India: New Laws Relating To Lease/Rent

THE NEW RENT CONTROL ACT, 2001:
The old Karnataka Rent Control Act 1961 had expired on 31.12.1999. The new Karnataka Rent Control Act 2001 has now been passed. No provision in the new act shall apply to any residential property where the monthly standard rent is Rs. 3500 within the town planning limits and Rs. 2000 per month in other areas. This act shall also not apply to any commercial property which has a plinth area of more than 150 sq. ft. The act is not applicable to properties which are less than 15 years old.

What this means is that in the bigger cities like Bangalore, the provisions contained in The Transfer of Property Act shall apply in all cases of lease. The termination of lease is now bound by contract between the parties and not by law. Upto now, the law had defined the conditions whereby a landlord can evict his tenant. Under the new act, protection of tenants against eviction by statute is now applicable only for properties having low rental values and for properties in interior parts of the state.

Standard rent means the rent calculated at 10% per annum of the aggregate amount of the cost of construction and the market price of the land on the date of construction. In many cases, this standard rent exempts the property from the provisions of this act.

OTHER SALIENT FEATURES OF THE NEW ACT:
The act has abolished oral tenancies for properties to which this act is applicable and has made it compulsory to enter into written lease deeds.

1. All estate agents are to register themselves with the rent controller and give information of all transactions
2. Although any rent can be agreed upon at the commencement of the lease, enhancement of rent is governed by the schedule appended to the act.
3. Charges for amenities can be decided by the landlord and tenant. If no such provision is made, the act provides for 15% of the rent to be reserved for amenities.

MARKET PRACTICE:
The usual market practice in the matter of renting an office or a house has so far been to enter into a lease agreement either for 11 months and frequently for more than 11 months. Most of these agreements are not properly stamped. They are usually not registered. The market seems to follow its own rules in this matter and the laws relating to lease are often ignored. This was because the mere payment of rent to the landlord by the tenant was enough in the court to establish a tenancy relationship. The courts could then be moved to protect such a tenancy under the old law. An unregistered or under stamped lease deed or lease agreement could not take away such a right. The right of the landlord to demand his property back on the termination of the lease continued to operate on trust and not law. It is submitted that this state of affairs need not continue any longer as the statutory protection of tenants from eviction is now no longer available in most cases.

REGISTRATION AND STAMP DUTY:
The Transfer of Property Act mandates that lease deeds for a period of more than one year should be registered. (Leases for periods less than a year do not require registration.)

LEASES FOR LESS THAN A YEAR:
The best practice is to enter into a lease deed for a period of 11 months with a conditional option to renew it at the end of that period by another 11 months, provided certain conditions are fulfilled. Such leases should also be properly stamped. The stamp duty is about 5% of the total amount of rent payable under such a lease. This duty is applicable even to an agreement of lease. However under stamping of a lease agreement or lease deed does not by itself make the lease void. In case of dispute, the court will demand that the excess stamp duty be paid along with penalty prior to hearing the case.

LEASES FOR MORE THAN ONE YEAR:
All leases for a period of more than one year should be compulsorily registered. The stamp duty payable on such lease deeds and lease agreements are high and is computed on the average annual rent along with deposit payable. The amount of stamp duty is almost equal to that of a sale deed. The usual practice is to split up the rent into two halves and make out one of them as an amenity agreement, which does not require registration. The amenity agreement will have to be stamped as per the article relating to lease of movables.

CONSEQUENCES OF NON REGISTRATION OF LEASE DEEDS:
Non registration of leases for more than one year is a serious offence. It does not establish any rights between the landlord and the tenant. It cannot be produced in court for want of registration. While under stamping a document is excusable, non-registration simply makes the document inadmissible as evidence. As the statutory protection of tenants has been removed in most cases, registration of a lease for more than one year is advisable in all cases where the lease value is large and protection of the contract by law is deemed necessary. On the other hand, even in cases of lease for more than one year, an agreement of lease can be entered into and possession given to the lessee by a later act. The lease deed remains pending for registration. This transaction will be protected by the doctrine of part performance. The stamp duty will remain high, but the serious consequences of non-registration does not arise. Under stamping such an instrument is not an un-rectifiable offence.

LEAVE AND LICENCE:
Documents that are styled as leave and licence, also require a similar type of stamp duty as a lease, but they do not have to be registered. In case of dispute, if the matter goes to court, then the courts will look into the true nature of the transaction and if it is determined that notwithstanding the language of the deed, a lease had in fact been entered upon, then the laws relating to lease will be deemed to apply.

USUAL CLAUSES IN THE LEASE AGREEMENT OR DEED:
The amount and time of payment of rent, lessor’s right to inspect the property, lessee’s obligation to keep the property in good condition, use of the property for the purpose for which it was given, yielding possession of the property to the lessor on the termination of the lease, are usual clauses contained in the document.

TITLE OF THE LESSOR:
Last but not the least, checking up the title of the lessor, the validity of the sanctioned plan and the zonal regulations of the area are important precautions to be taken before entering into any lease.