The Rent Agreement: What you need to know

The Rent Agreement in India What you need to know

A rental agreement is one of the most important legal documents both parties must sign, i.e., the landlord and the tenant, to regulate the tenancy. It contains details of the terms and conditions of the tenancy of the property. In addition, there is a binding contract/agreement between both parties. A contract includes all essential factors, such as rent, security deposit, property information, dimensions, address, type, and most importantly, the duration of the agreement or contract. The clause is binding, so both parties must go through it carefully before signing. The agreement remains invalid until the two witnesses or non-beneficiaries sign it as witnesses.

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Either party drafts a rental agreement with the other party’s consent, and both parties must agree. The rental agreement could be written, verbal, or implied. However, it is usually best to have a written agreement as it serves as evidence of mutual consent of the parties. Rent agreements cannot be amended until and unless both parties agree to them.

Types of Rental Agreement

One of India’s most prevalent rental agreements is the tenancy agreement for 11 months. This kind of agreement can be extended after its 11-month duration. Such contracts generally do not require registration due to their brief length.

Rent agreement regulation in India

Rental housing has become quite popular in developing countries like India. After the union cabinet approved the Model Tenancy Act, 2019, many Indian states are working on more future-aligned rent policies to promote this housing segment.

As per the draft Model Tenancy Act of the union government, tenants must sign an agreement with their landlord when entering a rental arrangement. In addition, the term and conditions of the rental agreement must be binding on both parties.

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Model Tenancy Act

The government drafted the Model Tenancy Act to promote rental housing in India and make the transaction beneficial for landlords and tenants. This model policy serves as a guide when drafting rent agreements, as it contains provisions that should be considered when preparing a rent agreement. As per the union housing secretary, the policy will replace existing laws on rental housing across India when states formally notify it, enabling over one crore of units to be made available in the rental housing markets.

Despite this, since it is progressive, the model tenancy law does not apply retrospectively to existing rent agreements. Therefore, even after the old rules are repealed, disputes relating to existing rent agreements will be handled under the old laws.

Does the model tenancy law cover all rent agreements?

The model tenancy law covers all rental agreements involving residential and commercial properties. For the Model Tenancy Act (MTA) to apply, the rental agreement must be drafted for a period exceeding 11 months. Therefore, for a rent agreement signed between a landlord and tenant for up to 11 months, the MTA rules do not apply. Accordingly, neither the landlord nor the tenant can cite the rules of the model law in case of a dispute.

Legal validity of rent agreement

Tenants and landlords sometimes agree verbally about the tenancy to save money and avoid executing a rent agreement. Some may also document the arrangement and include terms and conditions regarding the tenancy but decide not to register it. This is because both parties are responsible for paying the registration charge if a rent agreement is created and registered. In addition, once the rent agreement is legally valid, the landlord must also report his rental income. Rental agreements without registration, however, are illegal and can be risky for both parties, especially in future disputes.

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A rent agreement has no legal validity until it is registered with the sub-registrar’s office. Therefore, it is in favour of both parties to draft a rental agreement with specific terms and conditions and to get it registered. Printing the rent agreement on stamp paper should be done after preparing it by the landlord. Then, in the presence of two witnesses, the tenant and landlord should sign the documents before registering them at the sub-registrar’s office.

To register a rental agreement in a state, landlords and tenants must appear before the rent authority after the MTA is implemented in the city.

Why Do Rental Agreements Usually of 11 Months?

According to the Registration Act 1908, it is mandatory to register a lease agreement with a lease period of more than 12 months. However, to avoid stamp duty and other charges, people usually choose a rental agreement of 11 months that can be renewed later. In Delhi, a flat fee of 100 INR is added to the stamp duty rates as a security fee. Also, a flat INR 1100 is payable as a registration fee through Demand Draft (DD).

The Stamp Duty Cost

(Based on the total average annual rent)

Example: Suppose a property is let out for 24 months at a monthly rental income of Rs 20,000 for the first twelve months and then Rs 22,000 a month for the subsequent 12 months. The charges/fee for registering this agreement would be 2% of the average rent for 12 months: Rs 5,040 (average monthly rent is Rs 21,000, average annual rent is 21000*12, and 2% of that is Rs 5,040).

For this reason, both tenant and landlord usually opt for an 11-month rental agreement, which can be extended if both parties mutually share the cost.

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Registration charges

There is no fixed registration fee for rental agreements in India. Instead, it varies from state to state. It also includes stamp duty charges.

A rent agreement should contain the following information:

An agreement or contract between the owner of a property and the tenant who wishes to rent the property is called a rent agreement. On a rental contract, the following information is included:

Hike in Rent

According to Model Tenancy Act, 2019, landlords cannot implement any pre-fixed rent hike during the rental agreement’s entire duration. For example, a landlord cannot raise the monthly rent after 11 months if the rent agreement expires. However, once this period ends and the new rent agreement is registered, the landlord can hike the rate, typically not exceeding 10% of the existing amount. According to the Act, landlords must also give three months’ notice to tenants before raising the rent.

Penalty for delay in rent payment

According to the law, tenants who extend their stay in rented accommodations, as specified in the rent agreement, will be liable to pay double the rent for the first two months, followed by four times the rent.

Why is it mandatory to register a rent agreement?

There is a difference between a notarized rent agreement and a registered document. The court will not accept a notarised agreement or contract as proof in case of a landlord-tenant dispute. Hence, it is important to register the rent agreement.

The Documents Needed to Register a Rental Agreement

Registration of a rental agreement requires the following documents from the landlord, tenant, and witnesses:

Benefits of a Rent Agreement

The following advantages can be secured through this form of rent agreement:

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Requirements in a Rent Agreement

To fulfil the requirements, one must do the following:

Common mistakes to avoid while making a rent agreement

In most rental agreements, the parties make the following mistakes:

  1. Do not mention the terms that may lead to the tenant’s eviction.
  2. Do not specify a lock-in period or termination date. The Lock-in period is the minimum period when the tenant cannot vacate/evict the property. Moreover, the tenant should specify how long notice must be given before terminating the rent agreement.
  3. Specifies the amount of rent, repairing charges, and payment mode but does not specify how the payments are to be made.
  4. It is recommended to ignore the clause concerning subletting of the property.
  5. Do not mention the details related to the Power of Attorney.

What is the procedure to make a rent agreement?

There are some specific guidelines one must take to prepare a rent agreement.

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Conclusion:

A rent agreement helps in protecting both parties in case of any dispute or any breach caused by either of the party. It provides security to the property owner and protects tenants from the landlord’s unlawful demands. A well-drafted rent agreement consists of all the necessary clauses, such as the name of both parties, duration of the tenancy, rent amount, security deposit, etc. Thus, it is necessary to understand the tenancy before signing it. It is better to always take legal advice in case of failure to understand any clause in the contract or negotiate a clause in the tenancy agreement.