THE LAW TO BE ENFORCED NEEDS SOME MINOR REVISIONS

– Alok Gupta


I have been writing on this act, ever since the act’s draft was thrown open to the public for suggestions. On 2nd June 2021, the Union Cabinet has finally approved the Act and I am glad that most of my suggestions have been incorporated in the final law before giving it the name and the shape of the Model Tenancy Act, 2021 ( MTA 2021 ).

.. the parties concerned should draft the agreement between them carefully and then adhere to it too ..

I have always emphasised the need for a proper agreement between the landlord and the tenant. I am glad that MTA 2021 too has given due importance to the written agreement between the parties. Most of the time, disputes arise majorly due to two reasons. One, the agreement between the 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’. Is this the right way of tackling any issue lawfully? Certainly not. The parties concerned should spend time on drafting the agreement between them and then learn to adhere to it. It would be easier for the parties concerned to adhere to the agreement if they enter into it after giving a thought to each and every clause of the agreement considering all the aspects of renting the property and the probable causes of conflicts later.

.. landlords do not rent out properties for the fear of not getting them back ..

One of the major fears I had raised was about not getting the property back by the landlords whenever they wanted it. The current law seems to have taken care of the same quite a bit. Most of the time, 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 the fear of not getting them back. Can there be a situation worse than a person not getting his house, which he bought out of his hard-earned money, back from the tenant when he needs it? The law has no business to sympathise with any such forceful occupier of the house. The section 23 of MTA 2021 does define a heavy penalty i.e. twice the rent for first two months and four times the rent for the subsequent months of such forceful occupation by the tenants but, refrains the owners from disconnecting the essential services such as the electricity and the water supply to such tenants. Although MTA 2021, through its Sections from 21 to 25, speaks amply about evicting such tenants yet it restricts the landlords to take any forceful action himself. In my opinion, when the owners are not spared by such service providers on delaying their payments to them, why should then the tenants get such an immunity.

.. the landlord gets in hand less than half of rent after paying taxes, duties and expenses ..

Today, those owners who are investors are not even able to recover the interest cost on the capital they have invested while those owners who have rented out their apartments out of some compulsion, are just able to recover the expenses of maintaining their properties. 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.

SUGGESTED REVISIONS IN THE ACT

.. commercial aspects such as the Security deposit, advance rent, hike in rent should be market driven, based on the demand and supply or as agreed between the parties ..

All the commercial terms of such transactions 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 parties. The law should be invoked only when and where the agreements are incomplete and have omitted to cover the points of dispute between the two agreeing parties.

The law to be enforced should factor in the type of properties to be rented out. Whether residential, commercial, industrial, land or any other. Currently, except for a very few terms, there are no specific terms for residential and commercial properties. Similarly, the law as of now doesn’t distinguish between an individual tenant, a group of tenants and a company tenant. The Stamp Duties charged are the same on all kinds of Leave and License agreements.

Security Deposit. Section 11 of the act restricts the Security Deposit not to exceed two months’ rent and six months’ rent for residential and commercial premises respectively. It is to be understood as to why such a deposit is collected from the tenants. Most of the time tenants vacate the premises and exit the agreement abruptly either out of some compulsion such as due to their current 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 the unpaid rents, unpaid TDS, damage caused to the property etc. and other payables of the tenants such as the electricity charges, telephone or data charges, unpaid dues of some other service providers like the maids, milkman etc. from the deposit. If the deposit collected is capped at two months of the rent, it would be too little for the owner to cover his losses. Owing to the legal hassle and due to the amount of court fees and legal expenses being more than the amount recoverable, the landlords are forced to forego their dues. The law may hold the tenant liable to pay all such dues but, how and when the same would be available to the owners remains a question.

Further, capping the security deposit may sometimes be counterproductive for the tenants too. Quite a few times, mostly when a company rents an apartment for its employees, the tenant prefers to give more deposit to negotiate for a lower rent. This is because the deposit being refundable, is paid by the employer while the rent is borne by the employee. But, if the security deposit is capped, the landlord will have no option but to be rigid on the rent.

Penalty for not vacating the premises. Although the act envisages a speedy adjudication yet the owner, if he so desires, be allowed to take possession of his premises immediately on expiry ( or earlier determination ) of the agreement whether peacefully or forcefully. Rest others are commercial penalties, which can be levied and recovered from the outgoing tenant later.

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

.. Based on the market capital value, the law should fix the minimum rent a landlord should get ..

Minimum rent. On average, an owner gets a net return of around 3% through rent per annum on his capital invested in buying the property in any urban area. This means, had the same amount been invested in the bank Fixed Deposits, he would have got around 7% and if the same amount had been invested in any mutual fund, the return would have been over 9% per annum. This means that investment in properties fetches the lowest return. There is no significant growth of the capital value too. Why then would anyone invest in properties? They would not. This is the prime reason for the poor state of the Real Estate industry these days, the investors are not entering into it. Around two decades ago, the recurring return was over 10% and the appreciation of the property was over 30% per annum. The law should fix the minimum rent an owner should get. It should be based on the current market value of the property as per the circle rate or the ready reckoner rate. This will encourage more investors to come in thereby throwing open more stocks to the prospective tenants. The tenants would also not hesitate in paying the rent, especially when they would have a wider range of properties to choose from.


 

Author:

Alok Gupta

President of the prestigious, The Estate Agents Association of India, Central Zone One.