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Policy | Will the new Model Tenancy Act bridge the trust divide?

Conflicts between tenants and landlords are well known. The draft new Act is a long overdue attempt to set the house in order

Moneycontrol Contributor @moneycontrolcom
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Representative image

Anuj Puri 

India's rental property market for long has been an arena of disputes between tenants and landlords. That’s largely because it lacked proper laws that reflect the contemporary rental housing market scenario. To resolve the conflict, the government has recently formulated the draft Model Tenancy Act, 2019. Finally, after several decades, the rental housing market is getting due attention.

The Model Tenancy Act seeks to resolve the lack of trust between tenants and landlords by clearly stating obligations of both parties. A rent court and rent tribunal to ensure quicker resolution of disputes are also proposed. Given the government's mission to provide Housing for All, the objective is to create more rental housing stock for students, working professionals and other migrant population.

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Rental legislation – The need of the hour

Despite the acute housing shortage in the country, India's rental market is still underdeveloped and there are lakhs of vacant homes across cities which could serve as rental housing if more property owners felt that renting out their properties is safe and worth it. The last National Census stated that vacant homes accounted for around 12 percent of the total urban housing stock, amounting to nearly 11.1 million homes in 2011 – an increase of 71 percent since 2001.

These vacant homes could feed the rental market across the country. However, there have been several hurdles.

No sound rental policy: 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. This has disincentivised people from investing in second or third homes which could be rented out.

Lacklustre rental demand in far suburbs: Vacancy rates increase as the distance from the denser urban areas increases as there is little rental demand in disconnected far-flung areas. Even if rentals are very low in these areas, many of these locations lack liveability because the necessary infrastructure is still not in place.

Hesitation of NRIs to rent out properties: 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.

A well-balanced Act for both tenants and landlords

Given these challenges, there was a distinct need for revisiting the country's outdated rental laws and provide guidelines to enforce rental contracts and protect the rights of landlords and tenants.

In the draft Model Tenancy Act, 2019, the government has outlined the following new proposals.

Security deposit is capped to a maximum of two months’ rent for residential property and a minimum of one month’s rent in the case of non-residential property. If a tenant does not vacate the property after tenancy has been terminated by order, notice or as per agreement, the landlord is entitled to a compensation of double of the monthly rent for two months and four times of the monthly rent after that. The landlord can hike rentals in the middle of a rental term or withhold essential services like electricity, water, etc.

A tenant must be given advance notice of three months if the landlord wants to revise the rent. A tenant is not allowed to sublet a part of or the whole property to anyone else. The landlord is responsible for rectifying structural damage and undertaking measures such as whitewashing walls and painting doors and windows.

The proposed rent authority must be informed about the rental agreement within two months of its signing. An officer of the rank of deputy collector will act as the rent authority to adjudicate on any issue arising out of a rental disagreement.

Potential hurdles in implementation

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.

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.

A timely move

Despite these challenges, the Model Tenancy Act can certainly be lauded as a step in the right direction. It provides a clear road map for states to follow and tweak according to their local conditions and market. It remains to be seen to what extent the states will toe the central government’s line.

Tamil Nadu already came up with its own Tenancy Act in February and may therefore choose not to follow the Model Act. A fair and balanced tenancy law that protects the rights and interests of all parties will definitely contribute towards formalising and stabilising the country's rental market. If the states enforce it in letter and spirit, it may well reboot interest in the rental market – and the fortunes of the whole housing sector.

Anuj Puri is Chairman, ANAROCK Property Consultants. Views are personal.

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First Published on Jul 18, 2019 02:09 pm
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