Lease or License: Points of Caution

Renting a Property: Lease or License Way

Normally there are two procedures to rent out the property viz. lease and license. The lease is more traditional approach while renting through leave and license agreement is in vogue these days, mainly in metro cities. The main differences between the two approaches are:

Parameter	Lease	Leave and License
Parties	Lessor (Owner) and Lessee (Tenant)	Licensor (Owner) and Licensee (Tenant)
Definition	Granting possession of property with rights to enjoy the property	Merely giving occupation of the property to use it for specified purpose
Legal Possession	With Lessee	With Licensor
Right on Property	Right to enjoy & creation of interest in property	Right to merely enter, occupy & use the property
Term used	Rent	License fee
Governing Law	Transfer of Property Act	Indian Easement Act and Local rent laws
Party benefitting	Lessee	Licensor
Stamp Duty	Higher	Comparatively lower
Right to Occupy governed by	Section 105 of the Transfer of Property Act	Section 52 of the Indian Easement Act
Interest in property	Yes	No
Other	lessee gets protection against eviction, inheritable tenancy rights, and exorbitant rent increases	Governed mainly by agreement between parties, no such protection under law

 

Now I will discuss few things to be taken care while taking a property on rent, specifically on leave & license basis but can also be applied for entering into a lease deed. The points to consider are:

1.    Rent per square foot: The rate should include all the taxes, maintenance charges etc. This ensures that there are no hidden costs which will be passed on to licensee later on. In some cases there is separate agreement for maintenance/service which distributes the rate per square foot into License Fee & Service/maintenance Charges and can help reduce the taxes directly related to the quantum of the rent.   

2.    Taxes: All the present and future property taxes, levies or any other government or semi government taxes and the increase in taxes, if any should be borne by Licensor. Ideally only the service tax to be payable by licensee. Municipal taxes or any other taxes (water tax etc) should be borne by the licensor as the property belongs to him/her. Further, all the increments are also to be borne by the Licensor. 

3.    Interest Free Security Deposit (a) Is mostly in multiples of monthly rent, ranging from 3 months rent to 12 months rent. Ideally, it should not be more than 6 months of rent.

      (b) Terms of return of Security Deposit: Licensee should reserve the right to occupy premises without payment of rent, until security deposit is returned by the Licensor.  

4.    Lock-in period as per premises specific requirement. Licensee should consider the amount spent in interiors, availability of alternative space, difficulty in shifting the resources etc. 

5.    Rent-free period (Time post execution of agreement during which licensee is not required to pay rent as fit-outs are carried on by licensee) It should be atleast 30 days for interiors/Fit-outs. However, the requirement will depend on the size of the premises. 

6.    Terms of Renewal of the lease on expiry.

      (a) Extension: Licensee could have an option to extend the lease agreement for a further period of 3 + 3 years. Most License Agreements in Mumbai do not have this clause as the agreement of more than 5 years in duration (including renewal period) is treated as lease and the stamp duty payable is much higher. To avoid this situation, parties can enter into a separate “Supplementary Agreement” or “Side letter” after/simultaneously on signing of the lease/license deed. This Supplementary Agreement would lay down the terms of renewal of the lease and the escalation of rent amount.

      (b) Escalation of rent on renewal: Generally it ranges from 5% to 20% of the last amount paid as rent. However, licensee should insist that there would be no increase in the Security Deposit already paid alongwith increase in rent. 

7.    Termination of Lease/License: After the lock-in period, ideally Licensee should reserve the “sole right” to terminate the leave & license agreement. The notice period for termination ranges from 2 months to 6 months, ideally it should be 2-3 months. 

8.    Electricity Connection: Electricity connection needs to be available atleast by the time licensee intends to start its operations. Further, the powerload (kva) required should be ascertained and negotiated with the Licensor. It should be sole responsibility of the Licensor to provide the required powerload to the licensee. 

