The term ‘lease’ is very common and widely used by us in property-related matters. Nowadays, with the growing urbanization and increasing business opportunities, we need properties for various purposes, such as housing, commercial, and many more. However, the most affordable way to have a property is to take it on rent for a particular duration. This mechanism of lending property on rent is called a lease. In recent times, especially after the Covid-19 Pandemic, numerous contractual and legal disputes have emerged related to the lease deed and it is very important to understand its legal aspect.
In this article, we are going to discuss the meaning, types and essential elements of a lease deed. Further, we will go through the termination and rights and responsibilities of the lessor and lessee.
What is Lease?
Before moving further, it is essential to understand the meaning of lease. In simple words, a lease is a process whereby a person rents his property to another person for various purposes in exchange for a timely return, which is known as rent. The return can be periodic or it can be lump-sum depending upon the agreement between the parties. The person who rents his property is known as the lessor and the person to whom the property is given on rent is known as the lessee.
For Instance – A leases his office to B for 12 months in consideration of a monthly rent of 10,000 Rs. Here, A is the lessor and B is the lessee.
Meaning of Lease
In legal parlance, the term lease is defined under Section 105 of the Transfer of Property Act, of 1882. As per the said Section, the lease is a transfer of right to another person to enjoy such other property for a limited duration of time in exchange for consideration. It is important to note that the consideration need not be monetary only as a share of crops or rendering any service will be deemed as a valid consideration for the purpose of a lease. The legal document through which a lease is made is known as ‘lease deed’.
Essential ingredients of a valid lease
For constituting a valid lease, some essential elements must be satisfied, which are as follows:
- Immovable Property – It is important to note that a lease can only be made for an immovable property. The transfer of movable property cannot be considered a valid lease in the eyes of law. For a lease, it is essential that the property must be immovable and the purpose of the lease must be related to the usage of the property.
- Parties – It is needless to say that for having a valid lease agreement, the existence of 2 or more parties is an absolute necessity. If during the pendency of the agreement, any of the parties dies or the numeric strength is reduced below 2 on account of any other reason, the lease agreement will be void. A lease is a bi-partied system where 2 or more parties transact with each other.
- The subject matter of the lease – In the lease deed, the subject matter of the lease must be mentioned, such as the purpose of transfer of immovable property, details of immovable property, the quantum of return, etc.
- Duration – The duration of a lease must be specified clearly in the lease deed. Normally, a lease deed cannot exceed 99 years. Interestingly, if the duration is not mentioned in the lease deed, it would be void as per Section 106 of the Transfer of Property Act, of 1882.
- Consideration – As discussed earlier, a lease is a contract where a valid consideration is essential, which is known as rent. It can be in the form of money or a premium of rent or it can be a share in the crops.
- Competency – All the parties entering a lease deed must be legally competent to enter into a contract as per the provisions of the Indian Contract Act, of 1872. Both the lessor and the lessee must have attained the age of majority and have a sound mind. They must not have been disqualified or restricted by any other law in force to enter into a contract. Interestingly, if the lease is made in favour of a minor, he shall be represented through a legal guardian till he attains the age of majority.
- Express and implied transfer – In a lease deed, the transfer of the property must be express or implied, as per the terms of the contract. It is strongly advised to draft the Clause in such a manner that the transfer of property is duly expressed without any ambiguity.
- Possession of Property – For constituting a valid lease, the lessee must be in possession and the enjoyment of property. Here the possession cannot be equated with the ownership, which will remain with the lessor only.
Types of Lease
There are various types of lease deeds relating to the transfer of immovable property, which is discussed below in detail:
- Financial Lease – It is a permanent and irrevocable lease where the property is transferred for a very long time and the lessee handles all the rights and responsibilities of the property. For instance – A transfers his agricultural property to B asking him to grow crops and maintain it without specifying an exact duration, it will be considered a financial lease.
- Operating Lease – As opposed to the financial lease, the operating lessee holds the property for a limited amount of time and is only assigned the responsibility to take care of the property.
- Domestic Lease – As the name suggests, when the lease is executed within the territorial boundaries of the countries, it is known as a domestic lease.
- International Lease – It can be further divided into 2 parts. Firstly, a cross-border lease where both the lessor and lessee belong to 2 different countries. Secondly, an import lease where both the lessor and the lessee belong to the same countries and the equipment supplier resides in any other country.
Termination of Lease Deed
The termination of the lease deed is governed by Section 111 of the Transfer of Property Act, of 1882. As per the said Section, a lease can be terminated under any of the following conditions:
- Lapse of Time – If the lease is for a particular duration, the lease deed will be automatically terminated after the expiry of the time period. It is pertinent to note that for this type of termination, there is no requirement or any other procedural formalities.
- Happening of a specified event – If the lease is dependent upon the happening of a certain event that is duly mentioned in the lease deed, the happening of such an event will terminate the lease. For Instance – A lease deed will be terminated if the lessee dies before the expiry of 10 years.
- By Surrender – If the lessee accepts the property which is already leased to him by the lessor, it shall be considered as an implied surrender of the former lease. If the surrender takes place by the operation of law, it is implied surrender.
- Forfeiture – If the lessee through its own conduct breaches any of the essential conditions of the lease, it will stand terminated by forfeiture. For example – if the lessee doesn’t pay rent for consecutive 6 months, the lease will be forfeited.
- Loss of lessor’s interest in the property – If the lessor losses the interest on the property which is transferred to the lessee, the lease will stand terminated.
Triple Net Lease (NNN Lease)
A triple Net Lease (NNN) is a lease agreement where the lessee is required to pay all the necessary expenses related to the property, such as real estate taxes, building insurance, maintenance, etc. These expenses are in addition to the agreed rent and other necessary expenditures between the parties. Normally, the subsidiary expenses are born proportionately by the lessor and the lessee, which is not the characteristic of a Triple Net Lease. This kind of lease agreement is preferred in the commercial real estate sector and has become quite popular in recent times.
The most exciting benefit of a triple net lease is that it is very easy to understand without any hassles as all the operating expenses are paid by the lessee without any headache of the lessor. Further, it is a lucrative source of a steady and handsome income for the lessor with minimal expenses.
As discussed above, a lease is a valid transfer of immovable property in exchange for consideration for a limited period of time. Since it is a type of contract, all essential elements of a valid contract must be there, such as valid consideration, competency of parties, consent, etc. There are 4 types of lease depending upon the duration and the territorial operation of the lease agreement. A lease can be terminated after the expiry of the term, forfeiture, waiver, or by the surrender of rights in the leased property. It is the utmost duty of the lessee to keep the leased property in good condition and take necessary steps for its maintenance.