Rent Control Act - Objective & Purpose
RENT CONTROL ACT – OBJECTIVE & PURPOSE
INTRODUCTION
What is Rent Control?
The practice of imposing a legal maximum (rent ceiling) upon the rent in a particular housing market, below the equilibrium rent is called rent control. So basically, Rent Controls prevent prices from rising up to the equilibrium level and thus it alternatively rationalizes the mechanism.
A 1986 U.N. study estimated that about 42 percent of the world’s urban dwellers were renters. It was not known how many of those 150 million households lived under rent control regimes, but preliminary research suggested that the proportion is as high as 30 percent[1]. These numbers can reasonably be expected to have increased with the passage of time. Thus, it necessitates seeing why rent control laws came into being and why it has been persisting for such a long time.
While the proponents of rent control laws suggest that they prevent landlords from charging exorbitant rents and evicting tenants at will, the opponents suggest that rent control laws, by distorting incentives, lead to deterioration of existing housing stock, increased pullout of apartments from the rental housing market and thus reduced overall supply.
Origin of Rent Control Act[2]
Rent controls were introduced in the early 1900s in the United States and some other parts of the world to check uninhibited rent increases and tenant eviction during wartime housing emergencies. After World War II, there was a sudden increase in the demand for rentable housing from soldiers returning home. With industrialization and corresponding urbanization, there was an increase in rural-urban migrations. To prevent rents from rising too much Rent Control Acts (RCAs), under various names were introduced in many countries. These were called the first-generation rent controls. Those introduced later were called the second-generation rent controls or soft rent controls, because they provided for some leeway in rent increases and tenant landlord relationship.
Rent Control Act -India
The first rent control legislation in India was introduced immediately after the First World War in Bombay in 1918. It was followed by similar legislations for Calcutta and Rangoon in 1920. By the end of the Second World War, almost all the major cities and towns in the countries were covered by rent control measures. All these acts, born out of the inflationary aftermath of the First World War, were conceived as purely temporary measures to provide relief to the tenants against the demand of exorbitant rent and indiscriminate eviction by the landlord’s due to the scarcity of houses in the urban areas.
Rent Control Act – Purpose
Under the Indian Constitution, housing is a state subject. Thus, the enactment and enforcement of rent control laws is the responsibility of the individual States. Almost all rent control Acts and legislations are intended to serve two purposes:
1. To protect the tenant from eviction from the house where he is living except for defined reasons and on defined conditions; and
2. To protect him from having to pay more than a fair/standard rent.
But most acts also confer upon the landlord the right to evict a tenant who is guilty of certain specified acts and also when the landlord requires the house for his own personal occupation. There are various grounds under which a landlord can evict a tenant. The most common of these are listed below. There are also some states, where one or more of the provisions given below don’t apply.
1. Breach of condition of tenancy
2. Subletting
3. Default in payment of rent for specified period
4. Requirement of building for own occupation
5. Material deterioration in the condition of the building
The landlord is required to specify the exact provision of the relevant act under which he is seeking the eviction of the tenant, to enable the tenant to take any remedial action provided in the act. The whole idea of a rent control act is to control and regulate eviction of tenants and not to stop it altogether.
Exemptions have been granted to various sections of the Rental Housing Market
(Henceforth, referred as RHM) under many of the Rent Control Acts (Henceforth, referred as RCAs):
· Properties belonging to the Government.
· Any tenancy created by a grant from the Government in respect of the premises taken on lease or requisitioned, by the Government.
· Newly constructed properties for a period of ten years (in Delhi) from the date of construction. This period may vary from State to State.
· Any premises, residential or other, whose monthly rent exceeds three thousand and five hundred rupees (in Delhi). The amount may vary from State to State.
One bone of contention over the years has been the feature of most Rent Control Acts to grant exemptions to the properties owned by the government. While some say that this is a discriminatory practice, their argument is dismissed by the assertion that the government is not expected to raise rents or eject tenants in the pursuit of higher revenues. Thus tenants of government owned properties are in no need of protection.
OBJECTIVES WHICH MOTIVATE THE LAND REFORMS ACT
Following are the objectives that lead to Lands Reform Act:
a) Promoting an adequate supply of rental housing for different income groups and ensuring proper maintenance of old housing stock, especially in inner city areas;
b) establishing a better balance between the interests of bonafide tenants in terms of security of tenure and those of landlords in terms of adequate return and easy resumption of possession in genuine cases;
c) making rent control acts less inhibitive;
d) reducing litigation under the Rent Control Act
In pursuance of these objectives, the reforms have been directed towards;
i. Liberalizing the existing Rent Control Acts by slowly releasing a larger segment of the rental housing market from the purview of the market and reducing the stringency of controls in the controlled segment of the market;
ii. Amending provisions to facilitate expeditious disposal of cases;
iii. Plugging loopholes in existing rent control Acts for enabling periodic rent revision, enforcing obligations of landlords and tenants and balancing security of tenure with resumption of possession by landlords in genuine cases of need or hardship;
ARGUMENTS AGAINST RENT CONTROL
The arguments for rent deregulation and the reasons for its repeal or non-existence are divided into three parts – economic, social and legal.
