The real estate environment in India has been facing land market distortions, including inflexible zoning, rent control and protected tenancies for a large number of years. These were detrimental to the health of this market. The earlier Rent Control Act was an attempt by the government to eliminate the exploitation of tenants by landlords. However, in the long run, these archaic laws have gathered operational inefficiencies and have led to several adverse situations, including weakening investments in rental housing, deteriorating municipal property tax revenue, and so on.
Given the acute housing shortage and to achieve the vision of “Housing for All by 2022”, there was a definite need to incentivise and boost rental housing. The Finance Minister, in her maiden Budget speech of 2019, had also highlighted that the current rental laws are archaic, as they do not address the relationship between the lessor and the lessee realistically and fairly. The Model Tenancy Act, 2019, issued by the Centre, seeks to address the distortions in India’s rental markets and could help modernise it.
Applicable prospectively: The Act will be applicable to premises let out for residential, commercial or educational use, but not for industrial use. It also won’t cover hotels, lodging houses, inns, etc. This model law will be applied prospectively and will not affect existing tenancies.
Limits on security deposit: The law tries to address the most complex factor in a rental deal – security deposit. The draft Act proposes to cap the security deposit to a maximum of two months of rent in case of residential properties and a minimum of one month’s rent in case of non-residential properties.
The cap on security deposit could become an acute pain-point for owners in cities such as Bengaluru and Mumbai, where 10-12 months’ rental as security deposit has been the norm.
Also, if a tenant defaults or causes significant damage to the property, a two-month security deposit may not be enough to cover the expenses that the property owner may incur in repair and overhaul works.
Norms for increasing rent: The draft Act also tries to address the issue of how rent can be increased. Section 9(2) of the model law provides that rent can either be increased according to the terms and conditions mentioned in the agreement, or the land owner shall be required to give a notice in writing three months before the revised rent comes into effect. The tenant should either accept the increased rent or give notice for termination of the agreement. If the tenant fails to reply to the notice for an increase in rent, he shall be deemed to have accepted the increase proposed by the landlord.
Inform the Authority: A form for information of tenancy as prescribed in the first schedule to the model law needs to be filed with the Rent Authority, along with know your customer (KYC) documents of the owner and the tenant, within two months of entering into a rental agreement. A digital platform will be set up in the local vernacular language of the state for submitting tenancy agreement and other KYC documents. The Model Act imposes that the information filed with the Rent Authority shall be taken as evidence of facts related to the tenancy. In the absence of any statement of information, the tenancy agreement alone will not be received as evidence of facts in any court of law.
Vacate premises on time: The Act proposes to levy heavy charges on tenants who do not vacate on time. Under the provisions of Section 22, a landowner is entitled to get compensation equal to double the monthly rent for two months, and four times the monthly rent thereafter, for the use and occupation of premises by a tenant who does not vacate the premises after his tenancy has been terminated by order, notice or according to agreement.
Grievance redress mechanism: For disputes between owners and tenants, the Model Act stipulates a robust grievance redress mechanism comprising Rent Authority, Rent Court and Rent Tribunal, set up in specific areas, which will settle disputes within 60 days. An officer, not below the rank of Deputy Collector, shall be appointed as Rent Authority, with the approval of the state government. Rent Courts and Tribunals, with presiding officers from the judicial services background , have been vested the powers of a civil court under the Code of Civil Procedure, 1908.
Will states toe the line? The Centre is confident that the states and union territories will back the Model Tenancy Act, 2019, and it will not go the way in which the Real Estate (Regulation and Development) Act was implemented, with considerable dilutions and U-turns. All states have already given their commitments by signing memorandum of understanding. Under this, states will either enact the same Act or align their existing rental laws with it , once the Centre comes up with the Model Tenancy Act.
It remains to be seen to what extent the states will toe the central government’s line, as land remains a state subject. If the states and union territories are able to enforce this novel legislation in letter and spirit, it will go a long way towards reviving the fortunes of the rental market in India.
The writer is Director, Nangia Advisors (Andersen Global)