As such there is no separate law regulating lease agreements, but it being a contract, the provisions of The Indian Contract Act, 1872 are applicable to all lease contracts. There are certain provisions of law of contract, which are specifically applicable to leasing transactions. Since lease also involves motor vehicles, provisions of the Motor Vehicles Act are also applicable to specific lease agreements. Lease agreements are also subject to Indian Stamp Act.
We will discuss in short main provisions of The Indian Contract Act, 1872 related to leasing.
Contract: A contract is an agreement enforceable by law. The essential elements of a valid contract are – Legal obligation, lawful consideration, competent parties, free consent and not expressly declared void.
Discharge of Contracts: A contract me by discharged in following ways – By performance, by frustration (impossibility of performance), by mutual agreement, by operation of law and by remission.
Remedies for Breach of Contract: Non-performance of a contract constitutes a breach of contract. When a party to a contract has refused to perform or is disabled from performing his promise, the other party may put an end to the contract on account of breach by the other party. The remedies available to the aggrieved party are – Damages or compensations, specific performance, suit for injunction (restrain from doing an act), suit for Quantum Meruit (claim for value of the material used).
Provisions Related to Indemnity and Guarantee: The provisions contained in the Indian Contract Act, 1872 related to indemnity and guarantee are related to lease agreements. Main provisions are as under –
Indemnity: A contract of indemnity is one whereby a person promises to make good the loss caused to him by the conduct of the promisor himself or any third person. For example, a person executes an indemnity bond favoring the lessor thereby agreeing to indemnify him of the loss of rentals, cost and expenses that the lessor may be called upon to incur on account of lease of an asset to the lessee. The person who gives the indemnity is called the ‘indemnifier’ and the person for whose protection it is given is called the ‘indemnity-holder’ or ‘indemnified’.
In case of lease agreements, there is an implied contact of indemnity, where lessee will have to make good any loss caused to the asset by his conduct or by the act of any other person, during the lease term.
Guarantee: A contract of guarantee is a contract, whether oral or written, to perform the promise or discharge the liability or a third person in case of his default. A contract of guarantee involves three persons – ‘surety’ who gives guarantee, principal debtor and creditor. A contract of guarantee is a conditional promise by the surety that if the debtor defaults, he shall be liable to the creditor.
Bailment: The provisions of the law of contract relating to bailment are specifically applicable to leasing contracts. In fact, leasing agreement is primarily a bailment agreement, as the main elements of the two types of transactions are similar. They are:
There are minimum two parties to a bailment i.e. bailor – who delivers the goods and bailee – to whom the goods are delivered for use. The lessor and lessee in a lease contract are bailor and bailee respectively.
There is delivery of possessions/transfer of goods from the bailor to the bailee. The ownership of the goods remains with the bailor.
The goods in bailment should be transferred for a specific purpose under a contract.
When the purpose is accomplished the goods are to be returned to the bailor or disposed off according to his directions.
Hence lease agreements are essentially a type of bailment. Following are the main provisions related to lease.
Liabilities of Lessee: A lessee is responsible to take reasonable care of the leased assets. He should not make unauthorized use of the assets. He should return the goods after purpose is accomplished. He should pay the lease rental when due and must insure & repair the goods.
Liabilities of Lessor: A lessor is responsible for delivery of goods to lessee. He should take back the possession of goods when due. He must disclose all defects in the assets before leasing. He must ensure the fitness of goods for proper use.
Remedies for Breach of Contract:
In case of breach of contract various remedies are available to aggrieved party. They are as following:
Remedies to the lessor: The lessor can forfeit the assets and can claim damages in case of breach by lessee. The lessor can take repossession of the assets in case of any breach by the lessee.
Remedies to the lessee: Where the contract is repudiated for lessor’s breach of any obligation, the lessee may claim damages for less resulting from termination. The measure of damages is the increased lease rentals (if any) the lessee has to pay on lease of other asset, plus the damages for depriving him from the use of the leased asset from the date of termination of the date of expiry of lease term.
Sub-lease of a Leased Asset: The lessee must not do any act, which is not consistent with the terms of the lease agreement. Lease agreements, generally, expressly exclude the right to sub- lease the leased asset. Thus, one should not sub-lease the leased assets, unless the lease agreement expressly provides.
Effect of sub-lease: The effect of a valid sub-lease is that the sub-lease becomes a lease of the original lessor as well. The sub-lease and the original lessor have the same right and obligations against each other as between any lessee and lessor.
Effect of termination of Main lease: A right to sub -lease is restricted to the operation of the main lease agreement. Thus, termination of the main lease will automatically terminate the sub-lease. This may create complications for sub-lessee.
So far we have discussed the main provisions related to The Indian Contract Act, 1872. Now let us discuss the other laws related to leasing.
Motor Vehicles Act: Under this act, the lessor is regarded as dealer and although the legal ownership vests in the lessor, the lessee is regarded owner as the owner for purposes or registration of the vehicle under the Act and so on. In case of vehicle financed under lease/hire purchase/hypothecation agreement, the lessor is treated as financier.
Indian Stamp Act: The Act requires payment of stamp duty on all instruments/ documents creating a right/ liability in monetary terms. The contracts for equipment leasing are subject to stamp duty, which varies from state to state.
RBI NBFCs Directions: RBI Controls mainly working of Leasing Finance Companies. It does, not in any manner, interfere with the leasing activity.