9.    Free space to place DG sets, VSATS and other infrastructural set-up as per licensee’s business requirement. 

10.  Car parking slots: Ideally, should be free of cost and in sufficient numbers. 

11.  Place for Signages/Hoarding: Space to be provided on the Ground floor to place licensee’s signages. Additionally, as per requirements, Licensee can negotiate with the Licensor for extra spaces in the compound, outside of the Building etc. and it has to be free of cost. 

12.   Registration & Stamp duty charges: Ideally it should be shared in equal proportion by both the parties. Both parties shall bear their own legal charges. 

13.  Others: There should be running water, lift services, proper sanitation, electricity back-up security, etc. available 24 x 7 and all these facilities shall be necessarily included in the rent amount.

These are the few terms and conditions which would be helpful for a prospective licensee, both for commercial and personal property, to negotiate with Licensor. All the terms and conditions should be clearly mentioned in the agreement and the agreement should be registered at the appropriate registration sub-divisional office.

Does Indian Stock Market dance on FII Tunes

FII – An Indian Perspective

Once again foreign institutional Investors (FIIs) are hyper active in Indian stock market. After withdrawing more than 50K crores from Indian stock market in 2008, which led BSE to fall around 50%, FII have turned net buyers in 2009. FII have pumped more than USD 3 billion till May pushing Sensex over 15000. The cumulative FII investment in India is more than USD 50 billion. Presently there are more than 1500 FIIs & about 5000 sub-accounts registered with SEBI.

Historical Overview:

Before liberalization in 1991, India was a self reliant economy with markets depending on Domestic institutions and investors. FIIs & OCBs were permitted to invest in Indian financial instruments in September 1992 with restrictions.

Entities which can invest under FII route are:

• As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or investments on behalf of a broad-based fund (i.e., fund having more than 20 investors with no single investor holding more than 10 per cent of the shares or units of the fund)
• As Sub-accounts: They are partnership firms, private company, public company, pension fund, investment trust, and individuals. FIIs invest on behalf of sub-accounts
• Earlier Indian Portfolio Managers & Asset Management companies were allowed to register as FII to trade on behalf of sub-accounts

FII can be of two types:

• Normal: investing in equity and non-equity instruments in ratio of 70:30
• Debt FII: investing 100% in debt securites

What SEBI considers (while registering a FII):

• applicant’s track record, professional competence, financial  soundness, experience, reputation etc. (in case of fund, fund managers track record)
• applicant is regulated by an appropriate foreign regulatory  authority
• applicant is permitted by RBI under FEMA, 1973
• applicant must fulfill eligibility criteria (mentioned above)
• grant of certificate to the applicant is in the interest of the development of the securities market
• applicant is a fit and proper person

Investment by FII is restricted to 24% of paid-up capital of the company which can be extended to sectoral cap by board resolution followed by special resolution. Single FII investment can’t exceed 10% of paid-up capital of the company and single sub-account investment can’t exceed 5% of the paid-up capital.

Participatory Notes: These are offshore derivatives instruments issued by FIIs to their clients who may not be eligible to invest in Indian stock markets. Beneficial ownership is not revealed in PNs and hence they have become point of concern for Indian regulators. PN route is cost effective for investors who have small quantum to invest and it is also hassle free mechanism.

Pros & Cons of FIIs:

 FII and FDI augment domestic investment by supplementing domestic savings. They give boost to security markets, provide capital at lower cost and encourage investment by domestic firms. Overall this gives boost to economy and India achieving growth rate of 9% was a major outcome of foreign investment. The best part is that they don’t create foreign debt but on the flip side they are temporary and non-reliable.

FII Vs. FDI

As per definition of IMF, FDI reflects lasting interest i.e. long-term relationship with the investor. FDI investor looks for management & control of the organization which is not the case with FIIs. EU law defines FDI as more than 10% acquisition of stake while FII is less than 10%. SEBI emphasizes that FII should not participate in management and control of the enterprise and have put various restrictions to ensure the same.

FII are very important for development of securities market and hence should be encouraged. SEBI should have complete power to investigate any dubious or doubtful transaction of FII. As an age old Indian tradition of “Athithi Devo Bhavh”, we should welcome & treat FII as tourists and should create atmosphere where more and more FIIs come and invest in India.

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