Changing facets of Lease / Leave and License / Service arrangements

The commercial real estate space has been evolving over time. From having only “Leave and License“ arrangements in cities like Mumbai where real estate commanded prime rates, to lease arrangements and more recently to a “plug and play” model of business centres and co-working spaces. Corporates all across India are faced with common issues when acquiring such commercial space in deciding the best mode of taking on the premises whether it is on the basis of a license, lease, business conducting basis or a services agreement. We have, in this note analysed each of these arrangements to bring out the distinguishing factors as well as advantages and disadvantages in each situation.

A lease is a stronger right in immovable property since it is a transfer of a leasehold interest in an immovable property for a particular time period for the consideration and on terms as agreed under the lease deed. The statute governing leases and the rights and liabilities of the lessor and lessee is the Transfer of Property Act, 1882 (“TOP”). In contrast, a leave and license is a mere permission granted to the licensee to use and occupy the premises licensed for the purpose agreed between the parties and is therefore in the nature of an easmentary right limited to the licensee without any interest being created in favour of the licensee. Accordingly, whilst a leasehold interest can be the subject of a mortgage (subject to the contract), a license cannot generally be mortgaged since there is no interest that has been created. Both lease or license can be for commercial or residential properties.

In keeping with the changing business environment and the mushrooming of start ups everywhere, the co-working space or “plug and play” model of services agreements has emerged and become very popular. The co-working spaces have become very popular with start ups as well as smaller enterprises which are just starting out and do not have the need for larger space or the capital investment required to fit out an office space. The arrangement in these spaces involves a services agreement under which the service provider who is operating the space, provides services to its client which generally includes a fully equipped office space i.e. workstation/s, together with all facilities such as conference rooms, printing facilities, telephones, pantry services, security, utilities such as electricity, water and internet. The consideration for the services is in the form of a service fee for the general facilities with additional amounts payable for the additional facilities that may be availed of such as pantry, printing, conference room.

The primary distinguishing factor between lease and licenses vis-à-vis services arrangements is that the subject matter of the agreement in the case of a business centre or co-work space is the services that are being provided as against the immoveable property being the subject matter in the case of a lease/ license arrangement. Therefore, the ability of  a client under the services arrangement to claim to qualify as a ‘licensee’ under the Maharashtra Rent Control Act, 1999 (“Rent Act”) would be very low and therefore their ability to claim protection under the Rent Act would be low as well. This generally gives a lot of comfort to the owner of the premises.

It is important, however, to ensure that the agreement reflects the intent of the parties in relation to the nature of the arrangement. There are various judicial precedents which distinguish leases and license arrangements. The Courts have opined that there is a thin line between lease and leave and license arrangements and therefore while determining the nature of such agreements, various factors are to be taken into consideration such as the true and correct intention of the parties at the time of executing the agreements and whether any interest in the premises is being transferred.

Another difference in the treatment of various types of arrangements is the registration requirement: lease deeds and leave and license agreements are required to be registered in some States whilst services agreements are not compulsorily required to be registered. A lease deed for a term exceeding one year or from year to year basis or receiving a yearly rent is to be compulsorily registerable under the Registration Act, 1908 and under TOP whilst a leave and license in Maharashtra, for example, is required to be registered by virtue of the provisions of the Rent Act. In comparison, there is no transfer or interest created in relation to the immoveable property under a services agreement as in the case of a business centre arrangement or a co-working space and therefore such agreements are not required to be compulsorily registered.

The stamp duty applicable on a lease, license agreement and services agreement would also differ given that they would fall under separate Articles under the stamp acts and this too is a factor to be kept in mind.

Accordingly, all the aforesaid factors and the intent of the parties would need to be considered in deciding on the type of arrangement that would be best suited. Traditionally, the landlords in Mumbai used to prefer to give premises out only on a license basis since they did not want the occupant to claim protection under the Rent Act. However, this is changing and leases are granted especially in cases where companies are looking at longer term arrangements with flexibility to allow their group entities to also use and occupy the premises. With the co-working space becoming popular, the services agreements are also now common and whilst they do provide comfort to the landlord, from an occupant/ client point of view, it would be difficult to ensure and record the right to exclusively use the premises for a longer period since they would not have any interest in the premises. With changing business needs however, we are sure to see this model gain a lot more popularity.

Authors:

Nohid Nooreyezdan, Senior Partner
Monika Bhonsale, Partner
Priya Parab, Senior Associate
Jay Shah, Associate