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Here’s What The Industry Experts Think About The New Model Tenancy Act 2021

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If you’re planning to go live on rent in India, here’s what you need to know about the New Model Tenancy Act 2021 

On 2nd June of 2021 the Model Tenancy act was passed by the Union Cabinet in order to make the process of renting in India easier and support the real estate industry.

In the absence of a model law, informal agreements containing arbitrary terms prevail, and conflicts frequently result in litigation, which the Model Tenancy act (MTA) helps to solve.

For starters, let’s take a look what is the Model Tenancy act (MTA)?

The new tenancy law is a model Act developed by the Union cabinet, and each state and union territory must implement their own version. It requires that all tenancy agreements be registered with the government and assigned a unique registration ID. The registration agreements, along with any supporting documentation, would be posted on the Rent Authority’s website.

At the district level, there will be specific tenancy and adjudicating bodies, as well as Rent Courts. This might shorten the duration of the conflict. In reality, if a renter overstays his or her lease, he or she must pay twice the rent for two months and then four times the rate for up to six months. The Rent Authority, which shall be led by an official with the rank of deputy collector or higher, who will be appointed by the District Magistrate or District Collector with the consent of the State Government or Union Territory Administration, has the authority to enforce this.

Housing and Urban Affairs Secretary Durga Shanker Mishra on 21st July 2021, state that, the states have been urged to adopt the Model Tenancy Act, which was enacted by the Union Cabinet in June of this year, as soon as possible.

Mishra further stressed that the legislation, if adopted by the states, will be prospective in nature, and any issues relating to rent agreements will be resolved in accordance with the previous rules of the various states.

Along with that, Durga Shanker Mishra said, The Indian real estate industry is expected to reach USD 1 trillion by 2030, owing to growing demand and many changes implemented over the last seven years, such as the new real estate regulation RERA.

Also creating an opportunity for employment as the number of people engaged in the industry is anticipated to increase to 7 crore in the future years, up from 5.5 crore in 2019, he said at a CII event on the real estate sector.

“It is not mere talk and guesswork. The trend clearly shows that the real estate sector of our country will touch the figure of USD 1 trillion in the next 7-8 years,” said Durga Shanker Mishra.

Commenting on the development, Ms Reeza Sebastian Karimpanal, President – Residential, Embassy Group said,  “For years now, the Indian rental market has been infamous for its landlord-tenant disputes, also a cause for the existence of more than 1 crore vacant homes. The Model Tenancy Act has far reaching implications for both the residential and commercial real estate asset classes. With the Model Tenancy Act (MTA), the rental landscape is bound to change for the better, with the creation of a common legal framework which exclusively addresses tenancy disputes and will help restore confidence between landlords and tenants. For developers, MTA has the potential to create a positive outlook towards considering the rental model for future projects.

However, the implementation of the tenancy Act is dependent on the State Governments and Union Territories, and this will define its success in the days ahead. States might modify the Act, but it is essential to understand that this is not retrospective to the already existing rental laws. The MTA is a larger umbrella which provides a definitive structure to the landlord-tenant equation in the rental housing ecosystem.”

Following are the few of the main sections of the act along with others which will affect both landlords and tenants.

Prospective legislation: The law is forward-looking and will handle future issues. There is particular mention of property managers who can operate on behalf of landlords and renters. This is a fascinating feature that has the ability to provide a layer of services for both the landlord and the tenant. It goes beyond the typical property brokerage services available today.

The Rent Agreement will be signed in triplicate, with each landlord and renter keeping an original copy. Receipts for rent and other payments must be provided by landlords. Bank slips will suffice for electronic transfers.

The length of the tenure is left up to the tenant and landlord’s agreement. Renewal must occur throughout the term of the tenancy. Both the renter and the landlord have a three-month notice period. Subletting is only permitted with a separate agreement. The rent increase must be justified by the tenancy contract. On specified terms, the landlord may request increased rent for alterations, repairs, or enhancements from tenants who resided prior to the start of the work. The amount of advance rent that a renter must pay the landlord has been limited to two months for residential properties and six months for commercial properties. This should be returned to the tenant after deducting tenant obligations.

Property Manager: The Model Act includes a thorough section on the responsibilities of the property manager.

The landlord cannot refuse essential services. Water, power, and piped cooking gas supply, common area lighting, elevators, parking, communication, and sanitary linkages are all included. If he does, the Rent Authority may issue an order to reinstate it. However, an investigation must be conducted and completed within a month. If the landlord’s

If the objection is legitimate, the landlord may be required to pay two months’ rent as compensation for failing to provide needed services. If the objection is frivolous, the renter must pay the landlord two months’ rent as a penalty.

