The term “Lease” is widely used in various economic transactions related to the transfer of property. It is a contractual agreement made for transfer of an asset from one person to another. It is used for the transfer of the asset in both commercial and non-commercial or personal fields. Lease under Indian Laws is defined under Section 105 of the Transfer of Property Act, 1882. A person can enjoy another person’s property for a specific period of time as per the contractual agreement made by them.
What is Lease?
Section 105 of the Transfer of Property Act– defined Lease as —
“A lease of immovable property is a transfer of a right to enjoy such 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.
Lessor, lessee, premium, and rent defined as—
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.
According to the definition mentioned above, a Lease is a contractual agreement made for the transfer of the right of immovable property from one person to another for a specified duration of time in exchange for money, share of crops or any other services. The rights transferred in the form of a lease can be expressly or impliedly given to the other person who seeks those rights. A person can get a lease by paying the total sum of money as a premium or in installments as rent for the immovable property.
Lessor and Lessee
In the contract of Lease, the person who is the transferor of the property is called the Lessor and the person who is the transferee is called the Lessee. Both Lessor and Lessee can come into the contract of lease for the transfer of right of the immovable property. The person acquiring the property in the form of the lease can work on the property and share the profit gained by it to the true owner of the property.
Lease is a contractual relationship between the Lessor and the Lessee therefore, the essential elements of a valid contract are necessary to be fulfilled and the parties should be competent to the contract according to the Indian Contract Act, 1872.
Rights and liabilities of lessor and lessee are given in Chapter 5 Transfer of Property Act, 1882.
Duration of lease
Lease being a contractual agreement specifies the date and time of the contract and the duration in which the contract is valid. But there are certain circumstances that do not describe the duration of the lease and are neither mentioned in any of the local customs and usages. In such circumstances Section 106 of the Transfer of Property Act, 1882 is applicable which explains certain situations and prescribes the duration of the lease.
Section 106 describes the duration of lease of two conditions including Agriculture or Manufacturing purpose or other purposes.
Agriculture Or Manufacturing purpose
According to Section 106, if a lease agreement is made for agriculture and manufacturing purposes without specifying the duration of the contract then it is prescribed to be for a year and notice for termination of the lease is given in 6 months. The notice made should be written and sent by post or personally delivered to another party and duly signed by them. The notice made should be affixed without hiding it from the other party.
Other Purpose
If the lease agreement is made for any other transactions then the time duration of the lease is specified to be 1 month and renewed every month if it is not mentioned in the contract. The notice for such a lease can be given within 15 days of the lease contract and delivered to the other party in the same way mentioned for the agriculture or manufacturing lease purpose.
Essential features of a valid lease
There are various essential elements of a contract of lease mentioned under the Transfer of Property Act, 1882.
1. Immovable Property – A contract of Lease can be made only for immovable property or assets. It cannot be done for a moveable property. The lease made will be for the working and use of the immovable property and the Lessor and Lessee exchange the rights of the property through the contract of lease.
2. Parties – For a Lease agreement, the existence of two or more parties is necessary for the proper transfer of rights of the immovable property. It is a bi-partied system and it cannot be complete in the absence of the parties, therefore, making the contract of lease void.
3. Subject matter of lease – The subject matter or the purpose of the lease agreement is compulsory and necessary to be mentioned in the contract. The purpose of transfer of the right of the immovable property, the services and profit decided, the details of the immovable property, and other important data is required to be written in the contract of lease.
4. Duration – The duration of a lease agreement is an essential element which specifies the commencement of the contract and how long the services and rights will be transferred through a valid legal contract. Section 106 of the Transfer of Property Act, 1882 is referred if it is not mentioned in the contract of lease.
5. Consideration – Lawful consideration is necessary for the fulfillment of a contract of lease. The transfer of the rights of the immovable property is made by giving consideration in the form of money as premium or rent, shared profit or as share of crops and services.
6. Competency – The parties entering into a contract of lease should be competent according to the Indian Contract Act, 1872. Both the Lessor and the Lessee must be of sound mind, of majority age, and not subject to any law which restricts them to be a part of a valid contract. If the transfer of the right of property is done to a minor, then a legal guardian is necessary to work on behalf of the minor till he or she attains a majority age.
