Mortgage of Leased Land and Licensed Land in India

The concepts of lease, license and easement are dealt with or defined under two different Acts in India namely, The Transfer of Property Act , 1882 ( “TPA” ) and The Indian Easements Act, 1882 (“Easements Act”) respectively (significantly, both the enactments have come into force on the same day, i.e., February 17, 1882 being Act No.4 and Act No.5).
These three legal concepts play very significant role and deal with the crucial aspect of right to possess, transfer and enjoy the property, their own or property of another person for the beneficial interest of self or for their own property despite not having the ownership rights of such property but enjoying actual physical possession of the property under these laws subject to terms of contract or by law.

Object of TPA & Easements Act

The object of TPA is to deal with the transfer of property including any of the right, title and interest ( absolute or equitable ) therein between living persons with possession or without possession of immovable property by way of contract of sale, assignment, exchange lease, mortgage while the Easements Act deals with, inter alia, licenses and easements. Under the Easement Act, license is defined as “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 license”.

In other words, the grantor/transferor transfers the right in respect of immoveable property to another person(s) for specific purpose by way of contract without transfer of interest in the land with the legal ownership and legal possession of the property remaining with the owner and mere permission is given to the licensee with right to use the immoveable property/land for specific purpose, which is in nature of beneficial enjoyment of the land for limited period and/or for unlimited period as the case may.

Legal Concept of Lease, License and Easement

The right of lawful possession of immovable properties in India is a legal right of every person whether citizen or non-citizen subject to applicable law and such right is transferable/ enjoyable as defined in TPA and Easements Act.

Lease

Lease is governed by Section 105 of TPA. Under transfer of property by way of lease, the lessor/owner of the immoveable property transfers the right to enjoy to the Lessee who gets exclusive possessory rights and proprietary right subject to the terms of the lease agreement without having legal title of the property. In other words, under lease the Lessor is the owner of the leased premises in law but the Lessee is a defecto owner. The leasehold rights over the leased property (land and buildings ) consists of bundle of rights and the Lessor cannot interfere in the management of the leased property and cannot revoke or terminate the lease deed without complying with the terms and conditions of the lease deed.. Such a right is transferable and not revocable subject to terms of contract and applicable laws. The lessee has the ability to control assets exclusively and such leasehold right is inheritable and transferable subject to the terms of agreement. A lease creates a proprietary interest in favour of the lessee, granting them certain limited rights of ownership for the duration where the lessee is given exclusive possession and the lessor is excluded from the property. It cannot be revoked at will of the lessor before expiry, unless there is a breach of contract terms.

The leased premises agreement is governed by the provisions of Sections 105–117 of the TPA and subject to the terms of lease deed. Under the lease deed the word is used “demised leased land” . The words “Demised” is Latin word and the meaning is to transfer the identified part of land or building under lease agreement and transfer the possession in law ( not ownership or title of the Demised Leased Premises ) for exclusive enjoyment as per the terms of contract. Therefore, the Lessee has a bundle of rights associated with Demised Leased Premises under law and cannot be disturbed and evicted during the leased period unless the lessee is in breach of the terms and conditions of the lease deed. Subject to the terms of lease deed, the Lessee can assign/ mortgage the leasehold rights along with interest in the land and buildings in favour of another person and also sub-lease the lease property in favour of sub-lessee subject to the terms of lease deed.

Advantages of Lease Agreement

Lease Deeds provide certainty of duration, rent/lease rents / premium , and renewal clauses, and all such clauses ensuring stability for enjoyment of the property without disruption of business or residence of lessees and the lessors cannot alter these terms unilaterally. Such leasehold rights are also protected under local land laws of the states. If the lessor violates the terms and conditions of the lease deed including wrongful eviction of the lessee, the competent courts/tribunals generally grant an injunction or specific performance to protect the interest of lessee subject to the terms of lease.

Further, many times a leasehold interest created for long term period under lease deed ( 30 years to 99 years ), which is in nature of conveyance ( without legal title ) for a specific period or permanently is recognised and enforceable in court of law as legal estate of lessee. Such an interest having a bundle of rights namely, inheritance by legal heirs of lessee, right to assign and to create charges by way of mortgage of leasehold rights or the budlings constructed thereon as per applicable laws including rent control laws and bankruptcy law. Such lease hold rights cannot be terminated even during insolvency proceeding despite the fact that legal ownership remains with the Lessor during the lease period.

