The difference between lease and license
In one form of transaction the licensee will be allowed to use the property even though the possession will remain with the owner
Giving property on lease or license can be an attractive source of additional income. However, many persons are not familiar with the difference between a leased property and a licensed one. Though there is a marked distinction between a lease and a license, identifying whether a transaction is a lease or license of property might not always be clear.
The courts have attempted to lay down certain principles and propositions for ascertaining whether a transaction amounts to a lease or a license. Unlike licensing, lease of property is considered to be a mode of transfer of immovable property under the Transfer of Property Act. In a lease, the lessee is entitled to be put in possession of the property and is entitled to enjoyment of the property to the exclusion of the lessor. Thus, a lease is a transfer of an interest in the immovable property. However, in a license the possession of the property remains with the owner, but the licensee is permitted to use the premises for a particular purpose. Thus, no interest in the property is created in favour of the licensee and the licensee can use the property only in the manner permitted by the licensor. Broadly put, if in a transaction the person has only restricted or limited rights to use the property while it remains in the owner’s possession and control, the transaction is considered as a license. In such a case a party getting exclusive possession of the property, prima facie, will be considered a tenant; but circumstances may be established which might negate intention to create a lease.
The following are some broad indicators of the kind of transactions generally held by the courts to be lease or license. In some cases, where the lessee has been granted the right to exclusive possession of the property, the instrument in question has been held to be a lease deed by the courts. On the other hand, where the defendant has been given exclusive possession of the disputed premises for a particular purpose but has not been given the permission to sub-lease the property, the transaction is held to be a license. Interestingly, there have been cases in which the keys of the premises have been taken by the licensor in the morning and returned in the evening. This transaction has been held by the court to be a license.
In order to minimise disputes, the parties should make it clear at the outset that the transaction is lease or license. The lease deed or license deed should clearly set out the terms with respect to rent/license fee, which party is entitled to exclusive possession of the property, the terms of usage of the property, etc. Simply naming a document a ‘license deed’ does not make the transaction a license, if the nature of the transaction is actually a lease. It is wellsettled that the nomenclature of the document is immaterial in determining the nature of the transaction. To gauge the true nature of the transaction, courts seek to ascertain the real intention of the parties – whether they intended to create a lease or a licence. Courts take into account the language of the document and the facts and circumstances, irrespective of the name of the document executed by the Parties.