Lease and Rental Agreements
Before we get into what a lease agreement is and how it should be drafted, the first and foremost thing to understand is why it is important to enter into such agreements (rather than have oral understandings with landlords).
The simplest answer is for Nemmadi i.e. mental peace. A written agreement is a record of the terms of understanding between two (or more) parties. The agreement is legally binding and if drafted correctly, would provide solutions for (most) foreseeable future problems that may arise. The parties decide upon a course of action for various contingencies in advance which ensures that should such contingency arise, they do not need to discuss or negotiate a solution at that point of time. This saves a lot of time and effort and also ensures that relations do not quickly sour because of future disagreements on how to deal with a particular problem. A lease agreement is essentially a flow-chart and processes that parties agree to adhere to for the term of the lease.
(For example : If ‘A’ happens – the landlord sells the property, the landlord will do X – inform the purchaser about the tenant and ensure the lease is not affected, and the tenant will do Y – pay rentals to the purchaser for the remaining period of the lease)
Further, the written agreement ensures that owners / landlords cannot simply evict the lessee without recourse to appropriate eviction proceedings and on the other hand, ensures that owners / landlords can justify their claims for arrears or additional damages against lessees who fail to vacate the property after the lease period ends.
A ‘lease’ is a temporary transfer of property from the owner to another person for a certain period of time and for consideration (i.e. for payment or value). The ‘lessor’ is the person giving the property on lease and the ‘lessee’ is the person receiving the property on lease. Rent, premium, consideration, fees, etc. are all terms that refer to the amount(s) to be paid by the lessee to the lessor. This can be on a monthly basis, quarterly basis, annual basis or any such time period as may be decided by the parties.
Lease agreements are also informally called ‘rental agreements’ but the terminology aside, they are the same document that refer to the same transaction between the landlord and lessee.
(In Karnataka, license agreements are also akin to lease agreements as there is no difference in stamp duty payable for the two and they are treated alike by Courts. In other states, such as Maharasthra, owners prefer to execute license agreements so that they can avoid ‘landlord-tenant relationship’ between the parties as this affects the legal rights and remedies available to the parties, especially the tenants. In Karnataka, even license holders in respect of immovable properties are treated as tenants for all practical purposes and merely naming the agreement as a license agreement would not be enough to escape the creation of the ‘landlord-tenant relationship’)
A lease agreement (or rental agreement) is executed by both parties signing the written agreement and is binding from the date of execution or on the date specified in such agreement.
The essential terms that parties must agree upon and specify in the agreement are :
- The personal details of the parties entering into this Agreement (i.e. proper communication address, identification details, etc.)
- Full description of the property being leased (along with details of any movables, furniture(s) or fixtures included or located in such property)
- The date on which the lease commences, the rental becomes due and the date till which the agreement / lease is to be valid (i.e. details of the lease period)
- The consideration agreed to by the parties (i.e. rental charges) and the time period within which the same is to be paid (usually first week of each calendar month).
- Whether the consideration (rental charges) are inclusive of utility charges (electricity bill, water bill etc.) and who would bear such charges.
- The amount of security deposit being deposited by the lessee along with details of how the deposit was made (cash, cheque, demand draft, bank transfer, etc.) and whether such security deposit will carry any interest or be interest-free and within how long the security deposit should be refunded to the lessee after he/she vacates the property.
- Purpose of the lease (for residential purpose or commercial purpose)
- Requirements for either party to terminate the lease before the expiry date (usually by providing advance notice of 30-60 days to the other party)
- Any specific or additional terms agreed to by the parties (such as what additions or modifications to the property are permitted, any specific restrictions on the usage of the property, adherence to bye-laws or rules of apartment associations or housing societies, etc.)
- Such other terms as maybe necessary for the execution of the Agreement.
4. Things to keep in mind
There are some important things to keep in mind before entering into a lease agreement:
i. Payment of Stamp duty
Stamp duty is payable on all transactions pertaining to immovable property.
The agreement may either be printed on non-judicial e-stamp paper (available at co-operative societies / banks) or be paid online (www.kaverionline.karnataka.gov.in). The amount of stamp duty depends on the term / period of the lease.
If insufficient stamp duty is paid, the deficit stamp duty may be levied by the appropriate revenue authorities or by court in the event of any dispute between the parties. The appropriate revenue authorities may impose a penalty of up to 10x the amount of stamp duty to be paid.
Any lease agreement for a period of more than 12 months (i.e. one year) is a compulsorily registrable document and must be registered. The non-registration of such document renders the document inadmissible as evidence before any Court and as such, virtually defeats the purpose of the agreement.
This is why usually lease agreements are made for 11-month periods. However, even for 11-month agreements, appropriate stamp duty must still be paid.
iii. Witnesses to the agreement
Legally the agreement becomes binding as soon as it is executed / signed by both parties and no witnesses are required for such execution. Agreements are usually signed in the presence of witnesses so that neither party can deny having signed such document on a later date.
This post was authored by Ms. Sneha Nagaraj, Founding Partner of Frontier Legal