India's real estate market is said to grow to INR 65,000 crore (US$ 9.30 billion) by 2040 from INR 12,000 crore (US$ 1.72 billion) in 2019. Real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and contribute 13% (thirteen percent) to the country's GDP by 2025. Retail, hospitality, and commercial real estate are also growing significantly, providing the much needed infrastructure for India's growing needs. Indian real estate increased by 19.5% CAGR from 2017 to 2028.1
The recent trends in the real estate market required standardisation of the tenancy and rent control laws. In lieu of the aforesaid, the Ministry of Housing and Urban Affairs prepared the draft Model Tenancy Act, 2020. The need for the aforesaid model legislation has arisen to bridge the gap between the growing need for housing on one hand and the non-availability of houses for rental purposes on the other. To understand the growing need of the commercial and residential real estate sector it is important to trace the recent trends in the aforesaid sectors.
- Real Estate Trend – Sector Wise
The need for office spaces has increased in the recent years. Office space has been driven mostly by growth in ITeS (Information Technology Enabled Services) / IT (Information Technology), BFSI (Banking, financial services and insurance), e-commerce business consulting and manufacturing sectors.
The office market in top eight cities recorded transactions of 22.2 mn sq ft in the July – December 2020 period, whereas new completions were recorded at 17.2 mn sq ft in the same period. The year began on a high note with office leasing achieving 96% of the quarterly average of 2019 in Q1 2020. During 2019, the office leasing space reached 60.6 million square feet across 8 (eight) major cities, registering a growth of 27% year over year. In 2019, office sector demand with commercial leasing activity reached 69.4 million square feet.
The government-imposed lockdown to combat the fury of the pandemic, led to temporary economic inactivity and translated into a sharp fall in office leasing activities in Q2 2020. With the return to normality, gross leasing revived to 31% of the quarterly average of 2019 in Q3 2020, eventually surging to a staggering 115% in Q4 2020.
In terms of the share of sectoral occupiers, Information Technology (IT/ITeS) sector dominated with a 41% share in H2 2020, followed by BSFI and Manufacturing sectors with 16% each, while Other Services and Co-working sectors recorded 17% and 10% respectively.
Other than office space, the boom in the warehousing and logistic sector has in turn boosted the demand for properties suitable for logistic(s) and warehousing services. The demand for warehousing remained relatively resilient this year, correcting only by 11% Y-O-Y, as compared to the 44% CAGR recorded from FY17 to FY20. Despite the ongoing pandemic, the Indian warehousing sector is expected to remain comparatively less impacted due to the rising e-commerce demand which is expected to grow from $70 billion in FY19 to an estimated $160 billion by 2022. Grade-A office space absorption is expected to cross 700 million square feet by 2022, with Delhi-NCR contributing the most to this demand.
While all India residential sales saw a quarter-on-quarter (QoQ) rise of 84%, Mumbai (193%) and Pune (143%) recorded higher than average QoQ growth.
The majority demand for the real estate sector in India arises from Tamil Nadu, Andhra Pradesh, Maharashtra, Karnataka, Gujarat, West Bengal, Uttar Pradesh and National Capital Territory of Delhi. This rise in demand is attributable to the increase in the employment hubs in Chennai, Hyderabad, Mumbai, Pune, Ahmedabad, Bengaluru and National Capital Territory of Delhi. The need for rented accommodation has also increased in recent years for various income segments including migrants, formal and informal sector workers, professionals, students, etc.
- Real Estate Trend – Co-living Sector
Co-living spaces have also seen an increase in India. It is a concept of housing where the living space is shared by residents. According to a recent survey conducted by Knight Frank India, 72% millennials are wiling to consider co-living spaces as an option for accommodation. The study further concludes that a co-living facility generates net yield of approximately 12% (twelve percent) while rentals from a traditional accommodation yields at 1.5% – 3%.2
While the market for co-living spaces was blooming before COVID-19, COVID-19 has had a negative impact due to health and safety concerns and social distancing limitations.
- Real Estate Trend – Student Housing Sector
Student housing sector has also seen a significant growth (7% to 10%) in the past 3 years. The student housing sector was set up as larger facilities with varying amenities and varying degree of technology intervention. Rental yields are also better than in other asset classes on a risk adjusted basis i.e. 10-15% compared to 8-10% for commercial office assets.
Post Covid-19, the costs with respect to sanitization and cleanliness had increased. While student housing rents have increased, the growth of student housing will be paused.
- Model Tenancy Law – Status
The draft Model Tenancy Act, 2020 has been prepared by the Ministry of Housing and Urban Affairs. The objective behind preparation of the Model Tenancy Law is to balance the interests and rights of the landlords and tenants.
It is aimed to enable creation of adequate rental housing stock for various income segments of society including migrants, formal and informal sector workers, professionals, students etc.; increase access to quality rented accommodation; and enable gradual formalisation of rental housing market. It is also estimated to overhaul the legal framework with respect to rental housing across the country.
