Exit options when your property is occupied

Landlords of old properties have limited choices to unlock the value of their buildings.

Picture this: You own a property worth crores of rupees in a prime locality. But, you must be satisfied with the valuation only on paper. In real terms, all you get is a paltry amount — a few hundreds or even less in some cases — from your tenants as monthly rent.

Reason: The tenants are protected by the Bombay Rent and Lodging House Control Act, 1947, or as applicable, more commonly known as the ‘pagdi’ system. The Act is a state-wise subject and hence, varies across the board. It was an attempt to eliminate the exploitation of tenants by landlords by fixing the standard rents payable in the seventies. However, they have not been revised since and tenants continue to pay the low rents.
 

EXIT THE LANDLORD-TENANT RELATIONSHIP

• Sell off the property to the tenant: But, this will be at a discounted rate
• Redevelopment: Either accept monetary compensation for sale of the land title to the developer or an apartment in the new property
• Buyout: The property can be bought by the tenant. This is the most expensive option as it will not be at the market value
• Wait for the building to collapse: This will not help. As even in that case, the tenant will not lose protection

“The main aim (of the Act) was the protection of tenants against unfair eviction,” says Dhiraj Jain, partner (real estate), SNG & Partners. Tenants can be evicted only in case the landlord wants to use the property for residential purposes or the tenant has breached any contractual terms. Also, a delay in the payment of rent will not count.

However, this crippled the landlords. “The legal owner of the property may be the landlord but the ‘tenancy rights’ bestow an informal ownership upon the tenant,” adds Jain.

Many complain the laws are archaic and unfair to the owners. As a result, their options for unlocking the value of the property and capitalising on the boom in real estate prices are limited.

SELLING OFF TO THE TENANTS
Though not the most beneficial, this is the simplest way out and quite rare, too. As the tenants have the law on their side, they may not be willing to pay a high amount for ownership. Besides, once their status changes from that of a tenant to an owner, they are liable to pay property taxes at the current levels and not the low rates offered historically.

That said, they may be willing to buy out as legal ownership can benefit them, too. For instance, they can mortgage the property and raise funds against it, which would not have been be possible as tenants.

The selling price, though dependent on the location, will be at a discounted rate, as the tenant can easily flex his muscle in such cases, says Rajesh Mehta, proprietor, Raha Realtors.

REDEVELOPMENT/OUTRIGHT SALE
Usually, when buildings become old, members consider redevelopment or outright sale. In the former, they tie-up with a developer who demolishes the existing structure and builds a new one.

The members are rehoused in the same premises and get additional space (in excess of their existing flat area) or a monetary compensation for the same. In the second case, the builder buys out each of the flats at market price.

Both these options are available for properties under the Rent Control Act as well. Except, in the regular situation there are only two parties, the developer and the members. However, in this case, the transaction is three-way, involving the developer, tenants and the landlord.

“Builders are wary of such projects,” says Sunil Rohokale, ED, Ask Investment Managers. Reasons range from internal clashes between tenants and landlords, to delays in decision-making. “Probably the reason why those who venture into this area prefer to buy out both the parties,” feels Rohokale. In case of an outright sale, the builder has to acquire the land title from the landlord and the flats from the tenants.

However, the project is usually more commercially viable when the tenants are rehoused within the same premises, feels Rajesh Jain, chairman, Neumec Group. Builders get extra floor space index (FSI) as an incentive only if they rehouse the tenants in the same area and convert them into owners. “There are no clear norms about the additional area given to the tenants or the landlord. This depends on the negotiations,” adds Jain.

The landlord can either accept monetary compensation in lieu of the land title or an apartment in the new construction.

What if the building collapses? This does not mean that the tenant loses his protection under the law. “In such situations, he can easily say he was willing to pay the rent but the collapse is beyond his control. He will, therefore, be included in any redevelopment or sale and the resultant profits,” says Anil Harish, partner, D M Harish & Co Advocates.

Anyway, such cases are extremely rare. In fact, as Rohokale says, “Here the tenants are quite forthcoming for negotiations. And matters can be resolved much faster.”