What Startups must know while signing Rentals & Lease agreement in India

Renting or leasing of property (either for residential or commercial purposes) is a common phenomenon these days. And if we look at it closely, there are various benefits associated with renting or leasing a property rather than purchasing the same.

Firstly, renting a property doesn’t overburden a person with multiple expenses like EMI payments, house tax, and other legal issues as they come as a part and parcel of ownership of property. Secondly, a property could be rented or leased anywhere in a place of favorable location, whereas it may always not be possible to get your best deal for buying a property. Thirdly, taking a property on rent generally gives a feeling of lower liability, where you can easily rent a property worth Rs 50 lakh for only 10,000-20,000 per month. However, if you purchase the property you have to shell out anywhere from Rs. 30,000 – 40,000 as equal monthly installments.

Therefore, if you wish to rent or lease a property (say a house property) anytime soon, you should know that it is compulsory to create a tenancy agreement (while renting or leasing the property) for the legal enforceability of the landlord-tenant relationship while renting or leasing the property. Therefore, we have provided a comprehensive guide to understanding the rental & lease agreements for residential and commercial properties.

What is a Rental Agreement?

A rental agreement is a legal agreement entered between the landlord and the tenant, to regulate the respective rights and obligations of each party concerning tenancy. It includes details such as rent, security deposit, and information regarding the property, its size, address, type, and most importantly duration of the agreement, it is legally binding.

The importance of a rental agreement as a legal document cannot be undermined in any way. It safeguards the rights of the parties and saves them from any confusion or future disputes ensuring their quick resolution throughout the court settlements. It provides safety to the landlord towards the well-being of the property and at the same time protects tenants from unlawful demands of the landlords. The rental agreement provides temporary possession of the property to the tenant for a specified period. Another benefit is its value as a piece of legal evidence, as it is admissible as a piece of evidence in a court of law.

Since discussing and agreeing to the provisions orally is not enough, the terms of the contract have to be drafted, attested, and registered under the provisions of the State Rent Control Act 1948 (which vary from state to state). Once signed the contract between the tenant and landlord form is considered legally and mutually binding. Since it is binding in nature, both parties are advised to go through it carefully and may involve a legal professional at the time of signing and agreeing to the clause. Further, it also requires at least two witnesses or non-beneficiaries to be present and sign the agreement as chief witnesses.

Duration of rental agreements

A Rental agreement could be fixed for any duration as per the requirements of the parties and could be further renewed as per their agreement.  However, parties do fix a general period of eleven months under the standard rental agreement to avoid registration charges or stamp duty fees applicable under the Indian Registration Act 1908. Under the provisions of the Act, a  rent/lease agreement between the landlord and the tenant for more than 11 months needs to be registered and with the payment of applicable registration fees and the stamp duty charges as per the applicable rates in the state.

Important clauses of a rental agreement

i. Description of the parties

In a rent agreement, first of all, identify the names and details of the party being the landlord & the tenant. The landlord must be the absolute and rightful owner of the property and the tenant should hold valid proof of identification and all other required documents.

ii. Duration of the tenancy

Since there is no legally prescribed period to decide on a valid rental agreement, the parties are at their will to decide on the period of tenancy. Though, the parties may generally avoid a duration longer than 11 months if they wish to avoid registration or payment of additional costs. After the expiry of the validity period, it could be renewed with the mutual consent of the parties.

iii. Consideration (sum of rent)

The parties must discuss, negotiate and specify the agreed sum of the periodical rent (generally every month) in the rental agreement. Further, it should also provide for the preferred mode of receiving payments, either together as a lump sum payment or in installments, the due date for receiving payments, the date by which rent could be paid with fine or late fees, etc. This clause offers protection to both parties from the unlawful demands of money by landlords or delay in payment of rent by tenants.

