Basic Rules Of Leasing



  1. Leasing is a contract whereby the owner of something transfers its usufruct
    to another person for an agreed period and agreed consideration.
  2. The subject of lease must have a valuable use.
  3. It is necessary for a valid contract that the corpus of the leased property
    remains in the ownership of the lessor, and only its usufruct is transferred to
    the lessee. Thus, anything which cannot be used without consuming it
    cannot be leased out. Therefore, a lease cannot be effected in respect of
    money, edibles, fuels, ammunition etc. because their use is not possible
    unless they are consumed. If anything of this nature is leased out, it will be
    deemed to be a loan and all the rules concerning the transaction of a loan
    shall accordingly apply. Any rent charged on this invalid lease shall be an
    interest charged on a loan.
  4. As the corpus of the leased property remains in the ownership of the lessor,
    all the liabilities emerging from the ownership shall be borne by the lessor,
    but the liabilities attributable to the use of the property shall be borne by
    the lessee.

    Example: has leased his house to B. The taxes relating to the property
            shall be borne by A. The water tax, electricity bills and all expenses
            relating to the use of the house shall be borne by B (the lessee).

  5. The period of the lease must be determined in clear terms.
  6. The lessee cannot use the leased asset for any other purpose other than
    the purpose specified in the lease agreement. If no such purpose is
    specified in the agreement, the lessee can use the leased asset for
    whatever purpose it is normally used. However if the lessee wishes to use
    the leased asset for an abnormal purpose he cannot do so unless the lessor
    expressly allows him to do so.
  7. The lessee is liable to compensate the lessor for any damage to or loss of
    the leased asset caused by any misuse or negligence on the part of the
    lessee.
  8. The leased asset shall remain in the risk of the lessor throughout the leased
    period in the sense that any damage or loss caused by any factors beyond
    the control of the lessee shall be borne by the lessor.
  9. A property owned by two or more persons can be leased out and the rental
    shall be distributed between all the joint owners according to the proportion
    of their respective shares in the property.
  10. A joint owner of a property can lease his proportionate share to his
    co-owner only and not to any other person.
  11. It is necessary for a valid lease that the leased asset is fully identified by
    the parties.

    Example: for the first year is fixed at Rs2000/- per month and it is
            agreed that the rent for every subsequent year shall be 10%
            more than the previous one. The lease is valid.


    Example: (2) If in the above example A puts a condition in the agreement
             that the rent of Rs2000/- per month is fixed for the first year
            only. The rent for the subsequent year shall be fixed each year
            at the discretion of the lessor. The lease is void, because the
            rent is uncertain.


  12. In long-term lease agreements it is mostly not beneficial for the lessor to
    fix one amount of rent for the whole period because market conditions
    change from time to time.

    In this case the lessor has two options:
    (a) He can contract a lease with the condition that the rent shall be increased
            at a specified proportion after a specified period like six months or one
            year.


    (b) He can contract the lease for a shorter period after which the parties can
    .         renew the lease on fresh terms and conditions but the renewal shall be
            effected by mutual consent with full liberty to each one of them to refuse
            the renewal in which case the lessee is bound to vacate the leased
            property and return it to the lessor.
  13. The lessor cannot increase the rent unilaterally and any agreement to the
    contrary is void.
  14. The rent or any part thereof maybe payable in advance before the delivery
    of the asset to the lessee but the amount so collected by the lessor shall
    remain with him as 'on account' of payment and shall be appropriated to
    the rent when the rent becomes due.
  15. The lease period shall commence from the date on which the leased asset
    has been delivered to the lessee no ,matter whether the lessee has
    started using it or not.
  16. If the leased asset has totally lost the function for which it was leased
    and no repair is possible the lease shall terminate on the day on which
    such loss has been caused. However, if the loss caused by the misuse or
    by negligence of the lessee he will be liable to compensate the lessor with
    the depreciated value of the asset as it was immediately before the loss.

Page last updated: 2019-09-13