The concept of lease has existed from the late 14th century and today it is a vital concept for all businesses in the world. A lease is a legal agreement that allows a person to use certain property that doesn’t belong to them, for a specified period with specific conditions and for a suitable form of compensation. The owner authorizes the user to possess and use the property for a fixed duration of time without gaining any ownership rights over the property. The owner of such property is called the Lessor, the person to whom the Lessor will transfer the right of use is known as the Lessee. These terms have been given a definition under the Section 105 of the Transfer of Property Act, 1882.
The written document which governs relationship between the parties is called the Lease Agreement. The written document for the purpose of lease is seen as a contract between two parties. This contract is an important piece of evidence establishing the lessor as the owner of the property as well as it lays down the rights and liabilities of the parties and is necessary for establishing the legitimacy of a lease between two parties to be recognized in a court of law in the event of a dispute. Additionally, the rights and duties so imposed fall under the concept of privy to contract and as the two parties are privy to the agreement, they have to abide by all such duties and liabilities as stated under the lease agreement.
The agreement is not a valid piece of evidence until two witnesses or non-beneficiaries of each party sign the lease agreement as witnesses. An additional requirement is that the document as the case may be should be a registered agreement under the Registration Act, 1908.
B. ESSENTIAL ELEMENTS OF A LEASE AGREEMENT
In the present day, the concept of lease is so widely used in today’s business world that there is a requirement of drafting and vetting of agreement with care and precision and in consonance with the commercial plans for all parties. There are certain elements which are essential to any lease agreement which is discussed below.
Parties: In any agreement all the parties should have the competence under law to enter into a lease agreement. Competence for the purposes of any lease agreement refers to competence to contract as envisaged under Section 11 of the Indian Contracts Act, 1872. Description of the Property: The property should be clearly showcased within the lease agreement for the purposes of ultimate clarity and to avoid any type of fraud by either party.Term and Termination: The duration for which the agreement shall be valid or the duration for which the lessor agrees to lease out the property to the lessee shall be clearly mentioned. Additionally, all extensions to the term, terminations and rights of the parties post termination shall clearly be indicated in the lease agreement for the benefit of the parties to the contract. Consideration: The most general form of consideration for the usage of property is called rent, which is paid in definitive instalments. Rent can be set up by the Lessor in consideration with his own costs to maintain such property and other charges that property might face such as taxes, duties, etc. There are other methods of payment of consideration such as premium, tender, etc. which might depend from contract to contract. Representations and Warranties: Representation is a statement of past or present fact made by one party to induce another party to enter into a contract. A warranty is a promise that a condition or an assertion of fact is true and is typically supported by an implied promise of indemnity if the condition or assertion is false. A warranty may apply to the present and future. All the parties should be responsible in certain ways for the leased property and shall maintain the property based on such representations and warranties. Covenants: An agreement or promise to do or provide something, or to refrain from doing or providing something, which is meant to be binding on the party giving the covenant. Generally, the lessor being the owner of the property makes covenants to be followed by the lessee for the purposes of maintenance of the property.
C. LESSEE’S OBLIGATIONS AND LIABILITIES
As seen in the above case there are multiple important clauses of any lease agreement which will require different actions on part of all parties. For the smooth transaction between all the parties, it shall be the duty of all parties involved to follow to the best possible ability, the requirements of all the clauses of the contract as well as the requirements under the law.
The Lessee is required to abide by certain obligations and liabilities under law in itself under Section 108 of the Transfer of Property Act, 1882. The section particularly points towards obligation such as (i) rights of use of the property in case of accessions, fixtures, crops and other items attached to the earth (ii) recovery of money in the case of monies due to the lessee by the lessor as the case may be, (iii) termination of lease on mutual consent for reasons beyond control of the parties, (iv) transfer by lessee. The liabilities such as payment of rent, premium or tender as the case may be in a manner which is tenable under the lease agreement, protection of the property from any encroachment and the lessee has to maintain and return the property in similar nature as was received by the lessee.
D. LESSOR’S OBLIGATIONS AND LIABILITIES
Similar to the Lessee, the Lessor also has obligations and liabilities under the law and the agreement itself. Under Section 108, the lessor has to communicate all material defects in consonance with the right of use of the lessee, provide the property to at the request of the Lessee and also allow for the lessee to hold the property if timely rent is paid and all ancillary performances as stipulated by the clauses of the contract between the parties are fulfilled.
It is important to note at this juncture that that law on leasing also provides for certain principles of contract law to be upheld and maintained by both parties as the contract between the parties what would majorly govern the relationship of the parties. For a lessor to smoothly transfer possession of the property to the lessee, it is critical to record the oral terms and conditions of the tenancy into a written agreement. In some cases, the lessee may misappropriate the property for its own benefit, cause damage to the property, fail to pay the monthly rent, and resort to unlawful activities to transfer ownership rights over the property. Therefore, it’s extremely important to execute a lease agreement to safeguard the interests of the lessor who agrees to lease out his/her property to the lessee by incorporation of the terms of tenancy in the agreement. The execution of a lease agreement leads to creation of the following rights for a lessor or his representatives, including but not limited to the following:
(a) Right to recover the outstanding rent from the lessee as per the terms of rent as stated in the lease agreement.
