Premium Vs Rent: A Principled Approach To RERA's Jurisdiction Over Lease Transactions

The Real Estate (Regulation and Development) Act, 2016 (“the Act”), was enacted with the core objective of safeguarding the interests of homebuyers.^[1] While the Act has brought significant transformation to India's real estate landscape, its applicability to lease transactions remains a contentious issue in many states.

The ambiguity surrounding the applicability of the Act to lease transactions arises from seemingly contradictory provisions of the Act. Section 2(d) includes within the definition of an 'allottee' a person to whom a plot, apartment or building has been allotted, sold (whether as freehold or leasehold), or otherwise transferred. At the same time, it explicitly excludes a person to whom such property is given on rent.^[2] This definition of the allottee, when read along with the sale-centric definitions of 'real estate project'^[3] and 'promotor'^[4], raises the question of the jurisdiction of the Real Estate Regulatory Authority (“RERA”) in matters concerning lease transactions in relation to a real estate project.

Judicial Interpretations: Substance Over Form Approach

The Bombay High Court, in Lavasa Corpn. Ltd. vs. Jitendra Jagdish Tulsiani,^[5] emphasized the long-term nature of the lease and the inclusion of 'leasehold' in the definition of 'allottee' under the Act to hold that when the transaction is, in reality, the transaction of sale mere nomenclature of the document as 'Agreement of Lease' will not in any way take away the rights under the Act.^[6] However, the transaction will fall outside the purview of the Act when it is, in reality, an 'Agreement of rent and lease' and, in its true sense, is given purely based on rent.

Subsequently, the Maharashtra Real Estate Regulatory Authority (“MahaRERA”) clarified, via its Frequently Asked Questions, that only short-term leases for a term of five years would not fall within the ambit of the Act.^[7] Similarly, the Tamil Nadu Real Estate Appellate Tribunal (“TNREAT”) in Marg Properties Limited vs. T.M. Arunachalam^[8] held that the definition of 'allottee' under the Act also includes the leasehold rights if it is a long-term lease.^[9] However, it laid more emphasis on the rental aspect of the 'lease deed' to hold that the transaction is in the nature of a sale.

Furthermore, some jurisdictions, such as Delhi, have issued public notices requiring compulsory registration under the Act if certain conditions are met.^[10] Notably, these conditions suggest an intent to widen the scope of RERA and include within its ambit all the real estate projects, whether being developed for the purpose of selling or leasing.

A Path to Uniformity: The Consideration Approach

The judicial pronouncements consistently hold that long-term lease agreements, which by their recitals are in the nature of a sale transaction, fall within the ambit of the Act. They further affirm that short-term lease agreements, which are purely rental in nature, are not covered under the Act. However, there remains a lack of clarity in defining the guiding principles that would qualify a lease transaction as a sale transaction for the purpose of the Act.

For instance, unlike MahaRERA, TNRERA has not specified any fixed lease term threshold. Moreover, several other states and union territories, including the state of Telangana, have yet to address the issue explicitly. Since the approach opted by MahaRERA or TNRERA is not binding on other jurisdictions, the uncertainty remains unanswered.

In light of the above position of law, it is of paramount importance to bring uniformity in the jurisdiction of RERA with respect to the lease transaction. For such purpose, the following approach is suggested to understand the distinction created within the Act by including 'leasehold' and, at the same time, excluding the rental transactions from the definition of an allottee.

In a purely rental transaction, wherein the amount is payable periodically rather than as a lump sum, both parties share equal risk in case of breach by either party. Such risk is also sufficiently governed and protected by their respective rights and obligations defined clearly under the agreement. However, in the real estate sector, it is not uncommon to enter into lease deeds for '99+' or '999+' years in an attempt to circumvent RERA's jurisdiction. In such lease transactions, a lump sum amount is often payable by the lessee at the time the lease deed is entered into between the developer and the allottee, accompanied by a nominal or negligible rent paid annually. In such arrangements, since the lessee invests a significant amount at the outset, they bear a much higher risk than in a regular rental arrangement and, therefore, require stronger legal protection.

