The Model Tenancy Act, 2021: Resolution of Tenancy Disputes

29th December, 2021 - 5:04 am Categories: Intellectual Property News & Updates 0 Comments

History of Rent Control Laws in India

Rent Control Acts were first introduced by the USA and other countries to monitor the uninhibited increase in rent and tenant eviction. In India, the first-ever Rent Control Act was the Bombay Rent (War Restrictions) Act, 1918 (“the 1918 Act”) enacted in the foreground of World War I when all resources were directed towards war efforts and the inability to supply housing due to the then government policies led to scarcity in the housing markets. By the end of World War II, rent temporary control laws were enacted across the major cities of India to protect tenants against exorbitant rents and indiscriminate eviction by landlords due to urban housing scarcity. From 2002, the government engaged in constant efforts to create an investor-friendly environment in the housing sector with the ultimate goal to increase the housing supply. Introducing reforms in rent control laws as part of this strategy. Therefore, in 2005, the first-ever reform to rent control laws in India was recommended by the Jawaharlal Nehru Urban Renewal Mission at the central level.

Why was the Model Tenancy Act, 2021 enacted?

In 1948, a central Rent Control Act (“the 1948 Act”) laid down the rules to let out a property to ensure the non-exploitation of rights of neither the landlord nor the tenant. However, the 1948 Act, being extremely stringent and pro-tenant, hindered the growth of the real estate market. Moreover, some properties are being let out at the same rent amount from 1948 till today, thereby disregarding the actual property value and inflation. Therefore, through the Model Rent Legislation, 1992 (“the 1992 Act”), the Centre intended to rectify the 1948 Act in terms of accurate valuation of rental properties. However, the 1992 Act failed to take effect due to oppositions posed by tenants.

In the federal spirit of the Indian republic, the Indian Constitution declares housing as a state subject. Item 18 of the State List empowers states with the discretion to enact rent control measures and model tenancy acts put forth by the Centre. At present, there are state rent control and tenancy laws in nearly every state which has, however, failed at resolving the predicaments of the rental housing sector in India. To truly stabilize the rental housing market and potentially revive the entirety of the housing market, a fair and balanced tenancy law aimed at protecting the rights of landlords and tenants as needed.

Further, state governments have failed to update their respective state rent control laws as per present-day requirements. One such instance is the case of Mumbai wherein all constructions that have taken place after 2002 are outside the purview of the state rent control act. Moreover, residential and commercial units are lying vacant due to the outdated nature of rent control laws. There has been no assessment vis-à-vis whether there is a demand for houses at the rent amount they are being offered for.

Furthermore, there has always been a need for a detailed tenancy agreement to be executed between the landlord and the tenant. The lack of clarity in tenancy agreements results in disputes due to poorly drafted agreements that rely on the parties’ understanding of various issues, such understanding being subjective and unique to each party. Such lack of clarity is also an added predicament in case of non-adherence of the agreement by either party as the way ahead is cloudy and open to interpretation.

Therefore, in light of the aforementioned reasons, the Model Tenancy Act, 2021 (“the 2021 Act”) was introduced.

Scope & Objectives of the Model Tenancy Act, 2021:

Scope:

On 2^nd June 2021, the Union Cabinet approved the 2021 Act which governs both, residential and commercial properties/premises except the properties/premises excluded from the scope of the 2021 Act under Section 3.

The 2021 Act also governs lease agreements, provided they are executed as prescribed under the Act. The 2021 Act does not consider the existing rental arrangements, thereby excluding the huge body of pending tenancy disputes as well.

Pertinently, alternative dispute mechanisms such as arbitration have no mention under the Act. Therefore, the Act, by failing to address the existence of arbitration agreements or arbitration clauses in tenancy agreements, also creates a high degree of ambiguity on the subject as addressed in the following section.

