REGULATING INDIA’S RENTAL MARKET - THE MODEL TENANCY ACT, 2021

The Model Tenancy Act, 2021 is intended to give a new lease of life to the real estate rental business in India. We discuss the regulatory reforms sought to be achieved by the new model law.

Mridul KumbalathPartner

Prithvi GMAssociate

The Union cabinet has approved the Model Tenancy Act, 2021 (MTA), to set the wheels in motion for establishing a regulatory mechanism for the real estate rental business - one of India’s largest unaccounted and largely unregulated markets.

With India’s growing market potential, increased inflow of foreign investment, rapid urbanization, large scale migration, education and rise in population/employment, there is high potential in the growth of both demand and supply in India’s rental sector. However, this has largely remained untapped due to non-existing, outdated or inadequate rent laws, which in turn has resulted in an environment where informal arrangements have inhibited the growth of India’s rental market.

In this backdrop, the long-awaited approval of the MTA with its objective to (i) regulate the renting process; (ii) protect and balance the interests of landlords and tenants; and (iii) set up a speedy dispute resolution mechanism, is a step in the right direction.

Salient Features and Observations

  • Adoption of the MTA by States/Union Territories

    As the MTA is only a model framework, its adoption, and therefore, the possibility of bringing real change to the sector, is at the discretion of States and Union Territories.

    While the adoption of the MTA as-is by a State contemplates the repeal of existing rent control laws applicable in that State, the MTA is proposed as a prospective legislation and is not intended to apply retrospectively, i.e., it does not affect those cases and proceedings pending as on the date of commencement of the MTA. Such cases will continue in accordance with the provisions of the relevant State’s existing rent control laws. Consequently, it appears that the repeal of existing rent control laws is not intended to affect settled rights such as tenancies statutorily protected under respective rent control regimes.

  • The MTA will operate without any kind of pecuniary limitation in terms of its applicability.

  • No pecuniary limitation

    The MTA, primarily intended for residential and commercial premises, will operate without any kind of pecuniary limitation in terms of its applicability.

    This is a welcome change given that in some States rent control laws apply only to those properties that fall within a pecuniary threshold, which is often quite low. For example, in Delhi and Karnataka, properties with a rent over INR 3500 per month are outside the purview of rent control laws and therefore are not able to cater to most commercial and residential tenancy transactions, especially in urban areas.

  • Types of premises covered

    The definition of ‘premises’ under the MTA covers buildings or any portion thereof or any garden, garage, parking area, vacant land, ground and outhouse but does not apply to hotels, lodging houses, dharamshalas and to industrial uses.

    This definition appears to be constricting because (a) it does not cover land unattached to buildings; (b) excludes ‘industrial use’ completely (which is a very wide term, often used to cover a range of premises such as factory setup or development of software/technology parks with option to lease out premises for office use, etc.) In this context, the exclusion of the term ‘industrial use’ without suitable explanation and qualifications may create a degree of ambiguity and also leave out a considerable section of the property market from the purview of the proposed reforms; (c) fails to cover hybrid models such as paying guest facilities, co-living and/or co-working spaces and long-term rentals by companies such as Airbnb and Oyo, where bucketing into a single category may not always be possible.

    Further, unless the landlord and tenant specifically agree and inform the rent authority (set up under the MTA and as discussed below), the MTA does not apply to certain premises such as buildings exempted by the government in the public interest, premises owned by the government, local body or government undertaking/enterprise, statutory board, cantonment board, religious or charitable institutions, wakf/public trust properties and premises given on rent by an organisation or university to its employees as part of service contract.

  • Tenancy vs Lease vs License

    The MTA does not in itself define the term ‘tenancy’ or ‘rent’. However, the terms landlord and tenant have been defined and include lessor and lessee respectively, thereby bringing it within the purview of lease of immoveable property governed by section 105 of the Transfer of Property Act, 1882 (TPA).

    While the TPA requires registered instruments for leases as well as a default provision for month-to-month tenancies, the MTA mandates that all tenancies, regardless of the duration, be created only by way of a written tenancy agreement. This provision is given over-riding effect over any other provision contrary to it under the MTA or any other law.

    The MTA is silent on stamping and registration and only mandates that the landlord and tenant jointly inform the rent authority established under the MTA about the tenancy agreement for it to be valid (notwithstanding any other laws). This has led to ambiguity as this seems to suggest that failure to stamp or register a tenancy agreement does not affect its enforceability so long as the rent authority is informed about the written tenancy agreement. However, in jurisdictions such as Tamil Nadu, where a similar new tenancy law was framed a few years ago, stamping and registration requirements for tenancy agreements continue to be insisted upon by the rent control authority before accepting the tenancy agreement for validation. This approach might well be adopted in States where the MTA is brought into force as is. Further, reliefs under the MTA are not applicable for tenancy agreements not informed to the rent authority and therefore, such tenancy agreements will be enforceable only for contractual breach and limited and potentially protracted contractual relief before civil courts.

    Further, the MTA does not address leave and license arrangements which are quite prevalent. These are currently governed by the provisions of the Indian Easement Act, 1882 which allows for use of immoveable property under a permission without resulting in the transfer of an interest or possession of such immoveable property. While Maharashtra recognises licenses within the ambit of its rent control laws, most rent control laws such as Karnataka and Delhi do not consider licenses and the MTA appears to tow the same line.

  • Stakeholders

    While under the MTA landlords and tenants/sub-tenants are the primary stakeholders, the MTA has introduced the definition of 'property managers' and included them within its scope. The term 'property managers' has been defined to include not only persons who manage the landlord's premises but also persons who represent the landlord in dealings with the tenant, such as brokers and rental agents.

