Lease and Licence
by C.F. Alvares,
Advocate, Margao, Goa
Cite as : (1972) 2 SCC (Jour) 1
The burning question before us at present, appears to be the distinction between a lease and a licence. This delicate question has been brought before the Supreme Court more than once, which fact in itself indicates that we are still wanting a clear-cut distinction between the two terms, lest we repeat our past errors.
The most recent decision which I have at hand is the one in Sohan Lal Naraindas v. Laxmidas Raghunath Gadit, reported in (1971) 1 SCC 276: (1971) 2 SCJ 583: (1972) Bom LR 144 (SC), where Their Lordships of the Supreme Court held that the crucial test is the intention of the parties, i.e. whether they intended to create a lease or a licence, and that the test of exclusive possession, though not decisive is of significance. Such reasoning was expressed earlier in Ramamurthy Subudhy v. Gopinath (AIR 1968 SC 919) and in M.N. Clubwala (Mrs) v. Fida Hussain (AIR 1965 SC 610) and also in Associated Hotels of India Limited v. R.N. Kapoor (AIR 1959 SC 1262), where Their Lordships held that the document by itself could not be a deciding factor whether a particular transaction was a lease or a licence.
Section 105 of the Transfer of Property Act, reads:
"A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised or of money, a share of crops, service or any other thing of value to be rendered periodically, or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
The transferor is called the lessor, the transfree is called the lessee, the price is called the premium, and the money, share, service or any other thing to be so rendered is called the rent."
Section 52 of the Easements Act reads:
"Where one person grants to another or to a definite number of other persons a right to do or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence."
If we focus our attention only upon the question of rights in the above two definitions, we find that in both cases there is a transfer of a right. It may be noted that in a lease the Right consists in enjoying such property transferred, and so also in a licence the Right consists in doing something in or upon the immovable property of the Licensor, though without the creation of an interest in the property.
Although it is not clearly stated that a lease creates an interest in the property, inasmuch as the opposite is stated in case of a licence, yet by judicial dicta we have come to believe that a lease creates an interest in the property merely to highlight a contradistinction between a lease and a licence. We have, therefore, imputed such creation of a right or interest in the property, not due to the existence of a positive statement to that effect in the definition of a lease, but merely because of the statement of its non-creation in case of a licence.
This imputation of the creation of a right in the property in case of lease, is in reality a high overtone because all that follows from the definition is that the transfer is solely of 'a right to enjoy' which is equivalent to the 'right to do so, in or upon the immovable property,' as stated in the definition of a licence.
Considering that the Transfer of Property Act and the Indian Easements Act, were both passed in the same year, 1882, obviously the concept of a Right would not have been different. We cannot conceive that a lease gives a right to enjoy the property in any manner the transferee feels best, as against a licensee who could have his rights directed in a particular manner as per the terms of the grant. In fact, we are quite settled on the principle that if a tenant does any alteration/modification/improvement, etc., he does so at his own risk, since he does not have any property rights over the subject-matter of the demise, and he would not be allowed to contend that he had rights in the property due to which he did the alteration/modification. As long as he keeps on paying the rent, the dichotomy of owner and tenant shall subsist and consequently his interest in the property is in no way better or, is as precarious as that of the licensee.
As against this, we find that Section 60(b) of the Easements Act clearly states that a licence becomes irrevocable when "the licensee, acting upon the licence has executed a work of permanent character and incurred expenses in the execution", which goes to show that a licensee can create rights in the property, or, for every practical effect, he is on a safer position than a tenant, whose tenancy could always be terminated with an appropriate notice as provided in Section 106 of the Transfer of Property Act.
No doubt, we can still argue that the security in tenure of the licensee arises not by virtue of the creation of "an interest in the property" but in the creation of a right over the property, i.e. his rights are purely above the surface of the land, as against the rights of the owner which lie from the surface to below.
But if we adopt this argument, we reach a paradoxical situation. We conceive that the interests of the licensee restricts only to the structure above the surface. Then, does the structure have no foundation? Aren't these foundations embedded in the soil? Is this not immovable property? Does not this structure with its foundation constitutes an integral whole? Can we then conceive immovable property as layers of movable property put together? The obvious answer is "NO". The conclusion is that a licensee can acquire interest in the property if he, under the licence, puts up a work of permanent character and incurs expenditure.
The statement, therefore, that a lease alone creates interest in the land and that the licence does not so create, is definitely a high overtone due to the laying of too great an emphasis on the words "does not amount to an easement or an interest in the property" as found in the definition of a licence, as against its absence in the definition of a lease.
