. There is only a license given to the licensee for limited use of the property in a certain way. The terms of the licenses govern what are the rights of the licensee (the person who rented the house). This is the form of agreement most preferred by landlords, and 11 month leave and license agreements for residential properties have become a norm all over India. Lease agreements are common only with respect to commercial properties.
Advantage of leave and licence
Due to the difficulty of getting a tenant or a leaseholder to vacate a place, most landlords prefer to enter into a leave and license agreement for a contractually specified period after which the licensee is obligated to vacate the premises. Under a leave and licence, the amount of rent (and increases in rent in case of renewal of the agreement) can be contractually determined by parties. Further, the lessor or owner has greater freedom with respect to termination of the licence and eviction of the lessee.
It is a common practice to grant leave and license agreement only for 11 months or less to avoid being classified as tenancy. Leave and license agreements also do not attract the rent control acts that once plagued many residential property owners. If the licensee and the landlord agree to continue the arrangement and renew the agreement, they may enter into a fresh leave and license agreement for 11 months at a time.
A lease however, is for a longer duration of time, usually for 1 year or more, although there is no minimum or maximum period specified by law. A lease creates a property right in favour of the lessee (the person taking a lease over the property). Leases are more common for commercial properties as opposed to residential properties which are usually let out on basis of leave and license (lease of commercial property is discussed later).
Checklist to ensure an effective lease deed or leave and license agreement
Following is a checklist for the essential clauses in a leave and license as well as lease agreements:
Find out who is the actual owner
It is crucial that a leave or license or lease agreement is signed only with the real owner of the house. Find out who is the owner, and even demand to see some papers establishing the name and identity of the owner. Usually in residential societies it is very easy to find out the name of an owner. You can request the owner to examine the title deeds of the property, which will mention how land was originally allotted (by a government authority, etc.) and how its ownership transferred. These documents should be requested before paying the security deposit or making any advance payment. Electricity bills or bills relating to municipal taxes can also be referred to (although they are not very reliable indicators of ownership).
It is more difficult to trace ownership of agricultural land, which may have been transferred through several private hands, through intestate succession, partitions, intra-family tra