(b) Right to recover the amount of damages from the lessee in case of any material damage to the property.
(c) Right to inspect the property at all reasonable times during the term of the agreement.
(d) Right to recover the possession of the property in a good tenantable condition on the termination of the lease agreement.
(e) Prevent the lessee from using the property for any purpose other than the purpose of the agreement.
(f) Prevent the lessee from sub-letting the property to any third party without seeking prior consent of the lessor.
(g) Prevent the lessee from constructing any permanent structure on the leased premises.
(h) Right to terminate the agreement on breach of the obligations, representations, warranties, covenants by the lessee.
(i) The Lessor is eligible to claim tax benefits on account of expenses such as depreciation on assets, maintenance incurred and so on.
(j) Right to claim notice from the lessee about any proceedings or any encroachment or interference related to the property.
We will try and explain some of the possible cases and scenarios as seen under Contract law principles which might be applicable to the contact of lease. This list is not exhaustive and is an example of any situation that may happen.
E. APPLICABILITY OF THE DOCTRINE OF FRUSTRATION TO LEASE
The Doctrine of Frustration is stated under Section 56 of the Indian Contract Act, 1872. The understanding from this section essentially is that the performance of the contract so envisioned while entering into the contract has become impossible to perform due to reasons beyond the abilities of the parties, then such contract can be voided. The two general principles to be looked at when applying this doctrine are: (a) the occurrence of event which couldn’t have been prevented and (b) the impossibility of performing obligations of the contract due to such an occurrence.
Historically, the lease agreement has always been excluded from this doctrine. In the case of Sushila Devi And Anr. vs Hari Singh And Ors, the Supreme Court discussed the applicability of Section 56 of the Indian Contract Act to lease agreements and observed that once a valid lease has come into existence, even if it is through an agreement, the agreement to lease disappears and its place is taken by the completed conveyance, which is the lease in itself. Now, the lessee acquires an interest in the property beyond the contractual right that was granted by the agreement. Section 56 of the Indian Contract Act only applies to contracts and the benefit of Section 56 cannot be availed in the case of a completed conveyance. Also, in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh observed that generally Indian courts were of the view that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties are under a transfer of property. The Court held that the Doctrine of Frustration would not apply to a contract of lease when there was transfer of a property by way of lease under the Indian Law, owing to the transfer of right to enjoy the land as well. The courts stated “There is a clear distinction between a completed conveyance and an executor contract, and events which discharge a contract do not invalidate a concluded transfer. By its express terms Section 56 of the ICA does not apply to cases in which there is a completed transfer.”
In the two cases, aforementioned it is to be noted that a mention was also made to Transfer of Property Act. Under Section 108(e), it has been stated that “under a lease of land there is a transfer of right to enjoy that land. If any material part of the property be wholly destroyed substantially and permanently unfit for the purpose for which it was let out, because of Fire, tempest, flood, violence of an army or a mob, or other irresistible force’ the lease may at the option of the lessee, be avoided.”The courts have given importance to this clause in both the above mentioned cases and explained that importance is to be given to the words, ‘any material part of the property lease is not destroyed’ then the lessee cannot avoid the lease.
Additionally, in a recent Delhi High Court judgement, the Courts were of the view that in the event of an on-going pandemic, the Force Majure clause is something which takes precedence in governing the relationship in a lease and in any such event of ‘occurrence beyond the abilities of the parties’. Further these clauses will be governed under the Section 32, Indian Contract Act, 1872 and then further the Section 108(e) of the Transfer of Property Act, 1882 will apply to the lease agreement. But, Section 56 of the Indian Contract Act, 1872 will not in any case have any applicability in any lease agreement as has been mentioned in the cases aforementioned.
In any given scenario, it is important for all the parties to understand that in case of creating a written document which will become a contract, the parties under such a contract have to abide by its principles first and foremost, because of the Contract law principle of privity of contract. Additionally, if not for these contractual clauses, reference would have been given to the applicable law and if both the clause in the contract and the applicable law will not apply then only can a person escape his liabilities and obligations under any contract.
In the present world, commercial contracts in relation to leasing of property has become a general practice and after the pandemic worldwide the parties should realise that the extent of their powers, duties and liabilities in a contract. These powers, duties and liabilities is something which the parties should bring in line with their commercial goals and requirements. The contracts is in a way like the boundary for commercial goals and requirements, and the parties to the contract are responsible for such boundaries, it is their duty to discuss and build these boundaries within the limit of the law.
Author: Akarsh Deep, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at email@example.com
John A. Humbach, The Common-Law Conception of Leasing: Mitigation, Habitability, and Dependence of Covenants, 60 WASH. U. L. Q. 1213 (1983)
1971 AIR 1756
(1968) 3 SCR 339 Ramanand vs. Dr. Girish Soni and Ors. (RC. REV. 447/2017)