Distinction between lease and licence

Abdul Kharim Vs. M.M. Shibily

Lease and License - Distinction between - It is not only the words occurring in the agreement which determine the real nature of the agreement and that in order to determine whether it is a licence or lease, the intention of the parties had to be inferred from the terms of the documents, the conduct of the parties as well as from the attendant circumstances.

IN THE HIGH COURT OF KERALA AT ERNAKULAM

T.R.RAMACHANDRAN NAIR & P.V ASHA, JJ. 

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R.F.A No.882 of 2008-E 

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Dated this the 7th day of July, 2014 

Defendant in O.S.No.90 of 2004 on the file of the Subordinate Judge's Court, Attingal is the appellant. Suit filed by the respondents herein was decreed directing the appellant/defendant to surrender vacant possession of plaint schedule shop rooms; allowing realisation of arrears of licence fee and share of profit and restraining the appellant/defendant from inducting strangers in the plaint schedule shop rooms. 

2. The case of the plaintiffs/respondent before the court below was as follows: The plaint schedule property is owned by the 1st plaintiff. The 2nd plaintiff is the wife of 1st plaintiff. She had been running the business in textiles in the name and style of "Libas" in the Building No.AMC XII/200 one of the shop rooms owned by the 1st plaintiff, after investing a sum of about Rs.10 lakhs towards furniture, fittings, furnishings, etc. in it. The defendant executed separate agreements dated 01.01.2003 with the 1st plaintiff and with the 2nd plaintiff agreeing to take over and continue the business run by the 2nd plaintiff, on the strength of the licence issued to her, on payment of Rs.3,000/- per month for the first six months and thereafter at the rate of Rs.6,000/- per month to the 1st plaintiff as license fee of the building and on payment of a sum of Rs.9,000/- per month to 2nd plaintiff towards share of profit in the business. A sum of Rs.5 lakhs was agreed to be paid towards security deposit to 1st plaintiff. Payment of a sum of Rs.2 lakhs was acknowledged towards security deposit as on the date of agreement. Rs.1 lakh was agreed to be paid after one month and the remaining Rs.2 lakhs within a period of another six months. In the agreement with 1st plaintiff, it was provided that the 1st plaintiff will continue to have right of possession over the building along with the defendant. The agreement was for a period of 11 months, which could be extended by mutual consent. In the agreement executed with 2nd plaintiff, it was agreed that defendant will be allowed to run the textiles business run by her in the building (AMC XII/200) of 1st plaintiff on the strength of her licence, on payment of Rs.9,000/- per month towards share in profit. The list of articles in stock in the shop worth more than Rs.1 lakh was annexed to the agreement. It was also agreed that the defendant will not cause any damage to the furnishings, furniture, fixtures, etc. affixed by 2nd plaintiff for running the textile shop, investing more than Rs.10 lakhs. Thus defendant was to pay @ Rs.12,000/- per month for the first six months and thereafter @ Rs.15,000/- per month towards licence fee and share of profit to plaintiffs 1 and 2. The defendant became irregular in payment gradually and defaulted payment for the period from August, 2003 onwards. He changed the name of the textile shop as `Mayoori' without the consent of plaintiffs. The plaintiffs approached the Legal Services Authority for a direction demanding the defendant to surrender vacant possession of the building. In anticipation of the proceedings against him, the defendant had sent letters to plaintiffs to make it appear that he was prompt in payment. In the letter dated 20.01.2004, he pointed out the difficulty in effecting the payments and to get the receipts from plaintiffs. He filed a Caveat O.P No.18 of 2004 against the proposed legal proceedings to evict him. The plaintiffs issued a lawyer notice to the defendant on 25.02.2004, pointing out the violations of the provisions in the agreement including default in payment. As he evaded the same, it was returned unclaimed. In the said notice, the plaintiffs had demanded vacant possession of the building by 31.03.2004, after receiving the balance in the deposit amount after adjusting the arrears due to them. As the notice was not accepted, the plaintiffs approached the defendant personally requesting him to surrender vacant possession of the building intimating their requirements as well as the violations committed by the defendant in the payment as well as in changing the name of the textile shop without their consent. While so, the defendant filed O.S.No.82 of 2004 before the Munsiff's Court, Attingal, alleging threat of forcible eviction by the plaintiffs. The plaintiffs appeared and undertook that the defendant would not be evicted except by due process of law. As defendant continued to be adamant, the plaintiffs filed the Original Suit praying for a decree, ordering the defendant to surrender vacant possession of the plaint schedule building along with the materials, furnishings, furniture, textile shop, etc; a decree for payment of a sum of Rs.1,51,600/- towards arrears of licence fee as well as share of profit for the period from August, 2003 to June, 2004 together with future licence fee and share of profit till the date of surrender of the building. A decree for prohibitory injunction was also sought against the defendant from inducting strangers, from removing the movable articles and from causing any danger to the plaint schedule building and its fittings. 

