Model Tenancy Act: A Boon to India’s Rental Housing Market?

Profile of the Author - Aishwarya Gairola is a third year law student at Lloyd Law College.

INTRODUCTION

Adequate housing has been a persistent challenge in India, especially for low-income urban households with a housing shortage tally touching almost 10.8 million units. The eradication of physical inadequacy of housing that includes homelessness, congested living conditions and inadequate spaces and slum rehabilitation have been the key focus of housing policies in India with rental housing facilities emerging as the most viable solution.[1]

According to the 2011 census, as many as 1.02 crores complete homes are lying vacant in the face of the exponential growth of population tackling the problem of the housing shortage.[2] The discrepancy in the situation suggests the unwillingness on the part of the owners to rent out their properties due to the fear of repossession and overstaying by the tenants and the fear of exorbitant rent on the part of the tenants.

The Model Tenancy Act aims to set aside this discrepancy by legally structuring the rental housing market, utilizing the potential of vacant houses, erasing the mistrust and bringing an end to exploitative practices.

MODEL TENANCY ACT, 2019

The Model Tenancy Act, 2019 (hereinafter “MTA” or “Act”) conceived under the Housing for All by 2022 Mission under the Pradhan Mantri Awas Yojana-Urban, establishes the Rent Authority to uniformly regulate the relationship and the individual interest of the owners and the tenants by adjudicating a speedy and swift redressal mechanism. The ‘model’ law is a prototype of the law that can be adopted by the states and the Union Territory. Since ‘land’ is a state subject under point 18, List II under Schedule Seven of the Constitution States and Union Territories have the option to adopt the law, adopt it with changes or not adopt it at all. 

Every state has its own set of Rent Control Law that governs the matter of rental housing; however, the existing laws have failed to even address the shortage, let alone eliminate it. The Model Tenancy Act, 2019, with the novelty in approach, enlisting fair and balanced provisions to safeguard the interest of parties and stabilising the rental market, could revive the dormant potential of the rental market and the housing sector.

KEY PROVISIONS OF MTA 

APPLICATION

The Model Tenancy Act applies to any premises, which is, let separately for residence or commercial or educational use except industrial use. The Act does not apply to hotels, lodging houses, dharamshala or inns and premises owned or promoted by the Government. [3]

WRITTEN AGREEMENTS

The model tenancy law mandatorily calls for a written rental agreement in place for all tenancy agreements. [4] This agreement is required to be intimated to the rent authority by the landlord and the tenant jointly within a period of two months from the date of the commencement of the tenancy. The duration of the tenancy shall be valid for a period agreed upon and specified between the landlord and the tenant in the tenancy agreement.

The Rent Authority upon receiving the information about the execution of the tenancy agreement and the required documents, shall, within seven working days from the receipt of the information, provide a unique identification number to the parties and upload the details of the tenancy agreements on its website. The terms of the agreement will be binding on the successors of the parties and the agreement will cease to exist upon the expiration of the duration specified in the agreement. [5]

INDEPENDENT RENT AUTHORITY, RENT COURT AND TRIBUNAL

The Act proposes appointing a Rent Authority, an officer, not below the rank of Deputy Collector, appointed by the District Collector or District magistrate upon the prior approval of the State Government/ Union Territory Administration.[6] The Rent Authority is required to set up a digital platform in the local vernacular language or the language of State/ Union Territory, within three months from the date of its appointment, to enable the online submission of the documents. The Rent Authority has the power to initiate proceedings in matters of disputes arising from the terms of the rental agreements, revision of the amount of rent, repair and maintenance of proper and withholding essential supply or service.

