Watch out before you rent out

PROPERTY LAW

RENTAL ISSUES: It is important to know the salient features of  the rental agreement before any property is let out. DH Photo
It would not be easy to let out property and feel free from litigation unless there exists a properly drafted rental  agreement. Therefore, it is better to know the salient features of  the rental agreement before any property is let out.

Rental agreements in legal terminology, are known as Lease Agreements. The person who transfers the  property is called the ‘Lessor’,  and the person who accepts the transfer of property is called the ‘Lessee’.

Transfer of Property Act

According to Section 105 of the Transfer of Property Act, 1882, a lease of immovable property is a transfer of the right to enjoy such property, made for a certain time, express or implied, or in perpetuity,  in consideration of the price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. In short,  a lease is a transfer of a right to enjoy the property of the lesssor by the lessee  for certain time, during  which period the lessee is put in possession of the property upon payment of lease money or rent.  

Elements of a good lease 

The essential elements of a lease are (1) parties, (2) subject matter, (3) terms of lease (4) consideration or rent and (5) duration of lease. 

A lease transaction involves  commitment by both the landlord and the tenant  which are  complementary to each other.

The landlord agrees to let out his property to the tenant in consideration of the latter paying him the rent. The tenant agrees to pay the landlord the rent in consideration of the landlord allowing him to use the leased premises. A lease is that form of encumbrance which consists of a right to  possession and use of property owned by some other person.  It is the outcome of  separation of ownership and possession. 

A tenancy is created not only by an express contract but also by implication by the conduct of parties.  Acceptance of rent by the landlord clearly establishes existence of  tenancy. 

A lease of immovable property may be effected  either under a registered instrument or under an unregistered instrument.  However, in cases where the lease is from year to year or for any term exceeding one year or reserving a yearly rent,  the lease is to be made only under a registered instrument of lease (Sec. 107 of T P Act) and the lease agreements for a period less than one year do not require registration.

One-year period

It is a common practice to terminate the lease agreement at the end of every eleventh month and  enter into a fresh Lease Agreement since if the rent is paid on a yearly basis or if the period of lease exceeds one year, then it is mandatory to register the lease agreement under Sec.17(d) of the Indian Registration Act, 1908. The practice of termination of lease agreements at the end of eleventh month and entering into  new lease agreements is generally adopted to avoid payment of stamp duty and registration charges.

Contents

An agreement of lease should be drafted carefully and properly to protect the rights of both the parties and to avoid any misunderstanding at a later date. It should be fair to both the lessor (landlord) and the lessee (tenant).

It should invariably mention the party’s name and address, description of the property, duration of  lease,  monthly rent payable,  date of payment of  monthly rent; clause for enhancement of rent on renewal of lease, amount of interest-free refundable security deposit, penalty clause in case of default in payment of rent, liability of the lessee for damages to the property and the fixtures and fittings, notice period in case of premature termination of lease;  date of commencement of lease and the date of expiration of lease; notice period and manner in which the notice will have to be served etc.

Obligations of the lessor

The first and foremost duty of the lessor is to abide by the terms of the  lease agreement in letter and spirit and to ensure that the  lessee is allowed to enjoy the leased premises without interference.

He shall have to ensure that all the basic and civic amenities  are provided to the leased premises.  It is the responsibility of the lessor to carry out major repairs to the leased property to make it habitable and pay municipal and other taxes due on the property.

The Lessor should ensure that the leased premises is not used for any immoral or unlawful purposes nor allow storing of any hazardous and inflammable materials like explosives, etc. 

The Lessor shall issue receipts for the earnest money deposit and for the rents received by him in respect of the leased property. The lessor shall refund the security deposit received from the lessee when once the lease has come to an end. 

He shall not unfairly make deductions while refunding the security deposit on grounds of  repair to the leased property. The lessor is bound to disclose to the lessee any material defect in property with reference to its intended use of which the former is and latter is not aware and which the latter could not with ordinary care discover. The lessor is also bound on the lessee’s request to put him in possession of the property.

Obligations of the lessee

During subsistence of the lease, the lessee has a right to enjoy the leased premises without any interference from the lessor or by any person on his behalf.

The lessee shall pay to the lessor the monthly rent for the leased premises on the agreed date. 

He shall also pay the electricity and water bills on or before due dates to the concerned authorities and furnish a copy of the receipt received by him from such authorities to the lessor for his records. The lessee shall always keep lessor informed about the additions or alterations that the leased premises may require to enable the lessor to attend to such work.

The lessee shall not make any structural alterations to the premises or cause damages to fixtures and fittings during the subsistence of the lease. 

The lessee is under a legal obligation not to use the leased premises for immoral or illegal purposes nor for storing the hazardous and inflammable materials like explosives, etc. The lessee is under obligation to use the leased premises for self use and not to sub-let the same unless the lease agreement has a provision for sub-letting.

