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

HT Estates - - HTESTATES - Su­nil Tyagi

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

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