M. AMUDHA

FIXATION OF FAIR RENT – A DREAM COME TRUE IN INDIA

INTRODUCTION

A fair rent is a rent which is fair between the landlord and tenant and subject to prevailing rent law of a locality, enacted by a legislative body of the state concerned or central government.

The basic objective of the rent control legislation is to protect the tenant against exorbitant rents, arbitrary increases in the rent and ensure him security of tenure.

As housing is a State subject, different State Governments have framed their own rent control laws.

RENT CONTROLThe practice of imposing a legal maximum (rent ceiling) upon the rent in a particular housing market, below the equilibrium rent is called rent control. Rent control is an example of a price set below the equilibrium point. This is called a price ceiling. In the graph below,

The equilibrium (market) price of a rental unit = $1,800 per month. Government price = not more than $1,000 per month

The lower-than-equilibrium rent causes the quantity supplied of rental units to decrease to 700 units, because suppliers have less incentive to build and own rental units at the lower price. The quantity demanded increases to 1,200, because the lower price encourages more buyers. This results in a shortage of 500 rental units (1,200 minus 700).

Quantity Demanded1200 units

Quantity Supplied700 units

DEBATES – RENT CONTROL

• DEBATES FOR AND AGAINST RENT CONTROL

There have been various debates going on over the years over the pros and cons of rent control.

• While the proponents of rent control laws suggest that they prevent landlords from charging exorbitant rents and evicting tenants at will.

POSITIVE • The opponents suggest that rent control laws, lead to deterioration of existing housing stock, increased pullout of apartments from the rental housing market and thus reduced overall supply.

NEGATIVE

FAIR RENT & STANDARD RENT

Fair Rent• Fair Rent is the municipal valuation of the accommodation.• However, it cannot exceed the standard rent, if any, fixed or determined under a Rent Control Act.

Standard Rent• Under the Rent Control Act, Standard Rent is the highest possible rent of a particular property. • Thus, where Rent Control Act is applicable, Standard Rent shall act as an upper ceiling on the figure of Fair Rent.

TAMIL NADU BUILDING (LEASE AND RENT CONTROL) ACT,1960.

The object of this enactment was

discussed in Irani vs. State of Madras, 1962 (1) MLJ SC 92.

The legislation was enacted for

achieving three main purposes,

The regulation of letting,

The control of rents (fixation of fair

rent), and

The prevention of unreasonable

eviction of tenants from residential

and non-residential buildings.

FAIR RENT PROVISIONS

Under Section 4(2) of the act of the act, either the tenant or the landlord can file an application

for the fixation of fair rent.

On receipt of the application the Rent controller will make an

enquiry and fix the fair rent according to the principles laid

down under Section 4 of the Act.

In OSM Salih v. A.M.Salih 75 LW 511, • The main object of this provision is to

mitigate the difficulties of the tenants and at the same time to provide reasonable return to the landlord.

Fixation of Fair Rent

The total cost shall consist of The market value of the site in

which the building is constructed, The cost of construction of the

building and The cost of provisions of the

amenities specified in Schedule I of the Rent control Act (as prevailing on the date of application for fixation of fair rent).

FAIR RENT IN RESIDENTIAL BUILDINGS & NON-RESIDENTIAL BUILDINGS:

  RESIDENTIAL BUILDING

NON-RESIDENTIAL BUILDING

FAIR RENT

9% 12%

AMENITIES

15% 25%

FORMULA:FAIR RENT – RESIDENTIAL= (COST OF BUILDING+MARKET VALUE)*9/100

FAIR RENT- NON RESIDENTIAL = (COST OF BUILDING+MARKET VALUE)*12/100

MARKET VALUE OF SITE

Market value = (plot extent / built up area) x

guideline value 

Kaliammal & others v. Athi V/s. Ramachandra & others, 1983 (II) MLJ 252. While computing the market value of

the site, the following two factors are to be considered viz.,

The portion of the site on which the building is constructed,

A portion upto 50 percent, thereof of the vacant land, if any, appurtenant to such building. The remaining 50 percent of the vacant land is to be treated as an amenity.

The market value of the site on which the building is

constructed should also be taken into account while

fixing fair rent.

Rate of depreciation – schedule II

  Class                             Type of Building Rate of Depreciation1.    Building built in lime mortar and in which teak has been used through out

1.0 percent

2.    Building built partly of brick in lime mortar and partly of brick in mud in which teak has been used

1.5 percent

3.    Building built in mud and in which country wood has been used.

2.0 percent

4.    Building which are inferior to those of class 3. With brick in mud un-plastered walls and mud floors and in which cheap country wood has been used.

4.0 percent

Calculation of Depreciation

Where, A = total cost of construction of building, r = Rate of depreciation per annum, n = Age of the building and P = the final depreciated value of the building.

P = A (100-r)/100)n

Amount of Depreciation = A – P

Change in fair rent

When the fair rent of a building has been fixed or re-fixed under this Act, no further increase in such fair rent shall be permissible

except in cases where some addition, improvement or alteration has been carried out at the landlord’s expense and if the building is then in the occupation of a tenant, at his request.

The fair rent increased shall not exceed the fair rent payable under Rent Control Act for a similar building in the same locality with such addition, improvement or alteration and it shall not be chargeable until such addition, improvement or alteration has been completed.

Where, after the fair rent of a building has been fixed under this Act, there is a decrease or diminution in the accommodation or amenities provided, the tenant may claim a reduction in the fair rent as so fixed.

SHORTCOMINGS

Fixation of standard/ fair rent as a percentage of the cost of construction is a major disincentive for those wanting to invest in rental housing as it gives a very low rate of return as compared to other assets. It is difficult to evict a tenant once the house has been rented. Thus, the fear of losing perpetual control of their houses might lead them to withdraw their vacant premises from the rental market, leading to reduced supply.It is difficult to resell a tenanted house from which it’s difficult to evict tenants. This reduces liquidity in the market for ownership housing.

leading to formation of black, uncontrolled rental housing markets. The rents in these markets are much higher than they would have been in absence of rent controls.

Implementation of Rent Control laws also involves substantial administrative costs. All rental property must be registered, elaborate mechanisms to fix rents must be formulated and a dispute settlement body established.