All you need to know about Leave and License agreement

Simply put, a Leave and License is an understanding where one party (the owner, named the ‘licensor’) provides a limited right to use their premises to the other party (called the ‘licensee’) for rent. This arrangement is recommended since it generates no lasting legal rights in favour of the license. A Leave and License agreement has restricted authority concerning the property.

A Leave and Licence agreement gives the Licensee permission to hold the licensor’s property. Occupancy is thus issued based on Leave and License and not based on ownership.

Why is it compulsory to register a Leave and License agreement?

While renting your property, there is a possibility that your tenant does not follow what’s verbally decided. For example, you and your tenant decide on a rental amount of, say, Rs. 12,000, which is supposed to be transferred to you on the 1st of every month. Furthermore, you and the tenant agree on a lease tenure of 1 year. But when the due date arrives, the tenant either claims a false rental amount or delays transferring the rent on that particular day; even worse, they refuse to leave the property.

It seems like the worst nightmare, isn’t it?

Therefore you need to have a government-authorized Leave and License agreement that has everything in writing, which mainly includes- the rental amount, due dates of rent transfers, lease tenures, and yearly rent escalations. So that if the tenant does not comply with what is decided, you can take legal action against them.

It is your responsibility as a Licensor to register the Leave and License agreement with the government; failing to do so will also result in a monetary fine or imprisonment, along with the possibility of bringing the premises to court. .

Features of Leave and License agreement

The Leave and License agreement has the following properties:

• No transfer of interest is generated from owner to tenant
• No property rights are framed in the agreement.
• The amount due to a license fee, deposit, and other charges can be contractually defined by participating individuals.
• The average duration of a contract is 11 months.

The owner has a higher right and advantage when it comes to the cancellation and eviction of a tenant.

Essential elements of Leave and License agreement-

There are some general conditions to be included in an arrangement for Leave and License. These characteristics are not comprehensive, and not all of these characteristics might be present in an agreement. It depends on the conditions negotiated between the licensor and the licensee.

• Definition of the owner and the tenant: The agreement must verify the licensor and licensee through ID proofs like an Adhaar card, Pan Card, Passport or Driving license. This is necessary so that you are not tricked by some criminal/fraudster trying to intrude on your property with a fake identity.
• Title of the owner: Owners should have the authority to negotiate with their tenants. The owner can contract the deal either as an owner or as someone who is legal to the owner.

• Definition of the premises: An agreement must specify the exact portion of the premises to be rented on a leave & license basis and verify the premises being rented. The purpose of this is to prevent confusion about a tenant's privileges pertaining to the property.
• The rent tenure: The agreement must be explicit regarding the length of the agreement/rent tenure. This is because the relationship between the owner and the tenant ends after the duration of the agreement/lease tenure. Generally speaking, for convenience, a clause is included for the extension of the term upon completion of the initial duration by mutual consent of the parties. By using this clause, you can extend the rent tenure from 11 months to another 11 months if you and the tenant decide to do so mutually.

• Use of the premises: Sometimes the owner may want to limit the manner of use of the premises. Therefore, the agreement can define whether the premises are to be done for residential or commercial purposes only.

• Consideration for the licence: It is vital to specifically indicate the amount of rent payable, the date and method of payment and interest in the event of delayed payment. Generally, rent is agreed to be charged monthly or quarterly in advance.

• Security Deposit: In most cases, the tenant must keep an unintentional deposit with the owner. This deposit protects the tenant’s interest if he does not pay the rent. Sometimes, the licensee may be required to pay rent a few months in advance. The amount and terms of use and refund of such deposit and advancement must be clearly stated in the agreement.

Limits on security deposits under Model Tenancy law:

Under the Model Tenancy Law, the security deposit to be paid by the tenant in advance should be taken on the following conditions-

a) Deposit should not exceed two months’ rent, in case of residential premises; and

b) Not exceed six months’ rent, in case of non-residential premises.

However, the state governments of India have left it to the discretion of the parties and are regulated by the tenancy agreement.

• Rent Escalations: The owner may demand an increase in rent after a licensing period of more than one year. This increase is often referred to as a percentage of the tax paid in the previous year. Every three years, there is a 12%-15% rent escalation for commercial properties in India. In contrast, residential properties have an escalation rate of 10% yearly.
• Other costs and charges: The agreement must specify who between the tenant and the owner will bear the costs of services such as electricity, water, and maintenance. Usually, these costs are paid by the tenant.
• Common facilities: If the site has certain facilities, such as using a common area, roof, park, swimming pool, car park, library, club, gym, etc., it should be mentioned whether the tenant could use these facilities.
• Furniture and appliances: In most cases, when a property is rented, it contains appliances or furniture owned by the owner. It is recommended that the owner maintain a record of all licensed furniture and electrical appliances and where they are located to prevent confusion of authority over one or more of these items. Replacement provisions or damages for such services may be provided in the agreement.
• Right to sub-license: The tenant is not entitled by default to grant local licenses to a third party unless the agreement specifically states. If the owner and the tenant mutually agree upon a third-party licence, then the owner has to include the clause in the agreement.
• Termination of the license: It is essential to determine when the license may be terminated. This provision serves as a guide for the tenant and ensures the owner’s safety.

Benefits of Leave and License for tenant

• It can be used as valid address proof anywhere in India.
• These Leave and License agreements are legal documents that bind the licensor in terms of the security amount, rent amount, stay duration, and other payables for the use of property that cannot be changed once both parties sign the agreement.
• It is imperative for a tenant as it protects his right to stay for a particular duration and endures some stability. In addition, it gives surety of the conditions of the stay.

In conclusion, Leave and License agreements preserve the rights of both the parties- owner and tenant. Therefore, it is of utmost importance that the owner and the tenant sign the Leave and License agreement by reading it carefully. Ensure each clause has the appropriate values discussed and agreed upon between the parties. Owners and tenants may sometimes face unwanted legal consequences if the agreement is drafted incorrectly.

You should watch out for some minute details, such as the incorrect rental amount in the agreement, inaccuracies in the lease terms, and spelling errors in the tenants’ and owners’ names.

We hope you now have a better understanding of the importance of Leave and License agreements. PropReturns is a one-stop shop for real estate buying, selling, and debts, and we help you with the documentation too! To explore numerous real estate investment opportunities, head to our investment page.