The Cabinet on June 2 approved the Model Tenancy Act for circulation to the States/Union Territories for adoption. It is aimed at opening up of the vacant housing stock for rental housing purposes and helping bridge the trust deficit that exists between tenants and landlords by clearly delineating their obligations.
Real estate experts say that clear-cut incentives to boost rental housing via a sound policy will positively help the government to further strengthen its Housing for All initiative.
To ensure speedy redressal of disputes, the Act calls for establishing a separate Rent Court and Rent Tribunal in every state/UTs to hear appeals for matters connected to rental housing.
It also seeks to establish an independent authority in every state and Union Territory for registration of tenancy agreements. Only the rent court and no civil court will have the jurisdiction to hear and decide the applications relating to disputes between landowner and tenant and matters connected with it. It calls for disposal of complaints and appeals by the Rent Court and Rent Tribunals within 60 days.
Under the Model Tenancy Act, unless otherwise agreed in the tenancy agreement, the landlord will be responsible for activities like structural repairs except those necessitated by damage caused by the tenant, whitewashing of walls and painting of doors and windows, changing and plumbing pipes when necessary and internal and external electrical wiring and related maintenance when necessary.
On his part, tenant will be responsible for drain cleaning, switches and socket repairs, kitchen fixtures repairs, replacement of glass panels in windows, doors and maintenance of gardens and open spaces, among others.
Real estate experts say that the Act can fuel the rental housing supply pipeline by attracting more investors, and more rental housing stock will help students, working professionals and migrant populations to find urban accommodation, especially in COVID-19-like exigencies.
To apply to residential and commercial properties
The Act will apply 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.
It seeks to cover both urban as well as rural areas.
The Act says that a security deposit equal to a maximum of two month’s rent in case of residential premises and maximum of six month’s rent in case of non-residential premises would have to be paid by the tenants.
How will states implement it?
As per the memorandum of understanding signed between the states and union territories under PMAY-U, the states and union territories would legislate or amend the existing rental laws on the lines of the Model Tenancy Act.
Why was a need felt to bring this on
The housing and urban affairs ministry had floated the draft model tenancy law in July 2019.
Without a well-rounded rental policy and the proper implementation of rental contract, there was no sound mechanism to resolve tenant-landlord conflicts. Property owners find it challenging to evict tenants if they misuse the property. To steer clear of such complications, such property owners often chose to keep these homes vacant instead of renting them out.
Unattractive rental yield.
In India, the rental yield for residential property is quite low, even in bigger cities. It is in the range of 1.5% to 3% of the capital values. This has disincentivised people from investing in second or third homes which could be rented out.
NRIs have historically found it challenging to rent out properties because of the complexities of getting good tenants, managing rental agreements, and taking care of the maintenance of these properties. Often, they also prefer to leave their properties vacant in case they return to India. NRIs avoid leasing their residential properties for fear of squatters and dealing with the legalities of eviction.
How will MTA help
It will unlock vacant houses for rental purposes
The Model Tenancy Act will facilitate unlocking of vacant houses for rental housing purposes. As per Census 2011, more than 1 crore houses are lying vacant in urban areas across the country.
The existing rent control laws have been restricting the growth of rental housing and discouraging owners from renting out their vacant homes due to fear of the tenant to vacating the premises.
It will enable creation of adequate rental housing stock for all the income groups thereby addressing the issue of homelessness. Rental housing is a preferred option for students and migrants.
It will balance the rights of both landlords and tenants
The Act seeks to balance the rights of both landlords and tenants to promote rental housing. It is aimed at bridging the trust deficit between tenants and landlords by clearly delineating their obligations.
There is no monetary ceiling under MTA, which enables parties to negotiate and execute the agreement on mutually agreed terms. It will give confidence to landlords to let out their vacant premises, the housing ministry said.
MTA mandates for a written agreement for all new tenancies which are to be submitted to a Rent Authority.
A digital platform will be set up in the local vernacular language or the language of the state/UT for submitting the tenancy agreement and other documents.
The Model Tenancy Act addresses issues faced by landlords and tenants such as the requirement to have a formal rent agreement, how much security deposit should be paid, rate of rent increase and the grounds for eviction.
It has proposed limiting the advance security deposits to two months’ rent, and has also suggested heavy penalties for tenants who decide to overstay. Those who do may have to shell out double the rent for two months and even four months.