The Act also proposes to set up Rent Courts, Additional Collector or Additional District Magistrate or an officer of an equivalent rank appointed by the District Collector or District Collector with the prior approval of the State Government/ Union Territory Administration. Any person aggrieved by the order of the Rent Authority may take the recourse to appeal to the Rent Court whereby the courts have to pass an order within 60 days of receiving such a complaint. Subsequent to the physical conception of the Rent Courts in India, the civil courts would have no jurisdiction to address the problems pertaining to rental housing.[7]

RENT AND SECURITY DEPOSIT

The MTA does not contain any provisions dealing with a monetary ceiling on rents, allowing room to the parties to negotiate and mutually decide the terms of the agreement with the payment of rent at the end of the month or the year to be acknowledged by the landlord or the agent with a signed rent receipt and for virtual and digital payments, the bank acknowledgement to be held as conclusive proof of payment.[8]

The increase in the amount of rent shall take effect only after intimation of a notice to the tenant by the landlord, three months prior to the day of the proposed changes. The landlord cannot hike the rent during the course of the tenancy. In case a tenant fails to send a notice of termination of tenancy, he shall be deemed to have accepted the new terms proposing the hike in rent.  The law limits the amount of advance Security Deposit to a maximum of two months rent for residential purposes and a maximum of six months for non-residential purposes. The security deposit shall be refunded to the tenant on the day the owner takes possession of the premises from the tenant. [9]

DUTIES AND OBLIGATION OF TENANTS AND LANDLORDS

The Act restricts sub-letting the premises or any part of the premises by the tenant, except in case of a supplementary agreement mutually agreed upon by the landlord and the tenant, the terms of which should be intimated to the Rent Authority within a period of two months from the of execution of the sub-tenancy agreement.[10]

The cost of maintenance and the upkeep of the premise shall be borne by both the tenant and the landlord.[11] The Act in Second Schedule also lists down the distribution of responsibilities for maintenance of the premise, between the tenants and the landlords. In case of failure to carry out repairs by the tenant, the landlord may carry out the repairs, deducting the cost of the repairs from the security deposit. The Act restricts the landlord from withholding any essential supply or service in the premises occupied by the tenant, for the violation of which the tenant can file a complaint with the Rent Authority, that may after examining the matter, may pass an interim order directing to restore the services. The Act restricts structural alterations to the premises by the tenant, except in the terms of the agreement provides for such alterations with increased rent.[12]

The tenant, under the Act, cannot be evicted by the landlord during the course of the period agreed in the tenancy agreement, [13] except in case of any term in the agreement stating the otherwise or bonafide requirement of land by the landlord or the heirs of the landlord in case of death of the landlord.[14] The tenant, on the other hand, has to give one month notice for terminating the tenancy. The landlord, under the MTA, is entitled to double the monthly rent for two months and four times if the tenant fails to vacate the premises on the expiration of the period of tenancy or termination, provided that the landlord has fulfilled all the conditions stated in the rent agreement. The Rent Courts have the power to evict a tenant on an application by the landlord on grounds of the refusal by the tenant to pay rent, continued misuse of premises by the tenant despite the landlord’s notice to refrain, or unsolicited structural changes without the consent of the landlord, among others.[15]

RENT CONTROL ACT, 1948 v.  MODEL TENANCY ACT

Every state in India has its own law in the matter of tenancy and leasing operations under the Rent Control Act, 1948. The overarching aim of these Rent Control Acts is to protect the interests of the tenants and the landlords, regulate the relationship and settle the disputes pertaining to tenancy. These laws, however, have not aged well. Most of the States’ Rent Control Acts have not been amended in over two decades. Capping the rent ceiling in the late 90s with no modification discourages landlords from renting out the property. The provisions under the archaic acts disincentivize investors from purchasing second or third homes, dampening the potential of the rental housing market.

AGREEMENT

MTA mandates for written agreements for tenancy and the communication of such agreements to the Rent Authority. Under the existing Rent Control Act, written agreements are not necessary and the tenancy can take effect even in the absence of an agreement.

BALANCE OF INTEREST

The provisions Rent Control Act, 1948 stand in stark contrast to the Model Tenancy Act. The Rent Control Act ensures the protection of tenants from unfair practices of the landlord with the provisions majorly tipping in favour of the interest of the tenants. The Model Tenancy Act balances the interests of both the landlord and the tenant.

