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The concept of leasing as a mode of transfer has gained significant popularity in recent years. Leasing, also known as ‘renting,’ is a legal contract between two parties, where the owner of an asset grants the right to use it to the lessee for a specific period in exchange for periodic payments. This mode of transfer is widely used in various industries, including real estate, transportation, and technology.
Leasing has become an attractive alternative to traditional forms of transfer, such as purchasing or financing, due to its various benefits. For example, leasing allows businesses and individuals to acquire assets without committing to long-term investments or incurring high upfront costs. It also provides flexibility in terms of the duration of the lease and the type of assets that can be leased.
However, leasing is not without its drawbacks. There are several legal and financial considerations that need to be taken into account before entering into a lease agreement. This article will explore the concept of leasing as a mode of transfer and its various advantages and disadvantages. It will also discuss the legal and financial implications of leasing, as well as the factors that businesses and individuals should consider before entering into a lease agreement.
Definition of lease
A lease can be defined as a legal agreement that allows the party to the agreement to use land or a Building for a certain period of time in return for rent to be paid to the other party of the agreement.
- Parties to the agreement are known as Lessor and Lessee.
- Lessor: Transferor party in the agreement is known as LESSOR.
- Lessee: Transferee party in the agreement is known as LESSEE.
- Premium: This is the amount paid upfront as per the agreement.
In India, provisions related to the lease are governed under the Transfer of Property Act, 1882. The lease is defined under Sections 105 to 117 of the Act of 1882. The essentials of the lease as per the Act of 1882 are competent parties, right of possession, consideration, acceptance, time period, and right to enjoy the property.
Essentials of the lease under the Transfer of Property Act, 1882
The essentials of the lease have been discussed hereunder:
Parties to a lease agreement must be competent to enter in the same:
Competency of parties is an important factor of consideration whenever talking about any legal agreement for under the Indian Contract Act, 1872, Section 10 lays down competency as a prime essence of a contract. Competency is inclusive of the parties being major, of sound mind and not disqualified by any law in force. In the case of the lease agreement, absolute ownership of the leased property is another factor that is included under the ambit of competency.
Right of possession:
By executing a lease agreement, only the possession is transferred in relation to the concerned property and not the ownership. This is exactly how the lease is said to be different from the sale. Thus this is one of the essential requirements for the execution of a lease agreement between the lessor and the lessee.
Consideration is an important element of any kind of legal agreement, as is in the case of the lease agreement. In the case of a lease, consideration must be in the form of premium or rent. This is generally concerning the price that has already been paid or the price that has been promised to be paid in cases of demise. Both the premium and the rent can either be paid in instalments or can be paid in full.
Acceptance is an essential ingredient of a lease for the lessee by means of the same giving the lease agreement a valid stamp. The lessee accepts the terms and conditions laid down in the agreement entered thereby validating the possession transfer from the lessor.
It is necessary to note that a lease agreement always has a specific period of time for which it is fixed and valid. Following the passage of such a period, the lease agreement either has to be renewed or brought to an end.
Right to the enjoyment of the property:
Along with possession comes the right to the enjoyment of the leased property by the lessee as well. A lessee has the right to enjoy the property for the time period that is either decided by him and the lessor mutually or that which has been expressly provided in the lease agreement.
Execution of lease under the Transfer of Property Act, 1882
Leases for the immovable property for a month to monthly basis can be executed either by oral agreements or in writing but a lease for more than twelve months or more can only be created by registered deed.
In the case of Chemical Sale Agencies v. Naraini Newar (2005), the nature of the lease has been stated as if the lease agreement is neither a registered document nor an oral agreement along with the delivery of possession, it cannot create lessor and lessee relationship. Both parties to the agreement must be well aware of and adhere to their rights and responsibilities/liabilities.
Rights of lessor
- The lessor (transferor) of the property has the right to the monthly recurring payment of the rent as was pre-decided in the lease agreement.
- If any damage is caused to the property at the behest of the lessee, then the lessor has the right to recover that amount of damages from the lessee.
- If the lessee breaches any of the conditions of the lease agreement, then the lessor has the right to take back the possession of the property leased.
- The lessor has the right to take back possession of the property once the period mentioned in the lease agreement completes.
