Model Tenancy Act

Context:

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi has approved the Model Tenancy Act for circulation to all States / Union Territories for adaptation by way of enacting fresh legislation or amending existing rental laws suitably.

To establish Rent Authority to regulate renting of premises and to protect the interests of landlords and tenants and to provide speedy adjudication mechanism for resolution of disputes and matters connected therewith or incidental thereto.

Key Highlights Model Tenancy Act:

• The Union Cabinet, chaired by Prime Minister approved the Model Tenancy Act (MTA) under which separate rent authorities, courts and tribunals will be set up in districts to protect the interest of both the owner and tenant.
• States and Union territories can adopt the Model Tenancy Act by enacting fresh legislation or they can amend their existing rental laws suitably.
• The MTA will be applicable prospectively and will not affect the existing tenancies
• Maximum limit for security desposit:
  • Residential premises: Maximum two months’ rent
  • Commercial property: Maximum six months’ rent
• The written agreement is a must for all new tenancies. The agreement will have to be submitted to the concerned district ‘Rent Authority’.
• Rent and duration of tenancy will be fixed by mutual consent between owner and tenant through a written agreement.
• Under the Model Tenancy Act, unless otherwise agreed in the tenancy agreement, the landlord will be responsible for activities
  • Structural repairs except those necessitated by damage caused by the tenant
  • Whitewashing of walls
  • Painting of doors and windows
  • Changing and plumbing pipes when necessary
  • Internal and external electrical wiring and related maintenance when necessary.
• Tenant will be responsible for
  • Drain cleaning
  • Switches and socket repairs
  • Kitchen fixtures repairs
  • Replacement of glass panels in windows, doors
  • Maintenance of gardens and open spaces among others
  • Must not intentionally or negligently damage the premises or permit such damage
  • Must notify the landowner of any damage, as soon as possible.
• When the landlord proposes to make any improvement in or construct any additional structure on any premises, which has been let out to a tenant and the tenant refuses to allow the landlord to make such improvement or construct such additional structure, the landlord may make an application in this behalf to the Rent Court.
• No landlord or property manager can withhold any essential supply to the premises occupied by the tenant.
• Tenant will not be evicted during the continuance of tenancy agreement unless otherwise agreed to in writing by both the parties.
•  If tenancy has not been renewed and premises not vacated In this case, the tenancy shall be deemed to be renewed on a month-to-month basis on the same terms and conditions as were in the expired tenancy agreement, for a maximum period of six months.
• On the expiry of extended period of six months of agreed tenancy period or the termination of tenancy by order or notice, the tenant shall be a tenant in default and liable to pay the rent as follows:
  • Compensation of double of the monthly rent for two months and four times of the monthly rent thereafter.
• Revision of rent between the landowner and the tenant shall be as per the terms set out in the Tenancy Agreement.
  • If not agreed otherwise in the agreement, the landowner shall give a notice in writing three months before the revised rent becomes due.
  • If the tenant, who has been given notice of an intended rent increase, fails to give notice of termination of tenancy to landowner, he shall be deemed to have accepted whatever rent increase has been proposed by the landowner.
• Rent may not be increased during the currency of the tenancy period unless the amount of increase or method of working out the increase is expressly set out in the tenancy agreement.
• A landowner or property manager may enter a premise in accordance with written notice or notice through electronic medium served to the tenant at least twenty-four hours before the time of entry.
  • The entry can be for the following reasons:
  • To carry out repairs or replacement or do or get work done in the premises;
  • To carry out an inspection of the premises for the purpose of determining whether the premises are in a habitable state;
  • For any other reasonable purpose for entry as specified in the Tenancy Agreement.

Why was a need felt to bring this on

• The housing and urban affairs ministry had floated the draft model tenancy law in July 2019.
• Without a well-rounded rental policy and the proper implementation of rental contract, there was no sound mechanism to resolve tenant-landlord conflicts. Property owners find it challenging to evict tenants if they misuse the property. To steer clear of such complications, such property owners often chose to keep these homes vacant instead of renting them out.
• Unattractive rental yield.
• In India, the rental yield for residential property is quite low, even in bigger cities. It is in the range of 1.5% to 3% of the capital values. This has disincentivised people from investing in second or third homes which could be rented out.
• NRIs have historically found it challenging to rent out properties because of the complexities of getting good tenants, managing rental agreements, and taking care of the maintenance of these properties. Often, they also prefer to leave their properties vacant in case they return to India. NRIs avoid leasing their residential properties for fear of squatters and dealing with the legalities of eviction.

Rental housing lucrative proposition for REITs and FDI

MTA will help in overhauling the legal framework vis-à-vis rental housing across the country and is expected to give a fillip to private participation in rental housing.

Experts say that rental housing can gain traction with a conducive policy framework which shall attract corporate players to provide serviced apartments for their employees. It also gives a lucrative proposition for REITS and Foreign Direct Investments players with steady income as well as appreciation in the property value.

Realtors’ body NAREDCO had said earlier that the proposed model tenancy law, if implemented by all states, will promote rental housing in a big way and it expected builders to construct at least 50 percent of its total inventories for rent purpose in the next five years.

Challenges ahead

While the proposals of the Model Tenancy Act have been widely welcomed, their implementation may not be very simple. The Act is not binding on the states as land and urban development remain state subjects. It is still a matter of choice for states and Union Territories to repeal or amend their existing Acts. Like in the case with RERA, the fear is that states may choose not to follow guidelines, diluting the essence of the Model Act.

“While the government lays down the basic policies, the exact rules will likely change within each state since land is a state subject. Like we saw in the highly lopsided roll-out of RERA, the Model Tenancy Act, 2019 may lose its real purpose if states do not follow the basic guidelines and dilute them. For this reason, the Model Tenancy Act, 2019 – like RERA – may well become a process rather than an event, and need several course corrections to reduce regional dilutions before it becomes a force to reckon with,” said Anuj Puri, Chairman – ANAROCK Property Consultants.

Also, the Model Act is prospectively applicable and will not affect the existing tenancies. The repeal of rent control Acts can be governed by political exigencies. This may be a complicated process in cities like Mumbai, where tenants have occupied residential properties in prime areas for absurdly low rents.

The cap on the security deposit may not find favour with many landlords. In cities like Bengaluru, the norm is a 10-month security deposit as a two-month deposit may be insufficient to cover any damage to the property or compensate for defaulted rent payments.

Devendra Deshmukh, Partner, Khaitan & Co points out that the provisions of the proposed Model Tenancy Act (MTA) will have to be seen in light of the existing tenancy laws, most of which (baring a few exceptions) were enacted post the Second World War with the specific purpose of preventing exploitation of tenants by landlords, in markets that then had scarce housing stock.

The welfare objective of the existing tenancy laws, which are heavily skewed in providing tenant protection, appears to be fading away when we have instances of tenants occupying prime premises for paltry rents.

“In order to truly open-up the rental market as an evolved one, it is imperative for the Government to formulate a way to balance social welfare of tenants and the economic interests of landlords. Balanced protection to landlords and tenants alike will provide impetus to landlords to rent out vacant premises,” he says.

In the present form, the draft legislation envisages a three-tier dispute redressal mechanism and lacks provisions which can mitigate long drawn landlord–tenant litigations, he says.

Strangely, the MTA is altogether silent on leave and license arrangements. This is perhaps the most significant aspect which it must cover, he adds.

Also, 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.

Source: PIB

MTC 2020: PDF