Is a "Right to Use" Agreement Really Different from a Sub-Lease of Immovable Property?

Consider an individual who holds long-term leasehold rights over immovable property granted by a trust, and who now wants to let a company occupy and use the premises for nine years against a fixed monthly payment, without calling it a sub-lease. The instrument is titled a "Right to Use Agreement". Is that genuinely something different from a sub-lease, or only a sub-lease wearing a different label? The answer determines whether the arrangement creates an interest in property, whether it must be registered, how it is taxed, and whether it puts the grantor's own head lease at risk of forfeiture.

Lease or Licence: The Legal Divide

Indian law recognises two distinct ways of letting someone use immovable property. Section 105 of the Transfer of Property Act, 1882 defines a lease:

"A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised... to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms."

Section 52 of the Indian Easements Act, 1882 defines a licence:

"Where one person grants to another... 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."

The dividing line is whether an interest in the property is created. A lease transfers a right of enjoyment and creates an interest; a licence merely permits what would otherwise be unlawful, without transferring any interest. The practical consequences diverge sharply:

The Label Does Not Decide: Intention and Exclusive Possession

Calling the document a "Right to Use Agreement" settles nothing. In Associated Hotels of India v. R.N. Kapoor (AIR 1959 SC 1262), the Supreme Court laid down the governing test:

"The crucial test in each case is whether the instrument is intended to create or not to create an interest in the property the subject-matter of the agreement. If it is in fact intended to create an interest in the property, it is a lease. If it does not, it is a licence. In determining whether an agreement creates a lease or a licence the test of exclusive possession though not decisive is of significance."

The Court reaffirmed this in Sohan Lal Naraindas v. Laxmidas Raghunath Gadit ((1971) 1 SCC 276): intention is gathered from the terms of the agreement read in light of the surrounding circumstances; the parties' description "may be evidence of their intentions but is not decisive", and even a recital that no tenancy is created will not save an instrument that in substance operates as a lease. So a nine-year "right to use" under which the company enjoys exclusive, sole possession may well be a lease, whatever the title page says, with everything that follows: mandatory registration, restrictions on termination, and exposure of the grantor to a subletting breach under the head lease.

To hold the line as a genuine licence, the agreement should expressly disclaim the creation of any interest in the property, avoid conferring exclusive possession, preserve the licensor's rights of entry, inspection and control, describe the company as a permittee rather than a tenant, and confine the permission to specified portions and purposes.

GST: 18% Either Way

For GST, the label matters even less. Under the CGST Act, 2017, renting or granting the right to use immovable property for commercial purposes is a supply of services taxable at 18%, whether styled as lease, licence or right to use. The relevant service codes are SAC 997212 (rental or leasing of non-residential property) and SAC 9973 (leasing or rental services of immovable property), both at 18%.

Two compliance points deserve attention. First, registration: an individual supplier of services must register under GST once aggregate annual receipts exceed Rs 20 lakh. On an illustrative consideration of Rs 1,50,000 per month, annual receipts of Rs 18 lakh sit below that threshold, so registration would not be mandatory for the grantor, though the GST character of the supply is unchanged. Second, reverse charge: the reverse charge mechanism does not apply to commercial property rentals. Reverse charge was introduced for renting of residential dwellings to a registered person (Notification No. 5/2022-Central Tax (Rate), 13 July 2022), while residential dwellings used for residence remain exempt (Notification No. 12/2017-Central Tax (Rate), 28 June 2017), and composition taxpayers were carved out of reverse charge on renting by Notification No. 07/2025-Central Tax (Rate), 16 January 2025. An individual granting commercial use to a company falls under the standard forward charge at 18%.

TDS: "Rent" by Substance, Not by Name

Section 194-I of the Income Tax Act, 1961 requires deduction of tax at source on "rent", defined broadly as any payment "under any lease, sub-lease, tenancy, or any other agreement or arrangement" for the use of land or building. A right-to-use fee is squarely within that definition; the treatment of a payment as rent for TDS purposes depends on the substance of the arrangement, not the label in the document.