Objectives:

Some of the primary objectives of the 2021 Act are as under:

1. To regulate the residential and commercial properties in the rental housing market,
2. To lay down guidelines for:
   • tenancy,
   • rights and obligations for landlords and tenants, and
   • speedy and transparent dispute adjudication mechanism,
3. To balance the interests of and make rent laws more equitable for landlords and tenants,
4. To smoothen the process of renting a property,
5. To outline the roles of various stakeholders,
6. To enforce transparency in the process of renting a property, thereby minimizing the of litigations and reducing disputes between the parties,
7. To create an effective regulatory mechanism in India to govern the relationship between a landlord and a tenant,
8. To establish suitable rental housing for all income brackets, and
9. To encourage engagement and resultant investments by private companies in the rental housing sector to address the prevailing enormous scarcity.

Arbitrability of Tenancy Disputes – Journey So Far:

Over the years, the question of arbitrability of tenancy disputes has evolved through a series of landmark judgments of the Hon’ble Supreme Court which have been enumerated herein.

• Tenancy disputes are non-arbitrable:

In 1981, in the case of Natraj Studios (P) Ltd. v. Navrang Studios, the Supreme Court, in broad consideration of public policy, held that the Court of Small Causes solely had jurisdiction to decide whether the landlord was entitled to seek possession and that the arbitrator lacked jurisdiction to decide the dispute.

• Tenancy disputes are non-arbitrable if there exists a special statute:

In 2011, the Apex Court, in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd, held that the non-arbitrability of tenancy disputes is an exception applicable only where special statutes govern disputes and designate special courts to decide such disputes, and where the tenant is conferred with statutory protection.

Additionally, in light of Sections 111, 114, and 114A of the Transfer of Property Act, 1882 (“TPA”), the court clarified that the TPA does not negate arbitrability, thereby making the tenancy disputes covered under the TPA arbitrable.

• Arbitrability of tenancy disputes not implied:

In 2017, in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, the subject matter tenancy was governed by the TPA instead of the relevant rent control law. The Supreme Court clarified that the applicability of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) cannot be taken as implicit as a result of non-applicability of the Delhi Rent Act (“the Rent Act”). It was ruled that even in cases of tenancies governed by the TPA, civil courts would have jurisdiction to try the dispute and not the arbitrator. However, the exemption of non-applicability of the Rent Act may be withdrawn to enforce the rights of parties under the rent control law.

• Tenancy disputes are arbitrable:

On the other hand, the court, in Duro Felguera, S.A v. Gangavaram Port Limited, ruled tenancy disputes to be arbitrable as the law does not preclude the jurisdiction of an arbitrator. The role of an arbitrator as equated to that of a civil court as an arbitrator could enforce Sections 114 and 114A of the TPA and apply public policy considerations to protect tenants as a class.

In 2019, in another case of Emaar MGF Land Limited v. Aftab Singh, the Apex Court clarified that the trivial reasoning that the applicability of the Arbitration Act could not be implied as a result of non-application of rent control laws was not a valid justification and ground to hold that the subject matter was not arbitrable.

In the 2021 judgment of Vidya Drolia v. Durga Trading Corporation, the Supreme Court overruled the ratio in the Himangni Enterprises case and held that tenancy disputes covered by the TPA are arbitrable. The relevant paragraphs are enumerated below:

“48. Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have an erga omnes effect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to the inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions that protect the tenants.

… However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.”

Key Features of the Model Tenancy Act, 2021:

Firstly, the 2021 Act mandates a written agreement to be executed between the landlord and the tenant comprising the rent amount as agreed, period of tenancy, terms for rent revision, advance payment of security deposit, causes for landlord’s entry upon the property/premises and other responsibilities. Post the execution of a rental agreement, irrespective of the nature of the property being residential, commercial, or educational, the Rent Authority shall be intimated regarding said agreement within 2 months from the date of its execution. Further, in the case of execution of a sub-letting agreement, the 2021 Act mandates the execution of a supplementary agreement between the landlord and the tenant. Post the execution of a sub-letting agreement, both the parties are to inform the Rent Authority regarding said agreement within 2 months from the date of its execution.

Secondly, the 2021 Act limits the security deposit amount to a maximum of 2 months’ rent for residential property/premises and a maximum of 6 months’ rent for non-residential property/premises. The 2021 Act further provides for the security deposit to be returned, after due deductions, to the tenant by the landlord when the tenant takes over the vacant possession of the property/premises.

