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Lease and License: A Judicial Analysis

Lease and License connote different meanings and thereby create different rights and liabilities for the parties involved. In legal practice often the line between the two is blurred if certain principles applicable to one are extended to the other. In these cases, intention of the parties has to be determined to ascertain the nature of the transaction which further becomes the basis for the subsequent grant of rights to the parties.

Nomenclature of the document also holds certain significance in respect of agreements drafted by legal practitioners for there is a presumption of understanding of the rights between the parties, however, if the parties claim the document as a camouflage the courts have shown a trend of looking beyond the document to determine the nature of the transaction.

License bestows limited rights of occupancy, entry or usage to the party and typically the control and possession of such property lies with the licensor, however, in the case of lease the exclusive possession of the property is handed over to the lessee, the transfer of interest takes place for a certain consideration and the lessor has little or no control over the operations that may take place on the property.

The modern-day agreements are often a hybrid between the two and the courts have to determine intention of the parties (whether the parties aimed to create a lease or a license) based on the facts and circumstances of the case. However, there are certain characteristic differentiations that have been highlighted time and again and relied upon by various courts to determine the intention, these have been discussed in further detail in the paper below.

Introduction
A bare reading of the provisions of the Transfer of Property Act, 1882[2] and the Indian Easement Act, 1882 [3] provides for an understanding of lease and license and more often than not people do not raise questions on clarity on the elemental level. So, the question arises, if the concepts are so dissimilar, lease construes an transfer of interest whereas license is a mere permission of use of the immovable property to a certain individual or group, why this research paper?

Practical Application of the concept is a lot different than the theory we read. In legal practice often this distinction is not very easy to pinpoint and over the years judges have struggled to determine the intent of the parties to the document. The two seemingly different concepts have a lot in common which often raises disputes on the nature of the transaction and the subsequent rights of the parties thereof.

This paper aims to provide an understanding on the concepts of lease and license and discusses how the legal precedents laid down by various courts have drawn a line of distinction between the two. Special emphasis is laid on the intention of the parties to the agreement in determining the nature of the transaction. However, in certain cases involving detailed documents and agreements, the agreements are taken on face value i.e., whether the agreement was termed as a license or a lease. In this paper we will analyse various circumstances in which disputes can arise questioning the nature of the document and try to draw an inference based on the laid precedents.

Legal Provisions
The Transfer of Property Act, 1882 defines lease of an immovable property as the 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.[4]

The Indian Easement Act defines License as 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.[5]

The difference between the two can be best illustrated with the following example:
An agreement made between two parties allowing one party to pluck coconuts from the trees cultivated on the land of the other party wherein the other party also exercises control over the trade of such coconuts like fixing the price at which they maybe sold in the market, it will be a clear case of license. However, if a certain part of the land is let out to one party by the other party for a certain consideration with no directions from the other party regarding the manner in which such land may be employed to, coconuts may be plucked and processed on the farm with full autonomy to fix the rates.

The party has exclusive possession of the land with minimal interference from the lessor in its operations, it will be a case of lease.[6]

If a woman allows his brother to occupy her house rent free for certain period of time without any consideration, it does not create a legal relationship between the two. It is a mere case of license wherein one party has granted the other party permission to occupy the property[7]. If the document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner, it will be a license.[8]

Intention of the parties involved is the main criterion for distinguishing a lease from a license. If the intention deduced is of transfer of interest or of exclusive possession the agreement is likely to be classified as a lease, irrespective of the nomenclature of the document. However, in certain cases, the document/ agreement may itself be used for determining the intention of the parties, in such cases the nomenclature of the document gains significance.

However, if the plea of camouflage is taken by either of the parties to the agreement, the court is within its rights to venture beyond the document to look into the intention of the parties. Mode of eviction may also have an effect on the categorisation of an agreement, if the party can be evicted without any prior notice from the landowner, the court will be more inclined to categorise it as a license.

Case Laws
The breakthrough case for the distinction between the two was rendered in Associated Hotels of India v. R.N. Kapoor [9] by Justice Sarkar, Justice Subramaniam Subbarao and Justice Das. On deciding whether renting a part of the hotel premises to a hairdresser is in the same spirit as renting a room to a patron/ customer of the hotel, the court was stuck at an impasse. The question before the court was whether The Bombay Rent Control Act in charge of regulating rent for premises(lease) in Delhi was applicable to the said transaction or not, for there was a clear exemption of hotels from the act.

