Renting property in India —
lease or leave and license?

The two instruments

Two types of agreement are used in India when a property is let out:

• Rental lease agreement. A lease under the Transfer of Property Act, 1882. It creates an interest in the property in favour of the lessee. The lessee's rights are those of a tenant, protected in many states by rent control legislation.
• Leave and license agreement. An agreement under the Indian Easements Act, 1882. The occupier is a licensee — a person permitted to occupy the premises for a defined purpose and period. The agreement does not create any interest in the premises in favour of the licensee.

The two instruments look similar at first glance. They both involve an owner permitting another person to occupy the property in return for a periodic payment. But the legal consequences of the two are very different — and those consequences matter most at the point when the landlord wants the property back.

The key difference

In simple terms, in a rental lease agreement there is considered to be a transfer of interest from the lessor to the lessee. The lessee acquires an interest in the property. That interest, once created, is not easily brought to an end. In many states, the tenant's continued occupation is protected by rent control legislation, and the grounds on which a landlord can recover possession are limited and strictly construed.

In a leave and license agreement, no interest in the premises is created in favour of the licensee. The licensee occupies the premises with the permission of the licensor. When the period of the license ends, the permission ends with it. In general, rent control laws do not apply to a leave and license. The licensee's occupation, and the process by which a licensee may be required to leave, are governed by the Easements Act.

The consequence, in practice, is this: a landlord under a lease who wishes to recover possession may have to litigate for years. A licensor under a leave and license is ordinarily in a materially better position.

Why NRIs should prefer a leave and license

The practical case for a leave and license in an NRI matter is strong, for several reasons:

• The licensor remains in control. The property has not been burdened with a tenant's interest. When the license period comes to an end, the licensor is not in the position of having to displace a tenant's statutory rights.
• Rent control does not, as a general rule, apply. The rent control regimes in most states are built around the relationship of landlord and tenant. A license is a different relationship, and the rent control protections do not ordinarily extend to it.
• The exit route is defined by the agreement. The license agreement sets out the term, the permitted use, and the date by which the licensee must vacate. Where the licensee does not vacate, the licensor can proceed under the Easements Act and the terms of the agreement, rather than under the rent control framework.
• The instrument is well suited to short-term letting. A leave and license ordinarily has a defined term — eleven months is conventional — and renewal is a matter of agreement, not of statutory entitlement.
• It fits the NRI's circumstances. An NRI who rents out a property in India is often doing so in the expectation of being able to recover possession on a defined timeline, for their own use, for a family member, or for sale. A lease may frustrate that expectation. A leave and license ordinarily does not.

Drafting the leave and license — what to include

A leave and license agreement that is drafted well is the principal protection the licensor has. The following provisions should be present, and should be drafted with care:

• Term. The duration of the license should be clearly stated, together with the date on which the licensee is to hand back possession. Eleven months is common. A longer term is possible, but the longer the term, the more closely the arrangement may resemble a lease, and the more important it becomes that the drafting is precise.
• License fee and deposit. The monthly license fee, the manner of payment, the due date, and the interest-free security deposit — together with the circumstances in which the deposit may be adjusted.
• Purpose of the license. The use to which the premises may be put — residential, or commercial, and in either case the specific purpose. A license for a purpose not stated is a license for a purpose not granted.
• No assignment or sub-letting. An express clause prohibiting assignment, sub-letting, or parting with possession in any form.
• Maintenance and utilities. Who bears the cost of maintenance, society charges, property tax, electricity, water, and other utilities.
• Restoration on expiry. The obligation on the licensee to hand back the premises in the condition in which they were received, subject to ordinary wear and tear — and the consequences of failing to do so.
• Licensor's right of entry. A right for the licensor or their representative to enter the premises, on notice, for inspection or for showing the premises to prospective purchasers or licensees.
• Termination and eviction. The right of the licensor to terminate the license on the grounds specified — non-payment, breach of terms, unauthorised use — and the obligation of the licensee to vacate within a specified period on termination.
• Governing law and jurisdiction. That the agreement is governed by Indian law, and the court or tribunal whose jurisdiction is to apply to any dispute. For an NRI, this is important: it prevents the licensee from contending that a different forum applies.
• Registration. Where the term of the license exceeds one year, the agreement requires registration under the Registration Act, 1908. Even where the term is below one year, an agreement that is properly stamped and, where possible, notarised, is materially stronger than one that is not.

The rent-control question — and its limits

The general position that rent control does not apply to a leave and license is important, but it is not a universal rule. The rent control legislation of each state defines its own terms — some refer to "tenant," others to "licensee" — and the application of the statute depends on the way the arrangement has been structured in substance, not merely on the label the parties have chosen.

