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Burning Issues

[Burning Issue] Model Tenancy Act-2019

Context

    The ministry of housing and urban affairs recently came out with the draft Model Tenancy Act 2019. The draft Act is aimed at increasing accountability in the rental home ecosystem. It addresses factors like the need to have a formal rent agreement, how much security deposit should be paid, rate of rent increase and grounds for eviction. While the draft tries to strike a balance between the rights of the tenants and homeowners, there is some debate about whether it promotes the interests of one over the other

Why this act?

  • Restrictive Laws: As per Census 2011, more than 1 crore houses were lying vacant in urban areas. The existing rent control laws are restricting the growth of rental housing and discourage owners from renting out their vacant houses due to fear of repossession. 
  • Large scale informalisation in sector: One of the potential measures to unlock the vacant house is to bringing transparency and accountability in the existing system of renting of premises and to balance the interests of both the property owner and tenant in a judicious manner.
  • Lack of Uniformity: Since it is a state subject, states have enacted their laws and it differs from one state to another.
  • Housing Poverty: 2013 report by a Task Force for Rental Housing held that affordable rental housing “addresses the issues of the underprivileged and inclusive growth, in an even more direct manner than affordable ownership housing”. Model Tenancy Act helps bring investment in the sector as the sector provides better safeguards.

Features of act

  • Mandatory Rent Agreement: The act makes it mandatory to create a written lawful rent agreement between the owner and tenant. 
  • Rent Authority: The Act requires establishing rent authorities in every district to regulate renting of premises.
    •  Both the landlord and tenant will have to submit a copy of the rent agreement to the district Rent Authority.
    •  The proposed authority will also provide a speedy adjudication mechanism for the resolution of disputes.
  • Tribunal and Courts: It calls for creating dedicated tribunals and courts for dealing with tenancy related disputes.
  •  Security Deposit: The act puts a cap on the amount of security deposit. It will be a maximum of two months of rent in case of residential premises and six months in case of non-residential premises.
  • Subletting: The act bars tenants from subletting the property in part or whole.
  • Vacating Rental Premises: It says that if a landlord has fulfilled all the conditions stated in the rent agreement, then the tenant has to vacate the premises. 
    • If the tenant fails to vacate the premises, then the landlord is entitled to double the monthly rent for the first two months and four times after that.
  • Increase in Rent: The rent can be revised according to the terms and conditions mentioned in the agreement. If there is no such agreement, the landowner will have to give a 3 months notice to the tenant before revising the rent.
  • Coverage: The Act will apply to premises rented for residential, commercial, or educational use but not for industrial use. It also won’t cover hotels, lodging, etc. This model law will be applied prospectively and will not affect existing tenancies.

Need for Model tenancy act

(1) Unlocking homes

  • It will unlock vacant houses for rental purposes
  • It will enable the creation of adequate rental housing stock for all the income groups thereby addressing the issue of homelessness.

(2) Helping migrants

  • Rental housing is a preferred option for students and migrants.
  • It will balance the rights of both landlords and tenants.

(3) Effective negotiations

  • There is no monetary ceiling under MTA, which enables parties to negotiate and execute the agreement on mutually agreed terms.
  • It will give confidence to landlords to let out their vacant premises, the housing ministry said.
  • The Act also tries to address how a renter can legitimately increase the rent.

(4) Control over encroachments

  • It has proposed limiting the advance security deposits to two months’ rent and has also suggested heavy penalties for tenants who decide to overstay.
  • Those who do may have to shell out double the rent for two months and even four months.

(5) Rights of tenants

  • The landowner cannot cut power and water supplies in case of a dispute and would have to provide a 24-hour notice to tenants to carry out repair work.
  • Should the landlords wish to increase the rent, they will need to provide a three-months notice to the tenants.
  • These measures would go a long way in protecting the rights of a tenant as it regulates the rent hikes that tenants have had to face.

Scope of coverage

MTA applies to any premises, which is, let separately for residence or commercial or educational use except industrial use.

