This article is written by Adv. Arvind Jain.
(This article is spicy and prejudiced. The words “tenancy” and “lease” mean the same here.)
A little warm-up on attitudes of tenants and landlords is important, to enable us to design contracts that secure properties and Landlords till eternity. This article has bad experiences from more than 50 litigations and from losses of more than 200 crores. May God save the rest.
Most landlords bet their savings of a lifetime in the land and the construction. Landlords sacrifice months of sweat and sleepless nights in completing the land development. They assume that this is enough to get a steady rental income and enjoy land-appreciation. By the time the structure is ready for occupation, many landlords are holding torn pockets and are desperate for cash. They end up signing long lease deeds at low rents just to float for survival. In Britain there is a saying that “Fools build properties, intelligent people live in them”. Even the British Laws running in India, favor the tenants more than the Landlord. In India, Rental Income is highly over-rated, even though the Rental yields are less than 3% per annum of the property-value before taxes are deducted. India has a very high construction cost and the quality of construction needs expensive maintenance. All these factors push Landlords to poverty. In many cases, the Lands become the identity and status symbols of the Landlord’s family and they continue to hold the Lands even at a loss. Most Landlords fail to sell and exit a Land at the right time and often lack the money to buy more lucrative and cheaper lands.
But most tenants in India have a “socialistic” attitude and they think a rent agreement will eventually make them owners of the property under their feet. In India. They get upset if their Landlord sells the leased property to another investor. Every tenant thinks he has a right of pre-emption on every property. They end up quarreling with the new Landlord for silly things. Most tenants feel that for the rents they pay, the Landlord has to maintain the building in a brand new condition for the rest of his life. When this does not happen they think the Landlord is “misappropriating” the rents to some other project and they consider him dishonest. For some years, the tenants feel obliged to pay rents promptly every month. But after a decade when the building depreciates and the market value of that building falls, they begin to realise that the rents paid till-date, could have been used to buy this “old property” itself. They think they missed an opportunity by paying rents to the Landlord and the Landlord owes them an equivalent opportunity. They start considering themselves as the defacto-owners of the property.
Moreover since the tenants have been at the place for more than decade, they have many suppliers and service providers who happily give them credits for 4-12 months. They have a friendly informal network in that locality and their attitude begins to corrupt and harden. Now they expect their Landlord to acknowledge their “market dominance” and not expect them to promptly pay rents every month. Then they meet lawyers like me, who convince them that in case the Landlord files a suit for eviction, he can be sure that it will take at least 15 years for the Apex Court to confirm the order of eviction.
Many lawyers convince tenants that they need not even pay the rents till the suit is being prosecuted. I know a lawyer who was an expert in saving tenants from eviction and his fees policy was very simple. He advised clients to stop paying rents to the landlord and instead pay him 50% of the rent till the suit is disposed. He made a fortune in 20 years. If a landlord dies and there is a partition in his family, the tenants set one brother against the other and enjoy 20-20 scenes of the family feuds. They start withholding rents and demand the family to settle their succession before claiming any rents from them. Every building and every shop in that building in Kalbadevi Road of Mumbai has some story that resonates with this para. The attitude of tenants who were allotted rental properties by the Rent Controller is even more disgusting.
In India in the 1970s, the tenants were a huge vote bank and lawmakers made numerous laws that gave free-lunches to all tenants at the cost of the Landlord. Sadly many lawyers designed lease deeds that confirmed the social legislations of the 1970s and this ensured that Landlords walked with torn slippers and old clothes in the Court corridors to get their property back.
Builders who instantly sold properties after constructing them and avoided all rental fantasies made tons of money and began constructing malls in India with strong Lease Deeds that fixed high rents, high maintenance charges, high utility charges, etc.. Indian Real Estate got a taste of fair Rental Agreements that preserved Landlord’s control over the property. The Y-generation of Indian Lawyers who graduated after 2000 had the spine to lock tenants in their place. Many of my clauses in Lease Deeds have been copied by reputed lawyers and I feel elated when I get to professionally comment and edit such Lease Deeds. It’s a thrill to break your own locks that you thought were a master-piece.
Table of Contents
How can Landlords control their assets
By Due Diligence
Its best for Landlords to avoid tenants who are more powerful than them, who are more politically connected, who are seasoned in litigation and Who can flex more muscles when things turn ugly. Its best for landlords to have tenants who are focussed in their business and avoid illegal distractions alien to their business. Some sectors like pharmacy, banking, insurance, education, etc. generally have decent tenants. Landlords need to know their tenants before shaking hands with them.
By avoiding Desperate Deals
Its better to take a loan and easier to default than getting stuck with a crooked tenant at a low rent and a low security-deposit. Many times its safer and better to sell the property at a 20% discount that rent the property at a 20% lower rent.
By tough Lease Deeds
Many landlords still like to buy 200-rupee or 500-rupee Lease Deeds sold by typists outside the Court. Its shocking that Landlords rent properties worth 50 lakhs on such deeds. A Lease Deed should snatch away all the benefits a tenant can gain from any social legislation, snatch away benefits from the long procedures of the civil procedure code, etc. A good Lease Deed has to have atleast all of the following clauses:
- Avoiding the tenant’s heirs from succeeding to Tenancy.
- Fixing high rents to avoid cheap tenants.
- Fixing a Termination Date.
- Fixing all violations of the Lease Deed that will terminate it before the Termination Date.
- Making the Lease deed Terminate-able if the tenant is hit by bankruptcy, lunacy, or if he commits a commercial crime or any crime inside the premises.
- Making the Lease highly expensive and unaffordable after the termination of the Lease.
- Fixing very high measne profits.
- Making the Lease Deed terminate-able if the tenant’s defaults on Rents for at most 2 months.
- There are many more triggers that can be used in a Lease Deed.
- A confirmed right of Landlord’s Re-entry into the property.
If the Landlord cannot sell tough clauses to a tenant, its best to use a lawyer with a posh office. This magic works most of the time. In a lawyer’s posh office, the attitude of many tenants simply melts away.
What to do if tenants refuse to sign such lease deeds?
- Explain your intentions honestly
- Keep the keys inside and politely refuse the Lease
(A polite refusal pushes up your bargaining power)
- Advertise the property more than before.
- Tenants fall for looks, Make the property more attractive.
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