REAL ESTATE BASICS: WHAT IS A LEASE DEED?

In a lease, right of possession is transferred instead of the right of ownership. Transferor here is called the lessor and the transferee i.e. the one enjoying the property for a period is called lessee. Lease is governed by the Transfer of Property Act, 1882 and it is given from Sections 105 to 117.

DEFINITION OF LEASE

Section 105 of the Transfer of Property Act, 1882 states the definition of a lease which states that it is a transfer of immovable property for a particular time period for a consideration of which the transferee has accepted the terms surrounding the agreement.

RENTAL AGREEMENT

Rental agreements on the other hand are entered into for a period of 11 months, with an option to renew the agreement at the expiration of the agreement. As a rental agreement that is 11 months long is just a license for the tenant to occupy the premises for a short duration, rent control laws do not apply. Further, rental agreements that are 11 months long allow the landlord to take more measures in case of eviction of tenant from the property. Hence, most landlords prefer to enter into a rental agreement that is 11 months long, with an option to renew at the end of the agreement period. 

WHAT ARE THE ESSENTIALS OF A LEASE?

1. Parties must be competent: The parties in a lease agreement should be competent to enter into a contract. Lesser should be entitled to a property and have absolute rights over that property.
2. Right of possession: Ownership rights are not transferred in a lease, only the possession of the property is transferred.
3. Rent: Consideration for a lease can be taken in the form of a rent or premium.
4. Acceptance: Lessee, who is to get the interest in the property after lease, has to accept the lease agreement along with the time period and terms & conditions imposed on the transfer.
5. Time Period: Lease always takes place for a particular time period which is to be specified in the lease agreement. It can be relaxed at the option of the lessor.

WHO HAS TO BEAR THE STAMP DUTY?

If it has not been specifically agreed to in the lease agreement between the parties executing it, it is the responsibility of the lessee to pay the applicable stamp duty. 

WHAT HAPPENS IF ONE DOES NOT PAY THE REQUISITE STAMP DUTY?

If proper stamp duty is not paid on lease instruments, any government authority competent to take evidence on oath can impound it and send it to the jurisdictional Collector of Stamps for adjudication and payment of proper stamp duty, along with a penalty which may extend up to ten times of the deficient stamp duty amount. Further, if in court proceedings, the court comes to the conclusion that the instrument is not properly stamped with applicable duty, it would not be admissible as evidence until the stamp duty (with penalties) as adjudicated by the Collector of Stamps is fully paid.

WOULD IT MAKE ANY DIFFERENCE IF A LEASE AGREEMENT CONTAINS AN ARBITRATION CLAUSE?

If a lease agreement contains an arbitration clause, it would, as held by the Supreme Court of India in various judgements, be treated as a separate agreement between the lessor and lessee and the process of arbitration can be invoked by either party to such lease agreement as an arbitration agreement does not require any registration. However, the arbitrator would not rely on an unregistered lease deed for enforcement of any of the terms and conditions contained therein, except as evidence of contract in a claim for specific performance, or evidence of any collateral transaction which does not specifically require registration. 

As mentioned above, the contractual terms stated in an unregistered lease deed for a term exceeding one year cannot be relied on by the parties as the lease deed will be void. However, there is one exception – an arbitration clause. In SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited ((2011) 14 SCC 66), the Supreme Court had held that the arbitration agreement in the lease deed is a collateral term relating to the resolution of disputes and independent of the other terms of the contract. It further held that the arbitration clause is unrelated to the transaction affecting the immovable property contained therein and therefore even if the deed is challenged as not valid or unenforceable, the arbitration agreement would remain unaffected for the purposes of resolution of disputes arising with reference to the deed.

WHAT WOULD HAPPEN IF A LEASE AGREEMENT WHICH REQUIRES REGISTRATION IS NOT REGISTERED?

If a lease agreement which requires mandatory registration is not registered by the parties, it cannot be received as evidence of any of the agreed terms and conditions affecting the leased property contained therein, whatsoever, except for certain limited purposes including, inter alia in suits for specific performance or merely as evidence of a collateral or correlated transaction.

