Associated Hotels of India Ltd. case, is a landmark decision which expounds the test for ascertaining the nature of instrument and the distinction between a lease and a licence. The difference is that of two distinct legal concepts pertaining to an individual's rights and duties in a contract. A lease is a contract between the parties that provides the transferee or the lessee with right to enjoy an immovable property, that is an interest in the property, however, a licence, is when the owner gives permission to a licencee to merely conduct an action on the owner's property. The underlying difference therefore is of transfer of interest.

Relevant Laws
A lease as defined under Section 105 of the Transfer of Property Act, 1882 is a transfer of a right to enjoy an immovable property, made for a certain time, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.

It is a transaction with respect to immovable property and creates a right to enjoy such property for a certain term and for consideration on the conditions mentioned in it. Under Section 108 of Transfer of Property Act, the lessee is entitled to be put in possession of the property. A lease is therefore a transfer of an interest in land.The interest, transferred is called the leasehold interest.

A lease contemplates:

1. A transfer of right to enjoy an immovable property. It is merely a transfer of interest and not of ownership. Interest here means, a right to have advantage accruing from the premise or a right in nature of property in the premises but less than a title. The right to possess and enjoy the property are transferred in favour of the lessee (transferee). Such interest is transferable' and heritable. It may be transferred by a person who has absolute right over such immovable property (Absolute Lease) or by a person who himself has a limited interest in it (Derivative or Under-Lease).
    
2. Lease may be made for a certain time or in perpetuity. The duration of lease cannot be uncertain or indefinite. Therefore, lease may be for a specific fixed term; or the duration may be continuous from period to period (periodic lease); or it may be in perpetuity.
    
3. There must be a consideration fixed for the lease that may be in the form of money or money's worth such as share in crops or service or any other thing of value, to be rendered periodically or on specified occasions by the transferee.
    
4. Both parties to the lease, that is the lessor (transferor) and lessee (transferee), must be competent to contract at the date of execution of the lease. Therefore, a minor, unsound person or lunatic, or a person legally disqualified cannot enter into a transaction of lease.

On the other hand, a licence, as defined under Section 52 of the Indian Easements Act, 1882, is 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 is unlawful, and such right does not amount to an easement or an interest in the property.

Thus, the primary distinction between a lease and a licence is that the lease is a “transfer of a right” in a specific immovable property, whereas, licence is a bare permission. Also, a licencee is not entitled to notice to quit before eviction.

Other differences may be:

1. A lease is both transferable and heritable; however, a licence is not.
    
2. A licence comes to an end with the death of either the grantor or the grantee, since it is a personal covenant, but a lease does not.
    
3. A grantor may withdraw a licence, anytime at his pleasure; however, a lease can end only in accordance with the terms stipulated in the lease deed.
    
4. A lease is unaffected by the act of transfer of ownership of the property. It continues and the subsequent owner remains subject to such lease with respect to enjoyment and possession of the property, whereas, in case of a licence, if the property is sold to a third party, it comes to an end immediately.
    
5. A lease confers the lessee with a right to protect the possession of the property so conferred; however, licence does not confer any interest in the property, therefore, no such right exists with the licensee.
    
6. A lessee in possession of the property is entitled to any improvements or accessions made to the property, while a licensee is not.

The court, in various cases has tried to lay down a test to ascertain whether a document creates a lease or licence and has held that the decisive consideration is the intention of the parties, and that the test of exclusive possession, though not decisive is of significance.[i] The intention must be gathered on a true construction of the agreement and not merely from the description given by the parties. The conduct or the parties before and after the creation of this relationship is also of relevance to ascertain the intention. In Associated Hotels of India Ltd. v R. N. Kapoor, the apex court drew the test to ascertain the nature of such instrument.

Associated Hotels of India Ltd. vs. R. N. Kapoor

Hon'ble Judges/Coram: A.K. Sarkar, K. Subba Rao and S.K. Das, JJ. - Date of Decision: 19.05.1959

Facts of the case
In this case, the appellants, Associated Hotels of India Ltd., were the proprietors of Hotel Imperial, New Delhi. The respondent, R. N. Kapoor was in occupation of two rooms (i.e., ladies' and gentlemen's cloak rooms) in the appellant's hotel and conducted the business of a hair dresser under the name of Madam Janes'. The respondent secured possession of the said rooms under a deed dated 1st May, 1949, executed by him and the appellants. The document executed by the parties purported to be one as between a licensor and licencee and provided, inter alia, that the respondent was to pay an annual rent of Rs. 9,600 in four quarterly instalments. However, this was later reduced to Rs. 8,400 by mutual agreement.

On 26th September, 1950, the respondent made an application to the Rent Controller of Delhi under Section 7(1)[ii] of the Delhi and Ajmere Merwara Rent Control Act, 1947, alleging that he had occupied the rooms from appellant as a tenant and prayed for standardisation of rent. On contrary, the appellant contended that the respondent was a licencee under the document and that the Rent Control Act had no application in this case as the premises' in question were in a hotel, which is exempted from the Act. The Rent Controller upheld the respondent's plea and fixed the rent at Rs 94 per month, on the ground that the exemption under Section 2 of the Rent Control Act related only to residential rooms in a hotel and therefore the Act applied to the premises in question.

However, the District Judge reversed the findings of the rent Controller and held that the rooms in question were rooms in a hotel within the meaning of Section 2 of the Act and therefore the Act had no application to the present case. Further, on construction of the document, he held that the appellants only permitted the respondent to use the two rooms in the hotel, and therefore, the transaction between the parties was not a lease but a licence. On the basis of the aforesaid two findings, it was concluded that the Rent Controller had no jurisdiction to fix a fair rent for the premises.

