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Draft Model Tenancy Act: Brokers, Please Excuse

Draft Model Tenancy Act: Brokers, Please Excuse
The tenancy law must factor in residential, commercial or any other type of property/Photo: Anil Shakya
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Above: The tenancy law must factor in residential, commercial or any other type of property/Photo: Anil Shakya

The Model Tenancy Act is aimed at promoting the growth of rental housing and thus addresses the huge shortage of dwellings as well as takes some load off the overburdened litigation process

By Alok Gupta

It is one of the ironies of the housing sector in India that even though there exists a huge shortage of houses, particularly in urban areas, the census count of 2011 showed that more than 1.1 crore houses were lying vacant across the country. Needless to say, that number would have gone up tremendously in the last eight years.

In a bid to promote the growth of the rental housing sector, the Ministry of Housing and Urban Affairs has drafted the Model Tenancy Act, 2019. In her first Budget speech, Finance Minister Nirmala Sitharaman had promised such an Act and said that the government would bring in more measures which would render the current rental laws— that do not really address the “relationship between the leaser and the lessee realistically and fairly” redundant.

Most of the states in India already have their own rental laws. Maharashtra has “The Maharashtra Rent Control Act, 1999”, Karnataka has “Karnataka Rent Control Act, 2001 (known as the Karnataka Rent Control Act, 1999)”, Delhi has the “Rent Control Act, 1958” and Tamil Nadu has “Tamil Nadu Buildings (Lease and Rent Control) Act, 1960”. Ditto for most of the other states.

In rent deals, most of the time, disputes arise mainly 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”. The parties should enter into the agreement only after giving a thought to all the aspects of renting the property and the probable causes of conflicts that may arise later.

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 fear of not getting them back. The law has no business to sympathise with any such forceful occupier of the house. The current laws restrain the owners from disconnecting essential services, such as electricity and water supply, for tenants. But when the same owners do not pay their electricity or water dues, they are not spared by such service providers. Why should then the owners be forced to follow any such law?

The slow pace of the law and delay in court judgments discourage the owners from renting out their properties. On the 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. 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.

In order to cope with the burden the judiciary already has, the authority to resolve property-related disputes can be vested with the local police and the IPS officer in charge of the region can be given the power to pass and enforce orders based on the agreement entered into by the parties concerned. In fact, if the broking industry is nurtured well, regulated properly and licensed, the broker of the deal can be authorised to arbitrate disputes arising out of the agreements between owners and tenants.

The role of a broker or an agent in a deal is critical. First of all, only registered or licensed brokers should be allowed to operate in the market. The role of 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. 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 he the entity on whom a deal depends. He is also not the underwriter or the guarantor of the deal. He is just a representative of one of the two or both the parties.

There are three independent parties in a typical rent deal. One, the owner; two, the middleman, popularly known as the broker or an agent; and three, the tenant. From the owner’s side, an agent is asked to bring in tenants at a good rent while from the tenant’s side, an agent is supposed to get the lowest rent. He sometimes also helps in drafting and registering the agreement. There is a need to define the role of an agent vis-à-vis his services taken in a deal.

Another area of concern is the role of the electronic media related to the real estate sector. The Act should also define its role clearly.

The law to be brought in should also factor in the type of properties to be rented out. Whether residential, commercial, industrial, land or any other. 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 commercial terms and conditions of any rent transaction should be 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 two parties.

The law to be brought in should be invoked only when and where the agreements are incomplete and do not cover the points of dispute between the two agreeing parties.

Coming to the security deposit, it is to be understood as to why such an amount is collected by owners from tenants. Most of the time, tenants vacate the premises and exit the agreement abruptly either out of compulsion, such as 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 unpaid rents, unpaid TDS, damage caused to the property, etc., and other payables such as electricity charges, telephone or data charges, unpaid dues of other service providers like maids, milkman, etc., from the security 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. As far as the penalty for not vacating the premises is concerned, the owner should be allowed to take possession of his premises immediately on expiry (or termination) of the agreement whether peacefully or forcefully.

Regarding 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 reverse of the same would apply for tenants. The same should hence be market-driven and both parties should clearly define such an issue in their agreement.

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

On an average, the owner gets a net return of around three percent 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 fixed deposits in a bank, he would have got around seven percent. If the same amount was invested in a mutual fund, the return would have been over nine percent per annum. This means that investment in properties fetches the lowest return.

There is no significant growth of the capital value, too. This discourages the investors from investing in the real estate industry which is the prime reason for its poor state these days.

The law to be brought in should fix the minimum rent an owner should get which should be linked to the current market value of the property. This will encourage more investors to come in thereby throwing open more stocks to the prospective tenants.

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. Actually, it should be the owner’s prerogative as to who he rents out to so long as the primary usage of the property is not changed. Singles, bachelors, religion, caste or creed shouldn’t factor in any way from taking a particular property on rent. Surely, this is not an endless debate. A logical conclusion can definitely be drawn and a proper law or a by-law framed after due diligence of all the facts and situations.

—The writer is a real estate consultant and a patron member of The Estate Agents Association of India’. The views expressed in this story are his own

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