The law, which is likely to give a boost to rental housing in India, was first proposed in 2019.
The union cabinet, on June 2, 2021, approved the draft model tenancy law, in a move that is likely to revive India’s rental housing market by effectuating a multitude of reforms.
“Model Tenancy Act will enable institutionalization of rental housing by gradually shifting it towards the formal market. It is expected to give a fillip to private participation in rental housing as a business model, for addressing the huge housing shortage,” the Housing Ministry said, in a statement.
The government-approved draft that was proposed in 2019, will now be circulated to states, for them to make tenancy laws in line with the central version or amend existing laws to make them compliant with the model tenancy law.
Apart from rental housing, the draft law will also promote the growth of investment in the sector and give a boost to entrepreneurial opportunities and innovative mechanisms of sharing space. The law will be applied prospectively and will not affect existing tenancies.
The government expects that the Model Tenancy Act will facilitate the unlocking of vacant houses in India’s key housing markets. It is expected to give a fillip to private participation in rental housing as a business model for addressing the huge housing shortage.
In March 2021, housing secretary Durga Shanker Mishra had said that the Housing Ministry was likely to present the draft law to the union cabinet ‘in a month or so’, for its approval.
“We have received no comments from some states (on the draft act). We are analyzing the responses we have received from some other states. We are in the process and we should be taking the draft law to the union cabinet for approval, in a month or so. By March, it should be through,” the housing secretary said, during a press conference on January 11, 2021.
As the government pursues its ambitious dream to provide ‘Housing for All by 2022’, it unveiled a draft tenancy law, in order to boost supply in the rental housing segment. The Model Tenancy Act 2019, aims to make renting more lucrative for both, landlords and tenants, by plugging the many gaps that currently exist in policies regulating the rental housing segment.
Addressing a three-day virtual Real Estate and Infrastructure Investors’ Summit organized by industry body NAREDCO, housing secretary Durga Shanker Mishra, on November 25, 2020, said the new Act would release over one crore vacant houses locked in the clutches of the old Act and promote investments into the real estate sector, once it is implemented across states. “This will bring a new wave of affordable rental housing”, he said.
The draft model tenancy act may soon become law, as the center has told states and other stakeholders that they have time till October 31, 2020, to send their suggestions on the policy document. Meanwhile, the Chandigarh union territory administration has already started the process to implement the model act and has also sought objections from the public for the same, till October 31, 2020.
Note here that despite the tax benefits offered on rent payment, there were 11.1 million vacant homes in urban India in 2011 because of serious loopholes in policies even as the migrant population struggled to find decent accommodation. Considering that developers are sitting on huge unsold inventory in major cities of the country at present, the number of vacant homes in urban areas would have risen dramatically, between 2011 and now.
Let us scrutinize how the Model Tenancy Act 2019 aims to fix this problem so that the demand-supply gap is bridged.
Model Tenancy Act 2019: Key features
The Act has put in place several measures, by way of tightening regulations and making it lucrative for landlords and tenants, to boost rental housing.
A ‘Rent Authority’ will be established under the Model Tenancy Act 2019
On the lines of the Real Estate Regulatory Authorities that have been set up under the Real Estate (Regulation and Development) Act, 2016, states could set up rent authorities in cities. After its establishment, landlords and tenants would have to be present before the authority to get the rent agreement registered. In its part, the authority would set up a website, to maintain all the data it receives in the form of rent agreements.
“No person shall, after the commencement of this Act, let or take on rent any premises except by an agreement in writing, which shall be informed to the rent authority by the landlord and tenant jointly, in the form specified in the first schedule, within a period of two months from the date of the agreement,” reads the policy document.
Rent courts/tribunals to address disputes under the Model Tenancy Act
In case of any discontent, the contracting parties would first approach the rent authority for a solution. In case the disputing parties are not satisfied with the order of the rent authority, they could approach the rent court/tribunal to seek relief. These courts would have to pass an order within 60 days of receiving a complaint.
After the rent courts are set up, civil courts would have no jurisdiction over disputes pertaining to rental housing. ‘Only the rent court and no civil court, shall have jurisdiction, except the jurisdiction of the rent authority under Section 30, to hear and decide the applications relating to disputes between landlord and tenant’, states the Act.
Model Tenancy Law: Provisions that could help landlords
To discourage overstay of tenants
The policy states that tenants would be liable to pay the landlords to double the rent for two months and four times the rent in the consequent months, in case they stay after the expiry of the rental agreement.
To make eviction of tenants easy
Under the model policy, landlords could approach the rent court asking for eviction, if the tenants fail to pay the rent for two months in a row.
To stop sub-letting by tenants
Without prior permission of the landlord, the tenant is not eligible to the sub-let whole or part of the rented accommodation.
Model Tenancy Law: Provisions that could help tenants
To stop the intrusion of the landlord
That landlords march into one’s premises as and when they want, is a common complaint among those living in rented homes. To stop this from happening, the policy states that landlords need to give written notice, 24 hours in advance, to visit the premises. Also, they cannot make a visit before 7 am and after 8 pm.
To cap security deposit demanded by landlords
In cities like Mumbai and Bengaluru, tenants have to pay at least a year’s rent, as a security deposit. Landlords in states that adopt the policy would not be able to ask for more than two months of rent, as a security deposit.
To regulate the increase in rentals by landlords
During the entire rental agreement period, landlords cannot hike the rent, unless something giving them the right to do has been clearly mentioned in the rental agreement. The landlord will have to give three months’ notice to the tenant, before increasing the rent.
Landlord responsible for structural maintenance of rented premises
While the policy states that both parties will be responsible to maintain the physical health of the rented property, the responsibility of structural maintenance will lie on the landlord.
How effective can the Model Tenancy Law be?
However, questions remain over the effectiveness of the model policy, its laudable provisions notwithstanding. Firstly, the land is a state subject and hence, states are free to accept or reject the model policy, which has been in the works since the prime minister Narendra Modi-led National Democratic Alliance (NDA) first formed the government in 2014. As the rules are not binding, states would hardly be in a hurry to embrace them. “Two years after the launch of the Act, states are still busy setting up authorities under the RERA. Barring some, most are still struggling to learn the ropes,” points out Brajesh Mishra, a Gurugram-based lawyer who specializes in property disputes. “Not many states would show the willingness to adopt the policy, as it involves a great deal of work on their part,” Mishra adds.
Even if states set up the regulatory framework, developers may not be willing to engage in this housing segment, despite the fact that they are sitting on an inventory stock worth Rs 1.13 trillion. This is because rental yield, which ranges typically between 2%-3% annually, is not lucrative enough. In contrast, developers have to pay interest ranging between 12%-14% on loans for project development. The Model Tenancy Act does not address the issue of low rental yields. Hence, one may witness a scenario, where builders may be reluctant to build houses for the rental segment but may use their inventory stock for rentals.