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Note on Leave & License Agreement

5 Sept 2015

Note on Leave & License Agreement

OUR COMPANY is in reality business and it is letting out premises to prospective licensee for
different purpose in order to earn revenue. We are giving our premises to IT/ITes industry which is
not a commercial activity but an industrial activity.

Similarly we are letting out various halls for short term period for holding exhibitions and to others
for providing various facilities to support the exhibition activities. These all are covered under
industrial activities.

Thus, letting out premises/space let out by OUR COMPANY is of two kind :

I. Leave & License basis

II. Permissive right to operate or conduct business not amounting to license.

In case of any dispute, the jurisdiction of the court depends on what is the nature of contract
between the parties. If the contract is based on leave & license, only the Small Causes Court has the
jurisdiction under the various applicable Acts. We are not putting any arbitration clause in view of
section 41 of Small Causes Court Act which provides exclusive jurisdiction to Small causes court in
case of any dispute between the Landlord/Licensor and Tenant/Licensee.

In case the contract is only for permissive right to operate or conduct a business which is not a
license, the small cause court will not have the jurisdiction and hence we are putting an arbitration
clause to exclusion of all the courts in India. For example in our agreement for allowing to operate
counter in canteen area or for allowing to hold exhibitions in our exhibition halls we are only
granting permissive right to operate which is not even license under section 52 of Indian Easement
Act.

1. Whether a fully owned subsidiary of a foreign company is exempted under section 3 of


Maharashtra Rent Control Act?

Under section 3 of Maharashtra Rent Control Act, 1999, premises let or sub-let to certain category
of entities is exempted from the application of the Act. It reads as follows:

“3. Exemption. (1) This Act shall not apply ----

(b) to any premises let or sub-let to banks, or any Public Sector Undertakings or any Corporation
established by or under any Central or State Act, or foreign missions, international agencies,
multinational companies, and private limited companies and public limited companies having a paid
up share capital of more than rupee one crore or more.”

In the agreement there should be a clause ensuring that the Licensee will not reduce its paid up
share capital from one crore and that in case it reduces its paid up share capital from one crore, the
license agreement will stand terminated. As per supreme Court Judgment jurisdictional fact must
exist before the court proceeds to decide other issue. The court observed “In the instant case, in our
opinion, the courts below were right in holding that the date on which tenancy was determined, the
right in favour of the landlord got accrued. Such right could not have been set at naught by the
tenant by unilateral act by passing a resolution to reduce 'paid up share capital' of the Company.”
http://www.lawyersclubindia.com/judiciary/Maharashtra-Rent-Control-Act-1999-8211-Section-3-1-
b--54.asp#.Ve0BtdKqqko

Note : Maharashtra government has decided to amend the Maharashtra Rent Control Act (1999),
which would exclude all commercial establishments occupying more than 500 square feet from the
protection under the Maharashtra Rent Control Act that prohibits landlords from levying market
rents. Now, all those who have taken such commercial establishments on rent and also those living
as tenants in residential homes that are bigger than 862 sq ft will not be protected under the Rent
Control Act. http://articles.economictimes.indiatimes.com/2015-05-
01/news/61723824_1_maharashtra-rent-control-act-market-rates-new-amendment If such
amendment is notified, OUR COMPANY may be in a better position in evicting Bycula Properties
given on Lease.

International agencies & Multinational Companies have not been defined under the Act. Generally,
foreign company do their business activities in India through their agencies or subsidiary companies.
But it is difficult to say that subsidiary company which is 100 % owned by a foreign company will be
deemed as “multinational company” and will be exempted under section 3(1)(b) of Maharashtra
Rent Control Act,1999. There is no any such judicial precedent on this issue.