The operative rules, as they stand after Budget 2025:

• A company paying for the use of a building must deduct TDS at 10% once annual rent exceeds Rs 6 lakh (raised from Rs 2.4 lakh with effect from financial year 2025-26). On the illustrative Rs 18 lakh a year, deduction is mandatory.
• Individuals or HUFs not liable to tax audit deduct instead under Section 194-IB at 2% where monthly rent exceeds Rs 50,000.
• If the payee does not furnish a PAN, the rate rises to 20% under Section 206AA.
• Failure to deduct or deposit attracts interest (1% per month for non-deduction, 1.5% for late deposit) and, critically, disallowance of the rent expense in the payer's hands under Section 40(a)(ia).
• The payer must issue Form 16A to the payee recording the rent paid and tax deducted.

The Security Deposit Stands Apart

A genuinely refundable security deposit is neither a supply for GST purposes nor income in the grantor's hands on receipt, so it attracts no GST and no TDS. Advance rent is different: it is consideration for the supply and is subject to both. The distinction collapses if the deposit is later forfeited or adjusted against arrears or damages, at which point the amount adjusted takes on the character of rent or income. Interest paid on the deposit is income of the grantor. Standard commercial practice is a deposit of around three months' consideration, refundable within 30 to 90 days of vacation after inspection, with deductions limited to unpaid rent, damage beyond normal wear and tear, and unpaid utilities; where interest is agreed, 4 to 5% per annum is common. The agreement should state each of these terms expressly.

Registration: The Nine-Year Problem

Section 17(1)(d) of the Registration Act, 1908 makes registration compulsory for "leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent". A nine-year term is far beyond that line. The open question is whether a pure licence, creating no interest in property, escapes: Section 17(1)(d) speaks of "leases", and a true licence is not one, though Section 17(1)(b) separately catches instruments that purport to create or extinguish rights in immovable property worth Rs 100 or more. The practical position is that most courts treat a right to exclusive use of immovable property for nine years as creating an interest in the property, making registration compulsory in substance.

The cost of guessing wrong is severe. Under Section 49 of the Registration Act, a registrable but unregistered document does not take effect against registered documents relating to the same property. The company's occupation rights would be unenforceable against third parties, vulnerable to any subsequent registered transfer of the leasehold, and liable to be disregarded by a court if challenged by a registered transferee. The agreement should therefore covenant for registration within a stated period, and the instrument must in any event be stamped under the stamp law of the state where the property is situated; lease and licence documents typically attract duty in the range of 2 to 6% of annual rent, with state-to-state variation that must be verified locally.

Indemnity: Enforceable, but Only as Drafted

Sections 124 and 125 of the Indian Contract Act, 1872 govern contracts of indemnity: a promise by one party to make good loss or damage suffered by the other, with the indemnified party entitled to act and claim under the promise. Indemnity clauses in licence agreements are enforceable, provided they are clearly drafted, reasonably scoped, supported by consideration and not contrary to law. Indian courts construe indemnities strictly: the indemnifier is liable only for the losses and circumstances expressly covered, and ambiguity is read against the drafter.

That strictness makes drafting decisive. A clause indemnifying against "all losses suffered due to vacation of premises" is vague on coverage and causation and invites dispute. Sound practice is to identify the covered events precisely (in this scenario, above all, forfeiture of the head lease caused by the grantor's breach), limit recovery to direct losses and exclude lost profits and consequential damages, require prompt written notice and an opportunity to cure, impose a mitigation obligation, and fix a claim period of 12 to 24 months.

The Real Danger: The Head Lease from the Trust

The gravest risk in this structure lies outside the agreement itself. Leases granted by trusts, particularly charitable and religious trusts, routinely contain stringent covenants against subletting, assignment, parting with possession, or granting any right or interest to third parties, because trustees hold the property for the trust's purposes and owe fiduciary duties to preserve it. A grant styled as a licence can still breach a covenant against subletting or parting with possession: courts examine the substance, and a company enjoying exclusive use of the premises looks very much like a party in possession.

