We examine what a lease agreement is and why a rental agreement is not always a lease agreement
Although the two terms – lease and rent – are often used interchangeably, leasing a property is not the same as renting a home. This is true if we went by the strict legal division created between the two arrangements of tenancy. A tenancy could either be created through a lease agreement or a rent agreement. It is the duration of the tenancy period and rent payment that differentiate rent agreements from lease agreements. As a result of this, the monetary implications of leasing and renting are also different.
Leasing and renting: The difference
A rent agreement, a document signed between the tenant and the landlord to formalise the renting process, can either be a lease or a licence. Whether a tenancy could be executed through a licence or a lease agreement is primarily decided by the tenancy period. Note that 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 of the registration, lease agreements are generally not easy to terminate.
Leasing is more common in commercial renting
Owing to the high value involved in commercial transactions that require proper legal protection to both, the landlord and the tenant, leasing is more common in the commercial real estate segment. In such cases, the entire exercise is more formalised. The same is not true about renting in the residential segment, especially in the low-cost or mid-range property segments, where both, the tenant and the landlord, often want to skip the hassle of doing the paperwork and base their decisions pertaining to tenancy on their instinct or gut feeling.
What is a rent agreement?
Rent agreements signed for a 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.
Since the Model Tenancy law has now been approved by the union cabinet, all rent agreements that are executed for period exceeding 11 months, will be guided by the rules set up under the new law. However, states will come up with their own version of the model tenancy law or change their existing rental laws before that can happen.
Lease vs rent: Key differences
|Type of contract||Lease||Leave and licence|
|Parties||Lessor and lessee||Landlord and tenant|
|Payment||Monthly||Monthly, quarterly, yearly|
|Expiry||Expires at date mentioned||Expires at date mentioned|
|Time period||Long term||Short term|
|Ownership||Remains with lessor||Remains with landlord|
|Change in contract||No change for the period fixed||Changes possible|
Difference between rent agreement and lease
Most rent agreements do not fall in the category of a lease but under licence agreement. This is why a tenant must examine what a leave and licence agreement is.
What is a leave and licence?
Section 52 of The Indian Easements Act, 1882, defines leave and licence 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 licence’.
The Supreme Court, while adding further clarity to the section, said: “If a document gives only a right to use the property in particular way or under certain terms, while it remains in the possession and control of the owner thereof, it will be a licence. The legal possession, thereof, continues to be with the owner of the property but the licencee 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 favour any estate or interest in the property.”
For a rent agreement to qualify as a leave and licence agreement, it must fulfill the following conditions:
- A leave and licence 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 licence 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 leave and licence contract also give greater freedom to both, the landlords and the tenants. As the licence 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
- A lease gives to the tenant an exclusive interest in the property, whereas a licence does not.
- A licence cannot be assigned / transferred.
- A licence agreement is easy to terminate.
- It is easier for the landlord to change the terms of a licence agreement, as compared to a lease agreement.
- Rent agreements involving licences are for short periods, compared to leases.
- No requirement to provide long notices for vacating the premises in a licence agreement.
Lease vs rental agreement: Key takeaways
Rent agreements that work under the leave and licence contract are more common in the residential real estate segment, where the entire exercise is more informal.
Rent agreements in India
In India, rent agreements in the residential segment are typically signed for a period of 11 months, to avoid the legal complexities involved in the signing of a lease. The main reason for this, is that rental agreements of a period less than a year do not require registration. A document that enables tenancy for a period of less months, does not require registration and attains the form a licence.
In the commercial segment, however, leases are a norm, since they span longer tenancy periods.
Also note that with states implementing the draft model tenancy law of the centre, all rent 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.
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