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The term “Real estate” includes land and anything which is permanently attached to it, whether natural or man-made. Real estate includes only real property and totally differs from personal property, which includes things that are not permanently attached to the land, such as vehicles, boats, jewellery, etc.
Real estate is one of the largest industries in India and has a significant role in the economy and has seen a substantial change in the past two decades. In spite of the same, real estate has also remained the most unregulated of sectors, with every state having different laws, which would govern this industry.
In order to bring transparency in this sector, the government of India came up with central legislation viz. Real Estate Regulation Act, 2016 (RERA) in order to protect the interest of buyers and to regulate the real estate industry. It is mandatory for all states to form the Real estate regulation authority for the implementation of the Act and form rules and regulations under the same.
What are lease transactions?
Lease- The term ‘lease’ has been defined under Section 105 of The Transfer of Property Act, 1882.
Meaning– A lease is a transaction of an immovable property for transfer of right in favour of lessee to enjoy such property by the transferor known as “Lessor” to the transferee known as “Lessee” for a certain period of time, express or implied, or in perpetuity, in consideration of a price paid or promised to be rendered periodically or on specific occasions as per the terms of the agreement.
Distinction- Lease from License
Lease transfers an interest in the property by creating a right in favour of lessee. License only makes an action lawful.
In order to differentiate if a document is “lease or license” the following points must be kept in mind:
Basis of difference
Transfer of interest
Transfer of interest in favour of lessee.
No transfer of interest is possible and it is merely a permission to use land for a particular purpose.
Termination upon death
Death does not terminate the lease until and unless specified in the contract.
Automatically terminated after the death of the licensee.
Protection of interest
A lessee’s interest is protected even if the property is sold during lease agreement.
Contract has to be renewed if the property is sold.
Transferable and heritable
It is transferable and heritable and a sub-tenancy may be created unless specified in the contract.
Not transferable and heritable and sub-tenancy also cannot be created.
Condition on Termination
Can be only terminated as per the terms stated in the agreement.
Can be terminated whenever the licensor pleases.
Modification or changes in property may be permitted to the lessee.
No such right is available.
How to determine if an agreement is a lease agreement or a leave and license agreement?
Generally, the title of an agreement should mention what type of agreement it is but it is the essence of contracts that actually determines its nature. Determination of a contract becomes important when a party claims certain rights based on the relationship among parties.
In lease and rental agreement the tenant may enjoy certain additional protections. The nature of contract also affects its interpretation and hence the rights and liabilities derived out of it.
In Achintya Kumar Saha v. Nanee Printers, the Supreme Court said that we cannot go by mere nomenclature of an agreement for its interpretation. It is the intention of the parties which should be the deciding factor.
In Delta International Ltd v. Shyam Sunder Ganeriwalla and Anr, the Supreme Court determined the agreement by interpreting a clause in the agreement which determined the intention of the parties.
In Khalil Ahmed Bashir v. Tufelhussein Samasbhai Sarangpurwala the apex court held that if an agreement creates immovable property entitling the transferee to enjoyment, it is a lease. If an agreement merely permits a party to use property without exclusive possession, it is a license.
How can they happen under RERA?
In recent times we have witnessed that the real estate sector has been the focal point of discussion specifically after the implementation of Real Estate Regulation Act, 2016 (RERA). There have been some disputes with respect to the jurisdiction of RERA.
In relation to this matter there has been two schools of thought:
- The Act is solely for the purpose of the efficient sale of the real estate project; hence it does not extend to real estate transactions.
- The long-term lease should be a part of the Act as in long term lease; the lessees have similar rights to that of buyers of the property.
Among several other discussions relating to the applicability of the provisions of the RERA to the real estate projects, one of the prime focus has been on the definition of an “allottee” under the act. The industry has witnessed a transformation with the implementation of RERA.
Maha RERA has clarified that the wording in section 2(d) of the act “has been sold (whether as freehold or leasehold) or otherwise transferred by the promoter”, indicates that a long term lease falls within the ambit of RERA.
Whereas the premises given on leave and license basis or short term lease basis will not fall under the act. Hence, we can say that all long term leases (of more than 5 years) and perpetual lease will be covered under the act.
Support of RERA in these transactions
The first question that usually comes to mind is whether the provisions of RERA are applicable in case of lease transactions or not, if yes how does RERA support them?
Now to answer this question it is very important that we must first understand that the very prime objective of RERA is to protect and safeguard the interest of buyers from the malpractices of unfair builders and to bring transparency in the Real Estate transactions.
In Lavasa Corporation Ltd. Hicon vs. Jitendra Jagdish Tulsiani, it was held that the provisions of RERA will be applicable to long term lease transactions.
The court referred to the Haydon’s rule of Suppression of Mischief to state that the objects and reasons behind bringing a law like RERA should be kept in mind while interpreting the terms ‘Allottees, Promoters and Real Estate Projects’ and to say that they will not apply in ‘lease’ transaction and will apply only on ‘sale’ transaction would defeat the very essence or purpose of the Act.
As far as the applicability of RERA is concerned the court has held that the period of lease being 999 years is as good as transaction in perpetuity.
The court further stated that it can never be the intention of the legislature to exclude long term leases from the scope of RERA; otherwise it would not have used the term ‘freehold or leasehold’, when it has defined the term “Allottee” under section 2(d) of the Act.
