Although rental agreements are perceived as relatively straightforward and templated standard documents, it is crucial to ensure that the interests of both the parties are duly secured and the agreement is drafted in a manner which comprehensively covers the likely scenarios wherein a dispute may arise in the future.
The agreement must be water-tight and factor in the nitty-gritties of the transaction minutely. Both parties must contemplate the acceptable terms prior to signing and executing the same and ensure that the agreement covers all the crucial aspects of the transaction. It is also imperative to understand the enforceability of such agreements in the event of any breach and ensure that the document is legally valid and binding upon both parties concerned.
Commercial and Residential Property
Depending upon the usage, locality and type of operations that are permissible under the particular area, agreements can broadly be defined as commercial or residential rent agreements. While residential rent agreements are limited to locations such as apartments and standalone residential houses, commercial rental agreements are typically executed between a business and a lessor and are executed for a lengthier tenure. It is crucial to understand whether the purpose for which the property is being leased out is legally permissible in the premises as per local regulations.
By way of example, the regulations governing basements in New Delhi are only permitted to be commercially let out so long as the purpose is restricted to professionals and are not permitted to be let out for residential purposes.
Difference Between a Rent Agreement and Agreement for Leave & License
While the end usage and outlook of both agreements may appear to be similar, there is a clear distinction of rights under both agreements and the same entail distinct rights and duties upon the parties.
- Creation of rights/Enjoyment of property
Simple understood, a lease or a rent agreement permits the lessee to hold exclusive right to possess and enjoy such property till such agreement persists, whereas a licensing agreement may only permit such holder to do a particular thing on the owner’s premises. While a rental agreement essentially creates a specific interest in favour of the lessee, a license is merely permission for specific usage without any transfer of interest and therefore essentially does not create any right.
While a lease grants exclusive rights of possession and enjoyment in favour of a lessee, no such exclusivity or right to possession is inherent in case of a license.
While a lease may be transferred, a license cannot be transferred to a third party. Further, while a lease may also be inherited as per the governing terms of such agreement, there is no such transfer of rights in case of a license. A lease may further remain unaffected even after transfer of title to a third party, however, a license immediately ceases to exist after transfer of ownership of the property in question.
Whether any particular document ought to be treated as a license or a lease has to be understood upon reading the complete document in its entirely and determine the real intention of both the parties. Therefore, it is critical that while drafting such agreements, attention to detail is duly given.
Important Clauses in a Rental Agreement
It must be borne in mind that a rent agreement, like any other form of agreement is essentially a contract between two consenting parties and therefore the extent to which the courts interfere with the stipulated terms is often limited. Therefore, it is critical that the agreement is thoroughly drafted after duly taking into consideration.
- Rent Particulars & Security Deposit
While the amount of rent due and payable is stipulated, the parties often neglect to specify whether the rent thus payable is advance for the coming month or payable for the previous month. An aspect which often troubles tenants is that upon conclusion of the rent agreement, the security deposit is often erroneously withheld by the Landlord on alleged grounds of maintenance etc.
Therefore, to avoid any conflict the agreement must clearly specify the instances in which the forfeiture may be permissible and to what extent. Further, an additional levy of a penalty per day upon the landlord for delay in handing over the security deposit must also be considered to balance the interests of both parties. The Agreement must specify both events to occur simultaneously, i.e. possession of the property should be handed over to the landlord upon release of security deposit.
- List of Fittings and Fixtures
As indicated earlier, the security deposit is crucial for ensuring that the tenant has maintained the property in the condition that it was handed over and therefore it is advisable to have an elaborate list of movables and electricals which are provided at the time of handover and in working conditions and the same also be verified by both the parties both at the time of handing over possession to the tenant as well as at conclusion of the agreement.
- Maintenance Charges/ Wear and Tear
The associations may from time to time levy a proportionate share for upgradation of the facade and other amenities such as sewer lines, pipes, lifts, etc and therefore the agreement must specify which party shall be liable for making payments towards such expenses. Further, there may be monthly maintenance for menial services which may also be liable to be paid and must also be accounted for by both parties.
In addition to the aforesaid, the property may itself require repairs and maintenance from time to time and both parties must be ad-idem on terms in writing to avoid future conflicts and ensure that such terms are already settled prior such as major costs being borne by the owner while minor repairs and upkeep may be done by the tenant. Such clarity also avoids a dispute between the parties at the time of releasing possession and security deposit.
Often when a property is leased out through brokering agents, apart from the initial commission, a clause is included to state that such commission shall become payable each time that the agreement is renewed for a further period. Therefore, the agreement must be thoroughly reviewed to ensure that such consent is given consciously to avoid conflict at a later stage.
To avoid future conflict, it is always advisable to incorporate the terms for renewal of the rental agreement such as the percentage increase in the rent, the period for extension and the deposits which have to be made. Having a prior meeting of minds makes extensions hassle free and seamless for both the parties.
The agreement must also contemplate if the parties are open to flexible termination of the rental agreement before the complete tenure of the contract upon giving sufficient notice to the other party, thereby allowing both parties flexibility depending upon their individual circumstances to terminate the contract. In the alternate, to secure their interests, the parties may clarify that the same may not be terminated prior to the tenure of the contract and consider the levy of penalties.
It is imperative for the tenant to ensure that the landlord is vested with the proper title to the property and is competent to enter into the rental agreement. Therefore, a recital which asserts the landlord as the true owner of the property must be specifically inserted with a clarification that the property is free from any ongoing litigation.
The agreement must also incorporate indemnifications to the effect that the tenant shall be compensated for any loss or damage suffered on account of misrepresentation or breach of contract by either of the parties, including but not limited to any defect in the title of the landlord or damages to the property attributable to the tenant to be indemnified against.
Legality & Enforcement
Rental Agreements are governed by the provisions of the Indian Contract Act as well as the Transfer of Property Act and Rent Control Act. Rental Agreements of any nature of property are mandatory to be registered if the term of such agreement exceeds 12 months, however, no such requirement of registration is required if the tenure is less than 12 months. Depending upon the tenure of the agreement, registration fees and stamp duty are payable at the concerned sub-registrar’s office and determined differently by each state.
A crucial aspect of registering rental agreements is that it accords validation to the existence of such agreement and is admissible as proof before the Court. For the enforcement of any of the obligations under the agreement, the remedy lies in filing a suit before a civil court having competent jurisdiction, however, the interpretation of the same shall remain contingent upon the drafting of such agreements. Therefore, it is crucial that the same is drafted in a manner which clearly spells out the obligations of both parties which can be enforced.
A Lessor or landlord may approach the Civil Court file a suit for eviction in case the terms and conditions of the Rental Agreement are violated on account of non-payment of rent or the Lessee or Tenant refuses to grant possession of the premises despite the term of the Rental Agreement has come to an end. Further, a suit for eviction may also lie in cases wherein the premises have been substantially damaged and the same is attributable to the tenant.
- Outstanding Rent and Damages
The Lessor or the landlord may further seek payment of the rental arrears along with damages for illegal use of the property in question under a suit for recovery of rental arrears and damages.
Such eviction must only be on reasonable grounds, failing which the tenant may approach the Court and seek execution of the terms and conditions of the rental agreement and seek peaceful possession of the same. The tenant may also seek reasonable amount of compensation for lack of maintenance of the property by the Landlord, however, often the enforcement of such rights remains contingent upon the governing terms and conditions of the Rent Agreement.
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