The Hindu Business Line : The security of your nest

Alongside gold, real estate has long been a popular investment option. However, sound investment in real estate calls for some expert advice from advocates, architects, engineers, property maintenance managers and so on to ensure reasonable returns and appreciation. Of course, real estate properties always run the risk of litigation and problems with tenants but this is compensated by the prospects for appreciation in the value of the property.

With the Government's announcement of the IT Corridor in Chennai's Old Mahabalipuram Road, the prices of land quoted in lakhs of rupees a few years ago now run into crores.

The yield on residential property ranges from 4-6 per cent, and this can be optimised further, taking advantage of provisions in the Income Tax Act. Investors can avail loans against rents receivable in future.

Central Business District areas offer scope for long-term investment. However, the location should be chosen with care, ensuring that there is adequate parking space, backup power and proper maintenance of the building.

With the demand for large floor space by IT companies, large investors might prefer this type of property. The yield on retailing is about 12 per cent, while for offices it is about 10 per cent.

The relaxed norms for foreign direct investment in real estate has given a boost to this sector.

However, real estate investment has poor liquidity and the transactions are time-consuming. In comparison, shares can be disposed more easily, while this is easier still for gold.

The factors affecting real estate include provisions in various Acts, particularly the Town Planning Act and the Rent Control Act.

The latter Act has adverse effect on property value.

An alternate arrangement to let out properties is the Leave and Licence System. This provision has been included in the Maharashtra Rent Control Act 1999, which is in force from March 31, 2000.

Licensee in respect of any premises or part thereof means the person who is in occupation under a subsistence agreement for licence for a given licence fee.

Licence: Where one person grants to another or to a definite number of other persons 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, not amount to an easement or an interest in the property, the right is called a licence.

Licence is a permission to do something on an immovable property such as occupation or enjoying benefit thereon or using it for some other purpose. The intention of a licence is that the licensee will have a personal privilege but no interest in the property. A licence is a personal right; the licensee cannot transfer the licence or exercise it through an agent. The exception is a place of public entertainment. As the licence is of personal nature, when the licensor transfers the property, the licence comes to an end.

Revocation: A licence is revocable unless the licensee has acted upon the licence and executed work of a permanent nature, incurring expenses, or the licence is coupled with transfer of property. Revocation may be expressed or implied. A licence stands revoked when the licensor ceases to have any interest in the property or the licensee releases the licence or the period or specific act for which the licence was granted is over or the subject-matter of the licence is destroyed or altered or the purpose of the licence becomes impracticable or is abandoned or the employment, office or character for which the licence was given ceases to exist, or for more than 20 years the licensee ceased to use the property.

Licence or lease: A licence does not create an interest in the property but a lease creates an interest thereon. One of the tests of a lease is exclusive possession of property. Whether an agreement creates relationship of the landlord and tenant or the licensor and licensee, the intention of the parties is decisive.

A licence, which gives the licensee the right to profits or to excavate earth or to draw water is a licence coupled with transfer of the property. If a licensee constructs any permanent structure with the knowledge and consent of the licensor the licence cannot be revoked. The important thing is that the construction should be made by the licensor in pursuance of the licence granted to him.

The court will interpret the licence agreement, taking into consideration all the acts and surrounding circumstances to decide whether it is a licence or lease. Therefore the Leave and License Agreement may not be exclusive of the relationship between the parties to the agreement but the wordings of the agreement are most important.

The right to occupy premises under a lease agreement is governed by the provisions of Section 105 of the Transfer of Property Act, which states: A lease of immovable property is a transfer of right to enjoy such property, made for a certain time expressed or implied, 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 transfer by the transferee who accepts the transfer on such terms.

Thus the Act creates an interest in the property for the lessee for the duration of lease. The lessee can hold the property even after the expiry of the lease.

The right to occupy by licence system is governed by Section 52 of the Indian Easement Act which is defined as a right to do or continue to do in or upon the immovable property of the grant or something which would in the absence of such right be, unlawful and such right does not amount to easement or right in the property

The licence creates no titles or interest for the licensee. The licensee only gets the right to enter and use the premises for a limited period. The licence can be terminated at the discretion of the landlord.

Stamp duty

Stamp duty is a function of the annual lease rent and duration of lease, and is considerably higher. It varies from state to state.

For Leave and License Agreement, for more than one term of eleven months, and not exceeding three such terms

i) Rs 500 when the average annual rent plus security deposit or money advanced or to be advanced does not exceed Rs 2.5 lakh

ii) Rs 1,000 when the above amount is between Rs 2.5 lakh and Rs 5 lakh

iii) Rs 2,000 when the above amount exceeds Rs 5 lakh

Where such agreement is for a period not exceeding three terms with or without renewal clause, same duty is applicable as on lease.

The Maharashtra Rent Control Act applies both to leased premises and licensed premises. Under the Act, the Government creates a competent authority, who will have judicial powers to order eviction of defaulting tenants or licensees only when the agreement between the parties is registered. The responsibility of registering the agreement lies with the property owners and in case of default, the owner could be sentenced to imprisonment or fined minimum Rs 5,000 with no upper limit. Further, the owner will be debarred from filing eviction suits.

In the Leave and License system, only the right of entry is given to the licensee and not possession. Hence the word rent is to be replaced by license fee in the agreement.

Leave and License is applicable to residential premises only.

The owner can accept any amount as license fee and the licensee has no right to approach the court till the license fee is revised. The owner can take any deposit without interest. If the licensee does not deliver possession after the stipulated period he would have to pay double the license fee till the competent authority vacates him. If the licensee has given the premises to a third party, the third party has no right. The competent authority should finalise the matter within six months.

The landlord is entitled to recover possession of premises given on licence on expiry.

Notwithstanding anything contained in this Act, a licensee in possession or occupation of premises given to him for residence shall deliver possession to the landlord on expiry of the licence period; a landlord shall be entitled to recover possession by making an application to the competent authority, who shall, on being satisfied that the period of licence has expired, shall pass an order for eviction of the licensee.

Further, the licensee is liable to pay damages at double the rate of the licence fee or charge fixed under the licence agreement.

The competent authority shall not entertain any claim from any person who is not a licensee according to the licence agreement.

The introduction of this system in the Tamil Nadu Buildings (Lease and Rent Control) Act will motivate people to invest in housing.

The author is Former National President, Institution of Valuers, Chennai.

Picture by K.V. Srinivasan

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