Lease – Renewal or Extension?

Lease – Renewal or Extension?

Lease is one mode of transfer of an immovable property by the owner of the property to a third party whereby such third party secures an interest in the property for a stipulated period of time without thereby being a transfer of ownership rights in the property. The owner of property is referred to as the “Lessor” whereas the party securing interest in the property is referred to as the “Lessee”.

One of the points of discussion/ negotiation at the time of entering into a Lease is the provision for renewing/extending the Lease upon its expiry. While as a matter of standard practice, parties tend to agree to a provision of renewal of the Lease upon expiry either at the option of either party or through mutual agreement, however, parties tend to not understand the legal and practical implications of a provision of renewal of Lease vis-à-vis a provision for extension.

This article discusses the concepts of renewal and extension of a Lease and specifically, the legal and practical implications and significance of incorporating either.

What is Lease?

Section 105 of the Transfer of Property Act, 1882 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.”

What are the essentials of Lease?

Lease being a contract between parties mandates the essentials of a contract as stipulated under the Indian Contract Act, 1872 to be fulfilled, such as;

1. Offer and acceptance – The Lessee or Lessor should make an offer to take the property on Lease or give the property on Lease and the other party should accept such offer.

2. Competency of parties – The Lessee and Lessor should be competent to contract which includes them having attained the age of majority i.e. above 18 years, should be of sound mind and should not be disqualified by law.

3. Lawful Consideration – The Lease should have a lawful consideration which is usually in the nature of a periodical rent.

4. Lawful object – The Lessee and Lessor should enter into the Lease for a lawful object and which is not forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law or, or is fraudulent or involves or implies injury to the person or property of another, or is immoral or opposed to public policy.

5. Free consent – The Lessee and Lessor should enter into the Lease with free consent i.e. it should not be entered into out of coercion, undue influence, fraud, misrepresentation or mistake.

6. Not expressly declared void – The Lease should be of a kind which has expressly been deemed to be void such as an agreement by way of a wager.

In addition to the general essentials of a contract explained above, a Lease should also include the following.

1. Transfer of right in the property – The Lease should transfer an interest in the property in favour of the Lessee.

2. Time Period- Considering Lease is made for a certain time, the Lease should mandate a time period for the Lease.

Expiry of Lease

A Lease gets expired due to efflux of the stipulated time of the Lease which is recognized under Section 111(a) of Transfer of Property Act, 1882.

Upon expiry of a Lease by efflux of time, the Lessee’s interest in the property ceases to exist, and the Lessee is bound to return the possession of the property to the Lessor. However, should the Lessee continue to remain in possession of the property pursuant to the expiry of the Lease and without the consent of the Lessor, such possession would be deemed illegal and the Lessor would have a right to initiate action for securing eviction of the Lessee from the property.

Upon expiry of the Lease, the Lessor could permit the Lessee to continue in possession of the property either through renewal or extension of the Lease or the Lessee could exercise its right to renew or extend the Lease at its option, depending on the terms of the Lease.

Renewal of Lease

Renewal of Lease means to renew an expired Lease for a fixed period agreed between the parties thereby granting a fresh Lease in favour of the Lessee by the Lessor. Renewal terms in a Lease Deed are usually drafted to be invoked by and at the option of the Lessee.

When the provision of renewal is invoked, a new Lease Deed has to be executed by the parties upon the expiry of the original Lease, as it grants a fresh Lease in favour of the Lessee.

This is contrary to popular belief that a Lease Deed automatically stands renewed upon the efflux of the time period mentioned, if it contains the provision for renewal and such provision is invoked as per terms. Further, the newly executed Lease Deed is to be duly stamped and registered, as required by law.

Extension of Lease

Extension, according to Black's Law Dictionary, means enlargement of the main body; addition of something smaller than that to which it is attached; to lengthen or prolong. Thus, extension ordinarily implies the continued existence of something to be extended.

An extension clause in the Lease Deed gives the Lessee the right to opt for an additional term of Lease, upon the expiry of the original Lease term, usually at Lessee’s option. Therefore, in case the Lessee exercises its option to extend the Lease, the Lease would not expire as a result of efflux of the initial term but would get extended for the additional term. Accordingly, extension of a Lease would not require the parties to execute a fresh Lease Deed and the original Lease would continue for the extended period.

Differences between renewal and extension of Lease

Unlike a Lease Deed containing a renewal clause, a Lease Deed containing an extension clause does not come to an end upon the expiry of the time period of the original Lease Deed. The Hon’ble Supreme Court in Provash Chandra Dalui v. Bishwanath BanerjeeAIR 1989 Supplementary 1 SCC 487 had observed that the distinction between 'extension' and 'renewal' is chiefly that in the case of renewal, a new Lease is required, while in the case of extension the same Lease continues in force during additional period by the performance of the stipulated act. Therefore, incase of renewal, if a fresh Deed of Lease is not executed, another Lease for the renewed term shall not come into existence.

There is also a difference between renewal and extension when it comes to payment of stamp duty. In the case of extension, stamp duty for the entire Lease term i.e. original term of the Lease and the extension period, is to be paid along with the original Lease Deed. This aspect has been confirmed by the Hon’ble Delhi High Court in Jain Cooperative Bank Ltd. v Sh. Dharamveer MugraiRFA No.134/2013 & CM No.4201/2013 stated that the extension clause cannotbe misused in order to avoid payment of stamp duty of the extended period, since no new Lease is required in the case of extension. However, in case of renewal of Lease, since a new Lease Deed is to be executed, the stamp duty for the fresh Lease Deed is to be paid independently and cannot be levied/paid along with the original Lease Deed.

Lastly, in case of extension as there is a continuation of the original lease, the Lease Deed does not require a fresh registration whereas in case of renewal of the Lease, as there is a fresh Lease, the fresh Lease Deed would need registration.

Conclusion

Considering the implications of incorporating a clause for renewal and clause for extension, it becomes essential for both the Lessor as well as the Lessee to understand which of the two options to choose keeping in mind the circumstances. Parties should consider whether to incorporate a provision for renewal or extension keeping in mind the legal, financial and practical implications.

Since a new Lease Deed is to be executed in the case of renewal and stamp duty is to be paid separately on the new Lease Deed for the renewed period, this option should be considered when the parties are unsure about renewing the Lease pursuant to the expiry of the original term. A Lease Deed with a renewal clause will help in avoiding paying stamp duty for the entire duration of the Lease captured in the original Lease Deed i.e. original term of the Lease and the extension period, thereby saving money in case the Lessee does not wish to renew the Lease.

Whereas, the option of extension should be considered only if the Lessee is reasonably certain that he would continue the Lease even after the expiry of the original period of Lease. Incorporating a clause for extension would require payment of stamp duty on the entire period of the Lease i.e. original term of the Lease and the extension period. This would be convenient for both the parties as the stamp duty for the entire time period would have been paid along with the original Lease Deed. Also, no new deed would be required to be executed upon the expiry of the original period of Lease and the Lease Deed would automatically get extended upon the extension option being exercised.

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

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