iv. Cost of Maintenance & Repairs

Under a rental agreement, the parties may also decide on the expenses to be incurred among the parties in case of periodical maintenance of the property. Such sum of payment and the person paying the amount must be mentioned specifically in the agreement. Not only the cost of maintenance but may the parties also decide on any other expenses which may be either major or minor such as carrying repairs or payment of electric bills, etc., and allows clarity related to the obligation to meet the expenses in case any required to be incurred.

v. Security deposit involved

The rental agreement must specify the number of security deposits as decided mutually between the parties including the signatures of both the parties. This will save any further confusion between both parties from unlawful demands and allegations. Further, in case the tenant leaves without notice or payment of rent, the landlord could be relieved from the loss of rent.

vi. Mutual Rights & obligations

Next, the rental agreement must include the rights & obligations of the parties to leave peacefully during the term of validity of the Agreement. While the landlord may put conditions such as the obligation of the tenant to keep the area clean and well-maintained or restriction from sub-letting the property, etc. the tenant may put conditions like the right to get advanced notices for necessary communications or alteration of the terms & conditions, etc.

vii. Renewal and notice period

Further, a rental agreement may also include details related to the renewal of the agreement and the notice period required to be provided for renewal of the terms & conditions of its expiry including the preferred manner of renewal of the agreement as decided by the parties.

viii. Police verification

Police verification is one of the major pre-requisite for creating a rental agreement. Police verification generally means a background check of the potential tenant to avoid the use of the property of the landlord for any unlawful activity by the tenant by assessing his criminal history (if there is any) in the nearby police station located. Not only has it ensured the safety & security of the property, but also the security of the neighborhood. Therefore, the rental agreement should specify that the records of the tenant have been verified. Failure to comply with this clause of the agreement shall be punishable under Section 188 of the Indian Penal Code.

Lease Agreement

In a legal sense, the lease is the transfer of possession of the immovable property for a fixed duration of time in return for consideration. However, a lease doesn’t mean the transfer of ownership of a property by any means but just the right to enjoy the subject matter of the lease.

There are at least two parties involved in the lease, namely- Lessor is a person who leases out the property and the person who acquires a right in the property and is commonly known as the Lessee. Section 105 of the Transfer of Property Act (TOPA), 1882 provides for the definition of a lease and the provisions related to the registration of a lease.

A lease agreement is a written agreement that is entered between the parties stipulating the conditions under which the lessor agrees to let out a property to the lessee for its use. The lease agreement allows the lessee to use the property for such tenure as agreed by the parties and the lessor has assured a fixed sum of payment over the agreed period. It also provides for the rights & obligations of the parties related to the use of the property for a period owned by the lessor. Once registered the lease agreement is legally binding, therefore, in case any party breaches the terms of the agreement, there may be legal consequences.

A lease agreement contains information including-

• Details of the property include its size, type, and location.
• Term of the lease;
• Consideration involved;
• Conditions leading to termination of the lease;
• Dispute Resolution and
• Applicable Jurisdiction

Why should a Lease Deed be registered? Where the lessor & lessee have mutually agreed for a total duration of more than 12 months, then the parties must register the lease agreement under the provisions of the Indian Registration Act, 1908. The basic principle of laws relating to the transfer of immovable property and the Registration Act provides that the registration of a lease deed affords protection in case of disputes and helps protect the interests of the parties. Additionally, failure to register a lease agreement may cost a penalty up to ten times the original value of the stamp duty required for registration by the district sub-registrar in case it comes to the notice of the authorities.