Thirdly, upon expiry of the tenancy period, the tenant can rightfully request the landlord for an extension or renewal of the tenancy period. However, if the tenant has failed to make the aforesaid request and the tenancy period has expired without its renewal, the 2021 Act renders the tenant liable for payment of enhanced rent. Another condition that attracts the payment of enhanced rent is if the tenant fails or refuses to vacate the property/premises after the expiry of the tenancy period. If either of these two conditions is fulfilled, enhanced rent shall be imposed on the tenant in a staggered manner, that is, he shall pay two times the monthly rent for the first 2 months and four times the monthly rent for the remaining period of his occupancy every month.

Dispute Adjudication under the Model Tenancy Act, 2021:

Fourthly, the three-tier quasi-judicial dispute adjudication mechanism under the 2021 Act is a key feature for the effective and speedy resolution of disputes. The 2021 Act confers dispute adjudication authority upon three bodies viz. the Rent Authority headed by the District Collector, the Rent Court headed by the Additional Collector or the Additional District Magistrate, and the Rent Tribunal headed by the District Judge or Additional District Judge. Rent Tribunals may be established upon the discretion of each state government in every district after consulting with the High Court holding jurisdiction therein. With this detailed mechanism, the 2021 Act precludes civil courts from having jurisdiction over matters under the 2021 Act under Section 40.

Dispute Adjudication Timeline under the Model Tenancy Act, 2021:

Some crucial timelines prescribed by the 2021 Act are as under:

1. An appeal against the order of the Rent Authority or Rent Court shall be preferred before the Rent Court or the Rent Tribunal, respectively, having territorial jurisdiction over the rented property/premises within 30 days from the date of said order.
2. A case shall be disposed of by the Rent Courts and Rent Tribunals within 60 days from the date of receipt of application/appeal.
3. A copy of the appeal shall be served by the Rent Tribunal to the Respondent and a hearing date shall be fixed within 30 days from serving such notice, and this appeal shall be disposed of within 60 days from service of such notice.
4. Rent Courts shall conduct and dispose of an application for execution proceedings vis-à-vis any order passed under the Act, including its own, within 30 days from the date of notice being served upon the opponent.

Demerits of Model Tenancy Act, 2021 – Dispute Resolution:

Some of the major demerits of the 2021 Act are as under:

1. As the subject of ‘housing’ falls under the State List and the 2021 Act is only in suggestive capacity, the adoption and resultant efficacy of the 2021 Act depends on the discretion of each state. While most states have not adopted previously introduced rent control Model Acts, the Karnataka government plans to implement the Model Tenancy Act, 2021 in the state soon.
2. The Act, being a central law, unnecessarily delves into specific details which may depend on the terms mutually agreed by the parties such as division of maintenance responsibility between the tenant and landlord and imposition of a cap on the security deposit. Moreover, with such minute details being prescribed by a central law, there is a high degree of rigidity that makes it impossible for parties to mutually decide the terms of the tenancy agreement as per their factual situation.
3. The 2021 Act does not prescribe a timeline for the resolution of disputes vis-à-vis withholding essential services, revision of rent, and contraventions by property managers by adjudicatory bodies.
4. The 2021 Act is silent on alternative dispute resolution mechanisms despite the common use of arbitration clauses/agreements as part of tenancy agreements. As a result, if a dispute arises in an agreement covered under the 2021 Act, the position of the 2021 Act as compared to arbitral tribunals vis-à-vis dispute resolution remains ambiguous and unanswered. Similarly, as the TPA governs some tenancy disputes, the position of the 2021 Act as against the TPA in terms of predominance in dispute resolution is unclear.
5. The 2021 Act does consider the existing state rent control laws, thereby neglecting the importance of housing as a subject matter of the State.
6. As the 2021 Act does not govern existing tenancies and tenancy disputes, these existing tenancies are made to continue operating with no uniform regulatory rules and authority to govern them.

With tenancy disputes continuing to persist despite the existence of state rent control laws, there was a dire need for an effective dispute resolution mechanism to be established. While the 2021 Act could potentially have been a great example for effective dispute resolution in tenancy disputes, its exigent omission of the same casts doubts on its success.

Author: Deeksha Prakash- a student of Symbiosis Law School (Hyderabad), an intern at Khurana & Khurana, Advocates and IP Attorney,  in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com