Furthermore, the appellant itself has registered the project under the RERA and accepted its liabilities under RERA. The foremost objective of RERA is to promote transparency, accountability, and efficiency in the real estate sector.
The terms “Apartment” and “Building” defined under Section 2(e) and 2(j) of the RERA Act, not only cover the residential property, but also the commercial property, such as offices, show rooms, shops or godowns. In that sense, RERA has wide scope and coverage in real estate projects.
Mention the process of lease transactions
- Lease selection
- Lease period
- Lease contract
Lease selection- The first step in a lease transaction is identification of the asset or premises that is required by the lessee.
Lease period- It is usually between 3-5 years. The lease period totally differs from case to case basis in some cases the lease period may be 99 years or even 999 years.
Lease contract- Both the parties enter into a lease agreement setting out details of the terms of contract. It also contains all the rights and obligations of both the parties.
Need/significance of lease
- A lease agreement is not just a mere contract but it creates an interest in the premises by creating a right in favour of lessee.
- One of the biggest advantages of a lease agreement is that payments related to lease are spread over several years, thereby saving the burden of a payment in lump-sum.
- It is a legal document and is enforceable in nature in case any dispute arises with respect to the premises in accordance with the terms and conditions of the contract.
Relevant case law
Lavasa Corporation Ltd. Hicon … vs. Jitendra Jagdish Tulsiani (7th August, 2018)
Whether the provisions of RERA will be applicable in case of lease or not?
Lavasa Corporations was developing a township project to construct “lake views” and was also registered under RERA. The respondents had booked apartments on a period of lease for 999 years and have also paid more than 80% of the consideration amount and have also paid substantial amounts towards stamp duty and registration charges.
The respondents approached the adjudicating authority for the delay caused in handing over the possession but an order was passed in favour of the appellant stating that since it is an “Agreement to Lease”, it can not fall within RERA. The respondent then challenged this order before the Maharashtra Real Estate Tribunal and it was held that the provisions of RERA will apply here by stating its reasons for the same. Later, the appellant challenged this order of the tribunal before the Bombay High Court.
Order of the appellate tribunal
- The Tribunal held that the provisions of RERA will be applicable after perusal of ‘Agreement of Lease’ as a whole and considered the objective and purpose of RERA and said that though the ‘Agreement between the parties is titled as Agreement to Lease’ but in effect they are ‘Agreements of Absolute Sale’ and RERA will be applicable.
- The tribunal also held that the appellant has itself registered under RERA and therefore the provisions of RERA shall be applicable. In this respect, the tribunal has also relied upon the ‘Principle of Estoppel’, laid down in Section 115 of Indian Evidence Act and thus allowed the appeals and held that the ‘Adjudicating Officer’ of Maha RERA has jurisdiction to entertain the complaints on its merits.
Decision of the Bombay High Court
- The court felt that it is necessary to consider in detail the provisions of RERA, along with its ‘Objects and Reasons’.
- There is no substance in the challenge to the Constitutional validity of the said Act as RERA is for the benefit of both ‘Promoter and Allottee’.
- The agreement is titled as ‘Agreement to Lease’, in reality it is an ‘Agreement to Sale’ on the grounds that:
- More than 80% of the entire consideration amount has already been paid by the Respondents.
- The lease premium is only Rs.1/- per annum.
- The term of lease is for a period of 999 years, which is as good as a transaction in perpetuity.
- The High Court has explained that the intention of the legislature is to protect persons like respondents, who have invested substantial amounts in the real estate projects. The definition of the term ‘Allottee’ in the present context includes the term ‘freehold or leasehold’ under Section 2 (d) of the Act. To that extent, it has to be held that the definition of ‘Allottee’ includes the ‘Lease Agreement’, but it may not include such Agreement, when the apartment is given on rent basis and it is in reality an ‘Agreement of Rent and Lease’ and not, in effect a transaction of sale.
- The court has relied on Haydon’s Rule of Suppression of Mischief and held that the intention of the legislature has to be gathered from not only the terms used in the statute but also from ‘Objects and Reasons’ and ‘Preamble’ to the said legislation.
A lease creates a right in favour of “lessee” and there is a transfer of an interest created in favour of lessee in a lease transaction. A lease agreement is not just a mere contract to use the premises like in ‘leave and license agreement’, but it actually creates an interest in favour of lessee with respect to the premises that is being leased. One of the biggest advantages of a lease agreement is that the payments are spread over several years thereby reducing the burden to pay in lump-sum.
It was felt that one of the most unregulated sectors was the real estate sector as there were several buyers who had invested all their life savings into real estate projects but were never granted possession of property or there was always a delay in granting the possession. So in order to deal with this problem a central legislation came into existence i.e. Real estate Regulation Act, 2016.
As far as applicability of RERA is concerned it has been held that long-term lease will fall within the scope of RERA and the court has clarified that the intention of legislature is to protect the persons, who have invested all their hard earned money into real estate projects and RERA is for the benefit of both ‘promoter’ and ‘allottee’.
Therefore, we can say that RERA is bringing standardization in the real estate sector and that the courts are considering the ‘Objects and Reasons’ and ‘Preamble’ of the legislation while interpreting the statutes in order to protect the interest of the buyers and to bring transparency in the real estate sector.
- Transfer of property Act, 1882 (Bare Act)
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