One of the factors requiring the Model Tenancy Law that the existing rental laws had been long drawn provision with resulted in lengthy litigation to resolve disputes. Another factor for the Model Tenancy Law is the inability of low-income households to afford their own house.
The need for the aforesaid model legislation has arisen to bridge the gap between the growing need for housing on one hand and the non-availability of houses for rental purposes. The need for rented accommodation has increased in recent years for various income segments including migrants, formal and informal sector workers, professionals, students, etc.
The absence of standard legislation governing the intricacies of the tenancy has been the root cause for the introduction of Model Tenancy Law. The Model Tenancy Law has been prepared with an objective to balance the rights of both landlord and tenant and create a transparent and accountable system for renting premises.
Model Tenancy Law has been introduced to increase the access to rented accommodation, enable formalisation of rental housing/ commercial market and assist in the overhaul of the legal framework with respect to the rental housing market.
The Draft Model Tenancy Law is a model/ template for States to adopt. It is neither a Central Bill nor an Act of Parliament.3. The nature of the Model Tenancy Law is such as the ‘collection of rent' is part of the ‘State List' of the Constitution of India. Therefore, the template law has been prepared by the Ministry of Housing and Urban Affairs to be adopted by the states. Currently, no state has adopted the aforesaid template as legislation.
- Summarized provisions of Model Tenancy Law
The Model Tenancy Law has introduced various new concepts such as requirement of a written agreement, rights and obligations of the tenant and the landlord. The provisions of the Model Tenancy Law are summarized hereinbelow:
|Application||Landowner or ‘Lessor'–
a. person receiving or entitled to receive rent for a premises on his account,
b. its successor in interest,
c. or a trustee, guardian or receiver receiving rent for a premises on behalf, on account of or for the benefit of a person ineligible to enter into contracts.
a. building for commercial, residential or educational use
b. parking, garage or grounds, out houses, appertaining to building,
c. building for industrial use,
d. hotels, lodging dharamshala, inn
e. owned or promoted by government, government entities, cantt, religious, charitable institutions, owned by trust, wakf,
f. given on rent to employees as per service contract,
g. premises of public interest, as may be notified.
Points e, f, g can be covered voluntarily.
Tenant or ‘Lessee'-
a. by whom rent is payable for any premises or
b. on whose behalf or on whose account, rent is payable for any premises;
c. someone who, but for a contract, express or implied, will be liable to pay the rent;
d. occupying as a sub-tenant;
e. continuing to occupy post termination of tenancy
but does not include a person against whom an order of eviction or decree of eviction has been made
Whether License agreements covered under the MTL?
It appears that only leases are covered under the MTL and license of premises as per the Indian Easement Act, 1882 is not covered. Reasons – use of words lessor and lessee for Landowner and Tenant, properties such as hotels are excluded, Tenant cannot handover possession without consent of Landowner, possession possible only under leases.
|Agreement||1. Entering into a written agreement for letting or
taking premises on rent made compulsory;
2. Agreement to be informed to Rent Authority within 2 months jointly by tenant and landowner
3. Rent authority shall put up the agreement on a digital platform
4. If not so registered, the agreement loses its evidentiary value.
1. There is nothing to suggest that the format of the agreement or terms will be prescribed.
2. Period of agreement – as agreed between Tenant and Landowner, to be renewed mutually, prior to expiry of term
3. If not renewed, but premises continued to be occupied by the Tenant, the tenancy will continue for 6 months on a month to month basis and Tenant will be bound by same terms during extension. After 6 months tenant will be in default and will be liable to pay double rent for 2 months and 4 times after that.
4. No subletting or assignment by Tenant allowed without consent of Landowner
|Authorities under the model law||Rent Authority
a. not below the rank of Deputy Collector;
b. appeals lie to Rent Court within 30 days
Rent Courts and Rent Tribunals
a. jurisdiction of civil courts barred for matters related to the provisions of the Act. Jurisdiction of the rent court shall be limited tenancy agreement submitted to it as per First Schedule and the questions of title and ownership of premises shall be beyond its jurisdiction;
b. cases to be disposed within 60 days, or reasons for delay need to be recorded. Appeals to be disposed in 120 days
c. application and appeal shall be as per model form prescribed
|Obligations of the
|Obligations of the Tenant
1. Tenant shall undertake repairs and maintain common facilities shared amongst tenants as may be specified in the tenancy agreement.
2. Tenant is required to pay the cost of repairs if the same has been deducted by the landlord from the security deposit.
3. Tenant to look after the rented premises and keep it in habitable conditions.
Obligations of the Landlord
4. Landlord shall not withhold essential supply or service in the rented premises. The Rent Authority has power to conduct an enquiry and may levy penalty of a sum not exceeding twice the monthly rent to the tenant.
