All about drafting a lease agreement
The general principles governing the drafting of a lease are no different from drafting any other contract. Therefore, like any other contract, a lease, too, will have certain distinct portions, such as title of the agreement; place and date; introductory clause, which provides the description of the parties; recitals; testatum and testimonium. Leases additionally also have habendum and reddendum.
An agreement should ordinarily begin with a title, and this is no different for leases. It is advisable to title the lease agreement appropriately, as a lease deed or agreement to lease as the case may be. However, it is a settled principle of law that titles and headings do not define the nature of the relationship between the parties and the same is only governed by its contents. In Govinda Reddi v Patta Bhirama, the Madras High Court, in 1954, held that “the name given at the commencement of the document is not the controlling factor, it is the substance of the document and not the form, which should be looked into”. After the title it is important to mention the place and date of execution of the lease. Not mentioning the place and date is not of critical importance but it can become crucial towards proof, in several situations.
The next part of the lease, typically, is the descriptor of the lessor and lessee. Description of parties in a l ease may appear innocuous, but incorrect description can prove to be fatal. Both the lessor and lessee are advised to pay strict attention to the opposite contracting party. The lessor should only be the owner of the premises or its valid power of attorney holder or authorised signatory and none else. Similarly, the lease must be executed only by the lessee itself or its valid power of attorney holder or authorised signatory. Importantly, rent must only be paid and received by valid parties under contract.
In the event of the lessor/ lessee being an individual, the lease should describe him/her thus. The description should provide typical details of identification such as name of father/ husband, permanent residential address, PAN number, etc.
In case of partnerships, all partners must execute the lease. Failure by even one partner to execute, could jeopardise the lease. In case the partnership is a lessor, the partner that has not signed the lease could potentially argue that the lease was bad for the want of his/her signatures.
In extreme situations, the non-signing partner has also been known to demand an equivalent separate rental. Whether or not such a stance would withstand court scrutiny is questionable, but can certainly prove to be an irritant and such controversy, is thus, avoidable.
In case of HUF (Hindu undivided family) properties, only the karta is authorised to sign (or someone validly authorised by the karta). Finally, where the signatory is claiming authority under a power of attorney, it is imperative to check that the attorney holder has the requisite power under the power of attorney, including to lease the premises; to receive rents; to sign the lease and other relevant documents; and to execute and register the lease with the competent authority.
The power t o l ease an immoveable property requires compulsory registeration of a power of attorney. Contracting parties to a lease are advised, not to act on the basis of an unregistered power of attorney.
The next important part of the lease are the recitals. Simply put, these are a part of the lease, which begin with the word ‘Whereas’. Recitals are such part of the lease, which provide the background circumstances in which the lease is signed. The contents of the recitals are of non-binding nature and are unenforceable.
However, they are not unimportant and can be of powerful evidentiary value. The enforceable elements of the lease are captured after the recitals, in the operative part, which commences with the testatum, which usually begins with the words, “Now this deed witnessth as follows”.
The lease also contains a reddendum, which specifies the rent reserved and the time and mode of payment of the same. Typically, a lease also contains a habendum, which describes the leased premises along with any liabilities or limitations such premises may have. A lease must contain the schedule of property, accurately delineating the description of the property including its size, number of rooms, open area, etc. It is advisable to append a map of the property, along with its plan, to the lease.
The agreement concludes with a testimonium, which mentions that the lessee and the lessor have signed the lease in the presence of witnesses named, at a particular place and date.