It is elementary to state that a definition, in order to conform to the rules of logic, must be "per genus et diferentium". If we turn to the definition of the licence as per Section 52 of the Easements Act it surely has a "genus" and a "diferentium"; the genus is a wider category to which it belongs, viz. the right which is acquired under the grant and the diferentium is the right which "does not amount to an easement or an interest in the property". Such diferentium, no doubt, has been used to distinguish a licence from an easement, considering that an easement, as defined in Section 4 of the Easements Act clearly indicates that it is a right which creates an interest over the property of another. The qualification that a licence does not create an interest in the property therefore, is used in contradistinction or as a diferentium to the definition of an Easement. When this diferentium or contradistinction is dislodged from the context of the Easements Act and is used to contradistinguish or differentiate from a lease, it obviously loses all its sense and causes all the confusion.
With due respect to all the established authority therefore, I beg to submit that the theory which tries to create a dichotomy between a lease and a licence on the basis that the former creates an interest in the property and that the latter does not, is surely untenable. The respective definition of lease and licence have their proper meanings within the context of their respective acts, viz. the Transfer of Property Act and Easements Act. But when we try to establish a universality to these definitions and set one against the other by extricating them from their respective contexts, we find that we reach paradoxical situations and get into a wild-goose chase.
If this be not so, let us test the orthodox theory once again. When highlighting the distinction between Lease and Licence, it is noted in Mulla's Commentaries on the Transfer of Property Act (5th Edn., 1966 at p. 659) that a licence "does not entitle the Licensee to sue a stranger in his own name" apparently under the orthodox notion that a licensee has no interest in the property. If this statement be true, does it mean that a licensee cannot evict a trespasser? Can he not maintain a suit based on his possessory right? Surely he can. How can we then accept the statement as given in Mulla?
One may still argue that to file a suit based on the possessory right, is a right which a possessor/licensee has over the property and not in the property. My comment to this is that such reasoning is a sheer absurdity. I concede that there can be possession of "incorporeal rights", but considering that in licences, we are dealing only with tangible property it is obvious that our possessory right is not in the abstract but over a tangible property. Such possession therefore crystallises upon the "corpus"/subject-matter, i.e. the property licensed and hence the argument that one right emanates from over the property and not from in the property, is a sheer sophistry.
In the decision in Sohan Lal Naraindas v. Laxmidas Raghunath Gadit reported in (1971) 1 SCC 276: (1971) 2 SCJ 583: 1972 Bom LR 144 (SC), Their Lordships of the Supreme Court write:
"Intention of the parties to an instrument must be gathered from the terms of the agreement examined in the light of the surrounding circumstances. The description given by the parties may be evidence of their intentions but is not decisive. Mere use of the words appropriate to the creation of a lease will not preclude the agreement operating as a licence. A recital that the agreement does not create a tenancy is also not decisive. The crucial test in each case is whether the instrument is intended to create or not to create an interest in the property the subject-matter of the agreement. If it is in fact intended to create an interest in the property, it is a lease. If it does not it is a licence. In determining whether an agreement creates a lease or a licence the test of exclusive possession though not decisive is of significance."
Let us try to study the above passage by splitting up into three parts as follows:
First Part."Intention of the parties to an instrument must be gathered from the terms of the agreement examined in light of surrounding circumstances. The description given by the parties may be evidence of their intention but is not decisive. Mere use of the words appropriate to the creation of the lease will not preclude the agreement operating as a licence. A recital that the agreement does not create a tenancy is also not decisive."
It follows from the above that intention overrides the written document; that even though the document is styled as a lease, yet it may be a licence; that even an averment that the document is not a lease, is inadequate. In short, the Supreme Court feels that we should allow the parties to retract from their written commitment by alleging some intentions, which would suit best their conveniences at the time of litigation.
And with such rationale as adopted by the Supreme Court, the reader is preplexed as to what is the fate of Section 92 of the Evidence Act which excludes evidence of any oral agreement or statement for the purpose of contradicting, varying, adding or subtracting from the written terms of the contract. Does not the rationale of the Supreme Court violate the provisions of Section 92 of the Evidence Act? The obvious answer is 'yes'.
Section 35 of the Stamp Act, clearly states that instruments not duly stamped are inadmissible in evidence. No doubt, this provision is more in the nature of hindrance to the plaintiff than to the defendant, because it is the plaintiff who will place reliance on it, whereas the defendant will be interested only in destroying it. But it is possible to conceive (as it often happens) that the Plaintiff is interested in trying to class the document as a lease, notwithstanding that it is written as a licence, and institute eviction proceedings in the Rent Tribunal so as to pay a lower Court Fee, as the Rent Tribunals have a fixed Court Fee which is lower than the regular Court Fee prescribed for recovering possession of immovable properties.
Thus, if the above ratio is to be of a universal application, i.e. both to the plaintiff and the defendant, we reach the conclusion that its effect is only to leave the doors wide open for the plaintiff to violate this Section 35 of the Stamp Act.