An Indian subsidiary of a foreign company may remain private by its own choice as far as its internal
matters are concerned such as not inviting public to subscribe in shares. But in the eyes of law, it will
be public company. An Indian subsidiary of an Indian company may be as private company or public
company depending upon whether it invites public to subscribe in shares. Thus a subsidiary
company will be either private or public company having a separate entity from the parent company
of which it is a subsidiary and hence to be exempted from section 3(1)(b) of M.R. Control Act,1999,
it must have paid up share capital of more than rupee one crore or more.

Hence, it is better to consider a subsidiary company of a both foreign Indian company not covered
under section 3(1)(b) of the Rent Act. It should be covered under section 3(1)(b) only if its paid up
share capital is more than rupee one crore. It makes no difference if it is a subsidiary of Indian or
foreign company which is having paid up share capital of more than one crore.

2. Other grounds for eviction if premises let out to company having paid up share capital of less
than one crore.

If we are giving the premises on leave & license, then on expiry or on termination of the license
agreement, the licensee is required to vacate the premises. If the licensee do not vacate, the remedy
available with us is to file eviction suit under section 41 of Small Causes Act.

In our dispute with City Group now TCS-eServe, at the advise of our advocate Ms. Priti Ramani and
confirmed by Sr. advocate Mr. Mulraj Shah OUR COMPANY had chosen to file eviction suit on the
ground of expiry of Leave & License Agreement and not on the ground that TCS is having more than
one crore of paid up share capital.
Two cases filed against us by Princes Estates and Mewar on the ground that our company is having
more than one crore of paid up share capital is still pending and no final success has been achieved
by the respective landlords even after passing of 14 years.

Section 3(1)(b) M. Rent Act, 1999 seems to be only an effective ground in case there is a tenancy
agreement or lease agreement and the premises let out to the Company is having more than one
crore of paid up capital.

But if the company is having more than one crore paid up share capital then we will have an
additional ground for filing eviction suit.

Hence, in case a company having less than one crore paid up share capital approaches us, we can
concede to give them the premises on the basis Leave & License Agreement , provided they also
agree to pay some premium charge. We can make a point for negotiation for obtaining a little higher
license fee than what they agreeable to pay to us.

3. Legal implication if Agreement of License if it exceeds the period of 60 months

It is general practice that Leave & License Agreement now a day is executed only for 60 months. It is
a common apprehension that if Leave & License Agreement exceeds for more than 60 months, it will
amount to Lease. As our policy is not to give any premises on lease, we should have a better
understanding of the term License, Lease and Tenancy agreement from these perspectives.

Under Section 52 of the Easement Act, the term "License" is defined as follows: -

52. "License" defined. - 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 does not amount to
an easement or an interest in the property, the right is called a license.

Thus License is not defined in terms of period for which it is letting out. However, it must be for a
fixed period otherwise it will amount to perpetual license.

Under Section 105 of the Transfer of Property Act the term Lease is define as follows: -

105. Lease defined. - A lease of immovable property is a transfer of a right to enjoy such property,
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, to be rendered
periodically or on specified occasions to the transferor by the transferee, who accepts the transfer
on such terms.

Definition of Tenant - A tenant is defined in section 7(13) of the Maharashtra Rent Control Act, 1999,
and means any person by whom or on whose account rent is payable for any premises.

Difference between License & Lease

Supreme Court Judgment - In Khalil Ahmed Bashir Ahmed v. Tufelhussain Samasbhai, AIR 1988 SC
185, Honble Supreme Court of India laid down the following propositions as well established:
(a) to ascertain whether document creates a license or lease, the substance of the document must
be preferred to the form; It means that even if the title of the agreement is Leave & License, the
agreement may amount to lease if it can be concluded from the body of the agreement.

(b) the real test is the intention of the parties whether they intended to create a lease or a license; it
is therefore it is necessary to make such statement/averment in the agreement clarifying the
intention of the parties.

(c) if the document creates an interest in the property, it is lease; but, if it only permits another to
make use of the property of which the legal possession continues with the owner, it is a license;

(d) if under the document a party gets exclusive possession of the property, prima facie he is
considered to be a lessee.