RENT

The Rent Control Act mandates for standard rent fixed by the Control under Rent Control Laws based on the value of the land and the cost of construction. The Model Tenancy Act does not provide for standard rent and the amount of the rent is mutually agreed by the landlord and the tenant under the terms of the agreement and additionally provides for a rent receipt as acknowledgement for the payment of rent. An increase in the rent will be subject to the terms set out in the tenancy agreement or prior notice of 3 months to the tenant under the Model Tenancy Act. The Rent Control Act provides for the revision of rent omitted the tenants and were solely decided by the landlords subject to the approval of the Controller.

The Model Tenancy Act provides for the deposit of rent with the Rent authority in case the landlord refuses to accept the rent or acknowledge tit with a receipt. The Rent Control Act contains no provisions for any intervening authority to lawfully deposit the rent in matters of misbehaviour by the landlord. 

SECURITY DEPOSIT

The Model Tenancy Act aims to address the problem of housing shortage and therefore explicitly provides for capping at 2 months’ rent for residential property and 1 months’ rent for the non-residential property as security deposits, unlike the existing rent control laws with no provision for security deposits.

SUBLETTING

MTA allows subletting premises subject to the consent of the landlord and a mutually formulated sub-tenancy agreement, unlike the lack of provision with respect to sub-letting in the Rent Control Act.

ADJUDICATING AUTHORITY

MTA envisages a three-tier grievance redressal system with rent authority, rent courts and rent tribunals to ensure speedy disposal of rent-related matters. The existing laws do not provide for specific adjudicatory bodies, the disputes are usually taken up in the Civil Courts or by the Controller.

SIGNIFICANCE OF MTA IN THE RENTAL HOUSING MARKET

Indian rental market sits on a goldmine of over 110 lakhs units of vacant housing stock with more than one-tenth of the household population opting for rental housing.[16] Despite the potential of the market and the engagement of a large population still falling short of as many as 1 crore units, the rental housing market in India has remained underdeveloped concluding in mass disincentivizing of investors. The underwhelming statistics of the market are heavily influenced by the low rent yield in India, which has remained static for years, now pegged at two-three per cent.[17]

Low rental yields are largely attributed to disproportionality in the increase of the price of the property to the seemingly stagnant price of rent in all the major cities in India. A laborious mechanism of dispute resolution and a system ensuring the rights of the major stakeholders, i.e. tenants and landlords remain mutually exclusive, with no apparent common ground to settle the matters of rent, maintenance, distrust and exploitation, contributes to the loss of momentum in the already staggering rental yields. Set of rules largely tipping in favour of the tenants decreases the profit margin of the market.  According to a  report, seventy per cent of households living in urban rental facilities don’t have written tenancy agreements, the statistics clearly indicates that tenant and landlords opt to be more vulnerable to deceit than to take the recourse of law.

Increased cost opportunities in the lack of proper utilization of vacant housing units in the face of remarkably low rental yield discourage investors. Better prospects, increased interests and impressive returns in fixed deposits, public provident funds, index funds and mutual funds, among others in the absence of any policy or law actively targeting the growth of rental markets and rental yields, keep investors increasingly occupied with better opportunities and sufficiently disinterested and cautious of rental housing markets.

Model Tenancy Act, 2019, formulated with the aim to unlock the potential of the vacant units, endorses a better business model to increase the rental yields. The provisions in the act propose an equitable division of duties and obligations of the stakeholders in matters of rent, maintenance and termination of tenancy, and eliminate lengthy dispute resolution mechanisms by introducing a three-tier grievance redressal system that will facilitate the more effective use of housing stocks. The provisions categorically resolve the issues that actively disengage the potential of rental housing from adding to the rise of rental yield. Dissolving the age-old price structure of rental housing and allowing space for negotiating the terms of the agreement, Model Tenancy Act, in the presence of continued governmental aid and initiative, has the potential to maximize the rental yield. The efforts to increase the rental yield could effectively assist in the institutionalisation and organisation of the rental housing sector over the medium to long term, helping to secure the trust and interest of investors.

