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What is a lease?

lease agreement

CONCEPT OF LEASING:

Leasing provides access to a fixed asset. It can also be defined as a contract between two parties. Here, one party provides an asset for use to another party for a period of time in return for payments.

Various regulations and provisions relating to leasing come under the TRANSFER OF PROPERTY ACT 1882. These provisions are from section 105 to section 117.

According to the Transfer of Property act, 1925 in section 105; a lease of immovable property is a transfer of a right to enjoy the property. This is a transfer to enjoy and use the property. Therefore, a transferee or lessee always holds the possession of the property.

ESSENTIALS OF LEASE:

  1. PARTIES TO LEASE AGREEMENT –  The owner of the property or the transferor is called ‘lessor‘ and the person leasing immovable property or transferee is called ‘lessee’.
  2. RIGHT –  It is a transfer of a right to enjoy the immovable property. 
  3. TIME PERIOD – Such transfer is for a certain time or perpetuity.
  4. CONSIDERATION – It is made for a consideration which is either premium or rent or both; the agreed amount in the lease deed is called premium and the service provided for the property by the lessor is rent.
  5. PARTIES TO BE COMPETENT – The parties to the lease i.e. lessor and lessee must be capable to make a valid lease deed respectively.
  6. ACCEPTANCE OF AGREEMENT – Lessee, who is to get the interest in the property after lease, has to accept the lease agreement along with the time period and terms & conditions imposed on the transfer.
  7. POSSESSION RIGHTS – Ownership of the property is not transferrable to the lessee; he only gets possession of the property to use it for a specified period of time.

TYPES OF LEASING:

Let us discuss the types of lease agreements in India. 

Financial Lease
Financial leases are basically long-term lease agreements between the lessor and lessee wherein the lessee agrees to take care of the property i.e. depreciation and maintenance. Lessee also pays periodical payments for a long time to the lessor and eventually the ownership of property transfers to the lessee. 

Operating Lease
This type of leases is also known as ‘off the balance sheet leases’ since agreement for an operational lease is for a very short period of time and no ownership is transferred to the lessee. For instance, booking a stall for the comic-con fest is an operational lease.

LEASING AND LICENSING:

Among the most misunderstood terms in the leasing, parlance is the words — lease and license. A lease is distinct from a license.

The real test for determining whether the agreement is of lease or license is INTENTION OF PARTIES TO THE AGREEMENT.

Let’s distinguish between two concepts which would help understand better about leasing.

A license is a right to do or continue to do in or upon the immovable property of the owner of a property. Something which would, in the absence of such a right, be unlawful. It does not transfer any right of possession of property whereas lease does transfer possession of the property.

A lease involves a transfer of interest followed by the possession of the property for a specified period.

EXECUTION AND TERMINATION OF LEASE DEED:

A lease of immovable property for agricultural or manufacturing purposes can be a lease from year to year. This can be terminable by either party by providing a six months’ notice before the date of expiration of the lease. 

Lease of immovable property for a purpose other than agricultural or manufacturing can be a lease from month to month. This can be terminable by either party by providing a fifteen days’ notice before the date of expiration of the lease.

If the lease deed is an oral agreement i.e. if the leasing period is on a month to month basis, it must be followed by delivery of possession of the property.

Termination of a lease agreement can take place due to various reasons such as:

  1. When the agreed time for leasing property is over, the agreement inevitably terminates.
  2. Approval of a lease subject to the happening of an incident, it comes to an end when the incident takes place.
  3. Forfeiture of the agreement due to reasons such as non-payment of premium or lessee becomes adjudicated insolvent.
  4. When the intention to revoke the deed by either party in the notice period, the lease agreement terminates.

The ability to acquire assets by way of the lease rather than owning them has several benefits for the lessee, including allowing them to keep a lighter balance sheet and free up resources for working capital, among others. Among several other benefits of leasing is also its potential for bringing down the cost of credit. The lessor, with the title over the asset, has better recovery rights, and therefore, has lower risk. This allows the lessor to impose lower risk premiums while extending his financing. Reduced cost of funding benefits the economy as a whole.

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