7. Valid contract essentials – Lease is a contractual agreement made between two parties and therefore, it must follow the essential elements of a valid contract given under Indian Contract Act, 1872. Essential elements like Offer, Acceptance, Consideration, Lawful Object, Intention of the Parties, Competency, Capacity to Contract, Subject Matter, Writing and Registration etc, are important to be followed in the Contract of Lease.
8. Express and implied transfer – The transfer of right of the immovable property between the Lessor and the Lessee should be made expressly or impliedly, in a written contract. And the notice of the termination of the lease should be given according to the clause mentioned in the contract of lease and should be duly signed and delivered among the parties.
9. Possession of Property – In the contractual agreement of lease, transfer of the right of property is made and the parties exchange the right of possession of the property for a certain period of time and do not exchange the ownership of the immovable property.
Types of lease
There are different types of lease agreement for the transfer of the right of the immovable property, these are:
1. Financial lease
This type of lease is permanent and irrevocable. The Lessor transfers the rights of the immovable property for a long period of time and works on the property. The Lessee takes charge of all the burdens and liabilities of the property.
For instance, if a person assigned another person to look after his agricultural land and grow crops and maintain it without specifying the termination of the lease, then it is said to be a financial lease.
2. Operating lease
In this type of lease, the Lessee does not hold the burden of the property and the lessor takes care of the property. This type of lease is for a short period of time.
For instance, if a person transfers the property rights to another person in the form of a lease to provide services on the immovable property for a short period of time then it is considered an operating lease.
3. Sale and lease back leasing
In this type of lease, the lessee sells the asset to the lessor with an advance agreement between the two of leasing the asset back to the lessee for a fixed lease rental period. Such a lease is also known as Bipartite lease.
4. Direct lease
This is a tri-partied lease which includes :
- equipment supplier,
- lessor,
- lessee.
5. Single investor lease
In this type of lease, the lessor has to arrange for money in order to finance his asset by way of debt or equity. The lender cannot recover anything from the lessee, in case the lessor defaults in payment.
6. Leveraged lease
There are three parties in this type of lease :
- the lessor,
- the lessee and
- the financier/lender.
The lessor arranges for the equity and the financier has the responsibility to finance the debt.
7. Domestic lease
When the lease contract is made within the country it is known as domestic lease.
8. International lease
There are two types of International lease. :
- Cross border lease
- Import lease
An import lease occurs when the lessor and the lessee reside in the same country and the equipment supplier resides in a different country. On the contrary, when the lessor and the lessee reside in two separate countries ‘X’ and ‘Y’ then the lease is known as a Cross border lease. It doesn’t matter where the equipment supplier resides.
Conclusion
The term lease is widely used in our day to day life for the matters relating to transfer of immovable property. It is defined under Section 106 to Section 117, Chapter V of the Transfer of Property Act, 1888. The Lease agreement is made similar to a valid contract mentioned under the Indian Contract Act, 1872. It is a bi-partied agreement where the parties transfer the property rights for certain share of profit or service made on the immovable property. It has various types and essentials mentioned under the Act.
References
- https://corporatefinanceinstitute.com/resources/knowledge/other/lease/
- https://www.advocatekhoj.com/library/lawareas/lease/essential.php?Title=Lease&STitle=Essential%20Elements#:~:text=The%20essential%20elements%20of%20a,lease%20must%20be%20immovable%20property.&text=The%20contract%20for%20right%20for%20grazing%20is%20not%20lease.
- https://www.srdlawnotes.com/2018/03/lease-meaning-definition-and-essentials.html
- https://www.legalbites.in/lease-introduction-concept/
- https://blog.ipleaders.in/45943-2/
- https://accountlearning.com/different-types-of-leases/
- http://lawtimesjournal.in/lease-its-types/
- https://efinancemanagement.com/sources-of-finance/types-of-lease
This article has been written by Shrungeri Chauhan, BALLB (Hons) 2nd Year at School Of Law, DAVV.
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