INTRODUCTION
Understanding the nuanced differences between leasing and licensing arrangements is pivotal, as they dictate the extent of control an individual has over an asset.[1] While leases grant exclusive possession and control over a property for a specified duration, licenses merely confer the right to utilize the property without granting exclusive possession.[2]
Despite their seemingly similar provisions, discerning the fundamental disparities between leases and licenses poses a challenge. Situations often arise where the distinction between the two becomes blurred, necessitating a thorough understanding of their underlying principles and potential conflicts.[3]
In essence, a lease entails the transfer of a legal interest in land, affording the tenant exclusive possession for a predetermined period in exchange for rental payments.[4] Conversely, a license constitutes a contractual arrangement wherein the licensor grants the licensee the right to occupy the premises for a fee, without conferring exclusive possession.[5]
While the differences between leases and licenses may sometimes appear ambiguous, the implications of choosing one over the other are unequivocal.[6] The key disparities lie in the level of control and tenure security afforded to the tenant or licensee. Leases provide tenants with a stake in the land, offering sole possession and greater tenure security.[7] On the other hand, licenses offer a more flexible arrangement but do not guarantee the same level of security as leases.[8]
Both leases and licenses involve granting the right to use premises in a specific manner, but the nature of this right and its associated privileges differ significantly between the two. While leases provide tenants with greater control and security, licenses offer flexibility but may lack the same level of tenure security.
UNDERSTANDING LEASE AND LICENSE
Bare Provision
Section 52: “License” defined.[9]
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.
Section 105: Lease defined.[10]
A lease of immoveable 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.– 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.
Definition
The terms “lease” and “license” carry distinct meanings, leading to differing rights and obligations for the involved parties.[11] However, in legal practice, the boundary between the two is often blurred when specific principles applicable to one are extended to the other. In such cases, determining the parties’ intention becomes crucial in defining the transaction’s nature, serving as the foundation for subsequent transfer of rights. While the language used in legal documents holds significance, courts have shown a tendency to look beyond the document’s wording when parties dispute its interpretation, aiming to ascertain the true nature of the transaction.[12]
Necessary Elements of Lease
Several essentials can be gleaned from the definition of a lease, including:
i. Lease Parties: A lease can be entered into by any individual eligible to contract under the Contract Act. The lessor must have the right to transfer the property, either explicitly or implicitly. Additionally, a lease can involve multiple parties, though all lessees are typically treated as a single tenant unless otherwise specified.[13]
ii. Lease Subject Matter: The subject matter of a lease must be an immovable property, as defined in Section 3.[14] This encompasses not only land but also the benefits derived from it. When leasing a building, the lease automatically includes the land on which the premises are situated.[15]
iii. Transfer of Right: A lease entails a partial transfer of possession, followed by the transfer of interest. It effectively transfers the right to a portion of the estate, also known as “demise.”[16]
iv. Lease Duration: A lease can be for a specified period or in perpetuity. Lease durations typically fall into three categories: time-bound leases, periodic leases, and perpetual leases.[17] If the landlord retains the right to evict the tenant, the arrangement may transform into a landlord-tenant relationship.[18]
v. Consideration: In exchange for the enjoyment of the property, consideration is exchanged. This fee may be termed a premium if paid in a lump sum or rent if paid regularly.[19]
Necessary Elements of License
1. Distinct Parties: A fundamental aspect of a license is the involvement of two distinct parties: the licensor, who grants permission, and the licensee, who is given permission to use the property.[20] For instance, if individual B enters onto the property of individual A without permission, it constitutes trespassing. However, if A grants B explicit permission to enter, this arrangement is recognized as a license.
