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Overview of Lease Agreement Drafting

There are various laws prevailing in different areas. One such law related to the transfer of property has been enacted under the Transfer of Property Act, 1882 (ToPA). The Act covers provisions with regard to mortgage, lease, gift, sale, exchange, etc. A lease has been defined under Section 105 of the Transfer of Property Act and all the provisions with regard to a lease have been defined under Chapter 5 of the said Act. A property is taken on a lease, usually for commercial and business purposes.

When 2 parties, namely, the lessor and lessee, enter into an agreement whereby the lessor allows a lessee to use the property belonging to or is under the control of the lessor for a defined time period for some consideration in exchange for the lessee, the agreement is called a Lease Agreement.

The lease agreement only gives the right to use the property and not the ownership right to the lessee. Under certain circumstances, the lessor can allow the lessee to alter the property as per the requirement for the purposes for which the lease was made. The lessee is under an obligation to maintain the property in good condition during the tenure of the lease.

A lessor and lessee can enter into a lease agreement for several properties like immovable property, household appliances, vehicles, machinery, etc.

  • Lessor is the person who owns or has control over the leased property.
  • Lessee is the person who acquires the property through lease for exercising his right to use and enjoy it.
  • A lease agreement is entered between the parties for a specific time period decided in the lease agreement. The lessee has the right to use the property for the said decided period. The duration can be for a definite time period or in perpetuity. It can be either implied or expressed.
  • An agreement is entered between the parties for consideration. In a lease agreement, the lessee gets to enjoy the right to use over the property of the lessor and the lessor gets the lease rental in consideration of giving the right to use to the lessee. A lease rental is paid to the lessor as per the manner decided between the parties in the lease agreement.

Contents of a Lease Agreement

There are some basic details which are essential to be included in a lease agreement. These are:

  • Name(s) of the lessor(s) and his agents, if any.
  • Name(s) of the lessee(s) and his agents, if any.
  • Proper details of the property.
  • The decided consideration, the date of payment of rent, late charges, and grace period.
  • A mutually agreed mode of payment of rent.
  • A legally acceptable method of cancellation of the agreement before the expiration date and the charges for cancellation, if any.
  • Security deposit amount.
  • Charges for use of available utilities and the basis on which the amount will be charged.
  • Other available facilities for use to the lessee such as laundry, a security system, a sports club or a swimming pool, etc.
  • Certain valid rules for maintaining peace and penalty in cases of such breach.
  • Availability of parking lot, if available.

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Terms Commonly Included in a Lease Agreement

  • Duration: It is the time period for the lease mentioned in the lease agreement.
  • Rent: It is the consideration in return for the leasing out of the property to the lessee.
  • Deposits: It is the amount kept as a security with the lessor if required. The amount is either adjusted or returned to the lessee after the duration of the lease gets over.
  • Terms of Use: These are well-defined terms and conditions with regard to the use of property in the manner for which it was leased out.
  • Utilities: These are extra attached services being utilised by the lessee. The charges for such utilities are included in the rent, and the lessee is responsible for paying them.
  • Insurance: The provision of insurance is usually mentioned in commercial lease agreements to protect the property from any losses.
  • Repairs and Maintenance: The lease agreement specifies the name of the party (lessor or lessee) who will be responsible for all the repairs and maintenance to the leased property.

Stages of a Lease Deed

There is a basic procedure for the execution of a lease agreement. The steps are stated below in stages:

Negotiation Stage: The first stage of entering into a lease agreement is the negotiation stage. After the lessee has found a perfect property to take on lease for a specific purpose to be accomplished, the lessee needs to discuss various aspects of the lease agreement. The basic aspects include the duration of the lease, the rent, a mode of payment, insurance, if any, etc.

Preliminary Documentation Stage: After all the aspects required to be mentioned in the agreement have been mutually agreed upon, the parties form an agreement to lease or a memorandum of understanding between them. The Document should contain all the rights and obligations of both parties along with the other terms and conditions. The necessary paper depicts the real intention of the parties to enter into a valid contract of lease.

