No Single Litmus Test To Distinguish Licence From Lease: Kerala High Court Encourages Examining Parties' Intentions, Full Agreement

The Kerala High Court has reiterated that to distinguish between a lease and a license one has to consider the agreement between parties as a whole and the intentions of the parties involved rather than the nomenclature used in the document and reading a few isolated provisions.

A Division Bench of Justice Anil K. Narendran and Justice P.G Ajithkumar observed that there was no single litmus test to decide the nature of a document. 

"It is thus the settled law that the nature of a document has to be understood not by its nomenclature or by interpreting one or two clauses in it in isolation, but by interpreting the document as a whole. Going by the principles laid down by the Apex Court as well as this Court, there cannot be a single litmus test to decide whether the transaction in Ext.P1 is a lease or licence."

The respondent herein had sought eviction of the petitioner under Sections 11(2)(b) and 11(3) of the Kerala Buildings (Lease and Rent Control) Act, claiming unpaid rent and a failed sale agreement. However, the petitioner argued that he was a licensee, not a tenant and that the document in question was a license deed. It was submitted that he had handed over advance sale consideration and deposit to the respondent and, thus, had no liability to pay the alleged rent. 

The Rent Control Court (Additional Munsiff) considered various documents and concluded that the agreement in question was predominantly a rent agreement and ruled in favour of the respondent- directing the petitioner herein to deposit the outstanding rent amount within four weeks. Accordingly, the petitioner moved the High Court challenging the order of the Rent Control Court.

Advocates S. Easwaran, K.V Rajeswari and P Muraleedharan appeared for the petitioner and argued that the premises were handed over to petitioner for the specific purpose of conducting a car showroom and parking facilities, although the description on the license deed suggested otherwise. The petitioner argued that coupled with the other restrictions imposed to the occupation of the premises, make the transaction a licence. 

Advocates G. Rajeev, Ajith Kumar S, Aswani P.S, Naveen Radhakrishnan, Jyothsna G.J and Ardra Mini Satish appeared for the respondents and countered that although the nomenclature of the agreement was of a licence agreement, the terms in which possession of the premises was handed over constituted a rental arrangement. They also submitted that clauses specifying the payment of monthly license fee/rent and granting the petitioner the right to uninterrupted enjoyment of the premises indicated unhindered possession, supporting the contention that the arrangement is a lease and not a licensee. 

The High Court examined certain Supreme Court precedents that clarified that the substance of the document and the intention of the parties were crucial in determining whether it is a lease or a license. The Bench analysed the nature of the agreement and the intentions of the parties and noted that while it referred to a "monthly license fee/rent," the complete document indicated that the premises were given for a specific purpose (running a car showroom) and exclusive possession was not handed over to the petitioner.

"In clause (6) it was written “monthly licence fee/rent”. The usage of such a word by itself would not distinguish the arrangement between lease and licence...It may be true that the petitioner has been enjoying the premises without having any physical interference to such enjoyment by the respondent. However, by virtue of the provisions of Ext.P1, it is not able to say that exclusive possession of the premises so as to constitute the transaction a valid lease has been given to the petitioner." 

Thus, the Court concluded that the relationship between the parties was that of a licensee and not a lessee. The finding that the transaction was a lease was deemed incorrect, and the court upheld that it was a license. Consequently, the petitioner was not liable for the alleged rent and eviction claim.

Before concluding the order, the Division Bench also noted that both parties to the agreement were knowledgeable individuals, and considering the clauses therein, their intention was to create a license, not a lease, as evidenced by their transaction.

"The petitioner is a seasoned businessman and the respondent is the owner of a premises having such a vast extent. They have sufficient ability to understand the difference between lease and licence as can be gathered from the clauses included in Ext.P1. When such persons with open eyes enter into a transaction by executing a document fixing the period as 10 years in a stamp paper worth Rs.100/-, it can only be said that their intention was to create a licence alone and not a lease."

As such, the petition was allowed and the Rent Control Court's order was set aside. 

Case Title: Ashok Harry Pothen v. Premlal

Citation: 2023 LiveLaw (Ker) 345

Click Here To Read/Download The Order