Lease and license

Whether a particular document or transaction creates a 'lease' or 'licence' is not an easy task for the court to decide but the well established test laid down by the decision of this Court and as has been followed consistently, beginning from the decision of

Associated Hotels of India Ltd., vs. R.N. Kapoor [AIR 1959 SC 1264] is that 'it is not the form but substance of the document has to be seen to gather the intention of the parties for determining whether the document/transaction is a lease or licence'. It is further held as under:-

"The following propositions may be taken as well established :- (1) To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties whether they intended to create a lease or a licence; (3) if the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence, and (4) 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."

Section 105 of the Transfer of Property Act defines a lease of immovable property as 'transfer of a right to enjoy such property made for a certain time in consideration for price paid or promised'. Under section 108 of this Act, the lessee is entitled to be put in possession of the property. A 'lease' is, therefore, 'a transfer of interest in land'. Whereas section 52 of the Easement Act defines a 'licence' to mean 'a right granted to another person over immovable property to do or continue to do some act which would in the absence of such right be unlawful'. When such right does not amount to an easement or creates any interest in the property, the right is called a 'licence'. In all cases where the dispute is about the nature of the document to be a lease or licence, the question that has to be addressed by the Court to itself is what is the intention disclosed by the parties from the terms of the document or the transaction. Where the conclusion is that circumstance or conduct of the parties shows that all that was intended was that the occupier should have a personal privilege with no interest in the land, the transaction would be licence and not a lease.

In Board of Revenue vs. A.M. Ansari [1976 (3) SCC 512], this Court observes :-

"It is the creation of an interest in immovable property or a right to possess it that distinguishes a lease from a licence. A licence does not create an interest in the property to which it relates while a lease does. There is, in other words, transfer of a right to enjoy the property in case of a lease. As to whether a particular transaction creates a lease or a licence is always a question of intention of the parties which is to be inferred from the circumstances of each case. For the purpose of deciding whether a particular grant amounts to a lease or a licence, it is essential therefore, to look to the substance and essence of the agreement and not to its form.

In order that an agreement can be said to partake of the character of lease, it is necessary that the grantee should have obtained an interest in and possession of land. If the contract does not create an interest in land then the land would be considered as a mere warehouse of the thing sold and the contract would be a contract for goods."