Associated Hotels of India Ltd. v R.N. Kapoor (1959)

This is the lease-and-licence case on the Indian syllabus. Subba Rao J's four propositions are quoted in every later decision and should be reproduced verbatim in any answer on the topic.

But there is a trap that separates a careful answer from a copied one, and it is visible in the text itself. Subba Rao J was in the minority on the result. The closing order records: "In accordance with the opinion of the majority, the appeal is allowed." Sarkar J allowed the appeal on the ground that the spaces were rooms in a hotel and so outside the Rent Act, and expressly declined to decide the lease-or-licence question: "I do not consider it necessary to express any opinion on this question for this appeal must in my view be allowed as the spaces are outside the Act being rooms in an hotel." Subba Rao J would have dismissed the appeal, holding the document a lease and the rooms not rooms in a hotel. The four propositions have nonetheless been treated as authoritative ever since. Say so; do not pretend the propositions were the ratio of the whole Court.

The appellants owned Hotel Imperial, New Delhi. R.N. Kapoor occupied two rooms described as the ladies' and gentlemen's cloak rooms and carried on business there as a hair-dresser, under a deed dated 1 May 1949. He agreed to pay Rs 9,600 a year, later reduced by consent to Rs 8,400.

On 26 September 1950 he applied to the Rent Controller to fix a fair rent. The hotel resisted on two grounds: the premises were rooms in a hotel, exempt under s. 2 of the Act; and he was a licensee, not a tenant.

The document was headed a deed of licence, called the parties licensor and licensee, and recited that the licensee had approached the licensor "to permit the Licensee to allow the use and occupation of space allotted in the Ladies and Gents Cloak Rooms". Its terms granted "Leave and License to use and occupy the said premises to carry on their business of Hair Dressers" for one year from 1 May 1949; charges of Rs 9,600 a year in four quarterly instalments payable "whether the Licensee occupy the premises and carry on the business or not"; an option of extension at the licensor's option; an obligation to keep the premises in good condition and to pay for power and light; a bar on alterations without written consent; a right in the licensor to terminate without notice on default with interest at 12 per cent; and, on forced closure of the business, a right to transfer the licence to another person with the licensor's consent.

Did the deed of 1 May 1949 create a lease or a licence?

Lease. Section 105 defines a lease of immovable property as "a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised"; s. 108 entitles the lessee to be put in possession. Therefore: "A lease is therefore a transfer of an interest in land. The interest transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor."

Licence. Section 52 of the Easements Act:

"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, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence."

Hence "The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property."

The judgment is candid about how hard the line can be: "The dividing line is clear though sometimes it becomes very thin or even blurred."

Exclusive possession was once thought infallible. The modern position is taken from Lord Denning in Errington v Errington:

"The result of all these cases is that, although a person who is let into exclusive possession is, prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy."

and from Cobb v Lane, where Somervell LJ said the solution "must depend on the intention of the parties", and Denning LJ asked: "Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land?"

"(1) To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties - whether they intended to create a lease or a licence; (3) if the document creates an interest in the property, it is a lease; but, if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease."

The governing sentence that precedes them is equally quotable: "But it is the substance of the agreement that matters and not the form, for otherwise clever drafting can camouflage the real intention of the parties."

Applying those tests, Subba Rao J held the document created a tenancy:

- it did not confer "only a bare personal privilege"; it put the occupier "in exclusive possession of them, untrammelled by the control and free from the directions of the appellants"; - "The covenants are those that are usually found or expected to be included in a lease deed"; - most tellingly, "The right of the respondent to transfer his interest under the document, although with the consent of the appellants, is destructive of any theory of licence" — a licence is personal and cannot be assigned; - the payment was due whether or not he carried on business, which is rent, not a fee for a personal permission; - and the location of the rooms in a hotel building made no difference: "the clever phraseology used or the ingenuity of the document-writer hardly conceals the real intent."

On the second question he held that the rooms had been let for a non-hotel purpose with no "reasonable nexus between the business of the tenant and that of the hotel", and so were not rooms in a hotel. Sarkar J took the contrary view on that point and his view prevailed, so the appeal was allowed and the application to fix standard rent dismissed.

Whether an instrument creates a lease or a licence depends on the substance of the transaction and the intention of the parties, not on the labels used. Exclusive possession raises a prima facie inference of tenancy which the circumstances may rebut. A right to transfer the occupier's interest is destructive of a licence.