In view of the above different possible arrangements between the promoters and allottees, the legislature, under section 2(d) of the Act, has attempted to distinguish between persons who acquire leasehold rights on a purely rental basis and those who acquire leasehold rights by paying a lump sum amount at the outset. Such a distinction aligns with the beneficial nature of the Act and its objective to protect the allottees who invest significant amounts of hard-earned money in the real estate project. To further elucidate this distinction, reference must be made to section 105 of the Transfer of Property Act, 1882, which envisages the consideration in the form of either premium, rent, or both for creating a leasehold right with respect to an immovable property.^[11]

The distinction between premium and rent has been discussed in a plethora of judgments, wherein the Supreme Court has clarified that the fundamental distinction between a rent-based leasehold and a premium-based leasehold lies on whether the amount paid or payable is accrued at the time the contract was entered into or periodically over its term. ^[12] For instance, if the lessor parts its interest in the property for an amount paid by the lessee once at the time of entering into lease deed is premium, while, if the lessee pays an amount periodically, during the term of the lease, for the continuous enjoyment of the interest in the property would constitute as rent.

When the transaction where a lessee is paying a lump sum amount at the outset is viewed from the lens of distinction between 'premium' and 'rent' as drawn above, it becomes evident that the amount being paid by the allottee in such lease transactions constitutes premium rather than rent. Therefore, the intention of the legislature in including the 'leasehold' and excluding the 'rental transactions' from the definition of an allottee seems to be aimed at preventing attempts to circumvent RERA's jurisdiction, particularly from the perspective of the nature of the consideration involved. The intent appears to be to include all the lease transactions within the purview of the Act while excluding only those that are purely rental in nature.

Thus, for instance a lease transaction involving a lease agreement for a period of 999+ years where lessee is required to pay approximately 80% of the consideration upfront, with a nominal annual rent of Rs.1/-, would be a premium based lease and cannot be said to be a purely rental transaction. Thus, being included within the purview of the Act. On the other hand, a lease transaction involving a lease agreement for 99 years where the lessee is required to pay certain amount periodically, with upfront security deposit equal to two months of amount payable periodically, can be considered as a purely rental transaction. Thus, being excluded from the purview of the Act. It is to be noted that in the latter situation, the amount is to be paid periodically to enjoy the rights property continuously, while in the former just one-time upfront payment would be sufficient to enjoy the rights in the property till the lease expires.

In view of the above, it is suggested that the determination of whether a particular lease transaction falls within the ambit of the Act be undertaken through an analysis of the nature of consideration exchanged under the lease deed. The said approach is preferable to any attempt to construe the lease deed as a sale deed or to characterize the lease transaction as one in the nature of sale, as such interpretations may lead to unfair mischaracterization of the transaction based on the term period of the lease or other clauses of the agreement under consideration.

The courts or RERA authorities should interpret the ambiguity in section 2(d) of the Act in a way that gives a balanced effect to both the inclusion of 'leasehold' and the exclusion of 'rental arrangement' in the definition of allottee. Any interpretation to remove the ambiguity in a statute should aim to bring consistency and harmony rather than introducing or deleting the words or meaning not explicitly included or excluded by the legislature. However, the approach taken by various RERA authorities, as described earlier, not only alters the very nature of the agreement between the parties but also gives preference to inclusion over exclusion by introducing another uncertain area, namely, lease agreements, which are in the nature of sale transactions.

Accordingly, to avoid the above uncertainty, it is proposed that all the lease transactions between the promoter and allottees wherein the consideration is in the form of a 'premium', a combination of 'premium and rent', or any other form of consideration as contemplated under section 105 of the Transfer of Property Act excluding transaction involving only 'rent' shall fall within the ambit of the Act, thereby harmonizing the wordings of the Act and enabling uniformity in RERA's exercise of its jurisdiction over lease transactions.

Author: Parth Agrawal, Associate, Tatva Legal Hyderabad. (parth.a@tatvalegal.com) Views are personal.

References

[1] The Real Estate (Regulation and Development) Act, 2016.

[2] The Real Estate (Regulation and Development) Act, 2016, s 2(d).

[3] The Real Estate (Regulation and Development) Act, 2016, s 2(zn).

[4] The Real Estate (Regulation and Development) Act, 2016, s 2(zk).

[5] 2018 SCC OnLine Bom 2074.

[6] Lavasa Corpn. Ltd. v. Jitendra Jagdish Tulsiani, 2018 SCC OnLine Bom 2074.

[7] Additional FAQs, Maharashtra Real Estate Regulatory Authority, available at
<https://maharera.maharashtra.gov.in/faq>.

[8] Tamil Nadu Real Estate Appellate Tribunal, Appeal No. 2 of 2018.

[9] Marg Properties Limited v. T.M. Arunachalam, (TNREAT), Appeal No. 2 of 2018.

[10] Requirements For Registration of Real Estate Projects with the Real Estate Regulatory Authority (RERA) For NCT of Delhi, public notice dated 28.04.2022.

[11] The Transfer of Property Act, 1882, s. 105.

[12] CIT vs. Panbari Tea Co. Ltd, (1965) 57 ITR 422.