However, MTA does not provide what constitutes residence/commercial/educational/industrial use. Besides, MTA does not apply to the following premises–

  • Hotel, lodging house, dharamshala or inn etc.
  • Premises owned or promoted by:
  • The Central/ State/ UT Government.
  • Local Authority.
  • Government undertaking or enterprise.
  • Statutory body.
  • Cantonment board.
  • Premises owned by a company, university or organization given on rent to its employees as part of service contract.
  • Premises owned by owned by religious or charitable institutions as may be specified by notification.
  • Premises owned by owned by any trust registered under the Public Trust Act of the State.
  • Premises owned by owned by Wakfs registered under the Wakf Act, 1995.
  • Any other building specifically exempted in public interest through notification.

However, if the owner of any of the premises mentioned in (b) to (g) wishes a tenancy agreement to be regulated under MTA, then he can inform the same to the Rent Authority.

Significance

  • The model act will be applied prospectively and will not affect existing tenancies.
  • When enforced in all states, it will lead to a better regulated rental house market for middle and high-income segments.
  • The Pradhan Mantri Awas Yojana( Housing for all by 2022 mission ) has a component of having 20 per cent of 2 crore houses shall be created exclusively for rent.
  • This informality is the key reason why this housing segment, despite its huge potential, remains largely untapped. When landlords and tenants have a common platform to refer to understand the market dynamics, the rental housing segment would slowly march towards transparency and a formal setup.
  • A segment-specific court would mean the grievance redressal mechanism would work efficiently. This would generate in landlords the confidence to let out their units, which they otherwise shy away from, fearing squatting and other such unfavourable consequences.
  • A cap on security deposits would make a correction in these markets, where housing is expensive and renting is not cheap either.
  • Squatting by tenants is the key reason why landlords are wary of letting their unoccupied property. Since the policy sets monetary penalties for squatting, landlords will have greater confidence.
  • This would work as an alternative to eliminate the problem of the housing shortage in view of the ever-increasing population in India.

Drawbacks of the MTA

  • Non-Binding nature: Land and Urban Development is a state subject. The states may or may not adopt the proposed law, as done by them in the case of Real Estate (Regulation and Development) Act.
  • Prospective effect: The new model act would have a prospective effect. This means it would be applicable to future disputes only, hence past disputes would continue to linger on for years.
  • Inadequate Security Cover: Security Cap for two months may not be enough to cover damages, especially during the last month when tenants adjust their rent in the security deposit.
  • Lacunae in the formation of the Act: The act fails to properly define the term ‘habitation’. Further, it fails to mention the penalty if the owner delays in paying back the security deposit. Also, it is altogether silent on sudden leave and license arrangements.

What is the impact on Real Estate?

  • Model Tenancy Act will fuel the rental housing supply by attracting more investors
  • More rental housing stock will help students, working professionals and migrant populations to find urban accommodation.
  • Aimed at bridging the trust deficit between tenants and landlords by clearly delineating their obligations that will open up more players in the field confidence to landlords.
  • Attract corporate players to provide serviced apartments for their employees.

Way forward

  • Protection of rights: The Model Tenancy Act, 2019 is a progressive step in matters related to rent and rental housing in the Indian real estate sector. By combining a range of clauses covering aspects from the security deposit to rent tribunals, the draft policy will aid in protecting the rights of the tenants as well as the property owners.
  • Special authority setup: It also proposes the establishment of adjudicating authorities in an effort to lessen the burden on lower courts in the matters relating to tenancy. In doing so, it offers a comprehensive and well-structured approach to solving tenancy-related issues in India.
  • Needs improvement: Although the provisions offer a win-win situation for both tenants and landowners, the scope can still be broadened. For instance, the draft policy should draw a clear distinction between residential tenancies and commercial rental accommodations, which attract higher institutional investments. 
  • Must be made binding: The central and state governments can work in tandem to provide affordable rental housings. This will not only attract a lot of tenants but will also increase the supply of formal rental accommodations. 
  • Taking all the factors into consideration, including the setting up of tribunals and courts, the act does bring transparency, fixes accountability, and promotes fairness in the rental housing segment. 
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