In the recent judgment of the National Company Law Appellate Tribunal ( “NCLAT”) in West Bengal Housing Infrastructure Development Corporation Ltd (“WIDCL”) Vs Kshitiz Chhawachharia (Liquidation of M/s Conccast Steel and Power Ltd ) it was held that “Demised Leased Land” may be included as the Liquidation Estate of Corporate Debtor as the corporate debtor holds the leased land in terms of lease deed executed by WIDCL and the same was not terminated as per lease deed.

Disadvantages of Lease Agreement

By a sale deed, the ownership of immoveable property (right, title and interest) is absolutely transferred whereas in case of lease, only the right to enjoy the immoveable property is transferred. A sale confers absolute right, title and interest in, to and in respect of the immoveable property sold whereas there may be limitations in case of a lease. The disadvantages under lease deed, as compared to sale deed, depend upon the terms of lease like, (i) no legal ownership of the property irrespective of duration of lease period; (ii) on expiry of term of lease period , the lessee has no right to enjoy the property unless the lessor extends the term of lease; (ii) cannot use property for any other purpose as specifically mentioned in the lease deed; (iii) difficulty for transfer of leasehold property in favour of third party including creation of mortgage without prior permission of the Lessor, if it is not inbuilt in lease deed.

License

The legal meaning and purport of the term license is discussed in the foregoing paragraphs. In case of license, the owner of the immoveable property in question shall always remain absolute owner and no proprietary interest created in favour of the Licensee. Such transfer only gives personal right ( in personam) to use the property as agreed but have no possessory rights and interest in the property in law. In other words Licensor (owner) will always have exclusive possessory rights and ownership right and such a right is not transferable and revocable subject to terms of contract.

The Licensor has a right to revoke or terminate the right to use agreement at any time unless there is a specific clause for termination under the agreement. Since the Licensee has equitable right and interest, the same may be assigned in favour of third party subject to terms of agreement.

Advantages License Agreement

Under the License Agreement, no interest in the immoveable property is transferred (no demised property) and the licensee is only permitted to use property as per terms of agreement. Therefore, occupation or possession of the property is in nature of temporary period, so that occupier may not be treated under applicable law as a trespasser or wrongful occupier, otherwise such occupation may be treated as an offence under applicable law.

The License Agreement may also provide certainty of duration and also Licensor may take User Charges and also agree for renewal clauses, and all such clauses ensure certainty and stability for right to use the property .

In terms of Section 60 of the Easement Act, when a license, with permission to use property along with the transfer of property, is irrecoverable in nature, then the licensor cannot revoke the licence before the agreed term. For example if the Government transfers lands with possession for development of projects by way of lease or licences or grants for long term contract to an entity, such a contract may be by of license or lease but it is not revocable unless there is a breach of terms and conditions.

Disadvantages of License Agreement

A license cannot create legal relationship as a tenant – landlord and the licensor has the right to re-control the possession of the property and can initiate the process of eviction of the lincensee from the property. In other words, the licensee enjoys right in his personal capacity with or without consideration over the property contractually. It does not create any interest or easement in the property. The licensor retains control but shared exclusive possession to Licensee not conclusive. Such a right is neither inheritable nor transferable. It is generally revocable unless it is made irrevocable by contract.

Difference Between Lease & License

In case of Lease there is transfer of proprietary interest in the immoveable property i.e the right to possession of leased premises with equitable ownership right during the lease period while under Licence there is no transfer of such interest and only right to use the property with possession is granted. Both agreements provide legal protection against the termination of lease or revocation of license, as the case may be. If the lease or licence is terminated or revoked in violation of contract, the lessee or licensee can claim damages or compensation under the applicable laws from the competent courts/tribunals.

Easement

Section 4 of the Easement Act defines an easement as a right, which the owner of land or occupier of certain land possesses the land of other owner for the beneficial enjoyment of his land and such right is enjoyable on other land ( which is not his own) , for specific, beneficial purpose of his land, and such right ends, if necessity of such right ends.

In other words , an easementary right is a right possessed by the owner of the property (“Dominant Heritage”) on some other property or land (“Servient Heritage”), not on his own, for the purpose of beneficial enjoyment of the Dominant Heritage. It is because in the absence of this right, the owner cannot fully enjoy his own property. Easement are acquired by various ways, by grant, by necessity and by prescription. It is a legal right that allows the owner to do something on someone else’s land or stop them from doing something for their own benefit. Such rights exist when there is a dominant and servient tenement relationship of property. No possession is transferred except a right of use. Since such right is attached to the owner’s land, the same can be transferred to another person along with the owner’s land.