Title Investigation or Due Diligence Stage: This is one of the important stages for taking property for lease. This helps in identifying and ensuring that the lessor has the real title over the property or the lessor has the complete authority to manage the property and give it on lease as per the wish. It involves the reading of property ownership necessary papers, verification of the same through government records, and seeking a due diligence report from an advocate expert in the field of property laws. A notice with regard to the ownership of the property is served to the general public for inviting objections over the ownership of the property if any. A Title search report or a due diligence report helps in protecting the interest of the lessee and lessor from earning undue monetary benefits by committing fraud. Issuing a notice is not mandatory under certain circumstances.

Drafting and Payment of Stamp Duty Stage: A lease can be conveyed by the parties after forming a lease deed through an agreement. After the lease agreement has been drafted, ensuring that all the terms and conditions are decided by the parties, the next step is for payment of stamp duty for the lease agreement. The amount of stamp duty is a subject of state list and the amount varies from state to state.

Execution and Registration Stage: Under this stage, the lessor hands over the possession of the property to the lessee in consideration of the lease rent. It leads to the execution of the lease deed where both parties perform their parts of the contract of the lease. It has been usually preferred for the parties signing the agreement to sign the Document in the presence of 2 witnesses. After the agreement has been executed, it is submitted to the office of the Sub-Registrar of Assurance having jurisdiction over the registration of the lease agreement.

Post-Registration Stage: After the lease agreement has been registered, a notice should be sent to the government and other semi-government authorities with regards to the change in the holder of the property for a certain period. It would help the lessee to apply for various licenses for work.

Sample of Lease Deed

LEASE DEED

THIS DEED OF LEASE entered into at (CITY) on this xx/xx/20xx between (Lessor’s Name) r/o (Address of the lessor), hereinafter referred to as “Lessor” which includes all his heirs, successors and legal assigns being ONE PART;

AND

(Name of the organisation/person) represented through its Director (Name of the director) having its registered office at (Address of the Director) hereinafter referred to as “LESSEE” which includes the organization, managers, and subsidiaries being the OTHER PART.

WHEREAS:

The lessor has ownership of the land (details of the land including its measurement and proper address). The lessor acquired the said land through a will on (Date) drawn by his father (Name of the father), herein referred to as “Land”.

The lessee owns a business of production of clothes and already has another production unit at (City). The lessee is willing to expand the existing business, and the lessee has requested for granting of the said land of the lessor for setting up another production unit to increase the production rate.

The lessor has granted permission to the lessee to use of the land for 15 years considering all the accepted terms and conditions mentioned herein.

The lessor has proven his title over the said land. The land is free from any existing claims, doubts or encumbrances.

NOW THIS DEED WITNESSETH AS FOLLOWS:

The Lessor has agreed to give his plot of land (measurement and the address of the said land) to the lessee on lease for a time period of 15 years.

The Lessee is under an obligation to pay a lease rent of Rs. 50,000/- (Rupees Fifty Thousand) per annum starting from (the date from which payment will be made to the lessor). Such annual lease rent shall be payable by the first 15 days of the first month of the year. If the lessee fails to pay the rent on time, the lessee will be under an obligation to pay an interest of 5% per annum. Upon failure of the said condition, the lessor will have a right to revoke the lease agreement along with other courses available.

The Lessee Hereby Agrees to the Following Covenants:

  • To develop the land and set up a production unit for the clothes.
  • To pay all taxes, assessments, dues, and other duties to be paid with respect to the leased land to the respective state government or the respective other local or public body. During the time of the lease, if the lessor pays any of the said amounts, the lessee shall reimburse the same amount to the lessor.
  • The lessee cannot dispose of or sell the leased land or perform any act which can negatively affect the title of the land of the lessor without any prior permission of the lessor.
  • To keep all the plants, machinery, and buildings insured to indemnify any losses, if any.
  • To use the land only for the said purpose, i.e., for the production of clothes. Use of the said land other than the decided purpose can only be made after the consent of the lessor.
  • To build, occupy and maintain the said land with the applicability of all the prevailing rules and regulations.
  • To authorize the Lessor or his agent to enter the said land and constructed building at a reasonable time for inspection provided the Lessor shall not thereby unduly interfere with the Lessee’s production unit on the said land.

The Lessor Hereby Agrees To The Following Covenants:

  • The lessor has full and complete ownership of the said land and has the full authority to convey such land as a lease to the lessee.
  • The Lessee must peacefully hold, possess and benefit from the leased land, during the period of the lease without any disturbance, claims or demand at all by the Lessor or any person claiming under him.
  • If any authorization or no objection certificate is necessary to be obtained from the Government or local authority for allowing the lease of the leased land, the Lessor shall obtain such certificate at his own cost.