He shall not cause any nuisance to the co-tenants, maintain the premises in a habitable condition, and on completion of the lease period, hand over the leased premises to the lessor without creating any nuisance upon receipt of the earnest money deposit.

If the lessor fails to make any repairs, within reasonable time after notice, the lessee may make the same himself and deduct the expense of such repairs with interest from the rent, or otherwise recover it from the lessor. If the lessee comes to know of any recovery proceedings in respect of the leased property, or of any encroachment, or interference with the lessor’s right in respect of the leased premises, he is bound to give notice thereof to the lessor.

General grievance

Some lessors (landlords), for obvious reasons, fail to pay back the security deposit to the lessees (tenants) upon termination of the lease agreement or make unreasonable deductions from the security deposit.  Generally,the landlords who mainly depend upon the rental income and who would have utilised the security deposit for their personal needs, fail to refund the security deposit as per agreement.

Thus, when the tenant issues notice indicating his intention of vacating the leased premises or when the lease period expires, some landlords would start dodging till they get the security deposit from another new tenant.

It is the common practice that tenants prefer to continue to occupy the leased premises till they get back the security deposit since they feel that to get back their security deposit from the landlord upon vacating the leased premises could be a difficult task. In the absence of payment of monthly rent by the tenant during this period, the landlords resort to adjust the rent  against the security deposit  till  the security deposit wipes out. 

Non-vacating  the premises by the tenant

It is also not uncommon that the tenants continue to occupy the leased premises even after expiration of the lease period on one pretext or the other.  Upon their unsuccessful persuasiveness, the landlords, in many of the cases, resort to coercive steps to get their leased premises vacated.

Thus,  non-fulfillment of obligation by the landlord and the tenant would lead to uncalled for misunderstanding between them and sore their relationship resulting in prolonged and uncalled for litigation.

Need for amicable settlement

All said and done, problems do crop up despite having clearly spell out the rights, duties and obligations of the lessor and lessee in the lease agreements since it is not possible to change the mindset of a person.   

However, what is needed is to  adopt “give and take” policy by both the lessor and lessee and part with over a friendly note instead of litigating the matter, on the philosophy of ‘Live and let others live’.

It is suggested that the landlords who intend to let out their property may take the help of an experienced advocate dealing in property matters to safeguard his interest and avoid complications due to loopholes in the lease agreement.

Stamp duty

As already mentioned above, stamp duty is payable in respect of lease agreements and where lease of immovable property is from year to year or for any term exceeding one year, or reserving a yearly rent, such lease agreements require compulsory registration under sec.17 of the Indian Registration Act, 1908 and also under sec.107 of the Transfer of Property Act, 1882. 

Therefore, readers may benefit if the relevant article of Karnataka Stamp Act, 1957, as amended under Act No.9 of 2009 are reproduced.

In terms of Article 30 (1) of the Karnataka Stamp Act, 1957, as amended under the Karnataka Stamp (Amendment) Act, 2009, stamp duty payable on the lease agreement of immovable property are as under-

*Where the lease purports to be for a term not exceeding five years

*Where the lease purports to be for a term exceeding five years but not exceeding ten years.

*Where the lease purports to be for a term exceeding ten years but not exceeding thirty years.

*Where the lease purports to be for a term exceeding thirty years or in perpetuity or does not purport to be for any definite term

*One rupee for every one hundred rupees or part thereof on the total amount of average annual rent; and fine or premium or money advanced or security deposit (as the case may be) payable or deliverable under such lease.

*Two rupees for every one hundred rupees or part thereof on the total amount of average annual rent; and fine or premium or money advanced or security deposit (as the case may be) payable or deliverable under such lease.

*Four rupees for every one hundred rupees or part thereof on the total amount of average annual rent; and fine or premium or money advanced or security deposit (as the case may be) payable or deliverable under such lease.

The same duty as a conveyance (Article 20(1)), for the amount or value of such fine or premium or advance, as set forth in the lease, in addition to duty  which would have been payable on such lease if no fine or premium or advance had been paid or delivered; or for an amount equal to market value of the property which ever is higher;
Provided that in any case when an agreement to lease is stamped with the ad valorem stamp required for a lease and a lease in pursuance of such agreement is subsequently executed the duty on such lease shall not exceed rupees fifty.

Provided further that the duty in respect of an instrument of lease executed in favour of the wife, husband, father, mother, son, daughter, brother or sister in relation to the person shall be rupees one thousand.

Explanation: The term “ money advanced” in this Article means and includes the security deposit whether refundable or adjustable towards the rent.

(The writer is an advocate specialised in property matters. He may be contacted on 080-25530200 or 25526644 / 45. E-mail: editor@realestatereporter.net)

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