The Union Cabinet approved the Model Tenancy Act, a landmark reform. Once adopted by the states and the union territories, the act’s implementation can help bring in over 11 million vacant houses into renting and thus help make these hitherto idle assets become economically productive.

Share Market Live

NSE

The act brings clarity to the landlord tenant relationship by defining the roles, responsibilities and the recourse available to every stake holder. The act has also specified the structure of the regulatory frame work – the setting up of the Rent Authority, Rent Courts and the Rent Tribunals and their respective powers which should help improve the confidence levels of the landlords.

Since the act stipulates the timelines within which the aggrieved party can resort to an appeal and within which the respective authority should decide and dispose off the case, the landlords and the tenants can now be assured of a time bound settlement of their disputes. This is a huge positive! The fact that every tenancy agreement has to be uploaded with the rent authority without which the landlords and the tenants are not entitled to any relief under the act will go a long way in formalizing the business of renting thus encouraging institutional investments in the space.

Going by common consensus, the MTA scores very highly on intent& reform – that of being able to resolve the various issues that plague the rental segment currently in India. The overarching thought being - that the implementation of the act should encourage the landlords, who have currently opted to keep their houses vacant, to start letting out their properties and thus help address the massive housing shortage that the country faces.

The landlords may however feel a bit aggrieved with the cap on the security deposit. The act has capped the security deposit at 2 months rental & 6 months rental for residential and commercial properties respectively. The landlord here doesn’t enjoy the flexibility of adjusting the quantum of deposit based on his perception of risk. This is even more critical because the landlord doesn’t have any means at his disposal to be able to accurately verify the credibility of the tenant. Moreover, in the post pandemic environment, there may be many landlords, especially the ones staying overseas who are not able to travel tomeet the tenant prior to letting out his premises.

And the risks here could be high and from multiple fronts –

Default in payment of Rent

• In case of default in payment of rent, the landlord can file for the eviction of the tenant with the rent court only if the tenant has not paid the arrears of rent and other charges payable in full for two consecutive months including interest. The landlord has to serve a notice of non-receipt of rent and other charges and wait for a period of one month from the date of service of this notice before filing with the rent court.

This essentially implies that a landlord who has a security deposit of two months' rental can only file for redressal of his grievances after a period of 90 days from the date of first default. The landlord is by this time already out of pocket

• Once filed with the Rent Court, the MTA provides for the disposal of the case within a period of 60 days.

• Once the rent court has passed the order, the aggrieved party may opt to file an appeal with the Rent Tribunal within a period of 30 days from the date of the order. The tribunal has a further period of 60 days to decide and dispose of the appeal.

• The above process if it goes to its entire length, would entail a period of 240 days from the date of first default even if one can hope of a resolution.

Lock in Period

• Prior to letting out his premises, the landlord usually undertakes extensive repair and maintenance of the property. Apart from this, the landlord also has to pay the real estate consultant brokerage which is usually equivalent to one month’s rental.

Given that the landlord has already spent approximately 3-4 months rental income towards acquiring the tenant, it is only obvious that he would expect the tenant to stay at his premises for a basic minimum tenure, which is mutually agreed to between the landlord and the tenant. This is the lock in period and can range from 6 months to 11 months depending upon the place of domicile. The two months of security deposit is grossly inadequate to cover the landlord, should the tenant choose to vacate the premises before the expiry of the lock in period.

While the MTA attempts to resolve most of the issues that impact residential rental, the lengthy redressal mechanism and the low cap on security deposit may still deter landlords to overcome their hesitancy and eventually let out their premises.

Rental Bonds on the other hand may just be the solution that is required here. A rental bond is a guarantee in favour of a landlord that the tenant will fulfil his obligations under the tenancy agreement. It is a replacement to the cash security deposit & covers the following-

• Unpaid rent

• Up to 6 months of lock in period.

• Damages to the property other than fair wear & tear

• Unpaid bills - utility bills, maintenance charges, water bills, club charges etc as set out in the lease agreement.

Rental bonds provide the landlord with credit assessed & verified tenants and protect him from losses due to the default of the tenant in the performance of his obligations under the tenancy agreement. Essentially, the landlord can be assured of a better and a far more credible tenant thus entailing fewer or zero hassles.

Rental Bonds are a superior and wider cover as compared to the traditional security deposit that protects the landlord from default by the tenant. The landlord also has the flexibility of specifying the quantum of cover required under the bond. In addition, since the rental bond does away with the need for lumpy security deposits, it also increases the probability of the property being rented out faster than the properties that do not accept rental bonds.

To summarize, with a rental bond, the landlord gets a credible tenant, a comprehensive cover, faster occupancy resulting into higher rental yield – All of this at zero cost!

Rental bonds complement the provisions and the intent of the MTA and the two together will help the landlords feel secure and overcome his hesitancy to open up his premises to tenants.

We are not saying “Fast Forwarding Renting” yet!

The author, Vikash Khandelwal, is CEO at Eqaro Guarantees. The views expressed are personal