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Draft Model Tenancy Act 2019- Key to institutionalising India’s Rental Housing Market: Knight Frank India and Khaitan & Co Report

14 October 2019

: Knight Frank India, international property consultancy and Khaitan & Co, one of India’s largest law firms releases an in-depth study “Institutionalising the Rental Housing Market in India – 2019” which analyses the Draft Model Tenancy Act, 2019 (MTA). According to the report, the MTA is a key step forward to balance the tenant-landlord relationship in India which can help institutionalise the rental housing market by creating an accountable and transparent environment for renting the premises in a disciplined and efficient manner. 

The proposed MTA provides for a structure to a hitherto fragmented, yet highly valuable segment of housing by providing guidelines to some key aspects of rental housing. Some of the important aspects that the Act will address are: 

Provides for a prospective legislation covering in its scope the let out of residential, commercial and educational premises 

Sets up a three-tier redressal mechanism comprising a Rent Authority, Rent Court and Rent Tribunal 

Provides that once information is provided to the Rent Authority, it will issue a unique identification number to the transacting parties and upload necessary agreements on its website which shall be taken as evidence of facts relating to tenancy related matters 

Provides for a speedy dispute resolution mechanism to ensure that minimum time and material loss is incurred by either of the two parties

To truly open up the rental market, it is imperative that the government formulate a way to balance social welfare of tenants and economic factors, which coupled with the protection accorded to landlords and tenants under the MTA will catalyse the rent out of vacant premises which has hitherto been lacking

 

Shishir Baijal, Chairman & Managing Director, Knight Frank India, “The Draft Model Tenancy Act 2019, is important to ensure that India’s housing challenges are adequately addressed with home owners willing to lease / rent out their vacant homes. As per estimates, over 11 million homes are vacant in urban areas alone, which can provide for housing solutions to many urban dwellers. The Act’s ability to protect rights of both tenants and landlords will ensure a smoother leasing process, albeit, the adoption of the same is uniform across the country. A formalised market will further attract investment both national and global, as rental housing will provide for incremental rental income on a mid to long term basis, also opening up possibilities for REIT like investment opportunities.” 

 

Sudip Mullik, Partner of Khaitan & Co said “Limited policy relating to rental housing and existing legislations unfriendly to landlords / owners of premise have been a big deterrent for creation of rental housing stock in the country. The MTA provides a much-needed independent mechanism specially engineered to deal with issues pertaining to rental premises. MTA will provide for speedy remedies to both owner and occupier of rental properties and will enable the court to deal with more legal issues which require evaluation of various issues arising out of changing environment of complex commercial transactions, government policies and new laws.”

 

Other Highlights of the report: 

 

Reasons which create frequent conflicts between both parties which need immediate attention to carve out laws to smoothen the dealings between the two.  

 

Challenges for landlords Challenges for tenants

Fear of illegal possession by tenants Fear of untimely eviction

High transaction costs and dependence on brokers Bias in renting properties to certain population groups

Upkeep of the premises along with common areas of access No control over security deposit demands 

High property tax to be paid as renting is a commercial activity Disputes with respect to property maintenance  

Risk of long-drawn legal battle Restrictions related to lifestyle habits due to difficult landlords

 

Ambiguities in the Draft Model Tenancy Act, 2019 

There are areas that require clarifications for the landlords and tenants moreover the role of the Central Government, state governments and urban local bodies could also have been more transparently outlined in the MTA or in conjunction with another policy to avoid the long gestation period fraught with implementation challenges which were faced in the case of RERA.

 

From Landlord’s perspective

 

Part of Section 16, dealing with the tenant to look after the premises, states that the premises’ contents including fixtures and fittings are to be kept “reasonably habitable” with regards to its condition at the commencement of tenancy and the normal incidence of living. It does not specify any parameters to be taken into consideration for a “reasonably habitable” condition and remains ambiguous. 

 

From Tenant’s perspective

 

Rental revision percentage should have been capped to avoid disputes with landlords.

Section 23 (2), pertaining to default in making any refund of the amount of advance rent that the landlord has omitted or failed to refund, does not specify the rate at which the landlord is liable to pay interest which can be a bone of contention with tenants going forward. The rate of interest in this situation should be governed by the provision of the tenancy agreement executed between the parties.  

Section 25, pertaining to building of additional structures as part of improvement to premises or new construction, can be misused by landlords to try and evict tenants due to bias. 

 

From a 60% share in total investment in Indian realty in 2011, the share of residential sector declined to 24%; by the end of 2017 and nosedived further in subsequent years. Since rental housing has been a much-neglected sphere, India does not have any residential stock specifically developed to incentivise investments in this space. In view of existing demand for rental housing and this Draft Model Tenancy Act, 2019 to act as a supply side intervention, the upcoming stock for rental housing has the potential to attract investments. Though the rental housing phenomenon is still evolving in India, rental housing models such as ‘Build To Rent’ (BTR) and ‘Rent To Own’ (RTO) are a vital component of the mainstream housing market across the globe. With the impending rollout of the MTA, there are bright chances for the rental housing market to not only get regulated but also attract institutional investors to participate in quality assets in form of BTR and RTO stock.