How Commercial Real Estate Leases Usually Work

Most business owners signing a commercial property agreement in India assume the title on the document decides what they’re actually getting — call it a “Lease Deed” and you have a lease, call it a “Leave and License Agreement” and you have a license. Indian courts have repeatedly rejected that assumption. As one legal analysis put it plainly: nomenclature alone is not the decisive factor in determining what kind of document you’ve actually signed. What matters is the substance — specifically, who genuinely retains legal possession and control of the property — and getting this wrong has cost businesses their occupancy rights even when the paperwork said otherwise.

The Letter of Intent: Where Every Commercial Lease Actually Begins

Before any formal document gets signed, most genuine commercial lease deals start with a shorter, preliminary agreement that sets the terms both sides will negotiate from.

• A Letter of Intent (LOI) outlines the preliminary understanding between the property owner and the prospective tenant before a full lease deed is drafted
• A typical LOI specifies the core commercial terms — rent structure with yearly escalation, the proposed tenure (commonly structured around a multi-year term like nine years), the lock-in period, and the security deposit arrangement
• It also defines practical responsibilities — who pays taxes, maintenance, and utilities, along with infrastructure provisions like electricity and water supply
• Operational details like a rent-free fit-out period, the expected possession timeline, and what interior modifications the tenant is permitted to make typically get settled at this LOI stage, well before the more legally binding lease deed gets finalized

Lease vs Leave and License: Two Fundamentally Different Legal Instruments

Once the LOI’s terms are agreed, the actual legal document that follows falls into one of two genuinely different categories, and this choice carries real consequences.

• A lease, governed by the Transfer of Property Act, 1882, transfers an actual interest in the property to the tenant, giving them exclusive possession for the agreed term
• A leave and license agreement, governed by the Indian Easement Act, 1882, grants only a right to use the property in a particular way, while legal possession and control remain firmly with the owner throughout
• Under a genuine lease, the tenant has meaningful legal protections and, depending on the terms, stronger grounds to contest eviction or unpaid deposit disputes
• Under a genuine license, the occupant has no automatic right to renewal, and the owner generally faces considerably less legal friction if they choose to ask the occupant to vacate

The Test Courts Actually Apply: Possession and Control

This is the substantive question that determines which category a document actually falls into, regardless of its title.

• The core legal test, established in longstanding Supreme Court precedent, asks whether the document gives the occupant exclusive possession and control of the property, or whether it merely permits use while possession remains with the owner
• Specific clauses courts look at as evidence of retained owner control include the owner keeping duplicate keys, retaining a right to enter the premises for inspection at any time, or requiring the occupant to vacate on certain days each month to give the owner unhindered access
• If these kinds of control-retention clauses appear in a document, courts are inclined to treat it as a genuine license, even if it’s titled a “Lease Deed”
• Conversely, a document titled “Leave and License Agreement” that actually grants exclusive, uninterrupted possession to the occupant, with no meaningful ongoing control retained by the owner, can be treated by courts as a genuine lease in substance

A Recent Supreme Court Ruling That Reinforces This

A February 2026 Supreme Court decision directly reaffirmed this substance-over-form approach, and it’s worth understanding because it shapes how disputes get decided today.

• In The General Secretary, Vivekananda Kendra v. Pradeep Kumar Agarwalla, decided on February 26, 2026, the Supreme Court restored a registered 99-year lease deed that a lower court had wrongly recharacterized as a mere license
• The bench held that where a deed’s actual wording clearly discloses the parties’ intention, that deed must be read as a whole, with its clauses interpreted harmoniously, rather than reinterpreted based on how the relationship happened to evolve afterward
• Critically, the Court cautioned that courts should be far more careful about inferring intention from conduct that occurred after the document was executed, since that later conduct may not accurately reflect either the document’s literal wording or its original purpose
• This ruling reinforces a consistent theme in Indian property law: a well-drafted document, whose clauses clearly and consistently express the intended relationship, carries significant weight, while ambiguous or contradictory drafting invites exactly the kind of dispute this case addressed

A Cautionary Example: When a “Lease” Behaved Like a License

A real scenario illustrates precisely how this substance-over-form principle plays out when a business’s expectations don’t match what their document actually said.

