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Model Tenancy Act may reduce disputes but challenges remain

  • Individual states can make changes to the final Act, which may dilute the benefits for owners, tenants
  • The draft Model Tenancy Act deals with many issues that can lead to disputes between owners and tenants

At a recent event, housing and urban affairs secretary Durga Shanker Mishra said that the government would soon come out with The Model Tenancy Act. The government released the draft guidelines in July 2019. The Act aims to bridge the trust deficit between tenants and landlords by clearly delineating their obligations.

In the absence of such an Act, it’s challenging to get relief in cases of disputes between property owners and tenants. “The leasing and renting of residential properties still fall under the purview of the Rent Control Act, with each state having its version. With lack of proper legislation, tenant-landlord conflicts are quite common, leading to lengthy litigation," said Anuj Puri, chairman, ANAROCK Property Consultants.

According to Puri, despite the acute housing shortage, over 110,000 homes are lying vacant in India’s urban areas, and the absence of a sound rental policy is the key reason for this.

Let’s look at some of the key features of the proposed The Model Tenancy Act.

CONFLICT RESOLUTION

The draft Act proposes to establish a rent authority that will regulate the renting of premises. Once the property owner and tenant sign the agreement, they will need to inform the rent authority within two months of signing it.

The proposed authority will issue a unique identification number to both the parties. The information submitted to the authority will be taken as evidence of facts related to the tenancy.

The Act also proposes to set up rent tribunals and rent court to resolve disputes. These are expected to fast-track resolution.

SECURITY DEPOSIT

The amount of security deposit is often a point of contention. At present, this amount differs from one city to another. For instance, in Delhi, the deposit is usually two-three times the monthly rent, but in Mumbai and Bengaluru, it can be over six times the monthly rent.

The draft Act proposes to cap the security deposit to a maximum of two months’ of rent for residential properties and a minimum of one month’s rent for non-residential ones.

Many experts feel two months’ rent may not be enough to cover damages, especially considering that many tenants don’t pay last month’s rent before vacating the premises. “As each state is free to change the Act before implementation, some states may modify it depending on the prevalent practices," said Vivek Rathi, director – research, Knight Frank India, a real estate consultancy firm.

VACATING PREMISES

Most of the disputes arise at the time of the tenant vacating the premises, according to experts.

The Act provides for various scenarios for disputes that can arise when the owner wants the tenant to vacate the premises. There’s compensation for the landlord if he gives a notice to the tenant based on the conditions stated in the agreement, but the latter doesn’t vacate the house in time. The compensation is double the monthly rent for two months and four times after that.

In case there is a force majeure event like natural calamities, the owners must allow the tenant to continue possession of the house for a month after the cessation of such an event. Force majeure refers to the clause that gets invoked in case of unforeseeable circumstances that prevent someone from fulfilling a contract.

LEVEL PLAYING FIELD

The draft Act deals with many issues that can lead to disputes.

For example, the increase in rent must be based on the terms set out in the tenancy agreement. The owner has to give a written notice three months before the revised rent is implemented.

If the tenant doesn’t give a notice of termination of tenancy, it will be deemed that he has accepted the increased rent proposed by the owner.

In cities like Mumbai, property owners usually enter into an 11-month agreement with tenants. In such cases, the owner cannot propose to increase the rent unless the agreement states it. The Act also bars tenants from subletting the property in part or whole.

the challenges

The Act will not be binding on states that are free to make changes based on what they feel is right for their residents. “As each state can modify the law, it remains to be seen how each state will adopt it," said Ajay Sharma, managing director, valuation services, Colliers International India, a real estate firm. “In the past, some states tried to change the existing Rent Control Act. But the opposition was so strong that they had to withdraw the proposed changes," he added.

The Model Tenancy Act is prospective, which means it won’t affect the owner-tenant relationship as it stands today under the Rent Control Act of the respective state.

The proposed Act needs to focus on a few things. “It should define each condition. For example, if the Act states that the house should be ‘habitable’ it should detail what the term means. If the owner delays paying security deposit, what could be the interest penalty? Such things should be stated explicitly," said Rathi.

While the Act can help organize the rental market giving owners and tenants equal rights, the essence will lie in how each state implements it.

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