Decoding Model Tenancy Act

The Indian real estate sector holds immense importance in the economy. When it comes to generating income, it is only second to agriculture. Moreover, the sector makes for around 6-7% of the country’s GDP, estimated to reach 13% by 2025.

The residential rental market makes for a significant part of this sector. However, the market has been suffering through illegal practices, unorganized policies, and other disputes, operating at the whims of the landlords. 

Acts like RERA and Model Tenancy are now finalized, ready to set the housing sector right. While RERA was more focused around formalizing and building trust around developer-homeowner relationship, the Model Tenancy Act is focused around homeowner-tenant relationship and building trust.

In essence, the two acts formalize the relationship between developer, homeowners and tenants, most of the residential ecosystem (RE).

Tag along, and this piece will highlight the features and implications of the Model Tenancy Act on the residential rental market.

PURPOSE OF THE ACT

The Model Tenancy Act primarily aims to formalize residential renting, helping the tenants, landlords, and the industry on the whole. Here is a quick overview of the purpose of the Model Tenancy Act.

• Harmonizing the interests and rights of both tenants and landlords
• Ensuring adequate rental housing opportunities that are affordable
• A formal structural framework for the residential rental market
• Boosted private participation in the real estate rental housing sector
• Releasing vacant properties for renting

KEY FEATURES OF THE ACT

According to a census conducted in 2011, urban houses amounted to over 21 million, and the numbers have only been increasing. Besides, only 5% of the urban properties were covered through a formal rental process. In such times, the implementation of a regulatory act was quintessential.

The Model Tenancy Act is introduced to safeguard the interest of tenants and landlords while regulating the residential rental market.

Tenancy Agreement

The act states the requirement of a formal rent agreement between the tenant and the landlord. It must comprise details of:

• The payable rent
• Tenancy period
• Terms for the rent revision
• Advance security deposit
• Reasons of landlord entry into the premises
• Maintenance responsibilities

The act also makes it mandatory for the involved parties to intimate the Rent Authority about this agreement within two months.

Tenancy Period

The MTA lays out all the conditions of the tenancy period, including extensions and payments. The tenant can extend or renew the stay; however, the rent will increase if:

• The tenancy period has ended
• Tenant stays without extension or renewal

In case the tenant defaults at vacating the property, he will have to pay:

• Double the rent of the first two months
• Four times the amount of rent until vacating

Security Deposit

Tenants are only liable to pay security deposits amounting to a maximum of double the rent of residential premises. The tenants will get this money back on vacating the property after deducting maintenance charges.

Eviction

If the landlord wishes to evict a tenant due to inappropriate behavior, they can apply to the Rent Authority. The grounds of eviction include:

• Refusal to pay the rent
• Failure to pay the rent more than two months
• Giving the possession of the property to another party without the landlord’s consent
• Continual ill-treatment of the premises despite written notes and warnings
• Construction or structural change without the landlord’s consent

Sub-Letting

The Model Tenancy Act does not allow sub-letting without a formal agreement given to the Rent Authority. It needs to be done within two months of signing the agreement.

Dispute Resolution Mechanism

The act lays out a set of three tiers to resolve matters related to the provisions under the Model Tenancy Act. The District Collector will appoint Rent Authorities and Rent Court with the permission of the respective state agreement. Furthermore, the state government will establish a Rent Tribunal after seeking a green signal from the High Court of the district.

BENEFITS OF THE ACT

As per the 2011 census, almost 1.1 crore houses were found vacant across the country’s urban areas. A regulatory framework introduced by the Model Tenancy Act is sure to attract higher investment in the residential rental segment. Its further benefits include:

For Tenants

• Increased rental availability
• Price regulation and minimal security deposit
• Maintenance by the landlord
• Rental hike is allowed before the tenure starts
• 3-month notice by the landlord before rent revision

For Property Owners

• Tenant default addressal
• Compensation in case of overstay
• Rent court in each state

For Both

• Dispute redressal
• Formal regulation
• Detailed specifications
• Higher leasing by NRIs

GAPS IN MODEL TENANCY ACT

Despite multiple benefits for both parties, the Model Tenancy Act has missed out on multiple key issues. Check out some of them:

Lack of a Concrete Rental Housing Policy

The National Rental Housing Policy draft laid out in 2015 covered measures like enhanced affordability, a higher scope of investments, shelter facilities, and other incentives. However, the Model Tenancy Act only covers a small part of the policy.

Affordability is Still a Concern

In a nutshell, the Model Tenancy Act is a positive initiative for the growth of the residential rental housing market. However, these prospects are only possible with strict, timely implementation of the act.

Prevalence of Informalization

According to NSSO, only 5% of the total rented properties have gone through formal agreements. The informalization does not only disrupt the workflow but also makes the residential rental segment economically unattractive. This matter needs significant consideration, with the residential rental yield already being as low as 1.5-3%

Vacancy Stock

The National Commission on Urbanization recognized the significantly low vacancy stock of houses in urban areas in 1988. Plus, with the 2011 Census, the fact stands verified. The National Rental Housing Policy draft of 2015 highlights low rental yield, lack of incentives, and fear of repossession (landlords) as the possible reasons.

IMPLICATION ON RESIDENTIAL REAL ESTATE MARKET & FUTURE OUTLOOK

The Model Tenancy Act has set up district-wise rental courts, authorities, and tribunals to transform the rental segment into a formalized fraction.

While the tenants will enjoy increased availability and notice period, the landlords will get due compensation for default. Additionally, the formalization of the market will increase the yield, attracting investment. In a nutshell, it is a win-win situation for all the stakeholders.

Here is a quick overview of the Model Tenancy Act’s implications on the residential rental market.

• Investors’ confidence is sure to escalate for both retail and institutional.
• Higher participation by the private sector.
• Rental and Property Management will definitely play a key role in formalizing the Rental Residential market.
• It is currently valued at $13.5 billion with less than 5% penetration rate
• Landlords will be able to run legit background checks on tenants through tech-enabled verification systems.
• The value of India’s co-living industry is expected to reach $2 billion by 2022.
• According to the operational guidelines of Affordable Rental Housing Complexes (ARHCs) 2020, affordable housing will witness a significant boom.
• Both, the government and the public & private entities are will offer affordable housing opportunities on vacant land

Key Takeaways

• The Model Act ensures higher compensation if the tenant does not vacate
• Time-bound settlement of disputes through recognized courts
• Deposit worth two months’ rent and non-eviction are a relief to the tenants
• A mandatory tenancy agreement will provide legal backing to both parties