An agreement that is styled as a leave and license but that in substance transfers an interest in the property — for example, by granting the occupier exclusive possession for an indefinite term, or by conferring rights that are characteristic of a tenancy — may be treated by a court as a lease notwithstanding its label. The drafting is therefore the decisive point. A leave and license that is properly drafted, with a defined term, a defined purpose, and no transfer of interest, will ordinarily be given effect as a leave and license. A leave and license that is essentially a lease in disguise will not.

Practical protections beyond the agreement

The agreement is the foundation, but there are other steps an NRI landlord can take:

• Verify the licensee before signing. Identity, employment, previous address, and references. A licensee who is well documented is a licensee who is less likely to default.
• Inspect the property at the start. A joint inspection with a written schedule of the condition of the property, signed by both parties, is useful on handover and on any dispute about damage.
• Keep the utility connections in the licensor's name. Where the electricity, water, and gas connections remain in the licensor's name, the licensor retains a means of dealing with the property if the licensee defaults.
• Provide a permanent address in India. A licensor with no address in India, or no representative in India, has practical difficulties in enforcing the agreement. A Power of Attorney in favour of a trusted person in India, with the necessary authority to act on the landlord's behalf, is often essential.
• Keep the rent paid through banking channels. Cash payments are difficult to prove and provide no record if the licensor needs to establish non-payment.
• Inform the society. Where the property is in a residential society, a copy of the license and the licensee's details should be provided to the society. The society's records, and the gatekeeping that the society provides, can be a valuable first line of defence.
• Renew on time, or re-enter. A leave and license that is allowed to continue by conduct after the term has expired may, over time, be treated as having been renewed. Where the licensor wishes to renew, a fresh agreement should be executed. Where the licensor wishes to take back possession, the term should not be allowed to run on without written arrangement.

Where the disputes usually arise

In our experience with landlord-tenant matters involving NRIs, the disputes that come to court most often are these:

• Non-vacation after expiry. The licensee remains in occupation after the term of the license has come to an end. This is the single most frequent source of difficulty. It is significantly easier to address where the instrument is a leave and license than where it is a lease.
• Non-payment of the license fee. Arrears accumulate, and the licensor, being abroad, does not become aware of the extent of the problem in time.
• Unauthorised use or sub-letting. The licensee puts the premises to a use not permitted by the agreement, or parts with possession to a third party.
• Damage to the property. Restoration obligations are not complied with on handover, and the extent of the damage is disputed because no baseline inspection record exists.
• Dispute over the security deposit. The amount to be adjusted, or the circumstances in which it may be forfeited, are not clearly stated in the agreement.
• Agreements that were never properly stamped or registered. An agreement that does not meet the requirements of the Stamp Act or the Registration Act may not be admissible in evidence — which is precisely what the landlord needs it to be when the dispute arises.
• Mischaracterisation. An arrangement that was intended as a leave and license is contended by the occupier to be a lease, and the licensor's remedies are correspondingly narrowed. The drafting of the agreement is what determines the outcome on this question.

How Kavao Law can assist

We advise NRIs, foreign nationals, and their families on the letting out of property in India. Our work typically includes:

• Advising on the appropriate instrument — lease or leave and license — for the property and the intended use.
• Drafting a leave and license agreement, or a lease, that protects the licensor's position and complies with the applicable stamp and registration requirements.
• Advising on the registration of the agreement, and on the consequences of non-registration.
• Advising on the position under the applicable state rent control legislation, and on the practical effect of the choice of instrument.
• Advising on the Power of Attorney arrangement, so that a trusted representative in India can act on the licensor's behalf where necessary.
• Advising on the recovery of possession where the licensee does not vacate, and on the remedies available under the Easements Act and the agreement.
• Advising on the recovery of arrears, and on the enforcement of the deposit and restoration obligations.
• Representing the landlord in proceedings under the applicable rent control legislation, where a lease has been executed and the statutory framework applies.

For more on this service, see our Landlord & Tenant Disputes practice-area page and our Property & Land Records practice-area page.

A closing note

The information in this article is general in nature and is intended to give NRI landlords a clearer sense of how renting out Indian property is structured, and of why the choice of instrument matters so much. Every letting arrangement depends on its own facts — the state in which the property is situated, the rent control regime that applies, the intended use of the property, and the terms the parties are willing to agree.

There is no method of protecting an Indian landlord that is entirely proof against a tenant who is determined not to leave. But the choice between a lease and a leave and license, and the care with which the chosen instrument is drafted, determine how much of a problem that tenant becomes. Where the property matters, seek case-specific advice before the first agreement is signed.