• A retail business entered into what it believed was a long-term tenancy for commercial space, documented as a five-year “Leave and License Agreement” with renewal available at the licensor’s sole discretion
• The licensor retained the right to enter the premises for inspection at any time and kept duplicate keys to the space throughout the occupancy
• When the licensor sought to terminate the arrangement after just two years, the business argued it had effectively acquired tenancy rights and couldn’t simply be evicted
• The court found the arrangement was a genuine leave and license — because the licensor had demonstrably retained control and legal possession had never actually transferred, the document’s clear expression of intent to create a license, not a tenancy, was upheld, and the business lost its occupancy

Why Businesses Often Choose Leave and License Anyway

Despite the weaker legal protection, leave and license agreements remain extremely common in Indian commercial real estate, largely for a specific financial reason.

• Any agreement running 12 months or longer must be registered under the Registration Act, 1908, triggering stamp duty calculated as a percentage of the average annual rent — a genuinely significant cost for a multi-year commitment
• Structuring the arrangement as an 11-month leave and license agreement, renewed periodically, avoids this mandatory registration requirement in most states, saving on both stamp duty and registration fees
• Maharashtra is a notable exception — registration is mandatory for all leave and license agreements regardless of tenure, meaning this cost-saving strategy doesn’t work the same way there as it does in most other states
• This cost-driven preference explains why so many commercial arrangements default to the license structure even when the actual business relationship — a factory, restaurant, or corporate office intended to operate continuously for years — would genuinely benefit from a proper lease’s stronger legal footing

Which One Should Your Business Actually Use?

Given the real trade-offs between cost and legal security, the right choice depends heavily on what kind of occupancy your business genuinely needs.

• For long-term commercial operations — opening a factory, restaurant, or corporate office where business continuity genuinely matters — a properly registered lease is the structure that actually protects your ability to keep operating in that space
• For shorter-term, more flexible occupancy needs, a leave and license arrangement can make practical and financial sense, provided you go in understanding you have no automatic renewal right and comparatively weaker legal standing if a dispute arises
• Regardless of which structure you choose, ensuring the document’s actual clauses — not just its title — clearly and consistently reflect your intended relationship is what will matter if a dispute ever reaches a court
• Reviewing whether the agreement retains meaningful owner control (inspection rights, duplicate keys, restricted access windows) before signing gives you a realistic sense of whether you’re actually getting the tenancy protection the title suggests, or something considerably weaker

This is general educational information about how commercial real estate leases and leave and license agreements work in India, not legal advice. Specific state rules and case outcomes vary, and consulting a property lawyer before signing any commercial occupancy agreement is strongly advisable.

FAQs

Q1. If my agreement is titled “Lease Deed,” does that guarantee I have full tenancy rights?

Not necessarily. Indian courts look at the actual substance of the document — specifically whether exclusive possession and control genuinely transferred to you — rather than relying solely on its title, as reaffirmed by a February 2026 Supreme Court ruling.

Q2. Why do so many commercial agreements in India run exactly 11 months?

Agreements of 12 months or longer must be registered under the Registration Act, 1908, triggering stamp duty on the annual rent, so structuring an arrangement as an 11-month leave and license agreement avoids this mandatory registration cost in most states.

Q3. What specific clauses suggest a document is actually a license rather than a genuine lease?

Clauses where the owner retains duplicate keys, reserves the right to enter for inspection at any time, or requires the occupant to vacate periodically to give the owner access all suggest retained control, which courts treat as evidence of a license rather than a lease.

Q4. Is Maharashtra’s rule for leave and license agreements different from other states?

Yes. Maharashtra mandates registration for all leave and license agreements regardless of their tenure, unlike most other states where agreements under 12 months commonly go unregistered to save on stamp duty and fees.