Model Tenancy Act to create level-playing field between landlord and tenant

By giving landlords the confidence to rent their properties, it will augment supply, providing tenants with more choices

The Model Tenancy Act received the approval of the Union Cabinet recently. Once states and union territories implement it, it could prove to be a game changer for the rental housing market, just as setting up of the Real Estate Regulatory Authority (RERA) has proved to be in several states. The Act will ensure that landlords and tenants across the country play by a standard set of equitable rules.

Landlords get greater security

In India, owners of residential properties are reluctant to rent their houses because of the fear that the tenant may not vacate their property and they may lose it. “Once the Model Tenancy Act is in place, it will give landlords the security to rent out their spaces,” says Anshuman Magazine, chairman and chief executive officer (CEO), India, South-East Asia, Middle East & Africa, CBRE.

In India, people invest in residential properties for capital appreciation. The rental yield is barely 1-2 per cent. For such small gains, owners also don’t want to take the additional burden of dealing with tenants. In many new apartment complexes, however, the monthly maintenance cost is high. “While owners don’t earn a rental income, they have a monthly outgo. Once the Model Tenancy Act is implemented, landlords will be able to transform a non-performing asset into a performing asset,” says Magazine.

Punitive provisions within the Model Act will make it harder for tenants to refuse to vacate the property. “Landlords can now claim double compensation from their tenant if the latter refuses to vacate and hand over the property at the end of the agreed rental period,” says Anuj Puri, chairman, Anarock Property Consultants. If they refuse to vacate even after two months, the compensation can rise to four times.

The Act also restrains tenants from sub-letting the property without a formal go-ahead from the landlord. Making structural changes without permission is also not permitted.

The Model Act defines the procedure for evicting a tenant clearly. “Currently, there is no standard mechanism that can be used by the landlord to evict unruly or defaulting tenants. The provision of a Rent Authority and Rent Tribunal will also speed up the eviction process,” says Altaf Ahmad, chief business officer, rental business, Square Yards.  

On the flip side, landlords in many cities will not like the cap on security deposits to two months’ rent. The deposit was not just a safeguard against the risks of the tenant not paying rent on time or causing damage to the property. A high security deposit—equal to six months or more of the rent—also provides a kicker to the landlord’s returns. Some experts feel such aspects are best left to market forces. Setting a low cap could boomerang by making landlords less eager to rent.

Tenants to gain from improved supply

The biggest positive of this Act from the tenant's point of view will be the increased availability of housing. Demand for rental housing has increased massively in the past decade due to job-driven migration—both rural to urban and inter-city. According to Magazine, “The availability of housing is not the constraint. It is landlords’ reluctance to rent that has created a supply bottleneck.”

The Model Tenancy Act will hopefully give more landlords the confidence to let out their houses. Tenants will then have more choices. More supply may also lead to moderation in rental rates. People who currently live in an unorganised colony (because those are the only ones whose rentals they can afford) may be able to live in better areas.

In case of disputes, the landlord is forbidden from cutting off essential supplies (like water and electricity). He is also restricted from entering the property during the active rental period without giving prior notice.

Tenants also benefit from the capping of the security deposit to two months of rent, which in the past could be exorbitant. “This will especially help students and young professionals at the start of their careers who tend to have limited resources,” says Puri.

The Act also provides clear guidelines on refund of security deposit. “It says that the landlord must return the security deposit on the very day possession of property is handed back to him,” says Ahmad.

Sometimes, if only a short period is left for the lease tenure to expire, landlords don’t respond to requests to get much-needed repairs done. The Act clearly states that essential repairs must be carried out.

If a dispute arises, the tenant now has the option to stop paying rent to the landlord. He can instead deposit it with the Rent Authority. The landlord can’t claim that the tenant has defaulted on rent payment. Once the dispute is resolved, the Authority can transfer the money to the landlord. Thus, while the tenant retains bargaining power in a dispute, he also avoids the charge of taking the law in his own hands.

The provision that three months’ notice must be given for rent increase will also provide relief to tenants. “They will have time to decide whether to continue in the same house or hunt for a new one,” says Saurabh Garg, co-founder and chief business officer, NoBroker.com.  

Rental housing to get a regulator

The Model Tenancy Act has a provision for setting up a Rent Authority. It will play the role of an adjudicating authority, just as the Real Estate Regulatory Authority (RERA) does for the purchase and sale market.

Landlords and tenants will have to register their rental agreement with the authority and get a unique ID number. The adjudicating authority will look at whether the standard terms and conditions have been adhered to in the agreement. The agreement will be published online.

“Renting will become a more formal and organised activity,” says Subhankar Mitra, managing director, advisory services, Colliers India.

The adjudicating authority will have the power to act as a dispute resolution mechanism between the landlord and the tenant. “It will play the role of a facilitator and a quasi-judicial authority. It will be able to step in and give a clear and quick decision in case of disputes,” says Mitra.

Separate court for rental disputes

If someone is not satisfied with the verdict of the Rent Authority, and he doesn't want to go to the normal courts, where a decision can take years, he can approach a rent court. “These courts will be bound by the Act to hear a case within 60 days,” says Garg. Such time bound resolution of disputes will give landlord the confidence to rent out their properties.

The Act will, however, not apply retrospectively. “It will apply only to rent agreements drawn after the Act has been implemented. So, people who have entered into longer lease agreements will not get its benefit until their current ones expire,” says Garg.     

A few rules of engagement

• Whether you are a landlord or a tenant, insist on a formal rent agreement signed by both the parties
• Without it you will not be able to approach the Rent Authority for redress
• Read the rent agreement before signing on the dotted line to avoid unpleasant surprises later
• Tenants should pay rent via digital mode to create a payment trail
• Landlord should verify tenant’s background
• This would include getting the records of civilian and criminal courts, address and identity proof checked. Many agencies offer this service