THE MODEL TENANCY ACT, 2019

By Alok Gupta, Real Estate Consultant 

Almost every State in India has its own Rent Control Act.

A lot of debate is going on whether the government should bring in a law to control the renting of properties in India or not. Whether one such law would be enough to cater to such a widespread industry of renting premises. Most of the states in India already have some similar laws for their states. Maharashtra has its “The Maharashtra Rent Control Act, 1999”, Karnataka has its “Karnataka Rent Control Act, 2001 ( known as the Karnataka Rent Control Act, 1999 )”, Delhi has the “Rent Control Act 1958” and Tamil Nadu has its “Tamil Nadu Buildings ( Lease and Rent Control ) Act 1960, similarly all other states too have their acts in place. The central government now needs to study all of them minutely, pick up the best points of all such laws, consolidate them and then frame the act to be passed by the lawmakers sitting at the Indian parliament.

It is understood that the law to be enacted is primarily for the properties to be given on rent for a short period, currently known as and covered under the Leave and License agreements. Most of the time, disputes arise majorly due to two reasons. One, the agreement between the two parties is not well-drafted and a lot of issues are left to the ‘understanding’ of the parties involved. Two, the agreement is not adhered to and later, one of the parties starts asking the other party to be ‘practical’ or ‘considerate’. Is this the right way of tackling any issue lawfully ??? Definitely not. The parties concerned should spend time on drafting the agreement between them and then learn to adhere to it. It would be easier for the parties concerned to adhere to the agreement if they enter into it after giving a thought to each and every clause of the agreement considering all the aspects of renting the property and the probable causes of conflicts later.

Most of the time, the owners, popularly known as the ‘landlords’ even if they own just a small apartment in a big society, do not rent out their properties for the fear of not getting them back. There couldn’t be any situation worse than this. Imagine a person not getting his house, which he bought out of his hard-earned money, back when he needs it. The society, in general, can sympathise with any tenant who doesn’t have any alternative place to go to when asked to vacate the place but, the law has no business to sympathise with any such forceful occupier of the house. Secondly, the current laws refrain the owners from disconnecting the essential services such as the electricity and the water supply to such tenants. Why ??? When the same owners do not pay their electricity or water dues, they are not spared by such service providers, which at times are the local government bodies themselves, why should then the owners be forced to follow any such law.

Landlords prefer not to rent out properties unless it’s hassle-free and fetches reasonable returns

It is to be studied and deplored as to why the owners, more often than not, prefer to keep their properties locked and idle rather than renting out. On one hand, they take the risk of losing their properties while on the other hand, they don’t even get the returns worth taking such risks. Although renting out properties, especially in urban areas, nowadays, has become a bit less risky than what it used to be some two or three decades ago yet the slow pace of law and delay in court judgements discourage the owners to rent out their properties. The owners prefer not to rent out their properties unless it’s hassle-free and fetches a reasonable return. And, keeping such properties locked and idle is not in anyone’s interest.

Today, those owners who are investors are not even able to recover the interest cost on the capital they have invested while those owners who have rented out their apartments out of some compulsion are just able to recover the expenses of maintaining their properties. An owner gets in hand less than half of the rent after deducting the income tax, society charges, property tax and other incidental expenses such as brokerage, stamp duty and registration fees etc. leaving aside the interest cost on the capital deployed. Due to the default of a few, the tenants, in general, are seen with suspicion. The landlords too, on the other hand, don’t get a proper return on their investments. This makes the situation a lose-lose one for both.

A law which benefits all and is fit for all is required to be brought in. In order to cope with the burden the Indian Judiciary is already having, the authority to resolve the property-related disputes can be given to the local police and an IPS officer of the rank of a SP or a DCP be given the power to pass and enforce the order based on the agreement entered into by the owner and the tenant. In fact, if the broking industry is nurtured well and is regulated and licensed, even the broker of the deal can be authorised to arbitrate disputes arising out of the agreements between the owners and the tenants.

The role of a broker or an agent in a deal. First of all, only registered or the licensed brokers should be allowed to operate in the market. Secondly, there should be some basic qualification of the brokers to be eligible to get their license and deal in the market. It could be either based on their past experience or on their academic achievement. The role of the brokers as to their rights and responsibilities should be well defined. The act to be brought in should be enlarged to define the real estate broking business too.

A lot of responsibilities are usually attached and attributed to an agent but here, it needs to be understood that an agent is a mere facilitator. He is neither a part of the seller or the buyer nor is the entity on whom a deal depends on. It is to be understood that he is not the underwriter or the guarantor of the deal. He is just a representative of one of the two or both the parties. Loading too many responsibilities on him would not only be unfair but could also be counterproductive for the deal, especially when his own limited interest in the deal is neither safeguarded nor taken care of. In quite a lot of cases, the agent himself is the sufferer party. There are three independent parties in a typical rent deal. One – the owner, two – the middleman ( popularly known as the broker or an agent ), three – the tenant. From the owner’s side, an agent is asked to bring in tenants, do a lot of leg work, highlight the property features to the prospective tenants and sometimes, in the end, he is not even paid his legitimate professional fees. From, the tenant’s side, an agent is supposed to get the lowest rent, do a lot of running, show a lot of properties, help the parties in drafting and registering the agreement between them yet at the end of the deal, quite a few times, the agent again is left without his legitimate professional fees. All this happens when the deal is concluded smoothly. If by any chance, the deal gets concluded after some bumpy rides or gets called off or terminated prior to the regular expiry of the agreement, the agent not only loses his due professional fees but is also cursed to hell. Hence, there is an emergent need to define the role of an agent vis-à-vis his services taken in a deal.

