Civil Law: Lease and License / Interpretation of contracts

Distinguishing between a Lease and a Licence

In an earlier post, I had considered some of the principles regarding the interpretation of documents. I had discussed the leading case ofSundaram Finance v. State of Kerala, AIR 1966 SC 1178. In that case, the majority held that the Court has the power to go behind the documents and determine the true effect of a transaction. At the same time, the words cannot be ignored altogether. Drawing the line between substance and form can often be a difficult task. A recent judgment of the Supreme Court illustrates some of the complexities; and also discusses the law on the distinction between a licence and a lease.

In New Bus-Stand Shop Owners Association v. Corporation of Kozhikode, (2009) 10 SCC 455, certain traders were in possession of various shops and offices owned by the respondent Corporation. Licences had been issued to the traders, and they were paying certain 'fees' in accordance with the relevant provisions of the Kerala Municipalities Act, 1994. At the time of renewal of the licences, the Corporation insisted that the agreements were in substance

leases, and accordingly, stamp duty should be paid thereon.

The Supreme Court approvingly cited a passage by Vaughan CJ inThomas v. Sorell, [1558-1774] All ER Rep 107, which was approved by Lord Denning in Errington v. Errington & Woods, [1952] 1 All ER 149:

"… 'A dispensation or licence properly passeth no interest nor alters or transfers property in anything, but only makes an action lawful which without it would have been unlawful.' The difference between a tenancy and a licence is, therefore, that, in a tenancy, an interest passes in the land, whereas, in a license, it does not."

The Supreme Court went on to hold that the absence of exclusive possession is one of the indications to show that the agreement is one of licence and not of lease. The Court then held that on its substance, the agreement was a license. The fact that the agreement was termed as a 'licence' is of much lesser significance than the substance of the agreement. Interestingly, from the point of view of the law on interpretation of documents, the Supreme Court approvingly cited the dissenting judgment of Subba Rao J. in Associated Hotels of India v. R.N. Kapoor (the dissent being one on a different issue – as far as the present issue is considered, Justice Subba Rao concurred with the majority). In his dissent, Justice Subba Rao prefers a substance-over-form approach; contrary to his dissent in Sundaram Finance.

Of course, in Sundaram Finance, the dissent was motivated by the fact that the agreements were between two commercial persons in respect of commercial dealings, when the presumption that form conveys substance correctly is stronger. In Kapoor, Justice Subba Rao laid down the following propositions:

"The following propositions may therefore be taken as well established: (1) to ascertain whether a document creates a licence or a lease, the substance of the document must be preferred over 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 us 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."

These propositions have now been reaffirmed by the Supreme Court.