Eiviction: 

Restoring landlord trust in bringing empty stock back into the rental market is a critical problem. The Rent Court can issue eviction orders based on a landlord’s plea if:

  • The tenant fails to pay the agreed-upon rent in the Tenancy Agreement. The renter fails to pay the two months rent and interest, plus service costs, within a month after receiving notice.
  • If the tenant transferred control of a portion or the entire property without the landlord’s written approval,
  • If the tenant continues to abuse the property despite being presented with a notice from the landlord.
  • If the property must be changed, repaired, or redeveloped. Tenants may return only if a new Tenancy Agreement is lodged with the Rent Authority. If the landlord agrees, the renter may be permitted to occupy a portion of the property.
  • Tenants can be evicted if they provided the landlord written notice of vacation and the landlord planned the sale or repair of the property, or if they built a permanent construction without the landlord’s consent.
  • In the event that a landlord dies and his or her legal heirs can demonstrate the need for the premises, the Rent Court may issue an eviction notice to the renter.

The reason behind MTA being formed

In India, 95 percent of rural households own their homes, whereas rented housing is mostly found in cities. Between 1951 and 2011, India’s urban population increased sixfold, accounting for 31% of the overall population in 2011. This is expected to rise to 40% by 2036. However, between 1961 and 2011, the proportion of people living in urban rental housing fell from 58 percent to 27 percent. The draught National Urban Rental Housing Policy released in 2015 indicated that urban regions have a major housing scarcity that cannot be addressed by house ownership. A Technical Group researching urban housing shortage assessed the urban housing shortfall at 1.9 Crore homes in 2012.

According to the 2011 Census, between 6.5 crore and 10 crore persons (17% to 24% of the urban population) reside in illegal dwellings in metropolitan areas. According to the Economic Survey (2017-18), renting housing is an important approach to reduce informality and scarcity. It was claimed that rental housing facilitates mobility and affordability for low-income groups that would otherwise be unable to acquire housing. It also discovered that a large percentage of urban rental housing stock is empty, which it attributes to ambiguous property rules, weak contract enforcement, and rent control regulations.

In 1992, a model legislation governing tenancy was presented for the first time. The first draught Model Tenancy Act, which was accepted by Tamil Nadu, was issued in 2015. However, 20 states, including Karnataka, Maharashtra, and West Bengal, still have rent control legislation in place as of 2021. Rent control regulations have been overturned in a few states, including Madhya Pradesh, Jharkhand, and Chhattisgarh.

Pros and Cons of Model Tenancy Act 

Mr. Sanjay Sethi, CEO, ATS Infrastructure said, “The Model Tenancy Act approved by the central government is a welcome move as it will lay the foundation for a robust ecosystem as far as rental housing is concerned. It will further overhaul the legal framework and help foster a sustainable and inclusive rental housing market in the country.”

The following are the advantages of MTA-

Increased residential availability

In India, the rent control acts are different which are based on the state of your residence.

For example, Delhi has the ‘Rent Control Act 1958’, Maharashtra has the ‘Rent Control Act 1999’, and Chennai has the ‘Tamil Nadu Buildings (Lease and Rent Control) Act, 1960. The primary idea in each Rent Control Act is safeguarding tenants from unfair eviction and resolving tenant-landlord disputes.

Landlords are currently concerned about renting out their homes because they are concerned about asset loss, rental delays, and tenant overstays. The new Act, on the other hand, tightens the noose around such renters and establishes harsh penalties for overstaying or failing to pay rent. For example, if the tenant stays until the end of the lease, he or she will be required to pay the landlord double the rent for two months, which may be extended up to four times after two months.

Furthermore, the government intends to establish a Rent Authority in each State and Union Territory, as well as a special court to handle rent-related cases. Such steps are anticipated to restore homeowners’ trust and encourage them to release their houses for rental purposes, therefore boosting the rental housing supply throughout the country.

Easier for NRIs to lease properties

NRI interest in residential properties is increasing as India becomes a real estate investment centre. However, due to the lack of good rental regulations and the legal implications involved in the tenant eviction procedure, the vast majority of NRIs do not rent out their homes. As a result, the current infrastructure is underutilised and ineffective.

Other critical issues for NRI investors include property management, alternate use of property, and timely property upkeep. Nonetheless, the Act not only limits a tenant’s stay but also includes many landlord-friendly provisions governing subletting, transfer of rent agreement, and property damages, which are likely to increase NRI interest in renting in India.

Lower Security Deposits

The Tenancy Model puts a stop to the practise of collecting exorbitant security deposits by limiting them to two months for residential properties. Furthermore, when a tenant vacates a home, the legislation requires landlords to refund the whole security deposit within a month which works in the favour of the tenants. 

Regulated Rent prices

Increased home supply would also help to keep rental rates consistent across cities. In the lack of enough supply, rental costs in places such as Mumbai are rising, forcing tenants to relocate to outlying areas devoid of necessary infrastructure. The Tenancy Law, on the other hand, would liberate the city’s idle residential inventory and assist potential tenants in finding acceptable housing.