If the covenant provides for re-entry on breach, Section 111(g) of the Transfer of Property Act allows the trust to forfeit the lease by written notice. Worse, the usual escape hatch is closed: Section 114A, which ordinarily requires the lessor to give a notice allowing the breach to be remedied before suing in ejectment, contains a proviso excluding "an express condition against the assigning, under-letting, parting with the possession, or disposing, of the property leased". Relief against forfeiture for a subletting breach is therefore generally unavailable, though courts have occasionally intervened where the breach was promptly and genuinely remedied and the lessor suffered no material prejudice.

For the company, forfeiture is terminal. Its right to use derives entirely from the grantor's leasehold; once that is extinguished, the company's occupation ends with it, and it has no recourse against the trust. Its only protection is contractual: warranties from the grantor that the head lease permits the grant (or that the trust has consented in writing), an indemnity expressly covering forfeiture caused by the grantor's breach, disclosure of the relevant head-lease clauses in a schedule, and automatic termination with refund of prepaid amounts if the head lease falls.

So, Is It Different from a Sub-Lease?

In law, yes: a licence and a sub-lease are distinct institutions with different incidents. In practice, the difference survives only if the substance matches the label. A nine-year grant of exclusive occupation at a monthly rate, with the grantor absent from the premises, is likely to be treated as a lease for registration and property law purposes no matter what it is called; and for GST and TDS the question barely matters, since both regimes tax the arrangement by substance. The one place the distinction can be fatal is the head lease: a grant that breaches the trust's anti-subletting covenant can bring down both the leasehold and the "right to use" built on it.

Practical Takeaways

• Draft the agreement as a true licence: no interest in property, no exclusive possession, retained rights of entry and control, narrowly defined permitted use. Recitals alone will not survive the Associated Hotels substance test.
• Obtain and review a certified copy of the head lease before signing; secure the trust's written consent, or a legal opinion that consent is not required, and record it in the agreement.
• Provide for GST at 18% (exclusive of the monthly consideration), verify the grantor's registration position against the Rs 20 lakh threshold, and note that reverse charge does not apply to commercial rentals.
• Provide for TDS at 10% under Section 194-I where annual payments exceed Rs 6 lakh, record the grantor's PAN, and require issue of Form 16A; deduct nothing on a genuinely refundable security deposit.
• Structure the deposit as refundable, GST-free and TDS-free, with listed deductions, any agreed interest, and a fixed refund timeline.
• Register the document under the Registration Act, 1908 within a stated period and stamp it under the law of the state where the property is situated; an unregistered nine-year grant is unenforceable against registered interests.
• Include a strictly drafted indemnity covering forfeiture of the head lease caused by the grantor's breach, limited to direct losses, with notice, cure and mitigation requirements, plus automatic termination and refund of prepaid sums if the head lease is forfeited.

Key Authorities

1. Associated Hotels of India v. R.N. Kapoor, AIR 1959 SC 1262 — whether an instrument is a lease or a licence turns on the intention to create an interest in property; exclusive possession is significant though not decisive.
2. Sohan Lal Naraindas v. Laxmidas Raghunath Gadit, (1971) 1 SCC 276 — intention is gathered from the terms and surrounding circumstances; the parties' label and disclaimers are not decisive.
3. Transfer of Property Act, 1882, Sections 105, 111(g), 114A — definition of lease; forfeiture for breach of an express re-entry condition; relief against forfeiture excluded for subletting and parting-with-possession breaches. Source
4. Indian Easements Act, 1882, Section 52 — definition of licence.
5. Registration Act, 1908, Sections 17 and 49 — compulsory registration of leases exceeding one year; unregistered registrable documents ineffective against registered documents. Source
6. Indian Contract Act, 1872, Sections 124-125 — contracts of indemnity and the rights of the indemnity holder.
7. Income Tax Act, 1961, Sections 194-I, 194-IB, 206AA, 40(a)(ia) — TDS on rent at 10% above Rs 6 lakh a year; higher rate without PAN; disallowance for non-deduction.
8. Notification No. 12/2017-Central Tax (Rate), Notification No. 5/2022-Central Tax (Rate) and Notification No. 07/2025-Central Tax (Rate) — GST treatment of renting: residential exemption, reverse charge on residential dwellings let to registered persons, composition taxpayer carve-out; commercial renting remains forward-charge at 18%.

This analysis reflects the law as at June 2026. It is published for general information and does not constitute legal advice.