It is hereby agreed that if any wrong has been committed by the lessee in performance of any covenants hereby stated, then on such wrong, the Lessor shall be entitled to terminate the agreement and use other available remedies at the discretion of the lessor and from the production unit that may have been constructed thereon and to take back the complete possession of the property, provided that a notice has been served to the lessee depicting his intention to terminate the lease and take back the possession of the unit constructed if the lessee fails to comply with the covenants within 15 days from the date on which the notice was served. In such an event, the lessor will have the right to forfeit the full amount.

It is Hereby Agreed Between the Parties That:

The lessee must be provided with a time period of 4 months for serving prior notice to the lessor for termination of the lease agreement in writing.

After the Duration of Lease has been Expired:

  • The lessee shall hand over the possession of the said property to the lessor in good condition.
  • The lessor shall refund the deposit amount kept as security after adjusting the amount which has been paid by the lessor on the lessee’s behalf.
  • The lessee is under an obligation to pay off all the duties and penalties if any payable to the respective government authority.
  • If the lessee fails to discharge any government liability, it has to be paid by the lessor and the lessee has to reimburse the same to the lessor.
  • The building constructed over the said land must be handed over to the lessor at a depreciated book value after the termination of the lease agreement.

If the lease gets terminated, the lessor will have priority over others from purchasing property, plant, and machinery from the lessee on a mutually agreed price.

The lessor will have the right to sell or assign the land during the duration of the lease however such an act by the lessor will not affect the rights of the lessee over the enjoyment of the property during the lease period.

This agreement to lease must be executed in duplicate and the original agreement shall be retained by the lessor and its duplicate agreement by the lessee.

The lessee is under an obligation to bear all the costs related to stamp duty, registration fee and other necessary expenses with regard to the lease agreement. The Lessor shall pay all other costs made by him inclusive of his Advocate’s fees.

The said agreement is governed by the provisions of the laws of the (State). If any of the provisions of the agreement is unenforceable, the rest agreement will be enforceable and valid.

In case of any dispute between the lessor and lessee with regard to any disagreement between them, the parties shall discuss the matter and try to resolve the matter themselves. If such discussion fails to provide a mutually agreed decision, then the parties can settle the dispute with the help of provisions stated under the Arbitration and Conciliation Act, 1996. The parties are allowed to seek equitable relief from the competent court(District court of the state) having jurisdiction to entertain the matter.

SCHEDULE OF THE PROPERTY

  • Details of the property (measurement and the address)
  • Duration of lease
  • Decided lease rental

IN WITNESS WHEREOF, THE LESSOR AND THE LESSEES HAVE PUT THEIR RESPECTIVE HANDS ON THE ORIGINAL AND DUPLICATE THEREOF THE DAY AND YEAR FIRST HEREINABOVE WRITTEN.

  • Name and Signature of the lessor
  • Name and Signature of the witness
  • Name of the lessee
  • Represented by
  • Name and signature of the director
  • Name and signature of the witness

Frequently Asked Questions

There are two parties to a lease agreement, namely, the lessor and the lessee.

The tenure, the consideration amount, the purpose for which the property is being leased out, details of the property and both the parties to the agreement.

The amount of stamp duty varies from state to state as every state has its own well-defined statute with regard to stamp duty.

It is an agreement between two parties whereby one party agrees to hand over the possession of his property to another party for consideration for a specific time period.

Yes, a lessor can seek a deposit amount from the lessee for security purposes or adjust the same in the lease rent payable.

Yes, as per the provisions of the Registration Act, any property leased out for a time period of more than one year needs to be mandatorily registered.

The clauses which might waive the lessee from using the legal rights and remedies available to him must not be included.

Under a lease agreement, a person can enjoy the right to use another's property without owning the property for a specific time period by only paying the lease rental.

Yes, the signature of both parties is important to make the lease a valid and legally enforceable lease.

A dispute between parties to a lease agreement can be solved by means of arbitration.

Section 105 of the Transfer of Property Act defines a lease in India.

A lease agreement is entered between parties for a longer time period whereas a rent agreement is entered between the parties for a short time period.

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