In order to enjoy the Easement Right by the owner of land as a Dominant Heritage, he must establish easementary right of light, air, or access over the other owner’s land i.e the Servient Heritage. An easement cannot be presumed merely because construction reduces light or air and the claimant must prove such claim. For determination of easement rights the factors need to be proved :- (i) A specific, legally recognized easement, (ii) long, continuous, and peaceful enjoyment as an easement for 20 years (Section 15, Easements Act), and or (iii) the obstruction is so substantial that it renders the Dominant Heritage unfit for ordinary use.

Advantages of Easement Right

Easementary Right is generally irrevocable unless it is extinguished or ceased by operation of law. An easement may be permanent or for a term depending upon number of factors and conditions as may be associated with the beneficial enjoyable of dominant Heritage. Such a right is restrictive in nature and can be exclusive enjoyable by owner of the Dominant Heritage and may be disposed of such right to another person along with Dominant Heritage accordingly.

Judicial Analysis

(a)Lease Vs License
The Supreme Court in the case of Pradeep Oil Corporation Vs. Municipal Corporation of Delhi and ANR (2011) 5 SCC 270, (“POC”) has taken a view that the distinction between lease and license depends not on the label of the document but on the substance of the arrangement and the intention of the parties. In this case, POC was granted license under the Government Grants Act 1960, by the President of India, acting through the Superintendent of Northern Railway Delhi, with a purpose of maintaining a depot for storage of petroleum on railway land on long terms basis.The terms of license agreement allowed POC to erect and construct petroleum installations, buildings, chowkidar cabins, switch rooms, and other necessary structures for its operations, in return for a yearly license fee.The administration granted exclusive possession to POC and Municipal Corporation of Delhi (“MDC”) approved the plan for construction of ten oil storage and other structures. Subsequently, The MCD passed an assessment order with regard to property tax on the said license premises.

POC has challenged the order of MCD before Delhi High Court on the ground that POC is not lessee but licensee in terms of license agreement, therefore, POC is not liable to pay property tax as demanded by MCD. The issues framed were –(i) whether POC, as per the agreement, was merely a licensee or a lessee, and, (ii) whether the property in question is a government property or leased property of POC and (iii) whether POC is liable to pay property tax to MCD, being lessee before the Court.

The Single Judge of Delhi High Court held that the agreement in question is license agreement as premises was given on license basis, therefore, POC was not liable for property tax.

First Appeal
MCD filed appeal before Full Bench of the Delhi High Court and the said order of Single Judge was reversed and held that, the petroleum storage tanks are a building and POC was a lessee and not the licensee on the basis of nature of terms of license agreement including the facts associated with the transaction. Therefore, POC was liable for property tax.

Supreme Court Judgement
POC, being aggrieved by the above order, challenged the same before the Supreme Court (“SC”). POC argued before SC that POC was only a licensee, having no ownership or leasehold rights over the land in question as the document expressly called itself a “license” and referred to POC as a licensee. Therefore, the issue before SC was to decide whether an agreement for erection of oil storage tank together with house, chowkidar cabins, switch room, residential rooms and verandah for storing oil “decanated” from the railway site (the tankers) which bring petroleum products to the site would amount to lease or license.

Judicial Test
The court, while determining whether an agreement was license or lease discussed several important judgments, before passing the final order. Whether a particular document will constitute “lease” or “license” would, inter alia depend upon certain factors, which S summarised as follows:

1. Whether a document creates a license or lease, the substance of the document must be preferred to the form;
2. The real test is the intention of the parties – whether they intended to create a lease or a licence;
3. If the document creates an interest in the property, it is a lease; but if it only permits another to make use of the property of which the legal possession continues with the owner, it is a licence; and
4. If under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease.

Easement Right

In the year 1989, the Karnatak High Court in the case of K. Panduranga Nayak V. Jayashree and Others was of the view that a mere deviation from a sanctioned plan does not create an easementary right in favour of a neighbour. The court was of the opinion that there are six essential characteristics of easement which are (i) Dominant tenement (property benefiting) and servient tenement (property burdened), (ii) Easement must benefit the dominant tenement, (iii) Right must be for beneficial enjoyment of dominant tenement, (iv) Dominant and servient owners must be different persons, this is crucial, (v) Right to do or prevent something on servient land, and such the right must be well defined and capable of being granted.

