Is A Rent Agreement A Lease Or A Licence?

When we speak of immovable property, we use lease and licence interchangeably and in a combination. This might lead to users believe that the two terms mean the same. However, when we speak of a lease and a licence in terms of property, the two have different meanings, going by the legal definition.

The legal definition

Licence is defined under Section 52 of the Indian Easements Act, 1882.

"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 doesn’t amount to an easement or an interest in the property, the right is called a license."

Lease is defined under Section 105 of the Transfer of Property Act, 1882.

"A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, expressed 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."

The difference

The above-mentioned definitions indicate towards the wide difference between the two terms on various parameters.

Ownership and possession: By way of signing a lease, a landlord transfers a right in his property to his tenant for a specific period, mentioned in the rent agreement. However, when a landlord signs a licence to rent his property to a tenant, he doesn’t transfer any right over the property and solely holds that position. Then, why should a licence be created at all if there is no change in the landlord’s rights? Under the law, using the premises of another would be unlawful if a licence isn’t created granting the tenant the right to do so. When property owners allow their premises to be used as banquet halls or community halls, for instance, a licence agreement is signed between the two parties.

Since there is no ownership transfer, the tenant can claim damages under the law if a licence agreement is dishonoured. The landlord would, however, be forced to abide by the rules laid in the rent agreement in case of a default. Also, the landlord continues to possess the property in case of a licence agreement unlike a lease agreement.

Time limit:  A lease could be signed for a time period widely ranging between 11 months and perpetuity. The licence agreement terminates after the activity for which the premises was rented takes places.

Continuance: A license is a personal contract. This means it terminates immediately in case either party dies. The same isn’t true of a lease. In case the landlord dies, the new owner will be under legal obligation to respect the rent agreement. This works the other way round too. In case the tenant dies, his heir could continue to live in the premises till the rent agreement period terminates.

Also, the landlord will have to serve a notice to the tenant before terminating a lease. This is not required in case of a licence agreement.  

Transfer: Lease could be transferred to third parties and legal heirs; the same isn’t true of licenses. Similarly, the rights of the tenants remain effective even if the property has a new owner. This rule doesn’t apply in case of licence agreements.

Revocation: A lease comes to an end when the rent agreement period terminates. A licence agreement could be ended as and when the landlord feels the need to do so.

Monetary compensation: A lease would always involve money exchange between the contracting parties. The same is not true of a licence agreement.

Eviction: Under the rule laid in the Model Tenancy Law, the landlord will have to move the rent authority to evict tenants. Such a need doesn’t arise in case of licence agreements since there is no possession by the tenant.

This clarifies the point that all rent agreements must be leases while all contracts to rent your premises for specific functions or ceremonies are licence agreements. However, they wouldn’t become that on your own unless terms and conditions specifying the same are inserted in the document.

A tenant must be mindful of all his rights while signing a rent agreement. In the same fashion, the landlord must be careful while laying down the terms and condition in a licence agreement.