3. The respondent herein/defendant filed a written statement raising a preliminary objection that the suit for eviction will not lie in the civil court, since he was a tenant and that he can be evicted only in accordance with the provisions in the Rent Control Act, which was applicable in the Attingal Municipality. He alleged that the shop room was taken on rent and he was conducting the business on his own under his licence, utilising his own funds, in the name and style of "Mayuri Textiles". He alleged that apart from a sum of Rs.3 lakhs paid towards security deposit, he had paid another 1 lakh for which the plaintiff did not issue receipt. As against the licence fee and share of profit of Rs.15,000/- per month claimed by the plaintiffs, the defendant stated that he was liable to pay a sum of Rs.12,000/- only per month. According to the defendant, the plaintiffs were not receiving the rent from him. They refused to accept the same even when he sent it by post. It was also alleged that the name of the textile shop was changed as "Mayuri" with the knowledge and consent of the plaintiffs. It was alleged that the plaintiffs had not made any demand to him for surrendering vacant possession of the building and that no notice was sent to him before filing the suit. 

4. On the basis of the pleadings of the parties, the court below considered the issues as to 

i) maintainability of the suit; 

ii) right of the defendant in the plaint schedule property; 

iii) breach of agreement, if any, committed by defendant; 

iv) right of plaintiff to get the defendant evicted; 

v) right of plaintiff to realise the arrears as claimed; 

vi) grant of the prayer for injunction.

5. Evidence consist of the testimony of PWs 1 to 3, examined on behalf of the plaintiffs and that of DW1 and DW2 examined on behalf of defendant; and the documents Exts.A1 to A7, Exts.B1 to B3 series and Ext.X1. After considering the pleadings and analysing the evidence on record, the court below came to the conclusion that the defendant was allowed to run the business as a licensee and he violated the provisions in the agreement of licence. Therefore, the plaintiffs were granted a decree for eviction of the defendant from the plaint schedule building, directing the defendant to surrender vacant possession of the building along with the furniture, fixtures, etc. within a period of 3 months from the date of decree and a decree for realisation of a sum of Rs.1,51,600/- towards arrears of licence fee and profit for the period from August, 2003 to June, 2004 and for realisation @ Rs.15,000/- per month from the date of suit till surrender of possession of the building after adjusting the amount already paid. The defendant was also restrained by a decree of prohibitory injunction, from inducting strangers into the plaint schedule shop room and from removing the movable articles therein and from causing any damage to the building. 

6. The appellant has approached this Court as against the above judgment and decree. The main contention of the appellant is that the agreement executed with the plaintiffs were only an agreement for lease and he was not given mere licence as found by the court below. 

7. We heard the learned counsel appearing for either parties and examined the pleadings, evidence on record as well as the findings rendered by the court below. 

