This article is written by Shiraz Rajiv Bhatia, pursuing a Certificate Course in Real Estate Laws from LawSikho.
Introduction to the Pagdi System
Many times, one must have come across the term ‘Pagdi‘ while reading or hearing about real estate-related work. What is the Pagdi or Pagdi System? Pagdi is a traditional and unique tenancy model in India since the pre-Independence era, although the number of people, who are tenants under such a system today, may not be high. Similar to other renting arrangements, it also involves a tenant and a landlord, and pays a nominal rent as compared to market rates, on the other hand, the difference is that the tenant is also the co-owner of the property, and has both subletting and selling rights.
Origin and the history of the Pagdi System
The “pagdi-kirayedar” system was started in the pre-independence era to evade taxes paid to the British government. Under this system, verbal/oral agreements played an important role in transfer of property, wherein the tenants were given a receipt for the rent paid and further tenants made payments in full to the landlord.
According to Section 56 of the Rent Control Act, 1999, this consideration paid to the landlord as a fine, premium, or consideration (Pagdi) was legalized. The act provides authorization for a tenant to receive any amount in consideration to relinquish or transfer of his/her tenancy rights. The landlord or any person acting or purporting to act on behalf of the landlord could receive any fine, premium or other like sum or deposit or any consideration (refers to Pagdi) in respect of the grant, or renewal of a lease of any premises, or for giving his/her consent to the transfer of a lease to any other person.
The functioning of the Pagdi system and transfer of ownership in the Pagdi system
In the Pagdi system, the only differentiating element is that the tenant becomes a part-owner of the premises and not of the land. This tenant continues to pay rent to the owner as long as he/she is not sub-renting the premises. Additionally, the tenant has the choice to sell the said property nonetheless the tenant will have to give a percentage (between 30 to 50%) of the gross sale amount to the landlord.
In case of sub-letting, the old tenant who now is an owner and the original landlord of the property shall share the rent amount amongst themselves, usually at a 35:65 ratio. This facilitates for the landlord to make some money off his/her asset while evading taxes. The old tenant profited as well and the new tenant rented the premises at a very nominal rent. As there is no prescribed law about charges to be paid to a landlord for a No Objection Certificate.
For instance, in the Pagdi system, if a current tenant wants to sell his/her home for Rs.10 lakh, he/she is obliged to pay somewhere between 3 to 5 lakhs to the landlord. Needless to say, he/she enjoys restricted rights because the landlord collects nominal rent and accordingly gives the receipts.
Rules for inheriting tenancy rights under the Pagdi system
Section 7 (15) (d) of the Maharashtra Rent Control Act, 1999, states that a tenant’s family member who has been living with the dead tenant at the time of his/her death shall be eligible first from the family as the successor to succeed the tenancy. Upon the demise of a current pagdi tenant, the tenancy rights can only be transferred to that legal heir(s). The new tenant (legal heir) can request the landlord to issue a fresh rent receipt in the heir(s) name(s). But testamentary succession is not possible, as tenancy rights are peculiar to the tenant and therefore a tenant cannot bestow his/her tenancy rights under a Will.
Therefore, the family member who desires to claim the tenancy rights of the demised tenant must show evidence that he/she was perpetually living with the deceased tenant at the time of his/her demise. Only such a family member will get precedence over all other members of the family for the bequest of such tenancy rights over the premises.
How is it relevant today?
Currently, numerous micro-markets of Mumbai, Kolkata, and Delhi practice the Pagdi system and it has been predicted that over 7.5 lakh homes in Mumbai are under the Pagdi system. According to one of the official reports, Mumbai has around 19,642 old buildings where the Pagdi system of renting exists. Areas such as Colaba, Worli, Dadar, Mahim Fort, Parel, Lalbagh, Sewri, Warden Road, and Peddar Road have a considerable amount of tenancy of Pagdi dwellers.
Advantages of Pagdi system
- It is a legalized form of tenancy under the provisions of the Maharashtra Rent Control Act, 1999.
- Lower rents than the current market rates in major metropolitan cities Mumbai and Delhi.
- The tenant can be a co- owner of the premises but not of the land.
- The tenant as a co-owner of the property has both subletting and selling rights.
- Transferable tenancy to family, with conditions. Tenant’s family member who has been living with the deceased tenant at the time of his/her death shall qualify first from the family as the successor to succeed the tenancy.
