Lease: Introduction, Concept, Essentials and Conditional Leases

By | April 30, 2020
Lease: Introduction

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Lease: Introduction, Concept, Essentials and Conditional Leases | Overview

Concept of Lease: An Introduction

Elon Musk[1] said “Most people throughout the world prefer to own their belongings, rather than rent what is essentially someone else’s property via a lease. However, leases do provide some key benefits, particularly a low initial payment, tax deductions, lower risk on resale value and the convenience of returning a car (or property) without the hassle of reselling it personally.” This statement sums up the concept, need and purpose of lease.

In simple words, Lease is nothing but a relationship between landlord/landlady and his/her tenants. It is a form of contract between these parties for a fixed tenure. This relationship arises when an owner of an immovable property gives his property to another person for a fixed tenure and consideration subject to the terms of contract (rate at which rent will be collected, duration of lease, purpose etc.) between them. [2]

Legally, the term ‘LEASE’ and its related concepts are governed by provisions, namely sections 105 to 117, of The Transfer of Property Act, 1882. Section 105 defines Lease as

A lease of immovable property is a transfer of the right to enjoy such property, made for a period of time, either expressly or impliedly, or in perpetuity, in consideration of a price paid or agreed to be paid, or of monetary value, a share of crops, services or any other consideration, to be rendered regularly or on specific occasions to the transferor by the transferee who accepts the transfer under such terms.

For better understanding, let us look at the ingredients of this section;

  1. Transfer of a right to possess such immovable property
  2. Allowed over a certain period of time
  3. Taking into account the consideration
  4. By the transferor to the transferee
  5. Who agrees to transfer under those provisions.

The example of the relationship between Landlord and Tenant is the best way to explain Lease.  It is essential to have a lease for establishing the relationship between landlord and tenant. The relationship can exist only in respect of immovable property such as buildings, mines, land etc. A lease of livestock and other movable properties does not fall under the definition of s 105 and thus, does not equate to the relationship of lessor and lessee.

Essential Conditions for a Lease

  1. Availability of two parties –  a single party cannot execute a lease agreement.
  2. Both parties should be competent to contract – Essential conditions of a valid contract as per section 10 of the Indian Contract Act, 1872 must be fulfilled.
  3. A lease cannot be restricted around the explanation of a contract as it is also a transfer of a right to enjoy the interest in such property.[3] Lease always creates a right in rem which means that such a right is applicable against the whole world.[4]
  4. The term, duration or period of the lease should be defined – Section 106 of the Act addresses the issue as to what should be done in case of the duration of the lease in the absence of a contract. The provision states that a lease will have the duration of:-
  • Year to year in case of immovable property for agricultural or manufacturing purposes.
  • Month to month in case of immovable property for any other purpose.
  1. Consideration is to be paid from time to time[5] – whether it is a price paid or agreed to be paid or monetary value or share of crops or service or any other consideration.
  2. Acceptance of transfer by the lessor and lessee on such terms and requisite formalities as specified in the agreement.

Thus, a tenant is entitled to remain in possession of the leased property until the period of lease or till the lease is duly terminated. It is pertinent to note that mere renewal clause to a lease does not constitute that a lease is renewed. There has to be a fresh lease agreement to renew a lease.[6]

Essentials of a Valid Lease Agreement

It also becomes important to distinguish a sale and lease in this article. The words ‘transfer of a right to enjoy such property indicate that all rights of ownership’ is not transferred by a lease; whereas in ‘sale’, it is the transfer of ownership in exchange for a price.[7]

There are cases where, although the word ‘lessee’ is used, the transaction is of a special nature.[8] So, where a tract of forest is let out and a person is declared the highest bidder, and a written document is executed in which the transaction is described as a sale of jungle wood, and the purchaser is allowed to commence the cutting and removal of wood without the execution of any formal document, the so-called lease is not a lease but it is really a sale of goods and not a transfer of any interest in land. What is sold is wood standing in a certain forest for a specified price. It all depends upon the facts and circumstances of each case what a particular transaction is.

Conditional Leases

There may be leases, whose very existence would depend upon a contingency and condition. A conditional lease may be distinguished from an unconditional one through the undertaking of any of the party to perform his promise by confining the undertaking to the case where—

  1. the condition happens
  2. it does not happen.

If the condition happens or does not happen, as the case may be, the lease becomes good. But if the condition cannot possibly happen, the lease is void from the outset.

Sub-lease

A sub-lease would imply parting with by the tenant of a right to enjoy such property in favour of sub-tenant.[9] Sub-tenancy can be prohibited by parties as the law does not prohibit it.

The law does not prohibit the creation of sub-tenancy but the parties by agreement may prohibit such creation of sub-tenancy. For example: If the consent for demolition of a building is given by alleged sub-tenant, it would be immaterial and not binding upon the real tenant or his legal representative and heirs.[10]

This brings us to another question that how is a lease created? How is the relationship of tenant and landlord made through a lease?

These questions are answered in s 107 of the Act. It states that;

A lease of immovable property can only be made by a legal instrument from any period exceeding one year. All other leases of immovable property be made either through a legal instrument or by oral agreement followed by the guarantee of possession. Where a legal instrument allows a lease of immovable property, the lessor as well as the lessee shall execute such instrument.

Therefore, the relationship may be created in the following ways:

  1. Express transfer

An express transfer of a right to enjoy certain immovable property can be by suitable operative words which grant and conveys to the tenant (the lessee) a lease of a particular property/ estate in the immovable property. This is generally done in case of a registered agreement.

  1. Implied transfer

If a tenancy arises by implication of law, then it is an Implied Transfer. For example, An oral agreement for a lease may be implied from payment and acceptance of rent,[11] and a lease is constituted by transferring the possession.


Source:

  • Darashaw J Vakil, Commentaries on the Transfer of Property Act; 5th, vol. 1, (2017).****

[1] CEO of SpaceX and Tesla Motors.

[2] Vijay Kumar Bajaj v. Inder Sain Minocha, AIR 1982 Del 260 (263).

[3] Chori Onso v. Sasoon, AIR 1969 Ker 11.

[4] Krishnaswamy Nadar v. Subbayya Pillai, (1976) 1 Mad LJ 151 (153) (Mad).

[5] T. Ramakrishnaiah v. N. Seshadri, AIR 1972 Andh Pra 218 (220).

[6] Bhagat Ram v. Keshav Deo, AIR 1965 Assam 55.

[7] S. 54, Transfer of Property Act.

[8] Ajit Kumar v. State of West Bengal, AIR 1957 Cal 350; H.P. Fruit Growers Co-op. Mart. Processing Society Ltd. v. H.P. Housing Board, AIR 1996 HP 94.

[9] Mahendra Saree Emporium v. GV Srinivasa Murthy, AIR 2004 SC 4289 (4296).

[10] Bholanath Mandal v. State of W.B., 2008 (1) CHN 219 (227).

[11] Batakala Budhia Patra v. Durgasi Devdasi, AIR 1978 Orissa 103 (105).


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  • Ritika says:

    Really helpful and good notes… Thank you for providing helpful and reliable notes 🙂