DRAWBACKS OF MODEL TENANCY ACT

The Model Tenancy Act may soon become the law, therefore it is pertinent to closely analyse the provisions of the draft act. Despite the well-intentioned attempts to formulate the law to eliminate all the subsisting rental housing problems, the Act falls short in some aspects. The ‘model’ Act is open to be adopted by the states and the union territories, which may take years for proper implementation if left to the states to modify and implement. The Act provides to set up a complex grievance redressal system, which would require resources, dedicated effort and human resource that could discourage the States from readily implementing it.  The act is prospective in nature, covering only new agreements with positions regarding the existing tenancies left untouched. Therefore, at the outset, the scope of implementation may not be as wide.

The capping of security deposit at two months’ rent may not be viable to landlords, especially in metropolitan cities. The amount may not be sufficient to cover substantial damages caused to the property by the tenant. Application of the MTA to premises providing paying guest facilities is not clear, majorly attributed to the exclusion of lodging houses and hotels from the Act. The majority of the rental housing spaces are acquired through intermediaries. The Act does not define the role of brokers in a transaction.

CONCLUSION

The drastic shift from the desire for ownership to the need for accessibility over the last few decades has resulted in the emergence of rental housing as the most viable and pragmatic choice. With one-tenth of Indian households living in rental houses, the rental housing market with its impressive economic potential also fulfils the intrinsic human need for shelter. Despite the growing reliance on rental housing, the market is yet to witness the expansion and inflow of monetary interest by investors. The seemingly insurmountable disproportionality of  the value of property to the amount of rent adds to the disappointingly low rental yields in India providing sufficient reasons to investors to keep their interests at bay.

The Model Tenancy Act formalises the rental housing market, implementing a uniform legislature aimed at alleviating the issue of housing shortage and maximising the rent yield. The law provides for the interest of both tenants and landlords in tenancy, faring better in multiple aspects than its predecessor. The act is envisioned to create adequate rental housing stocks to address homelessness by instilling confidence in the owners of the premises in the regulatory regime. The institutionalisation of the housing sector over the long term with promising returns to the investors facilitated by the effective  implementation of MTA, may just prove to be the elixir capable of breathing new life into the faltering rental housing market. 

The effectiveness of the law, despite the laudable provisions, like other model policies,  remain highly uncertain. The states’ prerogatives coupled with their probable unwillingness to adopt the policy could dilute the effectiveness of the law mainly in absence of institutional support, proper resources and dedicated efforts. Investors’ lack of interest in the housing sector could also prove fatal to the vision of “Housing for All” policy under which the  law was conceived. 

References:-

[1]Roy, D. and ML, M.. Housing for India's low income urban household: A demand prospective 2020. (Icrier, 2020) [online]. http://icrier.org/pdf/ES/ES_Housing_for_India.pdf [accessed 13 June 2021].

[2] Government of India Ministry of home affairs, 'Census 2011' (Census India, 2011) https://censusindia.gov.in/census_and_you/housing.aspx [accessed 14 June 2021].

[3] Model Tenancy Act [2019] Section 3.

[4] Model Tenancy Act [2019] Section 4.

[5] Model Tenancy Act [2019] Section 6.

[6] Model Tenancy Act [2019] Section 30.

[7] Model Tenancy Act [2019] Section 30.

[8] Model Tenancy Act [2019] Section 8.

[9] Model Tenancy Act [2019] Section 11.

[10] Model Tenancy Act [2019] Section 7.

[11] Model Tenancy Act [2019] Section 15.

[12] Model Tenancy Act [2019] Section 9(6).

[13] Model Tenancy Act [2019] Section 21.

[14] Model Tenancy Act [2019] Section 22.

[15] Model Tenancy Act [2019] Section 21.

[16] Arjun Kumar, 'India's Residential Rental Housing' (Economic & Political Weekly, Vol II, No. 24, JUNE 11) https://www.epw.in/system/files/pdf/2016_51/24/India%27s_Residential_Rental_Housing_0.pdf [accessed 14 June 2021].

[17] Prashant Thakur , 'Indian Rental Housing: A Complicated Asset Class' (Anarock,) https://www.anarock.com/blogs/indian-rental-housing [accessed 14 June 2021].

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