Complete Guide to Lease Contracts in Nepal: Legal Provisions and Tenant Rights

A lease contract is a legally binding agreement between two parties, the lessor (owner) and the lessee (tenant), in which the lessor grants the lessee the right to use a property or asset for a specified period in exchange for periodic payments, typically known as rent. Lease contracts are commonly used for both residential and commercial properties, but they may also apply to vehicles, machinery, or other movable assets. The purpose of a lease contract is to clearly define the rights, responsibilities, and expectations of both parties to avoid future disputes. Key elements typically included in a lease contract are the duration of the lease, rental amount and payment schedule, maintenance obligations, termination conditions, and renewal terms. It may also include clauses regarding security deposits, insurance, and usage restrictions.

In Nepal, lease agreements are governed by the general principles of contract law as laid out in the Muluki Civil Code, 2074 (2017). For a lease contract to be valid, it must be made with free consent, lawful consideration, and for a lawful purpose. Registration of the lease is often required for longer durations, especially in the case of real estate. A properly drafted lease contract helps in maintaining a clear, transparent, and enforceable relationship.

Legal provision relating to lease contract.

A contract of lease deemed to be made:

A lease contract is established when one party, known as the lessor, grants another party, the lessee, the right to use and possess certain goods in exchange for regular rent over a specific period. These goods must be owned and possessed by the lessor and must be capable of generating benefits through their use without being consumed or destroyed. The legal definition of "goods" in this context includes any property that can provide value through possession or use without diminishing in substance. Once such a contract is made, the lessor is obligated—unless otherwise agreed—to ensure the lessee receives the goods in a condition suitable for immediate use, maintains them in working order, and allows their peaceful use without interference. However, it is explicitly stated that consumable or perishable items, which are destroyed during their use, cannot be subject to a lease contract. This ensures that the lessee enjoys uninterrupted and beneficial use of the goods throughout the lease period.

Form of the leased goods not to be changed:

The lessee is not allowed to alter the original form of the leased goods without the owner's consent during the lease period. However, the lessee is permitted to repair, maintain, improve, or renovate the goods as needed.

To use the leased goods in good faith:

The lessee must use and possess the leased goods in good faith and with care, as if they were their own, and in accordance with the purpose stated in the lease contract. If the lessee misuses the goods or acts against these terms, the lessor has the right to terminate the lease agreement at any time.

To repair and maintain leased goods:

The responsibility for repairing and maintaining leased goods generally lies with the lessor, unless stated otherwise in the lease contract. However, if urgent repairs are needed to continue using the goods and the lessor is informed, the lessee may carry out the repairs. In such cases, the lessor must either reimburse the costs or adjust them against the lease rent.

Lessor to be informed if goods are not usable:

If leased goods are lost, damaged, unusable, or subject to claims or disturbances, the lessee must immediately inform the lessor. Upon receiving this notice, the lessor must repair, restore, or seek legal remedies to return the goods to their original condition within 15 days. If the lessor fails to do so, the lease rent will be reduced in proportion to the loss, damage, or disturbance affecting the lessee's ability to use the goods.

Lessee to be liable:

The lessee must use and care for the leased goods responsibly to prevent loss or damage. If the goods are lost, destroyed, or decrease in value due to the lessee’s negligence or that of their family, agents, or third parties during the lease period, the lessee is liable to restore the goods or compensate the lessor. However, the lessee is not responsible for loss or damage caused by force majeure events such as natural disasters, fire (not caused by lessee’s fault), terrorism, riots, or similar uncontrollable incidents. If partial damage occurs due to such events and the lessor cannot restore the goods, the lease rent should be reduced proportionally.

To pay lease rent:

The lessee is required to pay the lease rent to the lessor according to the terms set in the lease contract. If the contract does not specify payment terms, the lessee must pay rent monthly for movable property, within fifteen days after the fiscal year for farmland, servitude, or land leased for industrial or housing purposes, and weekly for other goods. However, if the lessee is prevented from fully possessing or using the leased goods due to ownership disputes, hindrance, or claims by others, they may reduce the rent proportionally.

