House Rent Agreements – The Legal Dynamics

Ordinarily speaking, house rental agreements are the simplest of legal contracts known in the real estate industry. Many are a routine affair, requiring just one visit to the local notary while the real estate broker prepares the draft. Since most house rent agreements are signed for 11 months, often no registration is required and the Landlord hands over the keys to the Tenant after signing.

Types of Rent Agreements

Property rental agreements may be either ‘leave and licence’, ‘tenancy’ or ‘lease’ contracts, with leave and license agreements being the most widespread. For ease of reference without prejudice to legal meaning, we will be using the term ‘Rent Agreement’ in this article, as well as the terms ‘Landlord’ and ‘Tenant’ in an inclusive sense for the parties thereto.

While Rent Agreements are a seemingly simple affair, major complexity can result if unforeseen events are not provided for. Several things can go wrong in a Landlord-Tenant relationship, such as default in rent payment, harassment and forfeiture of security deposit and damage to property. All these can quickly result in legal disputes which, more often than not, wind up in court.

Law however, does provide a way. Under the Indian Contract Act, 1872 and the Transfer of Property Act, 1882, the parties to a Rent Agreement have the freedom to structure a contract that will cater to all contingencies. Once this contract is signed, the Landlord and Tenant will be bound by their respective obligations. A series of issues which the Rent Agreement must cover are detailed in the following paragraphs of this article.

1. Forfeiture of Security Deposit by Landlord/Owner:

Before the Rent Agreement is signed, the Tenant pays the Landlord a fixed amount known as a ‘Security Deposit’. The amount of such security deposit may vary from two to six months of rent. Should the tenant damage the property or stop paying rent, the Landlord can deduct the same from the Security Deposit.

While every tenant has a right to refund of security deposit, there are numerous instances where landlords refuse to pay citing flimsy reasons. The most common excuse is ‘repainting the flat’. By placing responsibility on Tenants, Landlords frequently forfeit the security deposits ostensibly to repaint the flat.

Such practice however, is illegal in law. Section 108 of the Transfer of Property Act, 1882 states that a tenant shall not be liable for reasonable wear and tear of the flat. Since paint wears off due to natural weathering, the Landlord cannot hold the Tenant responsible for the same. Hence, forfeiture of security deposit to repaint the flat is violative of Section 108 of the Transfer of Property Act, 1882 and the Tenant can recover the same through legal proceedings.

2. Termination before Expiry of Lock-In Period

Long-term rental agreements usually have a lock-in period of three years or more. By inserting a lock-in clause, the landlord and tenant mutually agree that neither the Tenant nor the Landlord shall vacate or evict before the expiry of a stipulated period of time, say two or three years. The advantage of ‘lock-in’ is that the Tenant need not fear sudden eviction and the Landlord is guaranteed a stable rental income for the duration of the period.

The Delhi High Court in the case of Satya Narain Sharma (HUF) vs. M/s Ashwani Sarees Pvt. Ltd. CS(OS) No. 1439/2008 had held that ‘lock-in’ clauses are valid and binding since they are the product of the mutual intention of the parties. Should the tenant vacate the premises before expiry of the lock-in period, the Landlord can move court to enforce the same, or seek damages in lieu thereof.

3. Registration of Leave-and-License Agreements:

Under Section 107 of the Transfer of Property Act, 1882 any lease agreement exceeding a year’s duration must be registered. Similarly, under Section 17 of the Registration Act, 1908 property leases of more than one year must be registered.

Usually the expenses of registration are evenly shared between the Landlord and Tenant. Interestingly however, Section 32 of the Registration Act, 1908 provides that a document shall be presented for registration by the person claiming rights under the same. Since the Tenant obtains a right to use the property by virtue of the rent agreement, the onus of registration is upon him as per Section 32.

4. Payment of Pending Dues (Utility Bills etc.):

Time and again, Landlords face mammoth electricity bills left behind by Tenants who avoided paying the same. Unpaid telephone and internet bills aggravate the problems. With the Tenant nowhere to be seen, the Landlord ultimately bears the burden of clearing the same.
Solution: The Rent Agreement may contain a clause requiring the Tenant to produce a ‘No Dues’ certificate from the concerned electricity utility or supplier. Upon presentation of this ‘No Dues’ certificate, the Landlord can return the Security Deposit to the Tenant and accept the keys. Further the Landlord can also withhold a part of the security deposit till the time pending dues are fully cleared.

5. Removal of Fittings and Fixtures:

It is not uncommon to hear of tenants who strip the entire property bare before moving out. Light bulb holders, fans, bathroom fittings, switches – all become targets of such vandalism. Consequently, the Landlord has to suffer major expenses in restoring the premises to its original state.

Section 108 of the Transfer of Property Act, 1882 states that a tenant is bound to return the property in the same state as he acquired it from the Landlord. Removal of fixtures amounts to damaging the property, for which the tenant will face liability under Section 108.

How to avoid it: Make refund of security deposit conditional upon leaving all such fittings and fixtures in place. The Rent Agreement must give the Landlord the right to inspect the vacated premises. Once he is satisfied that nothing is missing, then refund of security deposit can take place.

6. Resolution of Disputes

While the civil courts have jurisdiction over disputes in rent agreements, many parties prefer to go in for arbitration. An arbitration clause is frequently included in agreements. By this, the parties agree that in case of any dispute, a third-party arbitrator will be appointed to decide the matter.

While arbitration is a relatively faster option than the civil courts, it is also more expensive. In addition, other remedies are also available. For instance, Section 33 of the Maharashtra Rent Control Act, 1999 requires that all disputes concerning ‘leave and licence’ agreements must go before the Court of Small Causes. While the laws vary from state to state, it is advisable for parties to a Rent Agreement to name an arbitrator in the contract itself so as to smoothen the process. Issues such as recovery of security deposit are in the nature of money suits which can be decided by the Arbitrator himself and need not go before the Small Causes Court.

On a Concluding Note …

These are but some of the issues which can spoil a Landlord-Tenant relationship. It is imperative that all unforeseen events and contingencies are provided for. A well drafted contract prepared on the basis of sound legal advice is the best way to avoid protracted litigation and maintain Landlord-Tenant confidence. Further timely and cost-effective dispute resolution under the newly-amended Arbitration and Conciliation Act, 1996 will further cement the integrity of the Leave and License Agreement, thereby enhancing the mutual respect for parties and deter the dishonour of contractual obligations.

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Advocate Aditya Pratap
About Advocate Aditya Pratap 65 Articles
Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.