Centre floats draft model tenancy law: Will states bite the bullet?

Within a week of Finance Minister Nirmala Sitharaman stating in her maiden Budget speech the need do away with archaic rental laws, the Ministry of Housing and Urban Affairs has come out with the draft Model Tenancy Act, 2019, for public comments.

Experts point out, like in the case of setting up of the Real Estate Regulatory Authority (RERA), the implementation of the Tenancy Act will be state-dependent. However, the Centre may not come out with a central Act for rent control with land being a state subject.  

“The Model Tenancy Act may just be a template. Land is a state subject and they will have to legislate on it,” noted Arun Srikumar, partner at law firm Keystone Partners.

The model Act will provide a rough framework to states to follow, experts added. What is not clear though whether states will toe the central government's line or draft entirely different laws. Tamil Nadu, for instance, had come out with its own tenancy Act in February this year.

Most experts believe that though states will adopt the model law, there could be tweaks here and there to suit specific needs of the market.

The draft model law has both substantive and procedural provisions. The substantive provisions are things like how much security deposit could be charged and what the penalty is. “Any disagreement will be fixed by law,” said Sri Kumar.

The procedural aspects include setting up of a rent authority in each state. “No state can accept the substantive aspect and not the procedures. The way it is conceived is that states must accept the model law in its totality,” said Sri Kumar.

Among the various provisions listed in the draft model law, the proposed rent authority will be informed about the agreement between a lessor and the lessee within two months of the signing of the said agreement. The draft rules also suggest stiff penalties on overstay by a tenant, which will be codified under law.

According to Abhilash Pillai, partner, real estate practice, Cyril Amarchand Mangaldas, there could be three reasons for states adopting the model law: 

(a) Since tenancy agreements will be submitted to the rent authority, all such documents will get adequately stamped, bringing more revenue to the state exchequer.

(b) Increase of residential leasing will indirectly help achieve the ultimate aim of “Housing For All”.

(c) A balanced and fair tenancy law will formalise and stabilise the leasing market. 

Experts point out that under initial tenancy laws, the need was to protect the tenant. In all the major metro cities, there were large landowners and was also a lot of migration. The idea initially was to have a more secure tenancy in terms of tenure, experts said.

“Now the attempt is to take a relatively balanced view by taking the problems of landlords into consideration,” said Avnish Sharma, partner at Khaitan & Co.

The draft model law also proposes having an officer of the rank of deputy collector as rent authority to adjudicate the issue arising out of a rental disagreement between the lessor and the lessee in each district of the state.

“This is a deep-rooted reform. If implemented by all the states, it will give a precise data point on the market rent. That, in turn, will help to release the stock which is currently being held back by landlords,” said Sharma.

Pillai said there is a high possibility that the rent authority will rely on the opinion of the local revenue officials for deciding the fair rent. However, this may not be a practical approach. “Revenue officials may not be privy to the prevalent market rates,” he said. 

He suggested the issue can be addressed if states come up with a rent index on the lines of the RERAs in Dubai and Singapore. This move would help reduce “chances of any challenge” to the rent authority’s decisions, he said.

The establishment of rent authority in every district could, however, have problems of its own, the experts said. Though limited right has been given to the rent authority, it may create complications around the interpretation of the model laws, they said.

The experts are unsure if states would agree to some of the contentious issues such as the cap of two months on security deposit asked by the landlord. For instance, the new tenancy Act in Tamil Nadu has done away with the cap of one month of rent deposit. Under the new Act, the lessor and lessee are free to agree upon the amount of security deposit.

“There is a need for further improvements in the model Act at the central level or when rules are formulated at the state level,” said Sachit Mathur, partner at law firm L&L Partners.