To which  Mr. Sanjay Sethi, CEO, ATS Infrastructure added, “The Act can contribute to expediting the registration of rental contracts and organise the rental market by using digital platforms in the vernacular language of the State/UT for submitting the tenancy agreement and other documents. 

Also the act will help in Faster dispute resolution and will help solve delayed verdicts regarding the ongoing disputes by setting up a specialised court for rental cases, ensuring more rapid solutions and improving the renting scenario across the country”

He further adds, “The Model Tenancy Act is devoted to the vision of ‘Housing for All’ by 2022 and seeks to address imbalances in India’s rental ecosystem. However, the revised Act has few challenges such as,

Repossession issue left unaddressed

The Act cannot adequately address the restrictive and cumbersome procedure involved in the repossession of the rental premises. While the general bar on eviction has been removed, the process remains restrictive, but removal can be carried out only on specifically limited grounds. In the absence of a workable legal recourse to evict tenants, homeowners are still unlikely to have any incentive to rent out vacant homes.

 Equitable market access still a dream

The Act does not adequately ensure equitable access to the market for tenants. While introducing a digital platform will help facilitate the registration process, the Act does not help overcome the gaps in digital literacy. Apart from that, the Act fails to protect the tenants from rental discrimination.”

Following are the Cons or challenges faced by the Model Tenancy Act 

Insubstantial security deposit

The model legislation appears to be beneficial to both renters and landlords; nevertheless, there may be issues with its execution. 

For example, the restriction on the security deposit may prove to be a stumbling block for landlords, particularly in locations where a large security deposit is the norm. Another possibility is if the renter fails to pay the rent or destroys the property. In certain circumstances, a two-month security deposit may not be sufficient to cover the landlord’s repair or loss owing to nonpayment of rent.

Dilution of norms

As the land is a state subject matter, the Act is not binding on the states. The final choice on whether to accept or reject the Act rests with the state, implying that if judged unsuitable, the states can repeal the Act or modify the standards as they see fit, resulting in disparities in rental models between states. In addition, timely enforcement is required.

While the Model Tenancy Act has several ideas that can help foster a better landlord-tenant relationship, there are some issues at the state level. As a result, it remains to be seen how far the states will go to adhere to the Center’s rental rules, as well as how long it will take to update the antiquated regulations once the Act becomes a reality.

How does the Model Tenancy Act affect developers?

There was a need for a new legal framework for the rental housing industry which would make things easier for all the stakeholders be it tenants, landlords or investors.

While the tenancy in the commercial real estate segment has been a well-established tenet of the market model, the dysfunctioning relationship between a landlord and a tenant is a huddle for development of a market model of rental housing market. Due to MTA, this dysfunctioning relationship will come to a balance.

Along with that, this act will act as a catalyst for every stakeholder to invest more in the rental real estate industry because, more people for instance, students who felt less secure about their rights in a rental property, will be able to move to move into bigger towns as the Model Tenancy Act will protect them while making the properties affordable.

Developers should try to create a new market segment to create projects purly for rental purposes, this will give them an edge for accepting the Model Tenancy Act while creating a new, student or first time employee rental demographic.

How The Model Tenancy Act will fulfil India’s rental potential?

The Model Tenancy Act is a positive move that has the potential to progressively change the rental housing sector in the medium to long term. Over the next several years, the sector may see further formalisation and investment in new business models. The rule will have no effect on current tenancies, but it will most likely allow more effective use of unoccupied properties. However, the government must give extra incentives, similar to those previously granted to IT Export Units and SEZs, to spur the expansion of ‘sunrise sectors’ such as multifamily housing, co-living, and student housing.

Once such incentives are in place, developers may progressively embrace the ‘Build-to-Rent’ model due to the possibility of long-term consistent rental revenue. As the industry matures, institutional investors will begin to support multifamily developments geared toward millennial families. As more millennials marry, for example, entire buildings or towers in a residential complex may be rented out to families. This would result in a lively little neighbourhood with community areas, shared utilities, and services.

The act will also boost private engagement in the housing business, including asset management and maintenance companies. This would have a positive impact on job creation and the expansion of the real estate services industry, which would be supported by a well-defined legal framework.

If we have to conclude the Model Tenancy Act, we will say there are ups and downs for landlords but, it very well protects the tenants by giving them a power to decide reasonable, mutual terms and making the rental homes more affordable which in turn might just create a big turn of events for the rental industry.

There’s a common saying in India, “Buying a home is always better than renting one” but, this mindset might just change as the rights of tenants are being thoroughly protected in the MTA.

Although this act allows the state to have some sort of contemporary modifications which will mean optimized rules and sub-sections per-state but, on an overall basis it will be a good turn of events we will get to witness for the rentee and rental real estate industry.

ALSO READ: What Is The Significance Of CIBIL Score For Young Homebuyers?

 

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