    Historically, real estate brokers, agents, property managers have always been unregulated and unorganized. However, the MTA now formalises such arrangements and specifically provides for information requirements, duties and consequences for non-compliance by property managers.

  • Establishment of Three Tier Adjudicatory Mechanism

    The MTA provides for the establishment of a three-tier adjudicatory mechanism, as follows:

    • Rent authority: The rent authority is established under the MTA to regulate the renting of premises and the authority is required to put in place a digital platform to enable the submission of documents and provide a unique identification number. Additionally, the authority has powers to resolve disputes relating to revision and determination of rate of rent and charges and disputes relating to withholding of essential services by the landlord/property manager to the tenant. The authority also has the power to accept deposit of rent and other charges from the tenant (when not accepted by a landlord) and remove property managers acting in contravention of the instructions of the landlord.
    • Rent court: The rent court is the appellate authority for orders passed by the rent authority and adjudicates on eviction related disputes.
    • Rent Tribunal: The rent tribunal acts as an appellate body to the rent court. Although the orders of the rent tribunal are final, the writ jurisdiction of the high court, which is a constitutional remedy, will continue to be available.

    With the establishment of this three-tier adjudicatory system, the MTA bars the jurisdiction of the civil courts and the general applicability of the Civil Procedure Code, 1908, allowing the rent courts/tribunals to be guided by principles of natural justice. While this is intended to ensure speedy adjudication, the efficacy of this system will depend heavily on how well it is implemented by an already overburdened state administration.

    Further, the MTA allows the appointment of non-judicial officers such as deputy collectors/additional collectors to carry out judicial duties for the rent authority/court. This can be challenging, especially in jurisdictions such as Maharashtra where small causes courts have exclusive first jurisdiction on rent matters.

    Lastly, the MTA is silent on alternate dispute mechanisms such as arbitration which have become integral to speedy resolution of landlord-tenant disputes. However, going by the precedent set by the three-judge bench of the Supreme Court of India in Vidya Drolia vs. Durga Trading Company, should the MTA be implemented in a particular State, landlord-tenancy disputes in that State may no longer be arbitrable as they would then be covered by the special judicial regime created under the MTA.

  • Tenancy Agreement and prescribed restrictions

    While the MTA gives parties the freedom to decide on aspects such as tenure, monthly rent and escalation of rent, it imposes a ceiling on the security deposit that can be collected, at 2 months' rent for residential premises and six months' rent for non-residential premises, thereby restricting the parties’ freedom to contract.

    Further, prevailing market practices of lock-in clauses, pre-estimated damages as well as maintenance deposits in tenancy agreements have not been accounted for in the MTA. However, the MTA has divided maintenance responsibilities between parties in case the tenancy agreement does not account for it. Also, under the MTA, the landlord or property manager is no longer permitted to withhold essential amenities/services. If such services are withheld, the tenant can seek for restoration and can be compensated with up to two months’ rent.

  • The MTA aims to even the playing field by catering to the needs of the landlord as well.

  • Eviction

    General market perception on existing rent control laws is that they favour tenants, especially in matters of eviction and rent enhancement. In a visible shift in this approach, the MTA aims to even the playing field by catering to the needs of the landlord as well. The MTA specifically lists the grounds for eviction of the tenant and allows for enhancement of rent (by two to four times) if the tenant fails to vacate the premises at the end of a tenancy or renewal/extension. The tenant however cannot be evicted during the subsistence of the tenancy agreement, unless agreed in writing and except by way of an eviction order of the rent court, for grounds provided in the MTA.

    Another important inclusion under the MTA is the rent court's power to sever vacant land comprised in a rented premise from the rest of the rented premises. This would require the landlord to file an application regarding his intention to erect a building on the vacant land on such rented premises. The rent court must satisfy itself on the preparedness of the landlord to undertake such construction on that vacant land and that the severance will not cause undue hardship to the tenant of the rented premises. This inclusion will enable the development/redevelopment of vacant land forming part of a tenanted building complex, especially since eviction proceedings can be long drawn out (particularly in jurisdictions like Mumbai).

  • Force Majeure

    Where the term of a tenancy expires during the subsistence of a force majeure situation in the area where the tenanted premises is located, the MTA allows the tenant to continue in possession for a period of one month from the date of cessation of the force majeure event on the same terms as set out in the tenancy agreement. Similarly, if due to a force majeure event, the premises become uninhabitable for the tenant or tenant is unable to reside in it, the landlord cannot charge rent from the tenant till such time that the premises is habitable again.

    Interestingly, only war, flood, drought, fire, cyclone, earthquake or any calamity caused by nature are covered as force majeure situations under the MTA. Riots, civil unrest and even a pandemic have not been included resulting in a lot of ambiguity and cause for dispute. In the light of current events, there is no clarity on whether a pandemic such as Covid-19 would be considered a 'calamity caused by nature' (thereby qualifying as a force majeure event), which adds to the uncertainty on this issue.

After India’s largely successful attempt in tackling the developer and consumer/homebuyer market with the implementation of the Real Estate (Regulation and Development) Act, 2016, the MTA is the logical next step for the government to regulate the real estate sector. It will however be interesting to see how it is implemented by State governments for their specific needs and whether it sets up a conducive regulatory ecosystem for India’s rental sector. While Tamil Nadu had passed a new rent law in 2017 in line with an earlier version of the MTA (i.e., the Draft Model Tenancy Act, 2015), Uttar Pradesh promulgated a new tenancy ordinance in line with the MTA earlier this year. Assam recently adopted the MTA in August 2021 and reports indicate that Karnataka and Gujarat are likely to follow suit.

With the advent of new models of ownership such as fractional ownership of high value assets and establishment of real estate investment trusts, which are highly reliant on rental profits for their return on investments, the MTA is a regulation which can have the most defining impact on the real estate sector.

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