What the Model Tenancy Act means for landlords, tenants and NRIs?.
After releasing the draft in 2019, the Centre on 2 June 2021 formally approved the Model Tenancy Act (MTA) to streamline the process of renting property in India.
As per Census 2011, more than 1 crore houses were lying vacant in urban areas across the country. The Ministry of Housing and Urban Affairs says that the existing rent control laws are restricting the growth of rental housing as they discourage the owners from renting out their vacant houses due to fear of not getting them back.
In absence of a model law, there are informal agreements with arbitrary clauses and often litigation arising out of disputes. As per the government, both the tenants as well as the owner are often found at the wrong end of a bargain in informally drafted agreements.
The existing rent control laws are restricting the growth of rental housing and discourage owners from renting out their vacant houses due to fear of repossession. One of the potential measures to unlock the vacant house is to bring transparency and accountability in the existing system of renting of premises and to balance the interests of both the property owner and tenant in a judicious manner, the law says.
States can adopt the new act as it is by fresh legislation, as it is a state subject, or they can amend their existing rent acts suitably to factor in the new MTA. States and Union Territories have MoUs signed with the Centre under the Pradhan Mantri Awas Yojana-Urban which has this provision.
In 2015, before the Housing for All by 2022 Mission (Pradhan Mantri Awas Yojana-Urban) was launched, it was decided that 20 per cent of the two crore houses that were to be created should be exclusively for rent. The decision was based on a 2013 report by a Union government Task Force for Rental Housing, which held that affordable rental housing “addresses the issues of the underprivileged and inclusive growth, in an even more direct manner than affordable ownership housing”. The Expenditure Finance Committee even cleared an outlay of Rs 6,000 crore for a rental component in PMAY-U; the Centre would bear 75 per cent of the expenses incurred to create rental housing stock, while the rest would be borne by states, urban local bodies, or through NGOs or CSR activities of the private sector.
As per the ministry’s studies, rental housing is a preferred option for different segments of society such as migrant labour, working professionals and especially students. After enforcement of this Act, no person shall let or take on rent any premises except by an agreement in writing.
Repeal of local rent control Acts has been a politically sensitive issue in cities with high-value rent markets, like especially in South Mumbai, where old properties in prime locations have been occupied for decades by residential and commercial tenants at negligible rents. The Model Act has been in the making since 2015, but has been held up on this point.
The new Act will be applicable prospectively and will not affect existing tenancies. Rent and duration of tenancy to be fixed by mutual consent between owner and tenant through a written agreement. This Act seeks to cover urban as well as rural areas.
The law envisages a dedicated and robust redressal ecosystem in India for rent-agreement-related disputes. States will set up grievance redressal mechanisms consisting of Rent Authority, Rent Court and Rent Tribunal to provide fast-track resolution of disputes. Disposal of complaint/appeal by Rent Court and Rent Tribunal will be mandatory within 60 days.
There is no monetary ceiling under the new law, which enables parties to negotiate and execute the agreement on mutual agreed terms. While this is the case even now, in many old properties let out under archaic rent-control acts, such ceilings have forced landlords to be stuck with outdated rent amounts. Now, this law will give confidence to landlords to let out their vacant premises.
A digital platform will be set up in the local vernacular language or the language of the State/UT for submitting tenancy agreement and other documents. The Rent Authority will keep a tab on these agreements. It would avoid dispute by clarifying the roles and responsibilities of landlord as well as tenant, the ministry says.
Verbal agreements will be out of the picture, as the MTA mandates written agreement for all new tenancies which is to be submitted to the Rent Authority. The tenant will continue to pay the rent even during the pendency of a dispute with a landlord, and this is enshrined in the new Act. Subletting of premises can only be with the prior consent of the landlord and no structural change in the premises can be done by the tenant without the written consent of the landlord.
The security deposit to be paid by the tenant should not exceed two months’ rent for residential property, and should be a minimum of one month’s rent for non-residential property. It lists the kinds of repairs each party would be responsible for, with the proviso that money for repairs can be deducted from the security deposit or rent, as applicable, if a party refuses to carry out their share of the work. No arbitrary eviction of tenant can be done during the currency of tenancy period except in accordance with provisions of the Act.
The Rent Court can allow repossession of the property by the landlord if the tenant misuses the premises, after being served a notice by the landowner. Misuse of the premises, as defined, includes public nuisance, damage, or its use for “immoral or illegal purposes”. If the tenant refuses to vacate, the landlord can claim double the monthly rent for two months, and four times the monthly rent thereafter.
In case of “force majeure” event, the landlord shall allow the tenant to continue in possession till a period of one month from date of cessation of such disastrous event on the terms of existing tenancy agreement.
The security deposit will be 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.
The government says the Act aims to formalise the shadow market of rental housing, unlock vacant properties, increase rental yields, ease/remove exploitative practices, reduce procedural barriers in registration, increase transparency and discipline, which would help in reposing confidence of investors in the sector besides improving quality of rental housing stock.
Case of NRIs
Indian real estate has long been of interest to the NRIs. Residing overseas this community looks to have a house/residential property back in their home country which can be used to settle down once they decide to move back or even to invest in an asset class that has delivered superior returns in the long term.
The NRIs/HNIs expect investor-friendly laws for investment in any asset class with well-defined norms. The Model Tenancy Act once implemented by the states can help in the following ways.
Ease of Leasing - One of the biggest pain points in leasing out the properties was the fear in the mind of the NRIs, overseas investors, or even people who stay outstation that the tenant may not vacate the property post the lease tenure. There is a clause of penalty on the tenant in the event of failure to vacate the premise post the lease period. The Act safeguards the rights of the landlord as well as the tenants. The Act aims to do away with the concept of a hefty security deposit, the step will boost rental activities.
A steady flow of income - A high number of residential units were purchased and kept vacant due to the uncertainties related to the tenant vacating the property post the tenure of the lease. The act clears the air, will instill confidence in the minds of the investors to lease out the properties and unlock gains in the form of regular monthly rentals.
Institutional investment in residential units - The Act aims to formalize the renting & leasing activity of real estate properties in the country. The clarity on leasing laws will help boost institutional investment in residential real estate properties. Till now the HNI/NRI investment was largely seen in commercial properties due to the sheer scale, size, and high rental yields vs the residential properties. The new Act will boost confidence and institutional investment in residential real estate too. Developers can now work on projects that are built to lease which will reduce their cost substantially.
Institutionalizing rental business in India - Investor-friendly laws will help attract global investment into the Indian real estate industry. We have already seen a stellar response to several REITs’ IPO in India. The new act has the potential to attract similar investment in the residential real estate segment and institutionalize the renting business in India.
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