Lease? License? – What’s the difference?

Updated: May 28, 2020

What is Lease?


Section 105 of the Transfer of Property Act, 1882 (“TPA”) defines the term “Lease” of an immovable property as “..a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of price or promised, or of money, a share of crops, service or any other thing, of value, to be rendered periodically or on specified occasion to the transferor by the transferee who accepts the transfer on such terms.”


Lease is therefore a mode of transfer of an immovable property by the Lessor to the Lessee whereby the Lessee secures an interest in the property for a stipulated period of time, such as exclusive possession, without there being any transfer of ownership of the property.


One of the essentials of a Lease is transfer of interest in the property in favour of the Lessee, such as exclusive possession, which is referred to as Leasehold interest. In a Lease, the Lessor parts with his right to enjoy the property during the term of the Lease and the Lessee gets that right to the exclusion of the Lessor as has been held by the Hon’ble Supreme Court in Associated Hotels of India Ltd. vs. R.N. Kapoor, [1960] 1 SCR 368 (Supreme Court, 1959)


What is License?


License on the other hand is defined under Section 52 of the Easements Act, 1882 as“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.


Licence does not create any interest in the property in favour of the Licensee excepting a mere right/permission to use and occupy the property for a limited duration in consideration of the price paid and for the agreed purpose. Licensor is merely granted the right to enjoy an immovable property with the possession and right in the property remaining with the Licensor.


Difference between Lease and License


While the term Lease and License are used interchangeably in layman terms, however, for the purposes of law, lease and license are different. Below is a table highlighting the essential differences between Lease and License. There are general differences between Lease and License which could differ on a case to case basis based on the contractual terms.


1. Lessee has an interest in the leased property which is usually in the nature of exclusive possession; whereas, legal ownership and possession of property remains with Licensor and the Licensee merely has a right to enjoy the property.


2. Lessee has primary control over what is done on the property; whereas, Licensor has primary control over what is done on the property and the Licensee’s right is limited to using the property in accordance with the terms stipulated by the Licensor.


3. Lessee can sub-let the property to a third party, unless the agreement expressly provides otherwise; whereas, no third party transfer by the Licensee is allowed unless the agreement expressly provides otherwise.


4. A Lease can be terminated as per Section 111 of the TPA in the absence of a contract and otherwise, in accordance with the terms of the Lease Deed; whereas, a License can be terminated at any time by the Licensor unless there is a contract in which case the termination has to be in accordance with the terms of the contract.


5. Registration is required in case the lease is for a period of 12 months or more. However, certain States such as Andhra Pradesh have amended the provisions of Registration Act, 1908 to make Lease Deeds mandatorily registrable irrespective of the time period of the Lease; whereas, the requirement to register a License is dependent on the applicable laws of each State.


6. Lease is transferrable and assignable unless the Lease Deed expressly provides otherwise; whereas, License is not transferrable and/or assignable.


7. Lease is heritable; whereas, License is not heritable and will terminated upon the death of the Licensee.


8. A Lessee is entitled to maintain a suit in his own name against trespassers and strangers; whereas, a Licensee is not entitled to maintain suits in his own name.


9. A Lease does not terminate upon the death of the Lessor or the Lessee; whereas, a License terminates upon the death of the Licensee or the Licensor, unless agreed otherwise.


10. A Lessee is entitled to any improvements or accessions made to the property; whereas, a Licensee is not entitled to any improvements or accessions made to the property.


11. A Lease does not get affected as a result of sale of the property and it continues till the time period for which the tenancy was created; whereas, a License comes to an end if the property is sold to a third party.


Is the transaction a lease or license

Considering the thin line of difference between Lease and License which is essential the nature of right granted in favour of the Lessor/Licensor on the property it becomes important to understand the standards for determining if a transaction is Lease or License.


The Hon’ble Supreme Court in Mrs. M.N. Clubwala v. Fida Hussain Saheb, [1964] 6 SCR 642, the Hon’ble High Court of Delhi in Chandu Lal vs. Municipal Corporation of Delhi,  AIR 1978 Delhi 174 and the Hon’ble High Court of Punjab and Haryana in Madhu Behal and Anr. vs. Rishi Kumar and Anr. (2009) 3 PLR 628 have all held that the test for determining whether a transaction is a Lease or a License is the intention of the parties which is ascertained from the provisions of the contract as a whole and not the nomenclature of the contract. The Courts have also gone on to hold that mere exclusivity of possession will not conclude the transaction to be a Lease if the circumstances do not show an intention to create tenancy. However, in cases of exclusive possession, the line between Lease and License would be narrower.


Conclusion


The parties entering into a transaction for use of an immovable property should consider the facts and circumstances of the transaction and accordingly decide on the mode of granting right in the property i.e. Lease or License. The decision on the mode would not only depend on the above general differences highlighted between Lease and License, but also on applicable State laws. Many States have specific legislations in place for Lease and/or License.


Parties need to also consider factors such as period for which the right in an immovable property is intended to be granted. For example, in Mumbai, Maharashtra, the applicable leave and License legislation mandates the maximum period for License as 60 months, whereas, a Lease can be granted for perpetuity. Additionally, a Lessor would need to consider the extent of control and right that it wants to retain in the property when giving any right therein to any third party.


Kindly treat this as an information update and the same shall not constitute as an advisory by the firm.


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