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Model Tenancy Act: Tweaks may be required to enhance practicality

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The impact of this Act may vary depending on the current prevailing regulatory infrastructure around rental market in every city

The recently enacted Model Tenancy Act is not just a much-needed regulation for the industry but it is also extremely forward looking as it seeks to institutionalize the rental property sector.

We evaluate this Act from three specific lenses:

  1. How this Act may usher a digital revolution and institutionalization of the sector
  2. Changes with were much needed and overdue
  3. Changes that may be required in the Act to converge with the demands of practicality

 

To begin with, we would highlight certain contingencies that may impact the effectiveness of this Act.

The Tenancy Act is a Model Act for state governments to implement. Thus the onus will be on individual state governments to notify the same in the same spirit. This will be similar to the Real Estate regulation Act [RERA] where the RERA was enacted by the Central Government and it was up to the individual states to implement the same. We are hoping that the implementation is far more effective than we have seen with RERA.

The impact of this Act will also vary depending on the current prevailing regulatory infrastructure around rental market in every city. While Mumbai may see minimal impact which has a fairly robust rental environment with transparent practices and an effective regulatory mechanism, other cities like Gurugram may see a wider impact given that a significant chunk of rental agreements are unrecorded.

Digital revolution and institutionalization of the sector

We believe that the creation of a Digital Platform shall open a host of business opportunities for startups as a huge volume of data will become available for entities to build business models on top of it. We expect business models to emerge around the following:

  • Data analytics models similar to those in commercial real estate market focusing on rental trends, transaction values, rental yields to be built for B2B businesses
  • Data driven tools to assist listing platforms augmenting their listing quality through recent transactions, vacancy durations etc, demand supply in locality etc
  • Models focusing on background and credit history of tenants
  • Owner reviews based on history of deposit refunds among other factors

 

The Act is very progressive in legalizing sub-letting which should open up avenue for institutional investments. This should also result in more standardized rental offerings by institutional players which should help in improving rental yields.

The Act also recognizes the role of property managers in the rental industry. This stamp of recognition with clear understanding of their role and liabilities should give more impetus to the sector which is still in a nascent stage in the country.

Much needed changes

The rental market hasn’t seen significant reforms and has thus been driven by several outdated practices. This Act helps in addressing some of these issues:

  1. Constitution of Rent Courts for redressal of disputes relating to issues like eviction of tenants, recovery of possession by Landlords.
  2. Setting of a Rent Authority for swift redressal of minor disputes with wide ranging powers including (1) collecting rents in case of any dispute (2) determining revision in rents in specific cases, (3) restoring any essential supplies like water, electricity, if withheld by the landlord.
  3. The Act clearly lays down the division of repair and improvement costs between the landlord and the tenants and also specifies the mechanism for the same.
  4. The Act does away with the archaic requirement of signed rental receipts in case of electronic transfer.

Tweaks may help it become more practical

While the Act lays down a vision for the development of the rental market, we find certain areas where a generalized imposition would actually be detrimental to these specific segments.

Commercial Establishments: The Act specifically excludes premises used for industrial use but it covers all premises used for other commercial use. We believe that the new regulatory environment under this Act would be a positive for commercial use premises but restrictions on financial and commercial terms needs to re-evaluated in such cases.

Commercial rental agreements, especially for larger office spaces tend to be very different in nature as compared to residential agreements. The terms for these contracts have to be understood from an overall structuring of the deal as opposed to a single element like monthly rental and security deposit.

Typically these agreements are characterized by longer tenure, heavy upfront investment in infrastructure and these are then reflected in significantly larger security deposits. Hence a restriction on month security deposit is not a practical solution in commercial rental contracts. This needs to be left to market forces and terms of negotiation between the parties.

Capping of deposit to two months of rent for residential premises

The capping of deposit is a good measure as it helps in freeing up of dead capital to more productive uses and reduces an unnecessary friction in the system. However, we believe that a more pragmatic capping should be adopted as the security deposit is meant to cover the risks for unpaid rents, other outstanding liabilities under the contract like utility bills and damages to the apartments. The current cap may not be sufficient to cover these risks and may prove counter-productive in bringing more supply to the market.

We hope that the this Act helps in ushering much-needed reforms in the rental market and is implemented in the right spirit and vigor by the state governments. This could help in establishing a very robust rental industry which could gain substantial traction and become a significant sector within the real estate industry.

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