All you need to know about the Model Tenancy Act.

Mainly what you need to know about the Model Tenancy Act is that The Ministry of Housing and Urban affairs have drafted a ‘Model Tenancy Act’ which envisions to balance the interests of both the Landlord and the Tenant so that there accountable and transparent system to rent out the premises in a very disciplined manner.

The key factors that the Model Tenancy Act consists of is that: 

• This act mainly focuses on the tenants refusing to move out of the property after the agreed rental period expires. If this happens the landlord has all rights to claim double rental value for 2 months and four times of the monthly rental after which. This will help put to rest one of the biggest fears landlords have while giving out properties for rent.

• The new Model Tenancy Act 2019 aims to keep the rental deposit at 2 months of the agreed upon rental value for residential and 1 month for any other kind of properties. Although in cities like Bangalore where landlords ask for at least 6-7 months of rental amount as deposit. It is going to become hard for them to adjust and also, they will have a fear of not recovering the cost of any major damages caused by the tenant during his period of stay. 

• The Act emphasizes on the fact that the landlord cannot refuse to provide essential utilities and access to common facilities.

• The landlord also cannot increase the rent without giving a good 3 month notice period. This is another big advantage of the Model Tenancy Act.

• Within Two months of executing the rental Agreement it is mandatory for both parties to Intimate the rent Authority about the tenancy agreement. The rent authority within 7 days will issue a Unique Identification Number to both parties. 

• Mainly, it must be noted that Existing tenancies will not get impacted as draft model tenancy act will be applicable prospectively. 

I don’t think that the draft Model Tenancy Act is skewed specifically towards the tenant or the landlord. Rental housing has been a major gap in the Indian real estate market and what has kept investors and buyers from tapping into real estate for rental returns hasn’t just been low returns but the lack of sufficient legal enforcement of the rental agreement. This Act has been brought in to address these deficiencies in the existing rent control laws. If you look at some of the major announcements—like the security deposit being capped to a maximum of two months’ rent, or the heavy penalty on the tenant if he fails to vacate the premises, or how landlords can’t arbitrarily hike up rentals mid-lease without sufficient cause and notice—it is clear that the intention is to balance out the common problems faced by both parties. The real concern here is not so much about whether it is skewed towards one party but about the implementation. What is required for the success of the Act is the complete implementation by all the states.

The Model Tenancy Act is a step forward from the archaic laws governing rent control. While the tenant has a cap on security deposit and protection from arbitrary increases, the landlord is entitled to stiff penalties for failure to vacate and transparent repossession mechanism. However, the draft stops short of addressing the weak contract implementation. In its endeavour to strike a balance, the draft seems to err on the side of caution by tilting the commercial deterrents in favour of the tenant, such as cap on security deposit.

For the past several years, yield on residential investment has not been commensurate with the risks involved with the rental housing sector. The need of the hour is to provide an enabling framework for emerging business models like co-living, while providing a time-bound dispute resolution mechanism for traditional tenancy formats. The government has an opportunity to make this a more comprehensive and enabling legislation to achieve the Housing for All objective by 2022.

At first look, the draft rules do seem to be favourable for both tenants and landlords. However, there are some inherent challenges. The cap on the security deposit can become a pain point for many landlords—in cities like Bengaluru, a ten-month security deposit (with some scope for negotiation) was the accepted norm. If a tenant defaults or causes significant damage to a property, two-months security deposit may not cover the expenses the property owner incurs.

While the government lays down the basic policies, the exact rules will likely change within each state since land is a state subject. Like we saw in the highly lopsided roll-out of Rera, the Model Tenancy Act 2019 may lose its real purpose if states do not follow the basic guidelines and try to dilute them.

The draft aims to bring in transparency in the highly unorganised rental space and leaves little room for either party to take advantage of the other. Among the many benefits that the draft proposes for both sides, we feel it is more tilted in favour of the tenant who is usually treated as the underling by both landlord as well as brokers.

The draft caps the security deposit to a maximum of two months’ rent in case of residential property and to a maximum of one month’s rent in case of commercial property. There is no standardisation of security deposit across cities and this proposal is quite relieving. Issues such as increasing rent, eviction of tenants, etc. have also come within the ambit of this draft and a landlord cannot increase the rent arbitrarily or ask the tenant to vacate without prior notice. The draft Act also favours the owners in multiple ways. An efficient system is in place to curb challenges faced by them due to unscrupulous tenants who do not vacate in time and do not leave the property in a good shape.

For this reason, the Model Tenancy Act, like RERA, may well become a process rather than an event, and may need several course corrections to reduce regional dilutions before it becomes a force to reckon with.