Lease and License: The Fundamental Difference

Marked Distinctions exist between lease and license

There are marked differences between lease and license, though many would think that both have no substantial difference.

At one time, it was thought that if a person was given exclusive possession of a premises, it would conclusively establish that he was a lessee. The exclusive possession considered to be an infallible test to decide whether it is a license or not, is no longer an infallible one.

The key test now in deciding whether a deed is a lease or a license is the intention of the parties involved, as evident from the deed itself.

What is a Lease?

A lease of immoveable property, under the Section 105 of the Transfer of Property Act (TP Act) is defined as a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised.  The lessee, under Section 108 of the TP Act, is entitled to be put in possession of the property.

A lease is therefore a transfer of an interest in land. The interest, transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor. The price paid or to be paid is called the premium and the money, share, service, or other thing to be so rendered is called the rent.

A lease is a partial transfer of certain rights in the property. It is a transfer of right of enjoyment of an immoveable property for a certain period, in consideration of a price paid or promised, or money or the share of crops, service or any other thing of value to be given periodically to the transferor by the transferee. The right to ownership is not transferred in a lease.

Before lease the owner had the right to possession of the land and by the lease, he excludes himself during its currency, from that right. If the lessor has no right in the property the lease would be void.

The consideration in lease can be either premium or rent. The amount payable as consideration is paid is the premium. The consideration paid periodically is called the rent which can be paid in the form of share of crops, services or other things. The Supreme Court (SC) makes a difference between premium and rent in Commissioner Of Income-Tax, … v The Panbari Tea Co. Ltd (1965 AIR 1871).

What is a license?

A license, under Section 52 of the Indian Easements Act, is a right 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 immoveable 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.

If a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. A permission does not create in his favour any estate or interest in the property. There is a clear distinction between the two concepts, the dividing line is very thin or even blurred.

Case laws that reveal the distinctions

The case laws that make the distinctions crystal clear are Associated Hotels of India v R N Kapoor ( AIR 1959 SC 1262), Konchanda Ramamurty v gpoinath Naik and Ors  (AIR 1968 SC 919),  Captain B V D’Souza v Antonio Fausto Fernandez (AIR 1989 SC 1816), Chandy Varghese & Ors vs K. Abdul Khader & Ors, and so on.

Intention of parties is the key test

In Errington v Errington, Lord Denning pointed out after reviewing some cases on the issue that although a person who is let into exclusive possession is prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy.

Lord Denning says the test of exclusive possession is not the test but the intention of parties as revealed from the contract is important. Therefore, the intention of the parties is the real test for ascertaining the character of a document as a lease or license.

He adds that to ascertain whether a document creates a license or lease, the substance of the document must be preferred to the form. The real test is the intention of the parties-whether they intended to create a lease or a license. If the document creates an interest in the property, it is a lease. If it only permits another to make use of the property, of which the legal possession continues with the owner, it is a license.

if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant. But circumstances may be established which negative the intention to create a lease, then it is not possible to hold that the document is one of license.

Other obvious distinctions

A lease essentially is a transfer of an interest in a specific immovable property, while license is just a bare permission, with transfer of no interest. A lease creates an interest in favour of the lessee in regard to the property, but a license creates no such interest. A lease is both transferable and heritable whereas, a license is neither transferable nor heritable. On the death of the tenant, the tenancy can be inherited by his/her legal heir in the former whereas a license comes to an end with the death of either the grantor or the guarantee.

A license can be withdrawn at any time at the pleasure of the grantor but the lease can come to an end only in accordance with the terms and condition stipulated in the contract of tenancy agreement.

A lease is unaffected by the transfer of the property by sale in favour of a third party. It continues and the purchaser has to wait till the time period for which the tenancy was created is over before he can get the possession. But in the case of a license, if the property is sold to a third party, it comes to an end immediately.

A lessee has a right to protect the possession in his own right. Whereas, a licensee cannot defend his possession in his own name as he does not have any proprietary right in the property. A lessee in possession of the property is entitled to any improvements or accessions made to the property, while a licensee is not.

In short, in license no interest is created by means of a license. But the use of the word rent in a document does not make it a lease or vice versa to avoid the operation of the rent law. In the case of a license, there is something less than a right to enjoy the property by the licensee.

Other SC judgements that reveal the differences

The Supreme Court in Khalil Ahmed basher Ahmed v Tufelhussein Samasbhai Sarangpurwala (1988 AIR 184) held that if an interest is created in an immovable property which entitles a transferee to enjoy it without any interference, the document should be construed as that of a lease agreement.

In Mrs. M.N. Clubwala and another v. Fida Hussain Saheb and others ([1964] 6 S.C.R. 642) the Supreme court emphasised the if the exclusive possession to which a person was entitled under an agreement with a landlord was coupled with an interest in the property, the agreement would be construed not as a mere licence but as a lease.

Halsbury’s Laws of England makes the distinctions clear

The distinction between leave and license has been well summarised in Halsbury’s Laws of England.

It says in determining whether the relationship created in an agreement between the parties is that of landlord and tenant, or of merely licensor and licensee, the decisive consideration is the intention of the parties.

In summing up

In short, what makes an agreement a lease or a license is the nature of stipulations in the agreement and the underlying intention of the parties involved.

If the intention carved or derived out of those stipulations in an agreement show that there is transfer of some rights in the property, including exclusive possession from the transferor to the transferee, then that can be considered a lease.

If no such rights in the property, other than what is specifically permitted in the agreement as the transferee is authorised to do, is transferred from the transferor to the transferee in the agreement, then that is merely a license.

Further reading

  1. The Transfer of Property Act, 1882
  2. The Easement Act, 1882