What is an extension of a lease deed?
The extension clause in a lease deed is generally made, subject to an increase in rent and security deposit by a specified amount
In our previous column, we dealt with the consequences and implications of having a renewal clause in a lease deed for an immovable property. Renewal of lease postulates the existence of a prior lease. In all other respects, a renewal of a lease is actually a fresh grant of lease by the lessor in favour of the lessee. This column highlights the implications of having an extension clause in a lease deed. In ordinary parlance, ‘to extend’ means to lengthen or prolong. Before proceeding further, let’s illustrate an extension clause as is commonly incorporated in lease deeds.
Lessor X executed a lease deed for an initial lease term of five years. It had an extension clause stating that upon expiry of the initial lease term, lessee Y would be entitled to opt for an extension of lease for an additional period of five years, on the same terms and conditions as set out in the original lease deed. Such extension clauses are generally made subject to increase in rent and security deposit by a specified amount.
The chief distinction between an extension of lease and renewal of lease is that, in order to give effect to the renewal clause under the original lease, a lease deed has to be executed once again by the parties evidencing the renewal of lease. In Provash Chandra Dulai v Bishwanath Banerjee (1989) case, the apex court elaborated that a lease deed need not necessarily be executed afresh by the parties for giving effect to an extension of the lease. Rather, the original lease deed continues in force during the additional period.
Under the Transfer of Property Act (TPA), one of the grounds for termination of a lease is by efflux of time. While a lease deed contains an extension clause, the lease period does not terminate at the end of the initial period, in case the lessee validly exercises the option of extending the lease period. The lessee’s exercise of this option of extension of lease would not hinge on obtaining fresh assent of the lessor.
Ordinarily, the lessor is not in a position to challenge extension of lease, if it is sought to be done at the will and desire of the lessee. That is, a lessor is not entitled to unreasonably deny the lessee the right to occupy and enjoy the leased premises for the extended lease period. Courts have stated that in such cases, the lessor must be treated as having given the property on lease for the total period contemplated under the lease deed.
Thus, when a lease deed contains an extension clause, the lease does not terminate upon expiry of the initial term, in case the option to extend the lease is duly exercised in accordance with the terms and conditions of the original lease deed.
One must also bear in mind the implications of non-payment of applicable stamp duty on an extension of lease. Let’s take the example of lessor X and lessee Y who executed a lease deed for an initial term of nine years, con- taining a clause which gave the lessee an option to extend the lease for a further lease term of nine years. The parties had paid the stamp duty calculated on the basis of the initial lease term of nine years, under the erroneous belief that simply incorporating an extension clause would enable extension of lease for an additional period of nine years.
Recently, i n t he Punjab National Bank v Vijender Kumar & Another (2013) case, the Delhi High Court had held that parties cannot rely on such extension clauses for avoiding payment of applicable stamp duty for the total lease term contemplated under the original lease deed, simply by making payment of stamp duty calculated on the basis of the initial lease term. To give effect to the extension clause in the example above, stamp duty was required to be calculated and paid in the first instance, on the basis of the total lease term of 18 years.
This brings us to another important difference between an extension and renewal of lease. As a renewal is a fresh lease in itself which is independent of the previous lease, the earlier period cannot be clubbed t ogether with t he renewed lease period for the purpose of levying stamp duty. The lease deed for the initial term and the fresh lease deed for the renewed term are to be treated independently.
Hence, the two documents would be chargeable to stamp duty independently. To avoid litigation and uncertainty over rights and entitlements of the parties over leased premises, it is important for them to be aware of the different stamp duty implications in such lease transactions. The author is senior partner at Zeus Law, a corporate commercial law firm. One of its areas of specialisation is real estate transactional and litigation work. If you have any queries, email us at htestates@ hindustantimes. com or ht@ zeus.firm.in