- In case of redevelopment, the tenant can be a co-promoter.
Disadvantages of Pagdi system
Although legalized this system has many drawbacks for the owner as well as the tenants.
- The tenant can be a co-owner of the premises but not of the land. So, there is no satisfaction of being the owner of the property.
- Owners take lump-sum premium but over the period of time many years into the tenancy, the ratio goes disproportionate.
- Rents are very low for the premises in the prime locations of the metropolises.
- Lower rentals do not incentivize landlords enough for maintaining these structures, and hence they remain neglectful concerning maintenance and other repairs.
- Tenants have to spend from their own pockets for the renovations and repairs of the premise.
- Tenants may have to go forth with the redevelopment of the property.
Need for Pagdi system
As history goes, the Pagdi system was started in the British era to avoid paying excessive taxes. But this system has lived through more than that and survived to this new age. As we have discussed above, the advantages and disadvantages of this system are better able to understand the need for it in today’s real estate scenario.
Real estate prices are booming in major metropolitan cities like Mumbai, Delhi, Kolkata. About 35% of people staying in any city are floating population i.e. they don’t belong to the city and are living only to earn their livelihood or carry out their businesses and have no intentions of buying a property. They only want to stay in the city for work and they rent a property. This is mostly the working-class population who don’t have money to buy a property or do not want to invest in a permanent abode in the cities. They don’t wish to fall into the legalities of agreements and the registrations of the agreement thereafter, and /or who don’t want to pay higher rents. Therefore, they opt for a less cumbersome option of tenancy, i.e. the Pagdi system.
This system was also more favorable as it did not encompass under taxation laws. But with the new GST law Pagdi system is brought in the ambit of services. The tenancy premium earned on transmission of tenancy rights invites GST provided the exception given vide Sl.no.12 of notification no. 12/2017 of Central Tax (Rate) dated 28th June, 2017 on ‘services by way of renting of residential dwelling for use as a residence’.
The Government had issued a circular (Circular No.44/18/2018-CGST dated 2nd May, 2018) where the department has noticed that, the controversy that stamp duty and registration charges are charged on transfers of such tenancy rights, and such business deal thus should not be subjected to GST, is not applicable. Simply because a transaction or a supply includes execution of documents which may necessitate registration and payment of registration fee and stamp duty, would not disqualify them from the ambit of supply of goods and services and from GST. The transfer of tenancy rights cannot be treated as a sale of parcel or structure affirmed as neither a supply of goods nor of services in Schedule III, para 5 of CGST Act, 2017. Hence, the said activity shall be considered under the scope of GST.
Any amendment which should be made to this system?
Some new laws and regulations have ensured the Pagdi system being streamlined by getting the structure of this tenancy into its fold and trying to restructure the process and most of the problems arising from this system. Some of those are discussed below:
- Pagdi properties under RERA:
The government has been meaning to acquire pagdi properties under the Real Estate Regulatory Authority (RERA), which will offer the equivalent assistance and security to home buyers as offered to regular properties. As per the present scenario, tenants in pagdi properties are co-promoters of the development. Assuming that most are old properties, there is a necessity to redevelop such units. After Pagdi properties come under the authority of the RERA, such tenants would be eligible for compensation if the development is delayed. As of now, the Maharashtra Housing and Area Development Authority (MHADA) collects a tax from these tenants and offers help with the upkeeps of Pagdi properties.
- Pagdi Properties Redevelopment in Suburbs
The Pagdi properties redevelopment rules in Mumbai Suburbs are different from that of Cessed tenanted buildings in Island City. There is a TDR system and other redevelopment systems in the suburban areas of Mumbai.
In the City, there are rules for minimum carpet area for these tenants, whereas for suburban areas, the tenants merely have the right to the prevailing occupied area. Furthermore, for cessed buildings in Mumbai, the redevelopment is done principally under D.C. Reg.No.33(7) whereby the tenants become landlords while in suburbs the landlords are not obligated to offer ownership to tenants in redeveloped buildings and can keep them as tenants.
- Pagdi system in Mumbai:
In 2019, the Maharashtra government permitted a discounted additional Floor Space Index (FSI) to developers who were amenable to take on redevelopment of the pagdi properties. However, this would cause a loss of approx. 50% of the revenue for the Brihanmumbai Municipal Corporation (BMC) and a final decision on this matter yet to be taken. The 2018 BMC guidelines stated that those already living in non-cessed buildings prior to 13th June, 1996, are entitled for new flats if the property goes for a redevelopment. Even if the tenant had transferred the ownership officially and lawfully to the new tenant, the new tenant would be eligible for the same benefits.
