The consumption of real estate space has evolved significantly over time, particularly in the commercial segment. According to a report published by Cushman & Wakefield, India is a leading global player in the strength and maturity of flexible working spaces. It is therefore safe to state that flexible and managed working or co-working spaces represent the future of corporate and commercial  real estate.

Until a few years ago, most occupants of corporate commercial space would execute a leave and licence or a conventional lease deed, which would be registered as per The Registration Act, 1908, if such agreement was executed from year to year, or for any term exceeding one year.

Such an evolution has blurred the lines between traditional leases and service agreements. A significant question that arises in the context of service agreements is whether they are mandatorily required to be registered under the provisions of The Registration Act, 1908.

Understanding the concept of service agreements:

Managed working spaces typically operate on a model wherein the owner of such space offers fully equipped premises, inter alia furniture, fixtures, and internet connectivity required for an office setup. Additionally, the space provider offers amenities such as maintenance, upkeep, and other operational support to ensure the setup remains functional. The occupants of such spaces are usually charged service fees computed on the basis of the number of seats occupied. Crucially, the structure of the agreement is such that no rights in the immovable property are transferred in favour of the occupant or service recipient. These agreements are intentionally designed to grant only limited usage rights to the occupant of the premises, while the service provider or owner retains all rights in the immovable property.

Decoding the requirement for registration of service agreements under The Registration Act, 1908 (“Act”):

Section 17 of the Act provides for the documents for which registration is mandatory. The relevant extract of the provision is reproduced below:

“17. Documents of which registration is compulsory.—(1) The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act No. XVI of 1864, or the Indian Registration Act, 1866, or the Indian Registration Act, 1871, or the Indian Registration Act, 1877, or this Act came or comes into force, namely:—

(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property; (d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;”

Now, as per the aforesaid provision, leases for immovable property for a term exceeding one year are required to be registered. The rise in managed office spaces has given way to service agreements that do not sit harmoniously within the traditional property law framework, including section 17 of the Act as stated above. The key question is whether such service agreements fall within the ambit of section 17 of the Act and are thereby required to be compulsorily registered.

To determine the requirement of registration of a service agreement, it is pertinent to analyse the substance of the agreement over its nomenclature.

“What’s in a name?” A great deal, as it turns out the courts of law in India have consistently pierced through the “name” of a document to examine the substance therein, as analysed hereinbelow:

In the matter of Associated Hotels of India Ltd. v. R.N. Kapoor, AIR 1959 SC 1262 the Hon’ble Supreme Court of India laid down the tests to distinguish a lease from a licence. The Court held that the substance of the document prevails over its form, and the real test is the intention of the parties. If the document creates an interest in the property, it amounts to a lease; whereas if it merely permits use of the property while legal possession remains with the owner, it is a licence. The Court further observed that exclusive possession generally indicates tenancy, though surrounding circumstances may rebut such inference.

In the matter of M.N. Clubwala v. Fida Hussain Saheb, AIR 1965 SC 610, the Hon’ble Supreme Court of India held that since the stallholders had only limited, conditional, day-time use of the stalls and the landlords retained the legal possession and control necessary to fulfil their statutory duties, no leasehold interest arose.

The above principle is of particular relevance to managed office spaces, wherein the occupant is granted limited and conditional use of the premises during specified hours, while the service provider retains legal possession and overall control of the property, thereby negating the creation of any leasehold interest in favour of the occupant.

Similarly, in the matter of Delta International Ltd. v. Shyam Sundar Ganeriwalla, AIR 1999 SC 2607, the Hon’ble Supreme Court of India reiterated that the intention of the parties must be ascertained primarily from the terms of the document itself. However, where the language of the document is ambiguous or alleged to be camouflage, the surrounding circumstances and the conduct of the parties may also be taken into consideration to determine the true nature of the relationship between the parties, i.e., whether it constitutes a lease or a licence.

From a combined reading of the said judicial pronouncements, the following principles emerge to determine whether a service agreement for a managed office space requires registration under the Act:

First, the substance of the agreement must be examined over its form or nomenclature. If the agreement, in effect, creates an interest in immovable property, it would be treated as a lease regardless of the nomenclature assigned to it by the parties.

Second, if the legal possession and control over the premises remain with the service provider, and the occupant is merely granted a right to use the space in conjunction with services, the arrangement would constitute a licence or a service agreement and not a lease.

Third, the retention of the right to relocate the occupant, the provision of shared amenities, the charging of fees on a per-seat basis, and the absence of exclusive possession are indicative of a service arrangement rather than a traditional lease.

While the judicial position broadly supports the view that a bona fide service agreement does not require registration under the Act, it is imperative that such agreements are carefully structured to reflect the true nature of the arrangement.

Conclusion:

The emergence of managed office spaces has introduced a paradigm that does not fit harmoniously within the traditional property law framework. An agreement that is genuinely structured as a service arrangement wherein the provider retains possession and control, offers bundled services, and does not transfer any interest in immovable property would not attract the requirement of compulsory registration under section 17 of the Act. On the contrary, an agreement that is merely dressed as a service agreement but operates, in substance, as a lease would be subject to the registration requirement regardless of its nomenclature.

Author:

Ms. Shruti Choudhary – Senior Associate

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