Other provisions in the Act include limiting the tenant’s advance security deposit to a maximum of two months’ rent and to a maximum of six months for non-residential purposes.
The Act also tries to address how a renter can legitimately increase the rent. The Act states that rent can either be increased according to the terms and conditions mentioned in the agreement, or the landowner will have to give a notice in writing to the tenant, three months before the revised rent comes into effect.
Time bound and robust grievance redressal mechanism comprising the Rent Authority, Rent Court and Rent Tribunal to provide fast track resolution of disputes.
The landowner cannot cut power and water supplies in case of a dispute and would have to provide a 24-hour notice to tenants to carry out repair work. Should the landlords wish to increase the rent, they will need to provide a three-months’ notice to the tenants.
“These measures would go a long way in protecting the rights of a tenant as it regulates the rent hikes that tenants have had to face. The Act has got approved at the right time as many tenants have been facing liquidity crunch due to the pandemic and ensuing salary cuts and layoffs. It would also protect the interests of the owners as many houses have been vacant and the necessity of a formal rental agreement in place would help them get closures,” said Amit Agarwal, CEO and co-founder at NoBroker.
It will not impact existing tenancies
MTA will be applicable prospectively and will not affect existing tenancies. The rent and duration of the tenancy will be fixed by mutual consent between the owner and tenant through a written agreement.
Rental housing lucrative proposition for REITs and FDI
MTA will help in overhauling the legal framework vis-à-vis rental housing across the country and is expected to give a fillip to private participation in rental housing.
Experts say that rental housing can gain traction with a conducive policy framework which shall attract corporate players to provide serviced apartments for their employees. It also gives a lucrative proposition for REITS and Foreign Direct Investments players with steady income as well as appreciation in the property value.
Realtors’ body NAREDCO had said earlier that the proposed model tenancy law, if implemented by all states, will promote rental housing in a big way and it expected builders to construct at least 50 percent of its total inventories for rent purpose in the next five years.
Challenges ahead
While the proposals of the Model Tenancy Act have been widely welcomed, their implementation may not be very simple. The Act is not binding on the states as land and urban development remain state subjects. It is still a matter of choice for states and Union Territories to repeal or amend their existing Acts. Like in the case with RERA, the fear is that states may choose not to follow guidelines, diluting the essence of the Model Act.
“While the government lays down the basic policies, the exact rules will likely change within each state since land is a state subject. Like we saw in the highly lopsided roll-out of RERA, the Model Tenancy Act, 2019 may lose its real purpose if states do not follow the basic guidelines and dilute them. For this reason, the Model Tenancy Act, 2019 – like RERA – may well become a process rather than an event, and need several course corrections to reduce regional dilutions before it becomes a force to reckon with,” said Anuj Puri, Chairman – ANAROCK Property Consultants.
Also, the Model Act is prospectively applicable and will not affect the existing tenancies. The repeal of rent control Acts can be governed by political exigencies. This may be a complicated process in cities like Mumbai, where tenants have occupied residential properties in prime areas for absurdly low rents.
The cap on the security deposit may not find favour with many landlords. In cities like Bengaluru, the norm is a 10-month security deposit as a two-month deposit may be insufficient to cover any damage to the property or compensate for defaulted rent payments.
Devendra Deshmukh, Partner, Khaitan & Co points out that the provisions of the proposed Model Tenancy Act (MTA) will have to be seen in light of the existing tenancy laws, most of which (baring a few exceptions) were enacted post the Second World War with the specific purpose of preventing exploitation of tenants by landlords, in markets that then had scarce housing stock.
The welfare objective of the existing tenancy laws, which are heavily skewed in providing tenant protection, appears to be fading away when we have instances of tenants occupying prime premises for paltry rents.
“In order to truly open-up the rental market as an evolved one, it is imperative for the Government to formulate a way to balance social welfare of tenants and the economic interests of landlords. Balanced protection to landlords and tenants alike will provide impetus to landlords to rent out vacant premises,” he says.
In the present form, the draft legislation envisages a three-tier dispute redressal mechanism and lacks provisions which can mitigate long drawn landlord–tenant litigations, he says.
Strangely, the MTA is altogether silent on leave and license arrangements. This is perhaps the most significant aspect which it must cover, he adds.
Also, the Model Tenancy Act is prospective, which means it won’t affect the owner-tenant relationship as it stands today under the Rent Control Act of the respective state.
