This article analyses the key constructs of the Maharashtra Rent Control Act, 1999, being standard rent and increases in standard rent, and the recognition of 'pagdi', in comparison with its predecessor, the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947.
The observations in Malpe Vishwanath regarding the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (1947 Act), and the increased criticism of the 1947 Act, culminated in the promulgation of the Maharashtra Rent Control Act, 1999 (1999 Act).
The 1999 Act addresses tenant protection while also seeking to provide landlords a fair return on investment. To these ends, it limits the scope of protected ‘tenants’, stipulates standard rent and permitted increases in standard rent, and recognises the premium (i.e., ‘pagdi’) received by the landlords on the transfer of tenancy.
We briefly compare the relevant stipulations of the 1999 Act with the equivalent stipulations in the 1947 Act.
Persons Not ‘Tenants’
Exemptions and Not Exceptions Under the 1947 Act
The 1947 Act applied to all persons who let or sublet premises from a ‘landlord’ as defined in the 1947 Act. No person who so let or sublet premises was exempt from the protection provided by, and in terms of, the 1947 Act.
However, premises which either belong to the “...Government or a local authority...”, or are being used for “…public purposes of a charitable nature…”, or are being held by a “...public trust for a religious or charitable purpose and let at a nominal or concessional rent” are ‘exempt’ from the 1999 Act. This is similar to the scheme of the 1947 Act.
In contrast, the 1999 Act expressly excepts certain categories of persons from the scope of ‘tenant’, and, consequently, the protection available to a ‘tenant’, in terms of the 1999 Act.
Exceptions From ‘Tenant’ in Terms of the 1999 Act
Any “…banks,…Public Sector Undertakings,… Corporation established by or under any Central or State Act, or foreign missions, international agencies, multinational companies, and private limited companies and public limited companies having a paid up share capital of rupees one crore or more...”, which let or sublet premises are not ‘tenants’ for the purpose of the 1999 Act.
In Crompton Greaves Ltd. v. State of Maharashtra, the Bombay High Court considered the constitutionality of this exception. The petitioners contended that the 1999 Act: (i) created an invidious distinction between companies having a paid-up capital of INR 1 crore or more and other commercial ventures; and (ii) the paid-up share capital of a company is not indicative of its financial stability, and this does not qualify as a reasonable classification, and is inherently discriminatory.
The Bombay High Court rejected the challenge, and observed that:
Consequently, the constitutional validity of Section 3(1)(b) of the 1999 Act was upheld.
In Leelabhai Gajanan Pansare v. Oriental Insurance Company, the issue before the Bombay High Court was whether government companies were ‘public sector undertakings’ and, therefore, excepted from the scope of a ‘tenant’ under the 1999 Act. The Supreme Court held that government companies were public sector undertakings, and reiterated that the test of financial capability is the “…golden thread…” running through Section 3(1)(b) of the 1999 Act.
While the 1947 Act deemed certain licensees to be tenants, the 1999 Act excludes application of standard rent and permissible increases for premises let out or given on licence for a continuous period of less than 1 year. This has led to a rise in leave and license agreements for a period of 11 months to escape the stipulations of fixation of standard rent and permissible increased under the 1999 Act.
Determination of Standard Rent
The 1947 Act and the 1999 Act respectively set out criteria for the determination of standard rent. The 1999 Act follows the trend of determination of standard rent based primarily on a particular period:
The 1999 Act is silent on the determination of standard rent for premises which were let out for the first time after 1 October 1987. This is indicative of the legislative intent to continue the protection accorded to tenants under extant rent control statutes, without subsuming fresh tenants of newer constructions or persons occupying premises under a lease agreement into the fray of the 1999 Act.
Permissible Escalations for Standard Rent
A primary criticism of the 1947 Act was that it failed to address the rising inflation and cost of living.
The 1999 Act remedies this shortcoming by providing for an annual permissible increase of the standard rent by 4% every year.
Additionally, the 1999 Act allows the standard rent to be increased by up to 15% in case of special repairs or alterations or by up to 25% in the event of structural repairs. If the landlord is required to pay the government any new or increased rate, tax, or cess, the standard rent may be increased proportionately.
By permitting landlords to pass on the costs of maintenance of the property to the tenants, the Legislature presumably hoped that the landlords were incentivised to preserve their tenanted premises and prevent dilapidation.
Treatment of Pagdi
Unlike the 1947 Act, the 1999 Act does not prohibit the receipt of pagdi by a landlord for a transfer of tenancy. Under the pagdi system, upon transfer of tenancy, the incoming tenant paid a lump sum amount, calculated on the market value of the rental property to the outgoing tenant. A third of this amount went to the landlord.
The Rent Acts Enquiry Committee acknowledged that such unregulated and unrecognised transactions led to tax evasion and circulation of unaccounted money.
Changing Role of Rent Control Statutes
The 1947 Act was promulgated as a temporary, time-bound measure which was extended periodically.
The 1999 Act does not stipulate a cessation date and acts as a continuous policy measure. In fact, to formalise the rental housing industry, the 1999 Act imposes an obligation on the landlord to register agreements for leave and license, tenancy, or lease, under the Registration Act, 1908 consequently boosting the state exchequer through registration charges and stamp duty collections.
The 1999 Act also mandates disposal of suits and proceedings, as far as practicable, within 12 months from date of service of summons and, for appeals, within 6 months from date of service to expedite proceedings under the 1999 Act.
The 1999 Act also mandates disposal of suits and proceedings, as far as practicable, within 12 months from date of service of summons and, for appeals, within 6 months from date of service to expedite proceedings under the 1999 Act.
The last article in this series will review the Model Tenancy Act, 2021 in this context.
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