The court in interpreting the intention of the legislation came to the conclusion that the exemption was intended in terms of the patrons of the hotel, the hotel had the autonomy in deciding the rent to be charged for a certain room, however if a certain part of the property, in this case two rooms, is given to an individual or a party (group) the said act does not lose its application.

Therefore, the determining question before the court was Whether the agreement was a lease or a license?. If the agreement was indeed a license the standard rates as regulated by the Rent Controller would not apply and the hotel had the autonomy to decide its own rates, however if the agreement was a lease the hotel did not have the discretion in determining the rent to be paid by the hair-dresser and was to be regulated by the Rent Controller.

For this the learned judges relied on the following factors to render the judgement:
  1. To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form;
  2. The real test is the intention of the parties-whether they intended to create a lease or a licence;
  3. If the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and
  4. If under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negate the intention to create a lease.
The supreme Court held that in such case the real test is of the intention of the parties. If an instrument creates an interest in the property it is a lease whereas if it permits the grantee to make use of the property while the possession continues with the owner it is a license.[10] It is the substance of the agreement that matters and not the form, for otherwise clever drafting can camouflage the real intention of the parties.[11]
  1. Substance of the document must be preferred to form
    The construction of the document would depend upon its pith and substance and not upon the labels the parties may put on it.[12] Whether the transaction is a lease or a license depends on the operative intention of the parties and there is no single simple litmus test to distinguish one from the other.[13]

    In one of the early judgements in 1952 Lord Denning held the view that if a servant is given personal privilege to stay in a house for great convenience of his work and is treated as a part and parcel of his renumerations, it is a license”… and for the purpose of ascertaining whether a document is a lease or a license, substance and not the form or nomenclature and the intention of the parties is important.[14]

    However, when a document is executed by legal professionals on both sides the court is inclined to take the document on its nomenclature. In documents that showcase the clear intention of the parties to enter into a certain kind of relationship, the plea of camouflage becomes essential if the party wishes for the court to go beyond the document to look for the intention of the parties behind the agreement.

    The supporting view was held in Delta International [15]wherein the learned judge took the view that when an agreement is not entered into by an illiterate layman or poor person in need of some premises for his residence or business but is executed by two companies where it can be presumed that it is mentioned after full-understanding and to avoid wrong inference of intention, where the parties are capable of understanding their rights fully, expressly agreed and declared, the nomenclature of the document becomes important.

    Further, where no contention is raised to the effect that the agreement is a camouflage to circumvent the provisions of the law it would be unreasonable to draw an inference that the party intended to create a relationship contrary to the express terms stated in the deed.
     
  2. Interest in the Property and the Transfer of such interest
    In Wood v. Leadbitter[16], Baron Alderson emphasized the element of the transfer of interest:
    A dispensation or license properly passeth no interest, nor alters or transfers property in anything, but only makes an action lawful which without it had been unlawful.
    If an interest in immovable property, entitling the transferers to enjoyment, is created, it is a lease; if permission to use without right to exclusive possession is alone granted, a licence[17].

    In Rajbir Kaur v. S. Chokesiri[18], the premises were let out to a clothing and textile centre by the landowner, a lease deed was executed to that effect for the subsequent 10 years. The lease deed prohibited sub-letting of the premises by the tenants. However, before the expiry of the deed allegations were raised against the tenants for sub-letting the apartment to a certain ice cream vendor and a tailor.

    Eviction was sought from the court on the grounds of violation of the lease deed. The issue before the court was ‘Whether the following transaction was a lease or a license?’ On examining the agreement made between the parties, the Court concluded that only because the element of exclusive possession cannot be proved, the possibility of the transaction being a lease cannot be eliminated. If a reasonable case can be made out that the premises were let out for a monetary consideration and there was a transfer of interest on that account, the case for lease will be made.

    In cases of sub-tenancy wherein there is a document in effect against it, often tenants and sub-tenants collude to make it look like a license. The burden to prove the transfer of interest and the exclusive possession lies on the landowner. In such cases, to avoid defeating the purpose of the law and to protect the rights of the landowner the courts have to remove the veil of camouflage before any finding can be made. Specific documents made to skirt the law cannot and must not be taken on face value especially in cases wherein the aggrieved party is not even a party to the said contract/ agreement. The real intention of the parties behind the document must be uncovered before any affirmation to it can be made.
     