7. Other distinguishing Features - Apart from this there are following other differences:

i) A lease is assignable, but a license is generally non-transferable. Section 56 of the Indian Easement
Act describes the circumstances only in which the License is transferable.

ii) A lease unlike a license is not revocable. Section 60 of the Easement Act mentions that the License
is generally terminable at the option of the Licensor except in the case of the two exceptions carved
out therein. One very important is the case where Licensor allow the licensee to make structural
changes/addition/alteration amounting to permanent nature in the premises. In our dispute with
TCS-eserve, they had claimed that the nature of agreement with OUR COMPANY was that of Lease
as OUR COMPANY had allowed them to construct mezzanine floor at their own cost.

Licensee has the only right to demand damages in case of premature revocation of license by the
Licensor. Sections 63 and 64 of Easement Act prescribes the rights of the licensee upon revocation
and/or premature high handed eviction by the Licensor.

iii) A leasehold creates a heritable right but not the license

iv) A license is determined by the death of the grantor, while a lease is not.

v) If the landlord allow the licensee to make structural changes/addition/alteration amounting to


permanent nature in the premises then it is construed as lease.

vi) In a lease right to enjoyment of the property is assigned whereas in license only right to
permissive use of the property is allowed.

vii) Sections 63 and 64 of Easement Act prescribes the rights of the licensee upon revocation and/or
premature high handed eviction by the Licensor.

viii) Different Stamp Duty on Lease and Leave & License Agreement : As per Maharashtra Stamp Act
1958 Stamp duty on leave and license agreement as per Article 36A (a) of the Schedule I of the
Bombay Stamp Act, 1958.
W.E.F. 01/05/2013 Stamp Duty payable on the License agreement for a period upto 60 months,
including renewal period, if any is at the rate of 0.25% on the Total Sum. Total Sum means the total
of all license fees or rent payable for full duration of license period plus amount of non-refundable
deposit or advance or premium; plus interest calculated @ 10% per annum on refundable security
deposit. There is no distinction between residential or commercial property.

In case of the period of a Leave and License Agreement exceeds sixty months, it has to be stamped
at the rate applicable to a ‘Lease Agreement’ under Article 36 of Bombay Stamp Act as follows

For the period more than five years but less than 10 years

As per conveyance (5%) on 25% of the market value of the property

Eg. If market value is Rs. 1 lacs than 25% of 1lacs is rs.25,000/- and 5% on 25000/- will be 1250/-

Thus if the Leave & License Agreement is for a fixed period of more than 60 months it will be treated
as Lease only from the point of view of Maharashtra Stamp Act, 1958 and not from the point of view
of Indian Easement Act or Transfer of Property Act. If the intention of the parties is to create a
license, the agreement will not amount to lease merely on the ground that it is for a fixed period of
more than 6 moths.

While drafting a Leave & License Agreement, we need to ensure that clear statement is regarding
the intention of the parties, specific statement that the agreement does not create any interest;
does not assign right to enjoyment; does not give exclusive possession; does not allow licensee to
make structural changes/addition/alteration amounting to permanent nature; the period of license
should be for a fixed period preferably for not more than 5 years with our without renewal clause.

In case the Licensee insists for more than 5 years, we can give side letter for renewal of the
agreement for other terms of 5 years. Even if licensee insists for agreement for period more than 5
years in a single document, we may concede only up to 9 years with or without renewal clause
provided Licensee is ready to give premium charge and there paid up share capital is more than one
crore.

4. Termination Clause - Trespasser & Damages

Whether after the expiry of the Leave & License agreement, the status of the Licensee will be that
of a trespasser?

