Model Tenancy Act: Advantage Rental Bonds

    Posted by Pankaj Bhansali on Jun 2, 2021 4:00:00 PM

    The government’s approval for the Model Tenancy Act is a landmark reform that will usher in a new era for the real estate sector in the country. The Indian residential rental segment has been by large been unstructured so far with zero policy interventions so far. The archaic Rent Control Act currently in force has done very little to instil faith in the landlords who viewed it as pro tenant and preferred to keep it vacant rather than let it out. As per some estimates, there are over 11 million residential houses lying vacant despite a huge housing shortage.

     

    The Model Tenancy Act lays down the regulatory frame work for renting including the rights and obligations for every stakeholder and the recourse available to it which will help reduce litigation and encourage trust between the landlord and the tenants. The act will help formalise renting and will help make the over 11 million vacant residential units economically productive. The act will also encourage and attract institutional investments into the residential assets, thus ushering a new phase of growth in to the Real Estate Sector. By defining the quantum of security deposit, it also comes as huge relief to the tenant who has been so far required to put up large amounts as security deposit sometimes even extending to 8 to 10 months of rental.

     

    Implementation will be key if we are to experience the full benefits as intended under the act. Its critical that the states act swiftly and adopt the law, have the necessary regulatory structure in the form of tribunals, rent authorities & courts to provide speedy resolutions and a common framework across the country. The Act once adopted and enforced by states will reform the rental housing business in India with utmost transparency and help create a sustainable and inclusive rental housing market in the country.

     

    However, there is a flip side as well. The model tenancy act provides for 2 months of rental as security deposit. The landlords today who do not have any means at their disposal to verify the credibility of the prospective tenant may find the 2 months security deposit inadequate to inspire confidence in letting out their property. The two months security deposit is also inadequate to cover for the lock in period in the event of the tenant vacating the property prior to the expiry of the lock in period.

     

    This is where rental guarantees can help in the institutionalising the residential rental market in India. Rental Bonds help address the friction points in the process of tenancy thus promoting trust between the landlord and the tenant.

     

    Rental Bonds protect the landlord by providing him with credit verified and assessed tenants and protect him against default of the tenant in the payment of rent, damages to the property, unpaid utility bills and unpaid rent for the lock in period. Rental bonds will also help the tenant carry forward the benefits of his good tenancy track record to his subsequent tenancy agreements which may help him obtain preferential tenancy terms.

     

    The rental yield in India is amongst the lowest in the world. The Act once adopted and enforced by states promises to create a sustainable and inclusive rental housing market in the country. It would also attract a plethora of institutional & individual investors willing to invest in the real estate segment in order to earn consistent and hassle-free revenues by renting their properties.

     

    Topics: Model Tenancy Act & Rental Bonds

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