The Rent Agreement: What you need to know

The Rent Agreement in India What you need to know

 

Summary

  • A rent agreement is a rental contract, usually in written form, between the owner of a property (landlord) and a renter (tenant) who desires temporary possession of the property.
  • The rent agreement document contains details about the parties and the terms and conditions of the tenancy of the property.
  • A rent agreement has no legal validity until it is registered with the sub-registrar’s office.
  • Both parties must pay a stamp duty fee while registering the rent agreement, which varies from state to state.
  • The model tenancy law covers all rental agreements involving residential and commercial properties.
  • There are two types of rent agreements: Residential Rent Agreement and Commercial Rent Agreement.

What is a rental agreement?

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.

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.

  • Residential Rent Agreement– Long-term rental agreements are typically signed for residential purposes. Sometimes those feature a lump sum deposit rather than the rental income payment. These are duly recorded and notarized.
  • Commercial Rent Agreement or Agreement of a Business Property – Deeds between the businesses and landlords (landlord would usually be a company) or between two firms are known as commercial agreements. They don’t have a set structure.

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.

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.

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)

  • Up to 5 Years – 2%
  • 5–10 Years – 3%
  • 10–20 Years – 6%

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.

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:

  • The name of an owner
  • The name of the tenant
  • The details of the rented property
  • Rent amount and due date, including a grace period
  • Term of the contract/agreement
  • Responsibilities/rights of the landlord
  • Responsibilities/rights of the tenant
  • The mode of rent payment
  • Electricity, water, and maintenance charges
  • Scenarios of agreement/contract termination before the expiration period
  • The sum of a security deposit and also related terms and conditions
  • Procedure for handling emergency requests
  • Agreement-related rules and regulations

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:

  • Evidence or proof that the rental property is owned
  • Rental property records, including tax receipts
  • Passport-sized pictures of the witnesses and each party
  • Address of the witnesses and both parties, ID proofs like Aadhar, Passport, etc.
  • Route diagram for the rental property

Benefits of a Rent Agreement

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

  • Written: Rental agreements would be a formal and legal relationship between the two parties. Therefore, these agreements would always be in writing form.
  • Legal Compliance: By entering into a contract or an agreement, compliance can be maintained by both parties. Moreover, as the agreement is in writing, the provisions related to the law would apply to both parties, i.e., the landlord and the tenant.
  • Relationship between Parties: A relationship is developed between the two parties by entering into a rent agreement. This kind of relationship will be purely commercial, and the parties have specific responsibilities.
  • Liquidity: There are constant liquid funds through monthly rents for the landlord. It would be beneficial to the landlord. Instead of selling off the property in a one-time transaction, monthly income comes to the landlord. Also, the tenant would not have to pay a significant amount related to monthly rent.

Requirements in a Rent Agreement

To fulfil the requirements, one must do the following:

  • Verification from Police: The purpose of this step is to gain a better understanding of the tenant’s background. During this process, the character and antecedents of the tenant would be determined. Such a procedure would require the landlord to register online with the police to verify their identity.
  • Negotiation with Tenant: The next phase would be negotiating the terms and conditions with the tenant after the police verification is complete. Additionally, rent rates would also be discussed.
  • Drafting: Afterwards, a lawyer should be hired to draft the rent agreement on behalf of the landlord.
  • Registration: Registering the rental agreement under Section 17 of the Indian Registration Act is required if it lasts longer than 11 months.

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.

  • Draft the rental deed: This includes specific clauses where the landlord and the tenant could negotiate and decide what goes into the agreement. Then, once it is finalized, a deed is drafted.
  • Printing it on stamp paper: This requires purchasing stamp paper of the required value and printing the draft.
  • Signature: The parties, i.e., the landlord and the tenant, will have to sign at their designated places in the agreement form in front of at least two witnesses who will also sign the deed.
  • Registration: Finally, register the agreement at the sub-Registrar office by paying the appropriate registration fees.

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.

FAQs

 The rent agreement is commonly terminated upon the expiry of the agreement; however, it can also be terminated during the tenancy period. The rented property can then be left according to the lock-in period. In such a case, the tenant ensures that he collects his deposit from the owner.

 Yes, securing police verification for the property to carry out a complete background check on the tenant would be crucial.

 Yes, a rent agreement usually includes the landlord’s insurance taken out for the contract.

 A verbal tenancy agreement is an oral agreement between the tenant and the landlord. A verbal agreement decides the basic terms of the tenancy, such as the amount of rent, the duration, etc. Yet, all the rights and responsibilities of the tenant and landlord must be implied under the law due to the absence of any written agreement.

 Primarily tenancy agreements are written agreements between the landlord and the tenant. A written agreement specifies the terms and conditions of the tenancy in written form, and it must be duly signed by the landlord and the tenant in the presence of two witnesses. A copy of the tenancy agreement must be given to the tenant, and in cases of a joint tenancy, a copy of the tenancy agreement must be given to each tenant.

 A lease agreement is for a longer duration than a rent agreement. It is an agreement or contract between the landlord and the tenant for more than twelve months.

 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 about the parties and the terms and conditions of the tenancy of the property.

 The security deposit is a lump sum given as a security deposit by the tenant to the landlord.

 The rent agreement should be either for commercial or residential purposes only. The stamp duty is 1% of the total rent and includes the deposit paid annually.

 The rent agreement should include the names and addresses of the landlord and tenant, terms of the tenancy, period of tenancy, rent, and security deposit amount, restrictions on both parties, conditions for termination of the agreement, conditions for renewal, and details of who should bear other charges such as maintenance charges, repairs, etc.

 These types of agreements require to be registered if the duration of the tenant’s stay is more than 11 months.

 The rental agreement is prepared by a real estate agent hired by the landlord and the tenant. To legalize the rental agreement, both parties must sign the contract in front of two witnesses who are non-beneficiaries of the property.

 To avoid registration of the rent agreement to save money because Registration Act 1908 makes it compulsory for a rent agreement to be registered if the property rental period is more than 11 months.

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