Why Centre’s Model Tenancy Act Matters And How It Will Help States Reform Their Rental Markets

The Union Cabinet on Wednesday (2 June) approved the Model Tenancy Act, 2021 (henceforth MTA) which will be circulated to all the states and union territories so that they can adopt this either via fresh legislation or by amending their existing acts which regulate the landlord-tenant relationship.

It’s a model act because land and property are subjects in the State List and the Centre doesn’t have the right to make a national law on the same. It can only motivate or nudge them by giving incentives in Centre-run housing schemes - say, promise to give additional money for Pradhan Mantri Awas Yojana on the condition that they implement the MTA.

This is one of those areas of governance which is as important as it is drearily dull.

Over two crore rented houses (as per 2011 census), another one crore lying empty due to various reasons but mostly due to counterproductive public policies, a market worth almost Rs 1.5 lakh crore already with potential to grow even further and become one of the most important parts of the country’s real estate sector given ever growing pace of urbanisation, migration to cities from countryside for jobs and education, etc - with all these aspects, one would think that the governments would pay considerable attention to the rental household market in their areas to establish a system that is convenient for and fair to owners as well as tenants.

In 2012, over 70 per cent of the households living on rent in urban areas didn’t have a written contract with the owner. This should tell us that the Rs 1.5 lakh market size estimate is likely a conservative one. Nonetheless, the main reason why such a huge chunk of rent agreements lie outside the formal economy is due to the fact that the existing regulations are not convenient for either the owner or tenant to follow. They would rather take the risk of being cheated by one another than go through the complex regulatory processes.

One can also imagine the loss to the exchequer when big landlords owning multiple buildings and earning lakhs in rent per month don’t pay any tax on that income. One of the biggest reasons for the Modi government to pay attention to this sector could be the motivation to formalise it - an understandable obsession which is rooted in the desire to increase the State’s revenue which is also a proxy of its strength.

Another reason for so much informality in this area could be populist rent control acts enacted by state governments decades ago which are reminiscent of the socialist era when India’s soul and majority of population indeed lived in villages. But times have changed especially post liberalisation of the economy in 1991 but the laws have not kept up pace with the changing realities.

If most parts of Mumbai appear frozen in the 1950s and resemble more like Kolkata of the communists rather than like the richest city in the country, it’s because of the Rent Control Act which froze the rents that were there in the 1940s.

The amendment to the act in 1999 only allowed a four per cent increment per annum. Owners of around 30,000 buildings governed by the rent control act and which house six lakh families don’t make enough money to invest in their repairs. It’s no wonder that they are in such dilapidated condition.

Thanks to populism, it’s unlikely that this tough reform will be carried out in Maharashtra. The State housing minister has already stated that the government will not allow any injustice to the existing tenants and the MTA will be partially adopted. “Anything dealing with hike in rentals or eviction of existing tenants will not find a place in our law,” he says.

Of course, politicians don’t realise that the tenants are the biggest victims of such populism as they are squatting in buildings which are like ticking time bombs awaiting tragedies which would claim lives of the very group of people netas claim to champion. The city will continue to suffer as well because not only the quality of available rental accommodation remains poor but the supply remains restricted as owners hesitate to invest in properties specifically for renting purposes.

Real estate is an important sector of the economy however it has stagnated over the last decade after seeing unsustainable levels of short-term growth between 2000-2010. In the past few years, the weighted average residential prices have stagnated or declined in India’s top cities (Hyderabad being the only outlier). No wonder then that the middle class has slowly but steadily moved away from homes to other financial instruments (say mutual funds) as an investment option.

The nature of the middle class is itself changing as government jobs which ensured Job security are no longer the dominant option available to many. It’s the private sector which has become the default Job provider and the unpredictability of the private sector - not just in income but the fact that one can be asked to move cities - has further made buying home an unattractive proposition.

Moreover, the millennials, either due to the nature of the job market or cultural preferences, are taking more to renting than buying things. The rental household space hasn’t been left untouched by the uberisation of everything from transport to furniture to even essential items.

Then there are co-working and co-living trends which have come up in the last decade. Whether it’s Noida, Bengaluru or Mumbai, it’s quite common to spot a group of youngsters, who never met before, staying together in a rented flat. It’s purely economics which brings them to one place.

If these weren’t enough, Covid-19 delivered fatal blows to the market with millions of people moving away from cities back to their hometowns. They had barely started to return and the second wave hit.

The pandemic has introduced huge uncertainty in an already battered sector. The renters can’t pay rentals given the loss of income for months and owners who had taken financial risk to build for the sole purpose of renting will find it tough to survive.

In the absence of a well-defined regulatory framework, the relationship between tenant and owner has always been of conflict because the transactions are informal and based on trust which often breaks down due to misunderstanding.

Owners fear illegal possession by tenants while tenants fear untimely eviction. There are disagreements over maintenance or charges for repairs. All this has led to crazy high security deposits (equal to 11 months rent in Bengaluru, for instance).

Due to the lack of a formal contract system, owners look to other societal clues to establish trust - often it’s the caste, religion, dietary habits or lifestyle in general.

These could be drawn from their previous experiences or born out of prejudices. Being an ardent champion of private property rights, one is not of the opinion that owners should be legally forced to not deny accommodation based on these subjective criteria but it’s helpful to understand the roots of the problem to solve it. If a good system that establishes trust is not in place, it’s futile to blame people for falling back to other avenues.

The Covid-19 pandemic has worsened all the prevalent problems of the rental housing market.

The MTA attempts to correct these various problems which have accumulated over the decades.

By proposing simple regulations on contentious aspects - the period of tenancy, rights and obligations of successors (of tenant and owner both) in case of death, revision of rent, security deposit, describing rights and obligations of tenants and owners as far as repairs and maintenance are concerned, defining rules for eviction and recovery of property and creating a dispute resolution structure in a fixed time period at the district level - the MTA has tried to create a system free from uncertainty and lack of trust.

The MTA can help in solving a lot of problems in the residential rental market provided that the States amend their legislation or bring new laws and adopt the MTA in letter and spirit. The Centre should definitely extend financial incentives to states to nudge them in that direction by extending to them offers they can’t refuse. Otherwise, this model act will meet the same fate of irrelevance as most model acts normally do.