8. The agreement executed by the defendant with the 1st plaintiff is Ext.A1 and the agreement executed with the 2nd plaintiff is Ext.A2. The defendant does not have any case that he has not executed those agreements. As per Ext.A1 agreement, the defendant had to make payment @ Rs.3,000/- per month for the first six months and thereafter, @ Rs.6,000/- per month to the 1st plaintiff from 01.01.2003 onwards. The building of 1st plaintiff was given to defendant for conducting the textile business, which was being run by the second plaintiff. It was specifically stipulated that the defendant shall use the building only for running the textile business which was being run by the 2nd plaintiff. The stipulation in clause (VIII) was that the 1st plaintiff will continue to have his right of possession along with the defendant, which read as follows: The stipulation in clause xvi was that this agreement has to be understood as an agreement for licence. By Ext.A1 the defendant had agreed to remit a deposit of Rs.5 lakhs to the 1st plaintiff towards security, against which, he had already paid Rs.2 lakhs on the date of agreement and another 1 lakh thereafter. The balance payment Rs.2 lakhs which was to be paid, within another six months, was never paid. The defendant did not produce any material to prove any payment over and above 3 lakhs. The licence fee was to be paid on the 30th of the respective months and the period of licence was stipulated as 11 months. On violation of any of the clauses in the agreement, it was agreed that, the 1st plaintiff will be free to take the possession of the building back. Similarly, on expiry of the period of agreement, the defendant was liable to surrender vacant possession, after payment of arrears, in case the period of licence was not extended. 

9. Ext.A2 is the agreement executed with the 2nd plaintiff agreeing to take over the business run by the 1st plaintiff, utilising the licence which was issued in her name on payment of @ Rs.9,000/- per month to her towards share in profit. The defendant did not dispute the execution of the agreement Ext.A2. An objection was raised saying that he was running the business on his own, on the strength of the licence issued in his name. He has disputed the rate of share of profit also. According to him, he was required to pay only a sum of Rs.12,000/- per month altogether, that too, towards rent and he was having exclusive possession of the building. At the same time, he admits agreements Exts.A1 and A2 where the stipulations are as to payment at the rate of Rs.15,000/- per month ie. licence fee @ Rs.3,000/- per month for the first six months and @ Rs.6,000/- per month thereafter to 1st plaintiff, as per Ext.A1 and payment @ Rs.9,000/- per month to the 2nd plaintiff towards the share of profit of the business, as per Ext.A2. The 1st plaintiff who was examined as PW1 deposed that the defendant failed to make payment in accordance with the stipulations in the agreements Exts.A1 and A2. The defendant's case that he was liable to pay only @ Rs.12,000/- per month as a whole and not @ Rs.15,000/- per month as alleged by the plaintiffs, even while admitting the execution of the agreements Exts.A1 and A2, itself show that he has not made payment in accordance with Exts.A1 and A2. Defendant also admits that the business was run in the building of the 1st plaintiff where the 2nd plaintiff was running the business, where she had invested about Rs.10 lakhs towards the furniture, fixtures, furnishings, etc. in the shop room. Even though he raised the dispute regarding the stock in trade, the testimony of PW2 and PW3 show that the list of articles in stock were furnished to the defendant as provided in the agreement Ext.A2. PW2 who was admittedly working in his shop also, deposed that she prepared Ext.A7 list of articles in the stock in the shop room of the 2nd plaintiff, in the presence of the son of the defendant, who was examined as PW3. PW3 also admitted that the list of articles were prepared by PW2 in his presence. As per Ext.A7 list, the stock in trade was worth Rs.1,92,104/- and the same was prepared on 28.12.2012. By Ext.A2, he was given permission to run the business, utilising the stock, and the licence of 2nd plaintiff reserving the share of profit to 2nd plaintiff. From this it is seen that defendant was not allowed to run the business on his own. 

10. Defendant claimed that he was running the business based on the licence issued in his name only. But the licence Ext.B1 series are seen issued only on 23.02.2005 and thereafter for the period from 2005-'06 to 2007-'08 only. The complaint of the plaintiffs is that the defendant violated the provisions in the agreement from August, 2003 onwards. The suit was filed in the year 2004. Therefore, Ext.B1 series of the licence issued in the name of the defendant in 2005, 2006, 2007 or in the subsequent years will not improve his case. Ext.B3 series show that the defendant remitted profession tax for the years 2004-05 and 2005-06 in the address of "Mayuri Textiles". These documents Ext.B1 series, B2 or B3 series do not improve the case of the defendant. The defendant has admitted that the 2nd plaintiff was having the licence to run the textile shop and that he started running the business based on Ext.A2 in January, 2003. There is no licence in his name, at least till 2005-06. 