Drafting of Lease Deed & License Agreement

In view of a number of Judicial Decisions passed by various High Courts and the Supreme Court, drafting of contract of a lease or license and easement agreement has to be in such a manner that the intention of parties to contract and its terms and conditions determined the nature of contract , not the name of agreement. Therefore, understanding the intention of parties and drafting various conditions in agreements must be clearly mentioned before execution of such agreement. Such stipulation of conditions distinguished consequences of lease and license and easement under applicable laws including applicability of stamp laws and rent controls laws etc.

Mechanism For Creation of Security Interest Over Lease / License / Easement Right

Lease, license and easement rights are associated with the immovable property, therefore, one needs to understand the legal concept of immovable property under the Indian laws.

Statutory Definitions

The statutory definitions of “immovable properties” are defined under Section 3 (26) of The General Clauses Act, 1897 (“General Clauses Act”), under Section 3 of the Transfer of Property Act, 1882 (“TPA”) and under Section 2 (6) of the Indian Registration Act , 1908 ( “Registration Act”) . The definitions under different statutes, which includes or excludes clauses relating to immovable properties with different intention and purposes and their applicability depends upon the requirement of transfer of immovable property and applicability of law including stamp laws accordingly. Under the General Clauses Act, immovable property includes land, things, affixed to the earth or permanently fastened to anything affixed to the earth, and benefit arising out of the land while under the TPA the immovable property is defined as excluding standing timber , growing crops, or grass, though it includes land, buildings and things attached to the earth. In Registration Act, immovable property is broadly defined as land, building, hereditary allowances , rights to ways, lights, ferries, fisheries, profits arising out of the land and anything attached to the earth or permanently fastened to anything attached to the earth excluding standing timber , growing crops, and grass.

The definition given in the Registration Act and General Clause Act gives broad and inclusive definition of immovable property used across central statutes and achieve uniformity in legal meaning . Therefore, Right to Use and Right to ways arising out of the land are also treated as an immovable property. Such documents pertaining to such rights are registrable documents under applicable laws.

Security Interest

The Security interest over immovable property is required to be created by way of mortgage in accordance with the Section 58 of TPA and by way of charges in accordance with the Section 100 of TPA. Charge created by way of deed of mortgage transfers interest in the mortgaged property to a mortgagee while charge created by way of deed of charges provides only right to payment out of a particular property (both movable and immovable) without transferring the property (charge can be enforced similar to simple mortgage). Therefore, charge is wider than a mortgage and every mortgage is a charge but every charge is not a mortgage. [Dattatreya Shanker Mote Vs Anand Chintaman Datar S C 1974].

The rights of lessee, licensee and easement are arising out of immoveable property which is transferable/ assignable / mortgageable and chargeable as per the terms and conditions of the lease deed/ license agreement but easement right is not only contractual right but it is a legal right and beneficial right associated with the Dominant Heritage and the land owner is legally entitled to enjoy such right in accordance with the provisions of Easement Act, therefore, the easement right along with the owner’s land can be transferred / mortgaged under an applicable laws.

Mechanism

In view of various judicial decisions security interest can be created by way of Indenture of mortgage or by way of equitable mortgage or by way of assignment and such security documentation depends upon the nature of transfer of title and interest to the leaseholders/ licensees and easement rightsholder. Therefore, the Leasehold rights and Freehold right along with easement right, security interest may be created by way of deposit of lease deeds subject to terms of deeds. Lease Deed is itself treated as the Title Document.

Dual Ownership

In India, the Doctrine of Dual Ownership is recognised by various High Courts and Supreme Court where ownership of superstructure can be separated from ownership of the underlying land. In Dr. K.A. Dhairyawan And Others Vs J.R. Thakur And Others AIR 1958 SC 789; 1959 SCR 799 Case, SC held that during the currency of lease, the landlord owns the land while the lessee owns the superstructure. Such superstructure, on expiry of the lease, may be reverted to the landlord subject to the contract otherwise the Lessee has a right to remove all structures and building erected. Hence, the security interest can be created over the superstructure along with the right of way and other easementary rights as provided under the contract without mortgaging the land.

Since the long-term license agreements have the colour of lease as per terms of agreement, security interest can also be created. But such security interest is to be created by way of registered mortgage (as no title or interest transferred in land under license agreement) along with right and interest over the licensed land – right to use land, right to way and/or right to access including easementary right.

-By ISHTIAQ ALI
Managing Partner of Orbit Law Services

The author has more than 4 decades of experience in recovery of debts both as the inhouse lawyer of public financial institution as well as he is a practising lawyer specialized in banking and finance. In case of any clarifications, please feel free to contact the author at ishtiaq.ali@orbitlaw.co.in

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