2. Grant of Permission: Central to the concept of a license is the notion of a positive grant of permission. This means that the licensor, such as A, actively permits the licensee, like B, to perform certain actions or activities on the property. This grant can take various forms, such as verbal consent, a written agreement, or implied permission through conduct.[21]
3. Permission on Immovable Property: Licenses typically involve permission granted for activities to be conducted on or within immovable property owned by the licensor. This could include entering a building, using land for recreational purposes, or conducting business activities within a specified area.[22]
4. Lawful Activities: A key characteristic of a license is that it permits the licensee to engage in actions that would otherwise be lawful. In other words, without the license, the activity may be considered unlawful or constitute trespassing. By obtaining a license, the licensee gains legal authorization to perform the specified activities on the property.[23]
5. Distinction from Easements: It’s important to differentiate between licenses and easements. While both involve permissions related to property use, licenses are generally more limited in scope and duration compared to easements. Easements typically confer specific rights to use the property in a defined manner, often enduring even if the property ownership changes.[24]
6. Not an Interest in Land: Unlike easements or leases, licenses do not create an interest in land for the licensee. Instead, they represent a personal right or privilege granted by the licensor to the licensee.[25] Section 60 of certain legal frameworks may specify that a license can be revoked by the grantor at their discretion, unless certain conditions or agreements dictate otherwise.[26]
DISSECTING THE DIFFERENCE USING JUDICIAL PRONOUNCEMENTS
In the case of Planet M Retail Ltd. v. Select Infrastructure Pvt. Ltd.,[27] the High Court of Delhi clarified that upon the expiration of the stipulated period in a licensing agreement, the licensor forfeits all claim to the immovable asset unless the license is renewed. Subsequently, the licensee is required to vacate the premises as the property reverts to the ownership of the licensor.
Contrastingly, in R.N. Kapoor vs. Associated Hotels of India Ltd.[28] (Supreme Court, 1959), it was established that a lease entails the conveyance of a land interest, wherein the lessee assumes the right to use the property to the detriment of the lessor. Conversely, in the case of a license, the legal possession of the property remains with the owner, and the licensee is merely permitted to utilize the asset for specific purposes without acquiring any estate or interest in the land.
Further elucidating on the distinction, Fida Hussain Saheb v. Mrs. M.N. Clubwala[29] (Supreme Court, 1964) emphasized that the determination of whether a contractual agreement establishes a landlord-tenant relationship or a licensor-licensee one hinges upon the parties’ intended purpose, as discerned from the agreement’s pertinent clauses.
Similarly, Municipal Corporation of Delhi vs. Chandu Lal[30] (Delhi High Court, 1978) underscored that the crux of discerning the nature of a document lies in ascertaining the parties’ intent. A contract that confers the right to utilize the asset while retaining ownership and control of the property signifies a license rather than a lease.
This distinction is upheld even if the licensee enjoys sole possession, as long as the terms preclude the establishment of a tenancy. A license legitimizes restricted usage of the property without transferring ownership, whereas a lease entails the transfer of the right to enjoy the asset for a specified duration. Consequently, a mere licensee lacks the entitlement to full enjoyment of the property and cannot bring a possession action, as legal possession remains vested with the owner.
In Delta International Limited vs. Shyam Sundar Ganeriwalla & Others,[31] the determining factor to discern whether an agreement constitutes a lease or a license is the “intention of the parties.” This consideration is paramount, especially in situations where exclusive possession is granted, as the line between a lease and a license becomes notably fine.
Contrastingly, in the case of Madhu Behal and others vs. Rishi Kumar and others[32] (Punjab & Haryana High Court, 2009), it was established that the terminology used in a document does not singularly determine whether it constitutes a “lease” or a “license.” The crux of differentiation lies in the requirement of a change in interests in the demised property, which is indispensable in a lease but not in a licensing transaction. Additionally, while a lease can be transferred, a license remains personal to the grantee.
Furthermore, legal possession of the property typically transfers to the tenant in a lease transaction, whereas in a licensing transaction, the licensor retains legal possession, and the licensee is granted only the authority to utilize the premises as specified in the contract. In differentiating between a lease and a license, exclusive possession often emerges as a critical factor.[33] However, in cases where the terms of the agreement clearly indicate that the parties did not intend to create a lease, exclusive possession may lose its significance. [34]
While exclusive possession can bolster the argument for a tenancy by affirming the parties’ intent, it becomes inconsequential if evidence suggesting otherwise surfaces. Thus, while the presence of exclusive possession and the transfer of interest are significant in establishing a claim for tenancy, their absence does not automatically negate the existence of a lease.[35] Ultimately, the primary test, irrespective of whether the arrangement is deemed a lease or a license, is the intent of the parties involved. In a license, the licensee is permitted to utilize the premises without possessing any claim or interest in them.[36] Conversely, in a lease, the lessee has the right to enjoy the property to the extent it has been conveyed to them.[37]
In a nutshell, the distinction between leases and licenses, as clarified through various judicial decisions, hinges on the parties’ intent and the nature of their contractual arrangements. While terminology and exclusive possession play a role, the fundamental consideration is whether there’s a transfer of interests in the property. Whether it’s the conveyance of a land interest in a lease or permission to utilize property in a license, the central principle remains: the intent of the parties shapes the legal relationship. Therefore, while legal principles provide guidance, the true determinant lies in discerning the intentions expressed within the contractual framework.
