Definition of Lease

Section 105 states the definition of a lease which states that it is a transfer of immovable property for a particular time period for a consideration of which the transferee has accepted the terms surrounding the agreement.

A lease is a contract wherein the lessor grants the lessee temporary use and pleasure of a thing, in whole or in part, in exchange for payment (rent).If the lease is for real estate that cannot be moved, the lessor is the owner and the lessee is the tenant. In this situation, the rent may take the form of cash or a share of the property’s profits.

What are the essentials of a lease?

• Parties must be competent: The parties in a lease agreement should be competent to enter into a contract. Lesser should be entitled to a property and have absolute rights over that property.
• Right of possession: Ownership rights are not transferred in a lease, only the possession of the property is transferred.
• Rent: Consideration for a lease can be taken in the form of a rent or premium.
• Acceptance: 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.
• Time Period: Lease always takes place for a particular time period which is to be specified in the lease agreement. It can be relaxed at the option of the lessor.
• Maintain: Provision for the payment of the costs of maintenance and repair, taxes, insurance, and other expenses appertaining to the asset leased.
• Term of Lease: The term of the lease is the period for which the agreement of lease remains in operation.
• Ownership: During the lease period, ownership of the assets is being kept with the lessor, and its use is allowed to the lessee.
• Terminating: At the end of the period, the contract may be terminated.
• Renew or Purchase: An option to renew the lease or to purchase the assets at the end of the basic period.
• Default: The lessee may be liable for all future payments at once, receiving title to the asset in exchange.

What happens when the lease agreement does not prescribe the time period of the lease?

Section 106 provides for the duration of the lease in the absence of the lease agreement. It lays down that in the absence of a contract, lease can be ended by both parties to the lease by issuing a notice to quit. The prescribed time period always commences from the date of receiving the notice to quit. Following are the circumstances:

Purpose	Term (Deemed)	Notice	Prescribed End
Agricultural or manufacturing purpose.	Year to Year	6 month	1 year
Any other purpose.	Month to Month	15 days	1 month

In this table, there is a distinction of two purposes in regard to Section 106 i.e. Agricultural or manufacturing and other purposes. Hence, two things can be derived from this table:

1. When a lease for Agricultural or manufacturing purpose is deemed to be of year to year, then it will attract a 6-month notice that the lease will end on the expiry of 1 year from the date of the commencement of the lease.
2. When a lease for any other purpose is deemed to be of the month to month, then it will attract a 15-day notice that the lease will end on the expiry of 1 month from the commencement of the lease.

There is proviso to this section which states that the notice to quit in this section should be written and conveyed to the party who is required to abide by it. If this is not possible then it should be attached to a conspicuous place in that property.

How is a lease executed?

Section 107 states about lease how made. This section covers three aspects:

1. When there is a lease of Immovable property for a term of 1 year or more – This can only be made by a registered deed.
2. All other leases of Immovable property – Can be either made by a registered deed or an oral agreement or settlement along with the transfer of possession of that property.
3. When the lease is of multiple properties that require multiple deeds, it will be made by both the parties of the lease.

Advantages of Lease

The advantages from the viewpoint of the lessee

1. Saving of Capital: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way, the saving in capital or financial resources can be used for other productive purposes, e.g., the purchase of inventories.
2. Flexibility and Convenience: The lease agreement can be tailor-made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.
3. Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.

4. Improvement in Liquidity: Leasing enables the lessee to improve its liquidity position by adopting the sale and leaseback technique.
5. Shifting of Risk of Obsolescence: The lessee can shift the risk upon the lessor by acquiring the use of assets rather than buying the asset.
6. Maintenance And Specialized Services: In the case of a special kind of lease arrangement, the lessee can avail specialized services of the lessor for maintenance of asset leased. Although lesser charges higher rentals for providing such services, leases see overall administrative and service costs are reduced because of specialized services of the lessor.
7. Off-the-Balance-Sheet-Financing: Leasing provides “off-balance-sheet” financing for the lessee in that the lease is recorded neither as an asset nor as a liability.

The advantages from the viewpoint of the lessor

There are several extolled advantages of acquiring capital assets on lease:

1. Higher profits: The Lessor can get higher profits by leasing the asset.
2. Tax Benefits: The Lessor being the owner of an asset, can claim various tax benefits such as depreciation.
3. Quick Returns: By leasing the asset, the lessor can get quick returns than investing in other projects of the long gestation period.

