Lease Defined, and How a Lease Is Made

The test the courts apply is exclusive possession and the intention of the parties, judged on the substance of the arrangement rather than on the label. A document headed "leave and licence" that in fact gives the occupier exclusive possession for a term at a rent is a lease. The label the parties chose is evidence of intention, and no more.

Section 106: how long a lease runs when nothing is said

Sub-section (1). In the absence of a contract or local law or usage to the contrary:

• a lease for agricultural or manufacturing purposes is deemed to be a lease from year to year, terminable by either side on six months' notice;
• a lease for any other purpose is deemed to be a lease from month to month, terminable by either side on fifteen days' notice.

Sub-section (2). Notwithstanding any other law, the period commences from the date of receipt of the notice. This settled a long-running dispute: it is receipt, not despatch, that starts the clock.

Sub-section (3). A notice is not invalid merely because the period stated in it falls short of the statutory period, where the suit or proceeding is filed after the expiry of the statutory period. This is a curative provision: a landlord who wrote fifteen days when he should have written six months does not lose everything, provided he in fact waited.

Sub-section (4). Every notice must be in writing, signed by or on behalf of the person giving it, and either sent by post to the party to be bound, or tendered or delivered personally to him or to one of his family or servants at his residence, or, if that is not practicable, affixed to a conspicuous part of the property.

Note the purpose test in sub-section (1): it is the purpose of the lease, not the nature of the property, that decides whether it is yearly or monthly.

Section 107: how a lease is made

Only by a registered instrument:

• a lease from year to year; or
• for any term exceeding one year; or
• reserving a yearly rent.

All other leases: either by a registered instrument, or by oral agreement accompanied by delivery of possession.

Note that the oral route requires delivery of possession. An oral agreement alone is not enough.

Both parties must execute. Where a lease is made by a registered instrument, that instrument, or each of them where there are several, must be executed by both the lessor and the lessee. This is a real difference from a sale or a mortgage, where only the transferor need sign, and it follows from the definition: the lessee accepts the transfer on such terms, and he takes on obligations of his own under section 108.

The proviso. The State Government may, by notification in the Official Gazette, direct that leases other than those in the first paragraph, or any class of them, may be made by unregistered instrument or by oral agreement without delivery of possession.

Section 4 makes section 107 supplemental to the Registration Act 1908, so the registration question is answered from both statutes together, as Module IV explains.

A worked example

Zeenat owns a shop at Amravati.

Version one. She lets it to Arjun for three years at Rs. 40,000 a month by a document both of them sign and register. A valid lease: the term exceeds one year, so a registered instrument was required, and both parties executed it.

Version two. Same three-year term, but the document is written and signed only by Zeenat, and is not registered. It fails section 107 on two counts: no registration, and not executed by both. It does not operate as a lease for three years. Arjun's occupation would be governed by section 106, and the arrangement treated as a monthly tenancy, the purpose not being agricultural or manufacturing.

Version three. She lets it orally at Rs. 40,000 a month and hands over the keys. Valid, being a lease not within the first paragraph, made by oral agreement accompanied by delivery of possession.

Version four. She agrees orally to let it from next year and hands over nothing. No lease: the oral route requires delivery of possession.

Version five. She lets farmland to a cultivator, nothing being said about duration. Section 106(1) deems it a lease from year to year, terminable on six months' notice, because the purpose is agricultural.

Notice. Zeenat wants Arjun out of the shop and posts a written notice signed by her, giving fifteen days. The period runs from receipt, under sub-section (2). If she had mistakenly given ten days but filed her suit only after fifteen days had expired, sub-section (3) would save the notice.

A premium. Suppose Arjun paid Rs. 5 lakh at the outset plus Rs. 40,000 a month. The Rs. 5 lakh is the premium and the Rs. 40,000 is the rent.

What it does NOT mean

A lease does not transfer ownership. It transfers a right to enjoy; the lessor keeps the reversion.

Rent need not be money. A share of crops, service or any other thing of value will do.

Premium is not rent. The premium is the price of the grant; the rent is what is rendered periodically.

A perpetual lease is not impossible. Section 105 expressly contemplates a lease in perpetuity.

The label does not decide lease against licence. Exclusive possession and the substance of the arrangement do.

Section 106 turns on purpose, not property. Agricultural or manufacturing purposes give a yearly tenancy; everything else monthly.

The notice period runs from receipt, not from posting.

A short notice is not automatically bad. Sub-section (3) saves it where the suit was filed after the statutory period expired.

An oral lease needs delivery of possession.

Only a lease needs execution by both parties. A sale or a mortgage needs only the transferor's signature.

Distinctions

Quick revision

• Lease: a transfer of a right to enjoy immovable property, for a certain time or in perpetuity, for consideration rendered periodically or on specified occasions, accepted by the transferee.
• Lessor, lessee, premium (the price of the grant), rent (what is rendered periodically).
• Lease against licence turns on exclusive possession and substance, not the label.
• s.106: agricultural or manufacturing purposes, year to year, six months' notice; any other purpose, month to month, fifteen days' notice. The period runs from receipt; a short notice is saved if the suit is filed after the statutory period; the notice must be in writing, signed, and served by post, personally, or by affixing.
• s.107: year to year, over one year, or reserving a yearly rent, only by a registered instrument, executed by both parties; other leases by registered instrument or oral agreement with delivery of possession; the State Government may relax the latter.

Test yourself

1. Define a lease and name the four terms section 105 defines. A lease of immovable property is a transfer of a right to enjoy it, 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, rendered periodically or on specified occasions, accepted by the transferee. The four terms are lessor, lessee, premium and rent.

2. Distinguish premium from rent. The premium is the price paid for the grant of the lease itself. The rent is the money, share, service or other thing rendered periodically or on specified occasions during the lease.

3. A lease of a godown for storing goods says nothing about duration. What is it? A lease from month to month, terminable by either party on fifteen days' notice, since the purpose is neither agricultural nor manufacturing.

4. From what date does a notice period under section 106 run? From the date of receipt of the notice, by sub-section (2), notwithstanding anything in any other law.

5. Is a notice giving a shorter period than the section requires always bad? No. Sub-section (3) provides that it is not invalid merely because the period stated falls short, where the suit or proceeding is filed after the expiry of the statutory period.

6. How must a five-year lease be made? Only by a registered instrument, and that instrument must be executed by both the lessor and the lessee.

7. Can a lease be made orally? Only a lease outside the first paragraph of section 107, and then only by oral agreement accompanied by delivery of possession, unless the State Government has relaxed the requirement by notification.

8. Why must both parties execute a registered lease when only the seller executes a sale deed? Because a lease is bilateral: section 105 requires the transferee to accept the transfer on the stated terms, and section 108 imposes obligations on him. Section 107 therefore requires execution by both lessor and lessee.