Validity period of contract of lease:

Maximum lease validity periods by type of goods:

• Housing land (for building construction or with buildings): 35 years
• Land leased for servitude: 35 years
• Land for infrastructure (industrial, roads, canals, electricity): 40 years
• Farming land: 20 years
• Houses and land for other purposes: 19 years
• Motor vehicles: 15 years
• Machinery (other than motor vehicles): 15 years
• Other machinery and equipment: 15 years
• Domestic animals: 10 years
• Domestic animals: 10 years
• Lease period may be extended before expiry, subject to validity limits.
• Parties can decide on extension considering the location and nature of leased property.

Leased goods may be sub-leased:

A lessee may sub-lease the leased goods, or any part of them, to another person, but only with the prior consent of the lessor and by entering into a separate lease agreement. However, even after such a sub-lease is made, the lessee continues to remain fully responsible to the lessor for fulfilling all obligations under the original lease contract. The terms and conditions of the sub-lease must be consistent with those of the original lease. Additionally, the contract may include a provision making the sub-lessee directly liable to the lessor for obligations related to the leased goods. In such cases, the sub-lessee’s liability will be limited to the terms of the sub-lease agreement. Importantly, the duration of the sub-lease cannot exceed the term of the original lease. If the lessor takes legal action or seeks any remedy against the lessee, the sub-lessee will generally not be held responsible unless specifically made liable under the sub-lease terms. Despite the sub-lease, the original rights of the lessor as per the lease contract remain fully protected and enforceable.

To return leased goods:

When a lease contract ends, unless stated otherwise in the agreement, the lessee must return the leased goods to the lessor within 35 days of termination. In the case of immovable property, the lessor automatically regains possession after 35 days, regardless of physical return. The goods must be returned in the same condition as when they were leased, except for natural wear and tear due to reasonable use. If a record of goods, accessories, or spare parts was made at the time of leasing, the lessee must also return those items as per the record. However, any parts or accessories that were naturally lost or used up through normal use need not be returned.

Special Provisions Relating to the Lease of Immovable Property

In the case of immovable property, there are specific legal provisions that must be followed under lease contracts in Nepal. Firstly, all leases involving immovable property must be made in writing. If the lease is intended to last more than ten years, it is mandatory to register the contract with the legally authorized body. Furthermore, the law restricts the leasing of immovable property to individuals or entities that are not legally allowed to own land in Nepal, particularly for purposes such as farming, building construction, or land development, unless prior approval is obtained from the Government of Nepal. When the lease term expires, any buildings, sheds, gardens, or structures built by the lessee on the leased land are considered the lessee’s property unless stated otherwise in the lease agreement. Therefore, the lessee has the right to remove such structures or vegetation. However, if the lessor wishes to retain them "as-is," they must compensate the lessee with a mutually agreed price. These provisions ensure clarity, protect both parties’ rights, and maintain transparency in lease dealings related to immovable properties.

Termination of Lease Contract

A lease contract may be terminated by either the lessor or lessee under specific conditions. The lessor can terminate the lease if:

• The lessee fails to pay the lease rent within 90 days of the due date, unless otherwise permitted.
• The lessee uses the leased goods against the intended purpose.
• The lessee does not inform the lessor about damage, loss, or other important issues regarding the goods.
• The lessee fails to restore the goods to their original condition after damage.
• The lessee sub-leases the goods without the lessor’s prior consent.

On the other hand, the lessee may terminate the contract if:

• The goods cannot be used for the intended purpose.
• The lessor fails to reimburse or adjust repair costs.
• The lessor refuses to reduce the lease rent even when conditions under the law require such reduction.

Statute of limitation

Any person aggrieved by an act or action taken under this chapter must file a lawsuit within three years from the date the cause of action arises.

Lease contracts play a crucial role in defining the legal relationship between a lessor and lessee, ensuring mutual clarity, rights, and responsibilities. In Nepal, such agreements are governed by the Muluki Civil Code, 2074, which outlines specific provisions for movable and immovable property leases, including permissible durations, sub-leasing rules, usage conditions, rent payment, and grounds for termination. These legal guidelines promote transparency and accountability, helping to prevent disputes. By adhering to statutory requirements—such as proper documentation, registration for long-term leases, and clear termination clauses—parties can ensure enforceable and fair leasing arrangements that protect both ownership rights and user interests.