11. The defendant could not produce any material to establish his version that the agreement was for payment @ Rs.12,000/- per month only. According to the plaintiffs, the only payment the defendant made towards licence fee and share of profit is Rs.1,00,400/- only, as on 11.12.2003 and a sum of Rs.1,51,000/- was in arrears for the period from August, 2003 onwards. Defendant could not furnish any material to show that he had made any payment to the plaintiffs other than Rs.1,00,400/-. 

12. The main contention of the defendant in the court below as well as this Court was that he was occupying the plaint schedule building as a tenant and he can be evicted only in accordance with the provisions of the Rent Control Act. The court below has, after analysing the agreements Exts.A1 and A2 as well as the evidence on record, found that the intention of the parties by executing the agreement was to allow the defendant to occupy the building on licence and not on lease. While agreeing to allow the defendant to occupy the plaint schedule building, it was specifically provided that the defendant would not have any exclusive possession. The stipulation in clause VIII of Ext.A1 that the 1st plaintiff will continue to have the right of possession over the building along with the defendant shows that the defendant agreed to take the building in accordance with that condition knowing fully well that he will not have any right for exclusive possession or interest in the building. Similarly, while allowing the defendant to run the business, it was stipulated that it will be run only on the strength of the licence issued to the 2nd plaintiff. The entire articles of clothes/apparels which were in stock in the shop along with the furnishings, furniture, fixtures etc. were also permitted to be used for running the business of textiles with the provision that a share of profit would be given to the 2nd plaintiff @ Rs.9,000/- per month. The defendant was not able to establish that he was having any exclusive right over the building. The court below found that the defendant was given only the permission to run the business of the 2nd plaintiff in the building of 1st plaintiff in accordance with the stipulations in Exts.A1 and A2 and no interest in the plaint schedule property ever passed to the defendant by way of Exts.A1 and A2. 

13. The court below rightly found that it is not only the words occurring in the agreement which determine the real nature of the agreement and that in order to determine whether it is a licence or lease, the intention of the parties had to be inferred from the terms of the documents, the conduct of the parties as well as from the attendant circumstances. The court below found that the defendant took possession of the building at a time when there were stock of textile materials worth Rs.1,92,000/-, as evident by Ext.A7 and the defendant took the possession of the plaint schedule building agreeing to pay share of profit @ Rs.9,000/- per month acknowledging the availability of the furnishings, fixtures and furniture in the shop room along with the stock in trade. This was in addition to the licence fee to be paid to 1st plaintiff. 

14. The distinction between lease and license has been the subject matter of consideration by the Hon'ble Supreme Court in a series of judgments, including in Mangal Amusement Park (P) Ltd. v. State of M.P., [(2012) 11 SCC 713], while considering the effect of the provisions in a document allotting a parcel of land to the tenderer by the Indore Development Authority(IDA), after inviting tenders for setting up an amusement park. The appellants claimed that it was a lease, disputing the case of the respondent that it was a license. The relevant portion of the judgment, on the issue, is reproduced below. 

"15. The principal question to be considered is: as to whether the document of allotment of land dated 6-5-1994 was in any way a lease or a licence? 

xxxxx xxxx xxxx xxxx 

From these two definitions it is clear that a lease is not a mere contract but envisages and transfers an interest in the demised property creating a right in favour of the lessee in rem. As against that a licence only makes an action lawful which without it would be unlawful, but does not transfer any interest in favour of the licensee in respect of the property. 

xxxxx xxxx xxxx xxxxx 

16. The issue concerning the distinction between lease and licence came up for consideration before this Court in Associated Hotels of India Ltd. v. R.N. Kapoor [AIR 1959 SC 1262]. In para 27 of this judgment, Subba Rao, J. (as he then was) observed therein as follows with respect to lease: (AIR p. 1269) 

"27. There is a marked distinction between a lease and a license. Section 105 of the Transfer of Property Act defines a lease of immovable property as a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised. Under Section 108 of the said 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. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor." 