Disadvantages of Lease

The disadvantages from the viewpoint lessee

1. Higher Cost: The lease rental includes a margin for the lessor as also the cost of risk of obsolescence; it is, thus, regarded as a form of financing at a higher cost.
2. Risk: Risk of being deprived of the use of assets in case the leasing company winds up.
3. No Alteration in Asset: Lessee cannot make changes in assets as per his requirement.
4. Penalties On Termination of Lease: The lessee has to pay penalties in case he has to terminate the lease before the expiry lease period.

The disadvantages from the viewpoint of lessor

1. High Risk of Obsolescence: The Lessor has to bear the risk of obsolescence as there are rapid technological changes.
2. Price Level Changes: In the case of inflation, the prices of an asset rise, but the lease rentals remain fixed.
3. Long term Investment: Leasing requires the long term investment in the purchase of an asset and takes a long time to cover the cost of that asset

Types of the Lease

Leasing takes different types, which are given below;

• Based on Nature.
  1. Operating lease.
  2. Financial lease.
• Based on the Method of Lease.
  1. Direct lease.
  2. Sale & Leaseback.
  3. Leverage lease.

1. Operating Lease: An operating lease is a cancelable contractual agreement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset set’s services. According to the International Accounting Standards (IAS-17), an operating lease is one that is not a finance lease.
2. Financial Lease: A financial (or capital) lease is a longer-term lease than an operating lease that is non-cancelable and obligates the lessee to make payments for the use of an asset over a predetermined period of time. According to the International Accounting Standard (IAS-17), in a financial lease, the lessor transfers to the lessee substantially all the risks and rewards identical to the ownerships of the asset whether or not the title is eventually transferred.
3. Direct Lease: Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself.
4. Sale & Leaseback: Under the sale & leaseback arrangement, the firm sells an asset that it owns and then leases to the same asset back from the buyer. This way, the lessee gets the assets for use, and at the same time, it gets cash.
5. Leveraged Lease: Leveraged lease is the same as the direct lease, except that a third party, the lender, is involved in addition to the lessee & lessor. The lender partly finances the purchase of the asset to be leased; the lessor turns to be a borrower.

Distinguish between the Operating and Financial Lease

Topics	Operating Lease	Financial Lease
Definition	An operating lease is a short term lease used to finance assets & is not fully amortized over the life of the asset.	A financial lease is the lease used in connection with long-term assets & amortizes the entire cost of the asset over the life of the lease.
Duration	Short term leasing	Long term leasing
Cost	The lessor pays the maintenance cost.	Lessee pays the maintenance cost.
Cancel & Changeable	Cancelable lease & It is a changeable lease contract.	Non-cancelable lease & It is not a changeable lease contract.
Risk	the landlord bears the risk of the asset.	The lessee bears the risk of the asset.
Purchase	At the end of the asset is hot purchasable.	At the end of the contract, the asset is purchasable.
Renew	It is a renewable contract.	It is not a renewable contract.
Also called	Service lease, short term lease, cancelable lease.	A capital lease, long term lease, non-cancelable lease.

So, from the above discussion, we can say that a lease is a contract under which one party the lessor (owner) of an asset agrees to grant the use of that asset to another, the lessee in exchange for periodic rental payments. The rent is a tax-deductible expense.

RIGHTS & LIABILITIES OF LESSOR & LESSEE.

Rights and Liabilities of a Lessor

We already know who is a lessor, so legally a lessor is granted certain rights and certain liabilities. Section 108A talks about the rights and liabilities of a lessor, so let’s further analyse the rights and liabilities of a lessor.

Rights of a lessor

1. Right to accretions- If during the tenancy period or during the duration of the tenancy any further accretion, accumulation or addition is made in the property then the lessor is entitled to such property. Such addition can be natural or by the expense of the lessee but after the termination of the tenancy period, the lessee must deliver the title to the lessor.
2. Right to collect rent- The lessor has the right to collect rent or any form of consideration as mentioned in the terms and conditions of the contract from the tenant without any form of interruptions.

Liabilities of a lessor

1. Duty of disclosure- The lessor is bound to disclose any form of a material defect in the property. There are two kinds of defects:

• Latent defect- Latent defect cannot be discovered rationally or through inspection by the lessor.
• Apparent defect- Apparent defect can be easily discovered through some inspection.

