How the Model Tenancy Act (2021) Impacts Rent Control in Mumbai

Rent Jul 20, 2021

Key provisions of the Maharashtra Rent Control Act

  • When the Maharashtra Rent Control Act ('the Act') was enacted in 1999, it capped the rent payable by tenants at a 12.5 percent return on cost of construction plus cost of land at the time of construction on certain protected properties. It further allowed an annual increase at a fixed rate. However, the rate of increase permissible was still well below the prevailing inflation rate. [1]
  • The National Urban Rental Policy (2015) noted that the rent control legislations were heavily skewed towards tenant protection; very few landlords have successfully proved in court that they need the premises for their own use, enabling them to evict tenants enjoying rent control. As things stand, a large number of renters continue to occupy their rented premises since the time they were built.
  • The Act also legalised the pagdi system which bestowed upon tenants certain co-ownership and inheritance rights after they first rented the property by paying a certain principal amount. They subsequently kept paying a monthly rent which was often considerably lower than the market rate. The sale of his share of the property by the tenant resulted in him sharing between 30-50 percent of the sale amount with the landlord, while sub-letting his property resulted in him typically giving 35 percent of the rent amount to the landlord.

Today, it is estimated that more than 7.5 lakh properties in Mumbai have been rented out on the basis of the pagdi system. [2]

Fallouts of the rent control regime

Rent control froze the rents at one period in time for decades to come and effectively stripped landlords of their property rights in one fell swoop.

  • The freezing of rents led to the proliferation of informal rental housing. The National Sample Survey (2008-09) estimated that 25 percent of the total housing stock is used for informal rental housing, while only 5 percent of the total stock is used for formal rental housing.
  • The inefficient mechanism of dispute resolution and heavily pro-tenant provisions of the Rent Control Act have led to an increasing mistrust among landlords who have chosen to leave their homes vacant rather than rent them out. The 2011 Census documented as many as 11 million homes left vacant across urban India.
  • The imposition of rent caps in Maharashtra temporarily led to the proliferation of ‘leave and license’ agreements or short-term rental agreements which did not come under the rent control regime, allowing for the imposition of rents at the prevailing market rates. However, in 1973, leave and license agreements too were brought under the ambit of the Maharashtra Rent Control Act. [3]
  • This freezing of rents disincentivized landlords from investing in the improvement of their properties causing the gradual dilapidation of rent-controlled properties.

How the Model Tenancy Act (2021) impacts rent control in Mumbai

tThe Central government recently released the Draft Model Tenancy Act (2021) (‘the MTA’) on 2nd June, 2021.

  • One of the provisions of the MTA calls for the repeal of the Rent Control legislations of each state.
  • The MTA allows landlords to charge the rent based on the market value of the property. It also caps the annual rental hike permissible for residential properties at 5 percent.
  • However, the MTA, if adopted by Maharashtra will be prospective in nature; it will not impact the properties which are presently being rent out on the basis of the pagdi system.

News articles report that political parties are claiming that the MTA is inimical to the interests of tenants. In a situation wherein tenants residing in several rent-controlled properties are typically paying less than INR 500 to 600 per month, landlords are complaining that even the 4 percent annual hike in rent which the MTA permits is still well below the inflation rate.

Image by Milind Kaduskar on Unsplash

[1] Marron Institute (2014)- Decline of Rental Housing in India: A Case Study of Mumbai

[2] NAREDCO (2021)- What is the pagdi system in India?

[3] Marron Institute (2014)- Decline of Rental Housing in India: A Case Study of Mumbai

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