Similarly, Section 17(1) of the Registration Act makes leases from year to year or from periods exceeding one year, compulsorily registerable; and Section 49(c) of the Registration Act, categorically states that a document not registered as per the requirements of Section 17, shall not be received in evidence.
How, then will a party be allowed to class a document differently when he has clearly violated the provisions of the Registration Act? How, will then an unregistered instrument creating a lease (since a licence is not required to be registered) be accepted in evidence? If the instrument creating a licence is registered, it is all the worse. How will the party be allowed to retract from his admission made before the registering authority?
From the above discussion, I beg to submit that the rationale adopted by Their Lordships of the Supreme Court is far from satisfactory. And with this, I shall pass on to examine the second part of the passage reproduced above.
Second Part."The crucial test in each case is whether the instrument is intended to create or not to create an interest in the property the subject-matter of the agreement. If it is in fact intended to create an interest in the property, it is a lease. If it does not, it is a licence."
I think that I need not comment at length on this passage as I have already dealt with it above, under the sub-heading "A DEPARTURE".
To put it shortly, I beg to stress that the attempt in trying to establish a dichotomy on the basis of the interest created in the property is a monument of misdirected energy. As I noted above, the fact that the definition of the licence states that it does not create an interest in the property, has to be understood in its proper context, viz. when put in contrast to an easement and not when it is put in contrast with a lease. The logical definition of lease and licence lose all their meaning when withdrawn from their contexts of their respective Acts.
I, therefore, beg to submit that this passage loses all its force.
Third Part."In determining whether an agreement creates a lease or a licence the test of exclusive possession though not decisive is of significance."
Let us conceive that I give my rooms on a licence to someone. Does it mean that I can invade into his privacy? Does it mean that I can treat these rooms as a waiting room in Railway Station? What then is the good in saying that I still retain possession over these rooms and that my licensee has no exclusive possession? Will the mere fact of my keeping some items of furniture (say a bed-cum-sofa, as it is usually done in Bombay) give me joint possession over the room? I may at the most claim possession over these items of furniture, but surely it would be absurd to say that my licensee did not have exclusive possession.
If one is not prepared to accept this reasoning, then I may ask:
What about the electric fittings installed by a landlord in the premises leased by him to his tenant?
Or think of a lease agreement where the landlord stipulates a clause to enter and inspect the premises at any time. Does it abridge the exclusive possession of the tenant? No doubt, the owner, whether lessor or licensor always retains constructive possession. But what we are concerned, is actual physical possession while establishing exclusiveness. And we find that exclusive possession exists both in cases of leases as well as in case of licences.
My submission, therefore, is, that exclusive possession is no test at all.
THE CRUCIAL TEST
With due respect to all the authorities, I beg to submit that if we are to follow the law strictly, we would not be allowed to look beyond the document. We shall have to take the document, either as a lease or a licence, on its face value and that would be in consonance with Section 92 of the Evidence Act and Section 35 of the Stamp Act and Section 49(c) of the Registration Act. Besides, it would be in consonance with the principle of 'Estoppel by Deed' as envisaged in Section 115 of the Evidence Act, which principle rests upon a fundamental rule that "No man shall be allowed to dispute his own solemn Deed", as rightly expressed by Lord Mansfield.
How would the Court feel if a person who executes a sale deed, on finding that the price of the property sold, has shot up, all of a sudden turns the corner and affirms that he really intended to execute a mortgage by conditional sale?
In a very recent decision from Bombay, viz. Belapur Company Limited v. Maharashtra State Farming Corporation, reported in 1972 Bom LR 246, His Lordship Justice Vimadalal, has considered very extensively the ambit of proviso (6) to Section 92 of the Evidence Act.
Justice Vimadalal, after analysing a catena of authorities and reported decisions, mostly of the Supreme Court, expounded a very sound principle of law, that the fundamental rule of construction of a document is to ascertain the intention of the parties to it from the words used in the document which is considered to be the written declaration of their minds. If the words are clear of the intentions expressed and the language applies to existing facts, extrinsic evidence is inadmissible for construing the deed or for ascertaining the real intention. Extrinsic evidence is admissible only to explain doubtful words. The subsequent conduct of the parties is not relevant or admissible for the purpose of construing a written document and consequently whatever transpired subsequent to the written contract is not admissible for ascertaining the terms.
In the above cited decision, reliance has also been placed on the decision in Kamla Devi v. Tkakatmal reported in AIR 1964 SC 859. The relevant passage at p. 863 reads:
". . . . when a court is asked to interpret a document, it looks at its language. If the language is clear and unambiguous and applies accurately to existing facts, it shall accept the ordinary meaning, for the duty of the Court is not to delve deep into the intricacies of the human mind to ascertain one's undisclosed intention, but only to take the meaning of the words used by him, that is to say, his expressed intentions. Sometimes, when it is said that a court should look into all the circumstances to find the author's intention, it is only for the purpose of finding out whether the words apply accurately to existing facts. But if the words are clear in the context of the surrounding circumstances, the Court cannot rely on them to attribute to the author an intention contrary to the plain meaning of the words used in the document."