In case of Akapati Bhaskar Patro vs Trinath Sahu And Anr decided on 17/1/2002 the court
differentiated between a statutory tenant, lessee on the one hand and licensee on the other hand
after the expiry of the agreement and held that section 441 (offence of trespass) will be applicable in
case of not handing over the possession of the premises by licensee after expiry of the License
agreement. The relevant paragraph is as follows:
“5. On the basis of the discussions made in the preceding paragraphs, we are of the opinion that the
rigors of Section 441, I.P.C. (i.e. offence of trespasser) as amended by the Orissa Act 22 of 1986 shall
not be applicable to the following cases:

(i) Statutory tenants whose tenancy is governed by any statute.

(They are protected by tenancy laws like, Public Premises Eviction Act, etc.)

(ii) Tenant who has entered into possession by virtue of a lease.

Rights of such tenant are governed under the provisions of the Transfer of Property Act and the
Specific Relief Act and he acquires a right of possession. After determination of tenancy by notice, he
would become 'Tenant holding over", 'Tenant on sufferance" or Tenant at will" as the case may be.
His possession being Juridical, is protected. He can be evicted only in due process of law. The
possession of such tenant cannot be equated with that of trespassers.)

(iii) Person who has entered into possession by virtue of some covenant like, agreement to sell, will
etc. and/or put forth a genuine right over the property possessed.

If a person claims a right of title coupled with possession, till the dispute is adjudicated, his
possession cannot be conclusively said to be that of a trespasser and his right to possess would be
subject to the result of the suit or legal proceeding.)

However, the said section shall be applicable to the following category of persons:

(i) Person who was permitted to possess a property for a particular period and after lapse of the said
period, he was called upon to handover possession by issuance of quit notice.

ii) Person, who was put in possession by means of a 'licence' and who fails to handover possession
after expiry of the term of licence and/or after receiving quit notice from the landlord.

(iii) Person who was in "permissive possession" and who fails to handover possession even after
receiving a notice to quit.”

As per section 441 of IPC as applicable in Maharashtra, even notice to quiet is not required to be
given.

In Karnataka State Road Transport Corporation vs Nagaraj Hatwar the court in its order passed on
6/3/2000 while referring the Supreme Court Judgment clarified that a Licensor has every right to
prevent the licensee from entering into premises after the expiry of the agreement if they do not
vacate. The relevant paragraph is as follows:

“5. ……………... In fact, the Supreme Court has clarified that in respect of a licensee, the lawful way of
taking possession is just to walk into the premises and take possession, as is always the case of a
licensee, that possession and control of possession is kept with the licensor. A licensee is after all
occupying the premises under the permission and control of the licensor. So the due process of law
has also been interpreted as to mean that on the expiration of the licence, the licensor is entitled to
occupy the premises and prevent the licensee from entering into the premises.”
However, the above judgment is in contradiction of the settled law by the Supreme Court that even
a trespasser can not be evicted without following the process of law and hence it is not advisable to
take such recourse by taking law in hand as it may give an opportunity to file criminal proceeding
under section (wrongful restraint) 339 & 341 of IPC as it happened in the case of Schlumberger
matter. In place of taking such recourse we may consider of filing criminal proceeding against the
Licensee if after expiry of the License agreement they do not vacate.

Hence, even if there is no specific clause that after the expiry of the license agreement, the status of
the licensee will be that of trespasser and will an offence under section 441 of IPC, Licensee can be
booked for criminal trespassing in case they do not vacate the premises after expiry of license
period.

Mesne profit, Damages & Penalty-

(a) Summary ejection of Licensee on expiry of Agreement under Section 24 of the Maharashtra Rent
Control Act, 1999. However, this provision facilitating speedy disposal and relief to the aggrieved
party only if the premises is let out for residential purpose and not for non-residential purpose. Also
provision relating to damages at double the rate of the licence fee or charge fixed under the
agreement of the license from the day of default till the date of disposition is not applicable in case
the agreement is for non-residential purpose.

(b) L.D./compensation cannot be granted as per clause of the Agreement but reasonable
compensation which will be around market rate as per section 73 and 74 of Indian Contract Act.

posted by indian law at 20:03

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