  3. Exclusive Possession of the Property
    In Dipak Banerjee Vs. Lilabati Chakraborty[19], the Court said that in order to prove tenancy or sub-tenancy two ingredients had to be established, firstly the tenant must have exclusive right of possession or interest in the premises or part of the premises in question and secondly that right must be in lieu of payment of some compensation or rent.
    At one time it was thought that the test of exclusive possession was infalliable and if a person was given exclusive possession of a premises, it would conclusively establish that he was a lessee.
But there was a change and the trend of judicial opinion is reflected in Errington v. Errington[20], wherein Lord Denning reviewing the case law on the subject summarizes the result of his discussion thus at p.155:
The result of all these cases is that, although a person who is let into exclusive possession is prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy.

The same was reiterated in Cobb v. Lane [21] wherein Somervell.. L. J., stated:
................ the solution that would seem to have been found is, as one would expect, that it must depend on the intention of the parties.
Exclusive possession is one of the most important factors for determining whether a particular agreement is a lease or a license. But at the same time, when the terms of the document are clear leaving no doubt that the parties never intended to execute a lease deed, in that set of circumstances exclusive possession would lose its importance.[22] The test of exclusive possession is not decisive, though it is a very important indication in favour of tenancy.[23]

Exclusive Possession if proved makes for a strong case of tenancy, it supports for the intention of the parties to that effect, however, if contrary evidence is found regarding the intention of the parties, the evidence of exclusive possession will hold little value. Various factors are analysed to determine the intention of the parties to an agreement, transfer of interest and exclusive possession are key elements when establishing a case for tenancy, but their absence does not necessarily imply its absence.

In conclusion, the findings of Lord Dennings In Merchant v. Charters[24], holds true till date:
Gathering the cases together What does it come to? What is the test to see whether the occupier of one room in a house is a tenant or a licensee? It does not depend on whether he or she has exclusive possession or not. It on whether the room is furnished or not. It does not depend on whether the occupation is permanent or temporary. It does not depend on the label which parties put on it.

All these are factors which may influence the decision but none of them is conclusive. All the circumstances have to be worked out. Eventually the answer depends on the nature and quality of the occupancy. Was it intended that the occupier should have a stake in the room or did he have only permission for himself personally occupy the room, whether under a contact or not, in which case he is a licensee.

Intention of the parties is the ultimate criterion for distinguishing between a lease and a license. Factors including transfer of interest and Exclusive possession are only of significance if they help determine the intention of the parties. Exclusive Possession maybe proved but the agreement may still be a license. These factors though significant, hold significance only till a certain extent. The ultimate test of intention is set up according to the facts and circumstances of the case, and while exclusive possession may help prove tenancy in one case, it may not be conclusive of anything in another case.

End-Notes:
  1. Richa Agarwal, B.B.A. LLB. (Hons.) III Year, University School of Law and Legal Studies, GGSIPU, New Delhi
  2. The Transfer of Property Act, 1882, s.105.
  3. The Indian Easement act, 1882, s. 52.
  4. Supra, Note 2
  5. Supra, Note 3
  6. Subramaniam v. Arulmighu Renganatha Swamy, S.A.(MD) No. 681 of 2014.
  7. Cobb v. Lane, [1952] 1 TLR 1037.
  8. A.P. Singh and Ashish Kumar Srivastava (eds.), Property Laws 304 (Lexis Nexis, Haryana, First Edition 2015)
  9. AIR 1959 SC 1262
  10. Supra, Note 8 at 305
  11. Supra, Note 9
  12. Inderjeet Singh Sial v. Karam Chand Thapar 1995 6 SCC 166, Vayallakath Muhammedkutty v. Illikkal Moosakutty 1996 9 SCC 382.
  13. Rajbir Kaur v. S. Chokesiri, 1988 AIR 1845.
  14. Torbett v. Faulkner, (1952) 2 TLR 659.
  15. Delta International v. Shyam Sunder Ganeriwalla, 1999 (2) SCR 541.
  16. (1845) 13 M & W 838
  17. Quadrat Ullah v. Municipality Board, Bareilly, [1974] 1 SCC 202.
  18. Supra, Note 13
  19. 1987(4) SCC 161
  20. 1952 1 K.B. 290
  21. Supra, Note 7
  22. M.N. Clubwala v. Fida Hussain Saheb, 1964 SCR (6) 642
  23. B.M. Lall v. Dunlop and Rubber Co. Ltd., 1968 1 SCR 23, 27
  24. [1977] 3 All E.R.918, 922 CA
Written By: Richa Agarwal

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