Important Clauses of a Lease Agreement

Provided below are the key clauses in a Lease Agreement-

i. Description of the Lessor & Lessee

This is the primary clause in every lease agreement, i.e. it is important to state the identification of the parties including a description of their details such as name, age, address of residence, and father’s name/spouse name. Further, the clause should also describe the property subject to a lease and the intention of the parties to enter into such an agreement.

ii. Duration of Tenancy

The lease agreement shall further mention the agreed term of validity of the lease along with the effective date of the tenancy.  This clause shall ensure that the lessee doesn’t stay longer than the agreed period or the lessor doesn’t vacate the property before the expiry of the agreement unfairly.

iii. Consideration for Lease

Next, the parties may discuss, negotiate and decide on consideration for the term of the lease for the property. The clause shall further specify the due date of payment, whether it would be payment of a fixed sum or periodical installments. The purpose of this clause is to ensure that neither party attempts to claim payments or delay payments illegally and abides by the terms of the agreement.

iv. Rights & Obligations

The contract should undoubtedly state the rights & obligations of the lessee concerning the treatment & care of the premises and the surrounding area. Similarly, it should also mention whether or not the lessee has the right to make any changes or alterations or the prohibitions regarding sub-letting the property.

v. Security Deposit

The lease agreement must provide if any security deposit was paid in the agreement by the lessee. It should also provide that the security deposit must be fully refunded at the end of the term of the lease.

vi. Notice Period and Renewal

It shall be compulsory for the parties to pre-decide whether they wish to renew the agreement after its expiry and what should be the applicable notice period that should be specified before evacuating the property. It should also contain the period under which the lessee should inform the lessor for extension of the lease.

vii. Amenities and Fixtures

In cases where the residential or commercial property is either semi or fully furnished, the lease agreement must include a list of all furniture & fixtures.

viii. Exit Clause

This clause shall mention the reasons for termination of the lease agreement and any final charges the lessee shall be required to pay before leaving the property.

ix. Signature and Date

Finally, each party must go through the agreement carefully and put the date and sign the agreement.

x. Police Verification

As provided under the rental agreement, the requirements of undertaking police verification for the potential lessee are compulsory and the fact that the process of police verification has been completed must be specified in the lease agreement.

Procedure for registering a Tenancy Agreement (Lease/Rental)

It is not mandatory to register a rental agreement, but if the rental agreement‘s term of validity is more than 11 months (12 months in the case of a lease agreement), then it is advisable to get the same registered in the office of the sub-registrar of the district with all documents and witnesses as registration provides legal protection to parties in case of disputes.

It is important to know that to ensure the validity of the agreement, the process of registration must be completed at least four months before the date of expiration of the deed. If the parties wish to renew the agreement, they may renew the same by creating a fresh agreement and registering the same along with two witnesses for attestation. If only one of the parties appears in front of the sub-registrar then the party present must sign the Power of Attorney granting the rights related to the closure of the agreement.

Documents required for Rent Agreement registration

• Original & Copies of proof of ownership of the property.
• Copies of Tax Receipts of Property.
• Passport-sized photos for each of the parties and one photo for each of the witness
• Address proof of each of the parties to the Agreement & witnesses
• Route map of the subject matter of rent.

Documents Required for Lease Agreement Registration

For registration of lease on a residential property

• Stamp paper
• Receipt of the registration fee
• Copy of a valid lease agreement

However, for registration of the commercial lease deed following documents shall be required-

• Copy of proof of identification such as Aadhaar Card, Passport, Driving license, etc. of each party.
• Copy of board resolution/power of attorney on the letterhead of the company.
• Two Passport-sized photos of the authorized signatory of the company.
• Proof of address of the authorized signatory.
• PAN details of the company.

Difference between Rent & Lease Agreement

Provided below are the key differences between the rent and lease agreement –

Conclusion

Therefore, both rental & lease agreements allow parties to secure their legal rights in case there is any dispute between the parties or in cases where any of the parties concerned commits a breach of any terms of the agreement. It assures the security of the property to its legal owner and affords protection to the tenants from unlawful demands of the owner at the same time. Though it is up to the choice of the tenant to either lease or rent out the property, he could make decisions by analyzing the requirement of the asset if the asset (property) is required for a year or more, then the lease would be a good choice. On the other hand, if there is no such requirement then the person may opt for renting property.