We examine what a lease agreement is and why a rental agreement is not always a lease agreement
Although the two terms (lease vs rent) are often used as synonyms by a majority of renters, leasing a property is not akin to renting a home. A rent agreement can either be a lease or a license and will be treated accordingly, based on the terms and conditions and renting period mentioned in the agreement. This is primarily because the two arrangements are governed under different laws and thus, have varying characteristics.
What is a lease agreement?
Section 105 of The Transfer of Property Act, 1882, defines leases. According to this Section, a lease ‘is a transfer of a right to enjoy a property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms’.
For a rent agreement to qualify as a lease, it must fulfill the following conditions:
- The landlord has to transfer the right to make use of a property, to the tenant.
- This arrangement has to be for a specific period or for perpetuity.
- The landlord has to receive a monthly rent in exchange for transferring the right to enjoy his property to the tenant. Apart from cash, the two parties can enter into an agreement where the tenant could pay a share of crops, service or any other thing of value’.
A lease contract must be signed, when the landlord plans to let out his premise for a long period – this could range from 3 years to eternity. Also, a lease deed needs to be stamped and registered. Owing to the registration, lease agreements are generally not easy to terminate.
Key takeaway
Leasing is more common in the commercial real estate segment, where the entire exercise is more formalized.
What is a rent agreement?
Rent agreements signed for an 11-month period fall under leave and license contracts and have no validity under the rent control laws.
Rent control laws, which differ from state to state, have under their purview all lease agreements that are conducted for a period of at least a year.
Landlords, who rent their premises under the rent control laws, will find it extremely difficult to revise rents and evict tenants.
Difference between rent agreement and lease
Most rent agreements do not fall in the category of a lease but under a license agreement. This is why a tenant must examine what a leave and license agreement is.
What are leave and license?
Section 52 of The Indian Easements Act, 1882, defines leave and license agreements. According to this section, ‘where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a license’.
The Supreme Court, while adding further clarity to the section, said: “If a document gives only a right to use the property in a particular way or under certain terms, while it remains in the possession and control of the owner thereof, it will be a license. The legal possession, thereof, continues to be with the owner of the property but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favor any estate or interest in the property.”
For a rent agreement to qualify as a leave and license agreement, it must fulfill the following conditions:
- A leave and license contract is entirely permissive in nature.
- A license cannot be transferred or assigned.
- The landlord grants a right to the tenant to do something, which will not be legal if an agreement in this regard is not signed.
- This right does not amount to an easement or an interest in the property.
Commonly, landlords and tenants enter into rent agreements for a period of 11 months, to avoid legal complications. A rent agreement of 11 months, carried out as a leave and license contract, has no validity under the rent control laws. These laws would only be applicable if the period mentioned in the agreement is a year or more.
Rent agreements that fall under the leave and license contract also give greater freedom to both, the landlords and the tenants. As the license can be terminated at will, no form of lock-ins imposed in the agreement would be valid, even if the agreement says so.
Benefits of rent agreement
For landlords
- A lease gives to the tenant an exclusive interest in the property, whereas a license does not.
- A license cannot be assigned/transferred.
- A license agreement is easy to terminate.
- It is easier for the landlord to change the terms of a license agreement, as compared to a lease agreement.
For tenants
- Rent agreements involving licenses are for short periods, compared to leases.
- No requirement to provide long notices for vacating the premises in a license agreement.
Lease vs rental agreement: Key takeaways
Rent agreements that work under the leave and license contract are more common in the residential real estate segment, where the entire exercise is more informal.
Legality involved
Also note that with states implementing the draft model tenancy law of the center, all rental agreements in India will have to be made and executed in line with the provisions in the respective state-specific laws. The Uttar Pradesh government, in January 2021, for example, promulgated a tenancy ordinance, with an aim to safeguard the interests of landlords, as well as tenants. The law is likely to bring down tenant-landlord disputes, especially in high-intensity rental markets of Noida, Greater Noida, and Ghaziabad, by clearly specifying the duties and responsibilities of the transacting parties.
Source – https://housing.com/news/difference-between-lease-and-rent/
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