Economic Arguments
1. Fixation of standard/ fair rent Worked out on the basis of the value of land and cost of construction when built, as per the provisions of the Rent Control Act as a percentage of the cost of construction is a major disincentive for those wanting to invest in rental housing as it gives a very low rate of return as compared to other assets.
2. The low rate of return also leads to rapid deterioration of existing housing stock, as landlords have no incentive to invest any funds in the upkeep of their apartments. This is detrimental to the long-term interests of the tenants.
3. It’s difficult to evict a tenant once the house has been rented, thanks to the provisions of the RCA. Thus, the fear of losing perpetual control of their houses might lead them to withdraw their vacant premises from the rental market, leading to reduced supply.
4. It’s difficult to resell a tenanted house from which it’s difficult to evict tenants. This reduces liquidity in the market for ownership housing.
5. As any other price control, rent controls also distort incentives and price signals, leading to inefficient allocation of resources (here, land and building).
6. People invariably find ways around RCAs, leading to the formation of black, uncontrolled rental housing markets.
7. Rent controls also reduce the mobility of the labor and households living in controlled premises. This happens through the so-called “Old Lady Effect”, which operates through the reluctance of many consumers to part with the rent control subsidy.
8. Municipal revenues get eroded. As property tax is directly linked to the rent, it is now calculated on the basis of standard (controlled) rent rather than market rent.
9. Implementation of Rent Control laws also involves substantial administrative costs. All rental property must be registered, elaborate mechanisms to fix rents must be formulated and a dispute settlement body established.
Social Arguments
The social impacts of Rent Control Acts are more explicit and often, very bizarre. In absence of any fresh supply of rental housing, the existing tenants sit tight and the new entrants are the worst affected. The only possible way for them to get an apartment is through the death of an existing tenant (assuming no inheritance rights).
Legal Arguments
1. The Flawed Nature of Rent Control Acts: The structure of various rent control acts renders them contradictory to other laws of the land in some situations:
a. The law relating to the landlord’s rights to evict the tenant can be found in the Transfer of Property Act, 1882. While a landlord can immediately start an action for eviction of a tenant on expiry of the notice of eviction under Section 106 of the Transfer of Property Act, 1882, he cannot start such an action where the rent act applies, unless he can prove the existence of one of the grounds for eviction under the Rent Act.
b. Some provisions of these acts have been repeatedly denounced by the courts as unreasonable. E.g. The Supreme Court, while delivering its judgment on December 19, 1997, on appeals filed by several property owners in Mumbai, said that the existing provisions of the Act that related to the determining and fixing of the "Standard rent" was "no longer reasonable"[3].
c. The various acts relating to the control of accommodation in urban areas including the Rent Control Acts are examples of legislation interfering with the right to hold and dispose of property under Article 19(1) (f) of the Constitution of India. But such acts exist because they are considered to be necessary in public interest in times of shortage of houses.
2. Ineffectiveness of the Provisions: The provisions have not been very effective due to the following reasons:
a. Significantly large urban groups have been excluded from the purview of RCAs. E.g. The Delhi Rent Control Act (including all amendments) grants an exemption to the following tenancies:
i. Properties belonging to the government
ii. Any tenancy created by a grant from the Government in respect of the premises taken on lease or requisitioned, by the Government
iii. Newly constructed properties for a period of ten years from the date of construction
iv. Any premises, residential or other, whose monthly rent exceeds three thousand and five hundred rupees.
