LEASE – Meaning, Essential Elements and Kinds

“LEASE: Meaning, Essential Elements and Kinds”

INTRODUCTION

Various economic transfers related to the transfer of property uses the term ‘LEASE’. It is an agreement made for the transfer of an asset from one person to another. It is a transfer of rights of properties either for a certain period or permanently. It is not an absolute transfer of all the properties, rather it is merely a partial transfer. There is a list of essential elements which makes a valid lease, and a lease can be of many types. Thus, in this article, we will learn about the same.

WHAT IS A LEASE?

Section 105 of the Transfer of Property Act defines Lease as:

“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 transferee is called the lessee, the price is called the premium, and the money, share, services, or other thing to be so rendered is called the rent.

ESSENTIAL ELEMENTS FOR A VALID LEASE

There are various essential elements for a valid lease. They are:

  1. Immovable Property – A contract of Lease can be made only for immovable properties and cannot be done for a moveable property. The Lessor and the Lessee exchange the rights of the property through the contract of lease for the working and use of the immovable property and
  2. Parties – For a Lease agreement, there must be two or more parties for the proper transfer of rights of the immovable property. It cannot be completed in the absence of the parties as it a bi-partied agreement.
  3. Subject matter of lease The subject matter of the lease agreement is necessary to be mentioned in the contract. The purpose of transfer of the right of the immovable property, the services and profit decided, the details of the immovable property, and other important data are required to be written in the contract of lease.
  4. Duration– It is an essential to mention the duration of a lease agreement which specifies the commencement of the contract and how long the services and rights will be transferred through a valid legal contract. It is explained under section 106 of the Transfer of Property Act.
  5. Consideration Lawful consideration is an essential element for the fulfillment of a contract of lease. Considerations in the form of money as premium or rent, shared profit or as share of crops and services are essential the transfer of the rights of the immovable property.
  6. Competency –According to the Indian Contract Act, 1872, the parties entering into a contract of lease should be competent. All the parties must be of sound mind, a majority by age, and not subject to any law which restricts them to be a part of a valid contract. If the transfer of the right of property is done to a minor, then a legal guardian is necessary to work on behalf of the minor till he or she attains a majority age.
  7. Valid contract essentials– Essential elements like Offer, Acceptance, Consideration, Lawful Object, Intention of the Parties, Competency, Capacity to Contract, Subject Matter, Writing and Registration etc., mentioned in the essential elements of a valid contract given under Indian Contract Act, 1872 are important to be followed in the contract of a lease as it is a contractual agreement made between two parties.
  8. Express and implied transfer – The transfer of rights between the Lessor and the Lessee should be made expressly or impliedly, in a written contract and the notice of the termination of the lease should be given according to the clause mentioned in the contract of lease and should be duly signed and delivered among the parties.
  9. Possession of Property – In the contractual agreement of lease, transfer of the right of property is made and the parties exchange the right of possession of the property for a certain period of time and do not exchange the ownership of the immovable property.
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TYPES OF LEASE

There are following different types of lease agreement for a transfer of the right of the immovable property:

  1. Financial lease: It is permanent and irrevocable type of lease. The Lessor transfers the rights of the immovable property for a long period of time and works on the property whereas, the Lessee takes charge of all the burdens and liabilities of the property. For an instance, if a person assigns another person to look after his agricultural land to grow crops and maintain it without specifying the termination of the lease, then it is said to be a financial lease.
  2. Operating lease: This type of lease is for a short period of time and in this type of lease, the Lessee does not hold the burden of the property and the lessor takes care of the property.
  3. Sale and lease back leasing: When a lessee sells the asset to the lessor with an advance agreement between the two of leasing the asset back to the lessee for a fixed lease rental period, it is called sale and lease back leasing and it is also known as Bipartite lease.
  4. Direct lease: This is a tri-partied lease which includes the following parties:
    • equipment supplier,
    • lessor,
  5. Single investor lease: When a lessor has to arrange for money in order to finance his asset by way of debt or equity, it is said to be a single investor lease and the lender cannot recover anything from the lessee in case the lessor defaults in payment.
  6. Leveraged lease: It is also a tri-partied lease which includes the following parties:
    • the lessor,
    • the lessee and
    • the financier/lender.
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The lessor arranges for the equity and the financier has the responsibility to finance the debt.

  1. Domestic lease: When the lease contract is made within the country it is known as domestic lease.
  2. International lease: There are following two types of International lease:
    • Cross border lease
    • Import lease

When the lessor and the lessee reside in two separate countries, then the lease is known as a Cross border lease or an International lease and it does not matter where the equipment supplier resides.

CONCLUSION

The term ‘lease’ is widely used in a contract related to the transfer of property. And, in this article we learnt that there are various types of lease agreements, and it requires several essential elements to make a valid lease.

Author: APURVA .,
3rd Year, Fairfield Institute of Management and Technology, GGSIPU

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