Commercial aspects such as the Security deposit, advance rent, hike in rent should be market driven based on the demand and supply or as agreed between the parties. 

The law to be brought in should factor in the type of properties to be rented out. Whether residential, commercial, industrial, land or any other. Currently, there are no specific and separate Leave and License terms for residential and commercial properties. Similarly, the law as of now doesn’t distinguish between an individual owner and the company owner of a property, an individual tenant, a group of tenants and a company tenant. The Stamp Duties charged are the same on all kinds of Leave and License agreements.

A detailed survey along with an in-depth study is required before framing any law for renting out properties in India. All the terms and conditions of such transactions should be totally market-driven. Security deposit, advance rent, agreement period, hike in rent every year should be allowed to be based on the demand and supply and as agreed between the parties. The law to be brought in should be invoked only when and where the agreements are incomplete and have omitted to cover the points of dispute between the two agreeing parties.

On having a glance over the model law to be brought in, I come across the following items which need a thorough debate and study before being enforced as a law. Security Deposit. It is to be understood as to why such an amount is collected by the owners from the tenants. Most of the time tenants vacate the premises and exit the agreement abruptly either out of some compulsion such as due to their current poor economic health or for a better deal or due to the shifting of their base. In such a situation, the owner is left with no option but to adjust his dues such as the unpaid rents, unpaid TDS, damage caused to the property etc. and other payables of the tenants such as the electricity charges, telephone or data charges, unpaid dues of some other service providers like the maids, milkman etc. from the deposit. If the deposit to be so collected is capped at two months of the rent, it would be too little for the owner to cover his losses. The law may hold the tenant liable to pay all such dues but, how and when the same would be available to the owners remains a question.

Penalty for not vacating the premises. The first and foremost, the owner should be allowed to take possession of his premises immediately on expiry ( or termination ) of the agreement whether peacefully or forcefully. Rest others are commercial penalties, which can be levied and recovered from the outgoing tenant later.

Rent increment in the middle of the term. It is a commercial issue between the two parties. Usually, an owner doesn’t want to increase the rent in the middle of the agreement unless the market becomes extremely volatile. The same should hence be market-driven and both parties should well define such an issue in their agreement. Otherwise, the owners will tend to terminate the agreement by giving notice to the tenant and bring in the new tenants at a higher rent. The reverse of the same would apply for the tenants.

Cost of entering into the agreement. The law seems to be silent on this issue. The prime responsibility of registering the agreement is that of the owners but, the cost of the same should be borne by the tenants.

Minimum rent. On average, an owner gets a net return of around 3% through rent per annum on his capital invested in buying the property in any urban area. Which means, had the same amount been invested in the bank Fixed Deposits, he would have got around 7% and if the same amount had been invested in any mutual fund, the return would have been over 9% per annum. This means that investment in properties fetches the lowest return. There is no significant growth of the capital value too. Why then would anyone invest in properties ? They would not. This is the prime reason for the poor state of the Real Estate industry these days, the investors are not entering into it. Around two decades ago, the recurring return was over 10% and the appreciation of the property was over 30% per annum. The law to be brought in should fix the minimum rent an owner should get. It should be based on the current market value of the property as per the circle rate or the ready reckoner rate. This will encourage more investors to come in thereby throwing open more stocks to the prospective tenants. The tenants would also not hesitate in paying the rent, especially when they would have a wider range of properties to choose from.

Restrictions on renting a property. It is seen, majorly in urban areas, that the house owners’ association or the societies or the area local managements usually levy a restriction on renting the properties under their jurisdiction to a particular set of prospective tenants. It should be the owner’s prerogative as to whom he should rent and whom not as far as the primary usage of the property is not changed. Singles, bachelors, religion, caste or creed shouldn’t be restricted from taking a particular property on rent unless the taker changes the usage of the property such from residential to commercial or vice versa.

The act also should define the role of the electronic media related with the real estate industry. The industry has witnessed a deluge of portals and social media pages which are neither authentic nor regulated which often tend to mislead their patrons. The same property is shown and sold at various different portals by various different agents and ‘owners’ with widely different features at each different portal. Shouldn’t the electronic portals selling real estate across the country also be registered and regulated by an act of law? Surely, this is not an endless debate. A logical conclusion can be drawn and a proper law or a byelaw can be framed after due diligence of all the facts and situations.