CONCLUSION
In determining whether individuals occupying a single room are tenants or licensees, several criteria may influence the decision, including sole custody, furnishing of the space, and the nature of employment.[38] However, none of these factors are determinative on their own. Ultimately, the nature and character of the occupancy, as intended by the parties, is the decisive factor.[39] Whether the occupier was meant to have ownership of the space or merely permission to use it for their purposes, regardless of the label applied, determines whether they are a tenant or a licensee.[40]
The intent of the parties emerges as the ultimate criterion for distinguishing between a lease and a license. While factors like transfer of interests and exclusive possession may assist in discerning the parties’ intent, they are only relevant to the extent that they clarify the parties’ intentions.[41] Exclusive possession, for instance, may support the establishment of tenancy in certain contexts but may not be conclusive in others.
There are established strategies for distinguishing between a lease and a license. Content should take precedence over form in determining the nature of a document. The fundamental litmus test is whether the parties intended to create a lease or a license.[42] A lease is established when the agreement confers an interest in the property, whereas a license is created when the agreement permits another to use the asset while the landowner retains legal possession. Full possession of the land under deed may suggest tenancy, but circumstances may prove otherwise.[43]
In conclusion, given the significant consequences of agreements of this nature, it is imperative to exercise reasonable care to ensure the accuracy of documents and the appropriate levying of stamp duty.[44]
Notes:-
[1] DR POONAM PRADHAN, THE TRANSFER OF PROPERTY ACT (ED. 13, LexisNexis, 2018).
[2] Ibid.
[3] PROF (DR) HARPREET KAUR, THE TRANSFER OF PROPERTY ACT. (Ed 6, LexisNexis, 2021)
[4] Ibid.
[5] Supra, note 3.
[6] DR AVATAR SINGH, TEXTBOOK ON THE TRANSFER OF PROPERTY ACT (ED. 5, LexisNexis, 2015)
[7] Supra, note 1.
[8] Supra, note 1.
[9] THE TRANSFER OF PROPERTY ACT, No. 4 of 1882, section 52.
[10] THE TRANSFER OF PROPERTY ACT, No. 4 of 1882, section 105.
[11] Supra, note 1.
[12] Supra, note 1.
[13] Supra, note 3.
[14] THE TRANSFER OF PROPERTY ACT, No. 4 of 1882, section 3.
[15] Supra, note 6.
[16] Supra, note 3.
[17] H.R. Sharma, Liberalising the Lease Market, 41(8) ECO. & POL. WEEKLY (2006)
[18] Supra, note 1.
[19] Supra, note 3.
[20] Supra, note 6.
[21] Supra, note 3.
[22] Achal Gupta, Licence and its Revocation, SCCONLINE. (21st February, 2021) (Last visited 22 Feb, 2024) https://www.scconline.com/blog/post/2021/02/27/license/.
[23] Ibid.
[24] Supra, note 3.
[25] Supra, note 22.
[26] THE TRANSFER OF PROPERTY ACT, No. 4 of 1882, section 6.
[27] Civil Appeal No. 488 of 2013
[28] MANU/SC/0168/1959
[29] MANU/SC/0016/1964
[30] MANU/DE/0024/1978
[31] MANU/SC/0258/1999
[32] MANU/PH/0036/2009
[33] Yamini Rajora, Definition of Licence and Granting of Licence, ACADEMIKE. (30th April 2015, Last visited 20 February 2024).
[34] C.F. Alvares, Lease and Licence, 2 SCC(JOUR) 1 (1972)
[35] Ibid.
[36] Supra, note 34.
[37] Supra, note 34.
[38] Supra, note 34.
[39] Mitali Yadav and Sahil Asthana, Right of a Lessee to retain possession of premises subsequent to determination of lease by efflux of time, MANUPATRA (Last Accessed February 23, 2024).
[40] Ibid.
[41] Supra, note 33.
[42] Supra, note 39.
[43] Supra, note 33.
[44] Supra, note 39.
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