Besides the above, exemptions are granted to religious and ethnic institutions also. E.g. in Bihar, the properties owned by Digambar and Shwetambar Jain Trusts are exempted from all provisions of the Bihar Building (Lease, Rent, and Eviction) Control Act, 1982.
b. Under most of the RCAs, there is nothing illegal about charging a rent higher than the standard rent. Standard rents are fixed by the Rent Controller, only if the tenant or the landlord approaches him for this purpose. Even if there are no provisions in the RCA for increasing rents over time, the tenants often agree to an increase in rents to maintain good relations with the landlord.
c. Another way in which this act is made ineffective is through the prevalent system of lump sum payments at the beginning of the tenancy period. Such payments are illegal, e.g. under Section 5 of the Delhi RCA, which permits only one month’s advance.
d. Often the renting of the house is done under the Transfer of Property Act 1882 and a “Leave and License Contract” is drawn with the tenant. The period of the lease ranges from 11 months to 33 months and is renewed at the expiry of the contract period. This contract, however, has no validity under the Delhi RCA or other RCAs.
e. Often landlords make the non-issuance of rent receipt a prerequisite for renting out apartments. Thus, in the event of a conflict, the case of the tenant is weakened to a great extent.
f. The eviction procedure is usually very long and tiresome. And there is a lock in period after the eviction, during which the landlord cannot relet the house. Thus, if a landlord wants to relet the house at a higher rent, he’ll avoid going to court, and revert to the following illegal methods:
i. Pay reverse ‘pugree’[4] to the tenant to induce him to vacate the apartment. This is an illegal practice, just as ‘pugree’ is.
ii. Use of force to evict the tenant. This job is taken up by organized gangs who charge heavy fees.
3. Poorly written Acts: The following observations clearly highlight the fact that most of the states’ Rent Control Acts are poorly written and thus their implementation is bound to be problematic.
a. In many states, tenants are not even entitled to get a receipt from the landlord on payment of rent. The right to receipt on payment of rent is an essential right of any tenant and also, the foundation of the tenants’ right to seek justice in the court of law.
b. In many states, the landlords are entitled to make alterations or improvements to the premises without the written consent of the tenant. These improvements entitle landlords to increase the standard rent. This means that the landlord, despite the unwillingness of the tenant, can make structural alterations to the premises and claim an increase in rent.
c. Despite having adopted ‘second generation rent controls’, only a handful of the states actually allow for periodic, an unconditional increase in the standard rent.
d. And in some states, the evictions clauses are so stringent that a tenant cannot be evicted even if he causes substantial physical damage to the building.
OBLIGATIONS OF LANDLORDS AND TENANTS
Whereas most of the State Acts prescribe obligations of the landlords, that of the tenants are omitted. In order to streamline the system, it is imperative that the Act not only states responsibilities of landlords but also of tenants.
Whereas most of the State Acts prescribe obligations of the landlords, that of the tenants are omitted. In order to streamline the system, it is imperative that the Act not only states responsibilities of landlords but also of tenants.
1. Landlord to compulsorily register tenancy with the authority designated by the State Government.
2. Landlord liable to give rent receipt to the tenant.
3. Willful cutting off or withholding of essential services by the landlord or tenant to be penalized heavily.
Providing for better maintenance and up gradation of houses by:
Providing for better maintenance and up gradation of houses by:
a) including maintenance cost explicitly as charges payable by the tenant to the landlord, thus making it viable for the landlord to carry out proper repairs etc.
b) The landlord to be responsible for all structural repairs whereas the tenant can carry out day-to-day repairs against adjustment towards rent. These should be specified.
c) The landlord to be given the right to inspect the rented premises;
d) The tenant to restore premises of the landlord in as good a condition as at the time of entry.
e) Procedures for the temporary vacation of premises for renovating old buildings to be simplified. In this respect, the RCA should be excluded from the operation of the other related Acts like slum Clearance and Improvement Act etc.
CONCLUSION
The rental laws in India need to be revised to protect the owner and his/her property from the tenant. Special focus should be given on termination of old tenancies, removing constraints on the increase of rentals and empowering owners in the sense of being able to reclaim their properties without any court proceedings. The market forces should also be allowed to determine the rental amounts and the owner must have full protection for his/her property. This will go a long way in providing security to the landlord and also reduce the deposit amount required with the lease agreements. If these laws are enacted and strictly enforced, there is every chance that more investors will want to enter the real estate market to utilize the rental fees as income. This is especially true for the commercial sector. The tax laws also need to be revised so that renting of properties becomes a financially viable option. Amendments in the Rent Acts of several states are a progressive move.
*Disclaimer: The contents of the blog are not intended to convey any legal advice to the reader neither the blog creates any attorney-client relationship. You may contact an enrolled legal practitioner for assistance with your legal needs.*
[2] Satvik Dev, Rent Control Laws in India: A Critical Analysis, Centre for Civil Society Working Paper No. 158 Summer Research Internship Programme 2006
[3] R. Padmanabhan, A Rent Act under Review, Frontline, Apr 11-24, 1998, http://www.hinduonnet.com/fline/fl1508/15081080.htm
[4] An Indian term used to describe an interest free security deposit given to landlords which is refundable at the expiry of the lease term to the outgoing tenant by the successive tenant
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