5. Tenant to be informed of the appointment and details of the property manager.
6. Landlord may carry out repairs in case the tenant refuses to carry out the repairs and deduct the amount incurred for such repairs from the security deposit.
7. The tenancy agreement shall be signed in duplicate and retained by both the landlord and tenant.
8. The terms of the agreement shall be binding on the successors of both Landowner and Tenant for the remaining period of tenancy.
9. In case the landlord refuses to accept rent or does not issue an acknowledgement of rent Model Tenancy Law has a provision of payment of rent by money order or any other method consecutively for two months to the landlord, in case the landlord does not accept the rent, tenant may deposit the rent with the Rent Authority.
10. Tenant may also deposit rent with the Rent Authority in the event the tenant is unable to decide to whom the rent is payable.
11. Provision for payment of rent and other charges by the tenant. Requirement of issuing an acknowledgement by the landlord/ property manager. In case the payment made electronically, the bank acknowledgement shall be conclusive proof of such payment.
12. Duties of the property manager to include collection of rent, undertake repairs, inspect premises, issue notice to tenant, assist in resolution of dispute. Violation of any of duties may result in the removal of the property manager or costs on the property manager by the Rent Authority.
|Rent, fixation of rent and security deposit||Rent
1. Rent and any revision thereof shall be as agreed between Landowner and Tenant in the Tenancy Agreement
2. prior notice of revision shall be 3 months notice or as set out in the tenancy agreement, unless Tenant validly terminates the tenancy before such revised rent becomes applicable. If not terminated, the revised rent shall be deemed accepted by the Tenant.
3. Sub-let rent cannot be higher than the Tenant's rent.
4. Increased rent due to improvements in the premises (other than necessary repairs) also subject to mutual agreement between Tenant and Landowner.
Fixation of Rent: Rent Authority may, on application by Tenant or Landowner, fix or revise the rent and fix the due date of revised rent payable as per Rules.
1. Security deposit to be paid in advance
2. Maximum of 2 months equivalent rent for residential and 1 month equivalent rent for non residential premises
3. To be determined in the tenancy agreement
4. To be refunded on taking over vacant possession of the premises after deduction of any liability of the Tenant.
|Repossession of the premises by the landlord||Eviction
1. Eviction of Tenant possible only as per following prescribed under the Model Tenancy Law:
a. If Tenant and Landowner failed to agree on the rent;
b. If Tenant has not paid arrears in full, of rent, maintenance and other charges and interest for two months (doesn't say consecutive) within 1 month of notice for payment.
No order of eviction will lie if Tenant makes the payment of due amounts within said 1 month, either to the Landowner or as a deposit with the Rent Court.
In case of second default, the above relief shall not be available and eviction order will lie in case of repeat default.
c. If the tenant creates third party rights on the premises without consent of Landowner
d. Usage of premises other than what is allowed by the Landowner;
e. Where the premises are required by the Landowner for carrying out repairs or alterations or demolition.
Tenant can be reinstated in the premises after such works only if mutually agreed with Landowner and tenancy agreement signed and submitted to the Rent Authority.
f. Where the premises are required by the Landowner for carrying out repairs or alterations or demolition due to change of land use.
g. Tenant has given notice to vacate and as a consequence of that notice, Landowner has sold the premises and needs the possession otherwise his interests are seriously prejudiced.
2. Compensation to Landowner – double rent for 2 months and 4 times after that.
3. Advance rent to be refunded by Landowner to Tenant before seeking eviction
4. Rent to be paid during pendency of the proceedings and Rent Court may direct to pay the rent and penalty
5. Rent Court may order and allow construction of or improvement of premises if Tenant is not willing to give consent to the Landowner for doing so.
6. In case of vacant land which is part of the let out premises, the Landowner may ask Rent Court to direct on an application by Landowner to allow construction on such vacant land provided Tenant does not undergo any undue hardship
7. If interest of a Landowner is determined by the Rent Court, the order shall be binding on all the occupants of the premises, except where order is for partial eviction.
Hence, the Model Tenancy Law, while have been introduced by the Central Government is yet to take shape through its adoption by the State Governments. While the draft legislation has attempted to clarify disputable aspects of rent control and tenancy laws in India, is it silent upon certain practical aspects such treatment of long-term leases, and whether license agreement form part of the aforesaid draft legislation.
1 India fBrand Equity Foundation, Indian Real Estate Industry, October 2020, available at https://www.ibef.org/industry/real-estate-india.aspx.
2 Co-Living: Rent a Lifestyle, https://content.knightfrank.com/research/1004/documents/en/india-topical-reports-in-the-first-of-its-kind-industry-report-titled-co-living-rent-a-lifestyle-we-give-a-comprehensive-analysis-of-the-potential-for-rental-housing-in-india-6027.pdf.
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