Liabilities of lessor
- The lessor is bound to disclose to the lessee any material defect in the property related to its intended use, of which the lessor and lessee is not aware, and which the lessee could not in ordinary course discover.
- The lessor is bound to put the lessee in possession of the property at the request of the latter.
- The lessor is bound to let the lessee enjoy the property uninterrupted if the latter pays rent and performs the contracts binding on the latter.
Rights of lessee
- If the lessor neglects to make the repairs within a reasonable time after bringing the fact to notice by the lessee which he was bound to do, then the lessee may make the same by himself and deduct the expense of such repairs with interest from the rent.
- If the lessor neglects to pay any payment which he was bound to make against the property, if not made by him is recoverable from the lessee or against the property, the lessee may make such payments and deduct it with interest from rent.
- The lessee may remove all things which he has attached to the earth, after the termination of the lease provided, he leaves the property in the state as was received by him.
- If any material part of the property gets partially or completely damaged by fire, tempest or flood, or by war or violent acts of a mob, or other irresistible force making it inefficient to the purpose for which it was leased. Then at the option of the lessee lease stands voidable but, if any damage happens to the property because of the actions of the lessee then he shall not get the benefit of this right.
- In the case of a lease of uncertain duration lessee and his legal representatives have the right to the profits of the crops sown by them as well as a right to free entry and exit to and from the property.
- Lessee has the right to transfer either absolutely or by way of mortgage or by subletting, the whole or any part of his interest in the property. Lessee shall not be treated as independent from the conditions of the lease, for the purpose of this transfer.
Liabilities of lessee
- The lessee is bound to disclose to the lessor the nature and extent of interest which he is bound to take and of which the lessor is unaware and which increases the value of the leased property.
- The lessee is bound to make timely payment of premium or rent to the lessor or his agent.
- The lessee is bound to maintain and return the property in the condition it was received by the lessee on the commencement of the lease.
- Lessee is bound to inform the lessor of any proceedings to recover the whole or any part of the property, or of any encroachment or interference to the right of the lessor when it comes to his notice.
- Lessee is bound to use the property and its products as an owner during the duration of the lease but he must not by himself or allow any other person to use them for a purpose other than stipulated in the lease. This clause was also discussed in the case of Dashrath Baburao Sangale v. Kashinath Bhaskar Datta (1993).
- Lessee must not construct any permanent structure on the leased property without the consent of the lessor.
- Lessee is bound to return the possession of the property to the lessor on the termination of the lease.
Termination of lease
- On the expiration of the time period specified under the lease.
- On the happening of such event on which the termination of the lease depends.
- On the happening of such an event on which the interest of the lessor in the property terminates or his power to dispose of the same extends only to the happening of any event.
- In case the interests of the lessee and the lessor in the whole of the property are vested upon the one person at the same time. The interests of the lessor and the lessee are transferred or vested upon the same person at the same time.
- By express surrender by the lessee or by mutual agreement between the lessee and the lessor.
- Implied surrender.
- By forfeiture:
- On the occasion of a breach of any of the conditions of the lease agreement by the lessee.
- On the occasion when the lessee transfers the title of the property or renounces his character to the third person.
- On the occasion of the lessee being declared insolvent and the lease provides that on the happening of this event, lease stands terminated.
- On expiration notice to quit given by the lessor to the lessee, the lease stands terminated.
A notice to quit is a written statement issued by the lessor to the lessee if the lessor wants to terminate the lease agreement. Any lease can be forfeited on acceptance of notice to quit.
If the lessee remains in the possession of the property after the determination of the lease granted to the lessee and the lessor accepts rent from the lessee or otherwise assents to his continuing in possession, then the lease in absence of any agreement to contrary stands renewed from year to year.
In conclusion, a lease is a valuable mode of transfer that offers many benefits to both landlords and tenants. It provides landlords with a reliable source of income, while tenants can enjoy a degree of flexibility and affordability that might not be possible with other forms of property ownership. However, it is important for both parties to approach the lease agreement with care and attention to detail, to ensure that their rights and obligations are clearly defined and understood. By doing so, they can establish a productive and positive relationship that will benefit them both in the long term. Overall, a lease can be a smart and effective way to transfer property, and it is well worth considering for anyone who is looking to rent or lease property.
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