After considering various other decisions, Justice Vimadalal relies on the standard work of Odgers on the Construction of Deeds and Statutes and the relevant passage cited by His Lordship is found at p. 43 of the 5th Edn. (1967), which reads thus:
"Rule V.When is extrinsic evidence admissible to translate the language.It is to be noticed that extrinsic evidence here does not mean evidence of the writer's intention but evidence to enable the Court to interpret the language used. It is only admissible as so often with the subject of construction, when there is some doubt as to what the words mean or how they are to be applied to the circumstances of the writer."
To this I would like to add the passage found at page 44 (op. cit.), which clearly repeats the saying of our Supreme Court in the decision reported in AIR 1964 SC 859 and referred to above. The said passage in Odgers reads:
"However, evidence is not admissible to contradict the plain and unambiguous terms of a document by attempting to show that the intentions of the parties were to give a meaning of the provisions contrary to the words which the document plainly contains."
Justice Vimadalal also places reliance on a passage from Chitty on Contracts, which passage is found at paragraph 661 in the 23rd Edn. and reads as follows:
"Extrinsic evidence of this sort does not usurp the authority of the written instrument. It is the instrument which operates. The extrinsic evidence does no more than assist its operation, by assigning a definite meaning to terms capable of such explanation or by pointing or connecting them with the proper subject-matter."
Without boring my reader with any further questions, I would like to ask a simple question. Do we expect the Court to impose a contract between the parties? And that too in violation of the rules of evidence, the stamp and the registration requirements? The inevitable answer is "NO".
If we turn to Field's commentaries on the Evidence Act (10th Edn., 1972, Vol. V at p. 4972), we find the following:
"When both parties are equally conversant with the true state of facts, it is absurd to refer to the doctrine of Estoppel."
How does this synchronise with the statement of Their Lordships of our Supreme Court which says: "A recital that the agreement does not create a Tenancy is also not decisive"?
I was myself in the habit of inserting such clauses whenever I had to draft a lease agreement for my clients. But as soon as I saw this statement of the Supreme Court, in the decision cited above, I had no other alternative but to add another clause which went to say that the Licensee was signing the agreement only after obtaining independent legal advice from his own advocate, who signed with him below in token of his perfect understanding of each and every clause of the licence agreement. And on one occasion when I saw some doubts on the face of my client, I advised him to secure an Affidavit from his prospective licensee to annexe it to the licence agreement and have it all registered, lest his licensee got some super ideas at a future date. What better can we advocates do in putting down the facts as told to us by our clients?
The rulings of Supreme Court are undoubtedly opening the doors to the unscrupulous. It would be preferable if Their Lordships were to leave the parties to stand by their commitments and accept the consequences of their own deeds. In fact, if such ruling were to be pronounced, all the parties would have been more cautious when signing an agreement whether of lease or a licence. If our legislators felt that there was evasion of their strict laws regarding tenancies, it is open for them to insert a simple clause to the effect that all the sections of the various Rent Control Acts, extended also to licence agreements.
It is said that the law is the protector of interests. But with the present rationale adopted by the Supreme Court, it is far from it. The licensor does not know if his licensee is going to give a "volte de face" and brand himself as a tenant and invoke protection under the Rent Control Acts. So also a lessee is unsafe because he does not know if his lessor will call himself a licensor and circumvent all the Rent Control Acts and put him on the streets if he refuses to succumb to his extortions of an abrupt increase in rent or for like reasons. We are definitely in the midst of a whirlpool.
If the distinction between lease and licence was made clear by our Supreme Court, how do we find that this issue is appearing frequently before our High Courts? One of the recent reported cases is the one of Eswari Amma v. M.K. Korah, reported in (1972) 1 MLJ 218. The very fact that the same issue has come up before the Supreme Court more than once is a clear indication that something is wanting.
I submit that if our Lordships were to state that the parties are to stand by their written commitments, it would only enhance the cause of justice; the parties would know exactly where they stand in relation to each other; they would be more careful while signing agreements and would be in position to take their respective stands, instead of being left at the whims of the other party or the startling interpretations which the Court would attribute to their writings; they would know that the Courts would not upset the certainty of their agreements.
If the parties feel that the agreement which they executed did not express their real intentions, they would have the remedy of filing a suit for rectification of their agreements by invoking Section 26 of the Specific Relief Act, no sooner the agreements are executed. But it would be highly inequitable and a sheer injustice if they are allowed to carry on with their agreements over years and all of a sudden try to get smart. The line of reasoning as adopted by our Supreme Court makes the contracting parties feel as fence-sitters.