The respondent, then preferred a revision against the order of the District Judge to the High Court, wherein, Khosla J. set aside the order of District Judge and restored that of the Rent Controller. Consequently, an appeal by special leave was filed by the appellants in the Apex Court against the order of the High Court.

Issues
The two questions for determination before the Supreme Court in this case were:

1. Whether the agreement executed by the parties to the suit, created a lease or a licence?
2. Whether the two rooms with the respondent, were rooms in a hotel within the meaning of Section 2(b) of the Delhi and Ajmer-Merwara Rent Control Act, 1947?

The issue related to the subject is the first issue, that is with regards to the nature of the agreement executed by the parties. The issue is whether occupancy of rooms in a hotel for running a barber shop created a lease or a licence. Because, if it was a lease, the application for standardisation of rent under the provisions of the Rent Control Act, could be entertained by the court, but if it was a licence, there would be no question of fixation of standard rent.

Obiter Dictum

The bench while deciding the nature of the document dated 1st May 1949, whereunder the respondent was put in possession of the rooms, intricately examined the terms of the document. Prima facie, the document was described as a deed of licence' and the parties as licensor and licencee. The court on such finding was of the opinion that the substance of the agreement is of utmost importance and not the form, for otherwise clever drafting could camouflage the real intention of the parties.

Therefore, on perusal of the terms of the deed, it was observed by the court that the respondent was given possession of the two rooms for carrying on his private business on a condition that he was to pay a fixed amount to the appellants irrespective of the fact whether he carried on his business in the premises or not. Also, that the respondent would be evicted without notice, on default of such payment and would also be liable to pay compensation with interest. The terms of the deed allowed him to transfer his interest in the document with the consent of the appellants. Further, the respondent was to pay for power and electricity and not make any alterations without the consent of the appellants.

Then the court while explaining the difference between lease and licence observed that if a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licencee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property. There is, therefore, clear distinction between the two concepts.

The court quoted with approval of the observation of Lord Denning in Errington v. Errington[iii], that, although a person who is let into exclusive possession is prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy.

The question in such cases is one of intention that whether the circumstances and conduct of the parties was intended to give the occupier merely a personal privilege, with no interest in the land. The Court also referred to a similar proposition laid in the case of Cobb v. Lane[iv] by Somerville L. J. that the solution for ascertaining the character of a document would seem to have been found is, as one would expect, that it must depend on the intention of the parties.

On perusal of the aforementioned facts and the legal provisions, Subba Rao J. was of the view that the deed did not confer a bare personal privilege on the respondent to make use of the rooms, rather it had put him in exclusive possession of the property, untrammelled by the control and free from grantor's directions.

Such covenants were observed to be included in a lease deed. The right of the respondent (grantees) to transfer his interest under the document, although with the consent of the appellants, was held destructive of the theory of licence as licence is never transferable, but merely a personal privilege. The court concluded by holding that the intention of the parties was thus clear, and the clever phraseology used or the ingenuity of the document could not conceal the real intent.

The judges unanimously were of the opinion that the document there was intended to transfer a right to enjoyment of two rooms, and, therefore, it created a tenancy in favour of the respondent.

Ratio Decendi

The three- judges bench highlighted the difference between a lease and a licence. It was held that if a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. And to ascertain whether a document was a lease or a licence, the court gave the following propositions:

1. To ascertain whether a document creates a licence 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.

Analysis
Based on the principles and references provided in the preceding paragraphs, it can be safely asserted that, the distinction between a lease and a licence is very thin. It is evident from the respective legal provisions, that the transfer of interest or right to enjoy the property is an instance of lease. So, the transfer of exclusive possession of the property indicates a lease. However, the position is no longer so. As observed by the Hon'ble Supreme Court in the above-mentioned case, the transfer of exclusive possession generally indicates an intention to create a lease even though the sum is described as a licence fee, is no longer a conclusive test and there may be instances where a transferee in exclusive possession is a licencee.

Hence, the present position in this regard is that, in order to ascertain the nature of instrument, the court must look upon its terms, its substance and not merely the phraseology used. For instance, mere use of words appropriate to a lease will not preclude its being held to be a licence; the deciding factor is the intent of the parties to execute such an instrument. The intention must be gathered from the true construction of the agreement and not merely from the description given by the parties.

Where, on point of intention the document is ambiguous, the question is to be decided in the context of the surrounding antecedent and consequent circumstances and parole evidence.

Accordingly, this test can be termed as better than the “exclusive possession test” because the grantor may try to mislead the court by using ambiguous terms in the instrument. His acts could contradict the terms of agreement, and the grantee could be at a disadvantage.

For instance, where A (grantor) and B (grantee) enter into a contract titled “lease”, wherein the licencee, B had to advance licence fee inclusive of electricity charges of one day, subject to a minimum per week with no right, title or interest to possess the premises, and the land on which the building was constructed cannot be transferred.

It is evident from this illustration, that the grantor could assert from the misconstruction of the terms of the instrument that B is a lessee. However, when the intention is construed from the terms, there is no ambiguity of it being a licence. Therefore, keeping such abuse of phraseology in mind, the judiciary has propounded a shift from limited exclusive possession test to the intention of parties.

End-Notes:

1. Sohanlal Naraindas v. Laxmidas Raghunath Gadit, (1971) 1 SCC 276; Ramamurthy Subudhy v. Gopinath AIR 1968 SC 919; Delta International Ltd. v Shyam Sunder Ganeriwalla AIR 1999 SC 2607
2. Section 7(1) states that if any dispute arises regarding the standard rent payable for any premises then it shall be determined by the Court.
3. [1952] 1 All E.R. 149 at page 155
4. [1952] 1 All E.R. 1199 at page 1201

Written By Tanvi Sapra