- Benefits for the developers who takes the responsibility of redevelopment of Pagdi buildings:
The Mumbai Development Control and Promotion Regulations 2034 (DCPR) provides tantalizing incentives to the landlords of these buildings to encourage them to redevelop their properties. These incentives are given based on the total area necessary to rehabilitate the inhabitants. The rule further provides that the tenants are eligible to a minimum area of 300 sq. ft. and a maximum area of 1,292 sq. ft., free of cost. If the property area crosses the maximum cap, then the tenant needs to pay the construction cost. If the developer carries out the redevelopment of two to five pagdi buildings, he/she would be qualified for 60% incentive on FSI. If there are more than five buildings, the FSI incentive might go up to 70%.
Mumbai Development Control and Promotion Regulations 2034- 33(7)(A)- Reconstruction or redevelopment of dilapidated/unsafe existing authorized tenant occupied buildings in Suburbs and extended Suburbs and existing authorized non-cessed tenant occupied buildings in Mumbai City.
- The proposed Model Tenancy Act:
The suggested Model Tenancy Act will permit landlords to enforce whatsoever rent and increase it as they may think fit. It will be applicable to all tenants, occupancies, and premises, and will not safeguard even those who in the past have paid higher ‘Pagdi’ (security which is nearly equivalent to the market price of the premise given on rent) to landlords to dwell in tenanted premises. Many tenants may have paid for the repair and maintenance of the properties over the last 10 years.
Process for revision of rents:
- The landowner shall give notice in writing three months beforehand the revised rent becomes due.
- If a tenant, who has been given notice of a proposed raise in rents, fails to give the notice of termination of tenancy to the landowner, in such an event the tenant shall be deemed to have accepted whatever rent increase has been suggested by the landowner.
- In case the premises have been rented for a limited period, rent may not be increased during the term of the tenancy period except the increase in the amount or process of working out the surge is particularly established in the Tenancy Agreement.
- The tenant shall not directly or indirectly sub-let or allot, entire or part of the premises for a rent that is higher than the rent or the equivalent to the rent, charged by the landlord to its tenant.
- Where the landlord, subsequent to the commencement of the tenancy and with an agreement with the tenant has sustained expenses on account of improvement, addition, or structural alteration in the premises occupied by the tenant, which does not comprise of upkeeps of the essentials to be carried out, the landlord may upsurge the rent of the premises by a sum as agreed between the landlord and the tenant, before the initiation of the work and such rent increase shall become operative from one month after the completion of work.
To draw a proper conclusion we have to 1st acknowledge the fact that this system comes from the pre-independence era, and at a time where rent control was essential owing to the need for affordable housing after the world wars. Post-independence, India was no exception. That said, the times have changed within the proceeding seven decades and notwithstanding the pros and cons, the need of the hour is to protect landlords and the tenants alike. There have been a lot of grievances and disputes coming from landlords and tenants, who followed the Pagdi system and despite the legislative intervention the government has not been able to fix the issues and squarely refine and regulate this system.
We already have other tenancy systems like lease, leave and license, where a tenant gets an opportunity to negotiate the rent with the landlord or an individual can avail ownership of any property by getting into long term loan agreements under various housing schemes and instead of paying rents, pay a small amount of affordable EMI for repayment of loans akin to payment of a small amount of rent under the Pagdi system.
This only means that the Pagdi system falls short of balancing the needs of landlords and tenants in the current society and is outdated, which calls for either suitable changes to be made to this tenancy system to suit the needs of the new world or be completely abolished.
- The Maharashtra Rent Control Act, 1999
- Vasant Pratap Pandit v Anant Trimbak Sabnis, 1994 SCC (3) 481, JT 1994 (3) 267
- Updated version of the Notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017 as amended upto 14th Nov, 2017 – https://taxguru.in/goods-and-service-tax/notification-no-12-2017-central-tax-rate-updated-till-14th-nov-2017.html
- Circular No.44/18/2018-CGST dated 02.05.2018 https://taxguru.in/goods-and-service-tax/gst-applicable-transfer-tenancy-cbic.html
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