So basically a lessor shall disclose any apparent defect to the lessee and it is vital to disclose such defects as they interfere with the enjoyment of the property by the lessee.

2. To give possession- The lessor must give possession of the property to the lessee on lessee’s request. However, this liability only arises when there is a request on behalf of the lessee.
3. Covenant for quiet enjoyment- The lessee has all the rights to enjoy the property. It is the duty of the lessor to not cause any form of interruptions during the tenancy period. The Madhya Pradesh HC stated that actions such as physical interference or direct interference in the premises lead to a breach of enjoyment and interruptions.

Rights and liabilities of a lessee

Just like a lessor, a lessee has also some rights and liabilities which are granted to him by the Transfer of Property Act. So now we will analyse the rights and liabilities of a lessee.

Rights of a lessee

1. To charge for repair- If the lessor fails to make any repairs in the property which the lessor is bound to do in that case the lessee can make such repairs by his personal expenses. If a lessee makes such repairs by his personal expenses then, in that case, it is the right of the lessee to deduct the cost of such repairs from the rent or the lessee may simply charge the lessor for such repair.
2. Right to remove fixtures- The lessee has the right to remove any fixture in the property during the time period of the lease, however, after the termination of the lease deed the lessee must leave the property in the condition in which he received it. In case the lessee fails to do so, the lessor can sue the lessee.
3. Right to assign his interest- The lessee can sub-lease the property or the lessee can absolutely transfer his interests. However, if the lease deed restricts a lessee to assign his interest then the lessee is prohibited to do so and even after the transfer of his rights, the lessee is still subject to all the liabilities related to the lease deed.
4. Right to have benefits of crops- When the lease is of uncertain duration then, in that case, the lessee or his/her legal representative has been given the right to gain benefits from all the crops grown by them.

Liabilities of a lessee

1. Duty to disclose material facts– The lessee is bound to inform the lessor of any material fact which the lessee is aware of and the lessor is not. In case the lessee does not disclose such fact and the lessor suffers any loss then the lessee is bound to compensate the lessor.
2. Duty to pay rent- The lessee is bound to pay the rent or the premium to the lessor or his agent in the proper time and proper place as decided by the lease deed. In case the lessee fails to pay his/her rent then, in that case, the lessor can eject the lessee on the ground of non-payment of rent or file a suit for arrears of rent.
3. Duty to maintain the property- The lessee is bound to maintain the property in a good condition as it was when he was given the possession of the property. The lessor or his agent are allowed to inspect the property at the reasonable ground. Only the changes caused by irresistible forces can act as an exception for this liability.
4. Duty to give notice– If the lessee becomes aware that any person has tried or is trying to damage the rights of the lessor or the title of the lessor is endangered then, in that case, the lessee must give notice to the lessor.
5. Duty to use the property in a reasonable manner- The lessee must use Duty not to erect any permanent structure- A lessee cannot erect any permanent structures except in the case of agriculture without the consent of the lessor.
6.   Duty to restore possession– After the determination of the lease, the     lessee must restore the possession of the property to the lessor.

        7  Duty to restore possession- After the determination of the lease, the lessee must restore the possession of the property to the lessor. If the lessee does not vacate the premises even after the expiry of the notice, the lessee is then bound to pay the damages. 

 If the lessee does not vacate the premises even after the expiry of the notice, the lessee is then bound to pay the damages. 

7. the property in a manner as if it was his/her own property.

Termination of a lease

 A lease is terminated in eight different ways that are discussed below:

1. A lease is terminated after the expiry of the specified time period.
2. If the length of the lease is until the happening of some event and when that event happens the lease is terminated.
3. If the lessor’s interest in the property is to terminate the lease on the happening of some event and when the event happens the lease is terminated.
4. When the lessee surrenders by implying.
5. When both the lessor and lessee mutually agree to end the contract.
6. On the expiry of a notice which expressly conveys the intention to terminate the vacancy and such notice must be unconditional.
7. Through forfeiture which legally allows a lessor to re-enter and reclaim his property.
8. If the interest of both the lessor and the lessee in the whole property becomes vested at the same time in one person in the same right, then by the operation of law merger takes place