Thereafter, the learned Judge referred to the definition of "license", then observed as follows: (R.N. Kapoor case, AIR p. 1269, para 27) 

"27. ... Under the aforesaid section, 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 licensee 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 dividing line is clear though sometimes it becomes very thin or even blurred."

17. Subba Rao, J., thereafter referred to the judgments of the Court of Appeal in Errington v. Errington and Woods [(1952) 1 KB 290] and Cobb v. Lane [1952 All E R 1199 (CA)] and then observed as follows: (R.N. Kapoor case, AIR pp. 1269-70, para 27) 

"27. ... The following propositions may, therefore, be taken as well established: 

(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." 

These propositions have been quoted with approval subsequently by a Bench of three Judges in Konchada Ramamurty Subudhi v. Gopinath Naik [AIR 1968 SC 919] and in B.V. D'Souza v. Antonio Fausto Fernandes [AIR 1989 SC 1816]." 

After examining the document in question, the Hon'ble Supreme Court found as follows. 

"Obviously when all these clauses are seen together, it becomes clear that there was no exclusive possession handed over to the appellants. Thus, the document of allotment merely granted a permission to use the parcel of land concerned in a particular manner, and without creating any interest therein. Hence, if we apply the tests which have been laid down by this Court way back in the year 1959 (and followed subsequently) the document will have to read as granting a license, and not a lease."

15. In the present case the ownership of the property vested in the 1st plaintiff, while the 2nd plaintiff was running the textile shop in the name and style of `Libas'. The defendant was put in possession of the building for the purpose of running the business, using the very same furniture and furnishings along with the stock in trade on the strength of the licence issued to the 2nd plaintiff, retaining right of possession of the building with the 1st plaintiff also, along with the defendant. Therefore, the question of exclusive possession does not arise in the case of the defendant, when he was given permission to run the business. 

16. Even the witness DW2, who was examined at his instance, deposed that unlike the defendant, he was holding exclusive possession of the building and doing independent business, in another building let out by the plaintiffs, as per Ext.X1 agreement. His testimony only proved that the nature of transaction in the case of the defendant was entirely different, whereby the plaintiffs had given permission in the case of defendant to take over the business items along with the stock in trade, furniture, furnishings, etc., with provision for share in profit. 

17. We find that the findings arrived at by the court below relying on C.M.Beena and Anr. v. P.N.Ranachandra Rao [(2004) 3 SCC 595], Sorab @ S.P.Kavina v. Viswanatha Menon [1974 KLT 606], Rajappan v. Veeraraghava Iyer [1969 KLT 811] and Devadas v. Calicut Corporation [1996(2) KLT 77] are perfectly in accordance with law and in the correct perspective. The judgments of the Honourable Supreme Court in M/s.M.N.Clubwala v. Fida Hussain Saheb and Ors. [AIR 1965 SC 610], Corporation of Calicut v. K.Srinivasan [2002 (2) KLT 291 (Supreme Court)]: (2002) 5 SCC 361], New Bus Stand Shop Owners' Association v. Corporation of Kozhikode & another [2009 (4) KLT 476 (Supreme Court) : (2009) 10 SCC 455] and Mangal Amusement Park (P) Ltd. v. State of M.P & Ors. [(2002) 11 SCC 713] also support the findings arrived at by the court below in determining that the defendant was given only a licence to run the business in the plaint schedule building. 

In the above circumstances, we do not find any circumstances warranting the interference of this Court over the impugned judgment. However, we grant time to the appellant till 31.03.2015 to surrender vacant possession of the building to the respondents. The appeal is disposed of as above. There will be no order as to costs. 

Sd/- T.R.RAMACHANDRAN NAIR Judge 

Sd/- P.V.ASHA Judge 

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