The provisions of the Registration Act, 1908 (“Registration Act”) and the Transfer of Property Act, 1882 (“TOPA”) set out the law governing registration of lease deeds. Section 17 of the Registration Act states that leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent must be registered compulsorily. Further, section 107 of the TOPA states that a lease of immoveable property from year to year or for any term exceeding one year or reserving a yearly rent can only be made by a registered instrument. All other leases of immoveable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.

CASE ANALYSIS

The position of law with respect to registration as provided in the Registration Act and the TOPA has been reiterated by the Supreme Court of India (“Supreme Court”) in various cases. In Anthony v. KC Ittoop and Sons and Others ((2000) 6 SCC 394; AIR 2000 SC 3523), the Supreme Court had considered whether an unregistered lease deed can create a lease. The Court held that an unregistered instrument cannot create a contractual lease due to the three-pronged statutory restrictions under law (put simply, sections 17 and 49 of the Registration Act and section 107 of the TOPA) but that the existence of a lease can be presumed from the conduct of the parties. The Supreme Court held: “A transfer of right in the building for enjoyment, of which the consideration of payment of monthly rent has been fixed, can reasonably be presumed.”

In Burmah Shell Oil Distributing now known as Bharat Petroleum Corporation Ltd. v. Khaja Midhat Noor & Ors (AIR 1988 SC 1470), the Supreme Court held that a lease for a period exceeding one year can only be created by a registered instrument. In the absence of a registered instrument, the lease shall be a month to month lease. The Supreme Court held:

“…since the lease was for a period exceeding one year, it could only have been extended by a registered instrument executed by both the lessor and the lessee. In the absence of registered instrument, the lease shall be deemed to be “lease from month to month”.

 It is clear from the very language of section 107 of the Act which postulates that a lease of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent, can be made only by a registered instrument. In the absence of registered instrument, it must be a monthly lease.

This has also been reiterated in the more recent case of Park Street Properties (Pvt.) Ltd. v. Dipak Kumar Singh and Ors. (AIR 2016 SC 4038) where it was held that in the absence of registration, a month-to-month lease is created which is governed by section 106 of TOPA.

DOCUMENTS FOR REGISTRATION OF LEASE DEED:

1. Original Lease Agreement & copy
2. Stamp paper
3. Draft of registration fee with undertaking

THE FOLLOWING DOCUMENTS ARE REQUIRED BY THE LESSEE OR TENANT IN CASE OF A COMPANY LEASE:

1. Original Power of attorney/board resolution on company letterhead.
2. Original photo ID proof and its copy (Aadhaar Card, Driving Licence, Passport, etc) of the authorized signatory.
3. Address Proof of the authorized signatory.
4. Two passports sized colored photographs of the authorized signatory.
5. Company PAN card copy.
6. Original & copy of Aadhaar card of the authorized signatory.
7. Company seal/stamp of authorized signatory.

IN CASE OF LANDLORD OR LESSOR:

1. Original ownership Documents (Sale Deed or Conveyance Deed ).
2. Original Aadhar Card of Lessor.
3. Original picture ID of Lessor ( Driving Licence / Passport).

DIFFERENCE BETWEEN THE REGISTERED AGREEMENT AND NON-REGISTERED AGREEMENT

Registered Agreement: If the rent/lease agreement that you are preparing is for a period of 12 months or more, then, you need to register the rent/lease agreement at the sub-registrar office in your city. The registration fee differs from state to state. However, it could be approximately around 3.4% of yearly rent. The registered rent/lease agreement is a legally binding document.

Non-Registered Agreement: If the rent/lease agreement that you are preparing is for a period of less than 12 months, then, you do not need to register the rent/lease agreement. Typically, non-registered rent/lease agreement is prepared for a period of 11 months. A non registered agreement can be prepared on Rs 50 or Rs 100 Stamp paper issued by the state. Once, the document is prepared, it is notarized by the local notary. In case there is an issue between owner and the renter, the non-registered rent/lease agreement can also be presented in court of law as a proof of agreement between an owner and renter.