Protecting property: Before you decide to let

Dec 01 2012, 10:27 IST
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There are instances of litigations especially due to the lack of safeguards on the part of the owners while renting out properties. There are instances of litigations especially due to the lack of safeguards on the part of the owners while renting out properties.
SummaryRental segment of residential realty space is picking up with growing demand.

After taking a back seat for decades, the rental segment of the residential realty space is picking up. Potential home buyers are turning to rentals as they are unable to purchase their dream house on account of astronomical capital values. The trend towards rentals is also drawing a greater number of home owners who have begun to rent out their flats.

There are however, instances of litigations especially due to the lack of safeguards on the part of the owners. If the correct procedure is followed, home owners will have a steady source of additional income as demand, already high, is projected to increase further.

Changing scenario

A few decades ago, landlords were reluctant to give their properties on rent mainly on account of three apprehensions.

One, the fear that the property may be grabbed by the tenant and will not vacate when you want him to, resulting in long-drawn legal battle for eviction. Two, the fear that the flat would be misused and proper care may not be taken. Third, the fear that the property may be sublet to a third party.

There were lakhs of vacant flats in cities across the country a few decades ago, and none of the owners had the courage to risk it by giving it on rent. There were two main reasons. The main reason was the lack of adequate laws to protect the properties and second, there was also a lack of awareness that an agreement, if entered into carefully, could actually benefit both landlord and tenant.

In last decade, many laws came in to force, which not only guide the legal procedure for such deals but also protects the interest and property of the owner. This empowered the courts to take stronger action in cases of violations or breach of agreement. Law enforcement agencies have also been looped in with mandatory regulations such as verification. This has given relief and support to the owners.

The other factor is the changing profile of the tenant. A new breed of educated professionals began to migrate to cities to take up emerging job opportunities or take up residence upon job transfer. There was demand from corporates, multinationals and even students. The fear among owners began to disappear and professionalism is creeping in albeit slowly.

Benefits from rental

Rentals are beneficial in two ways. One, the income and secondly, the person who moves in, invariably takes care of the premises, thereby removing the worry on account of maintenance. For example, NRIs usually rent out their flats to MNCs, for are not able to visit, check and follow-up on their property frequently. Hence they need a legally sound agreement and a tenant who can maintain the property well. MNCs fit the bill.

The legal agreements are drawn in professional manner and the companies take care of these flats very well as people who stay there are of very high ranks such as CEOs, directors etc. “I have a 3 BHK flat at Marine Drive in southern Mumbai. I have given it to a foreign bank at Rs 2 lakh per month. The agreement is executed by the solicitors of both the parties. I cannot take risk of any kind since I stay in USA and my flat here costs about Rs 20 crore,” says Reena Asher who is busy renewing the agreement and renegotiating the rent.

If a flat owner does not have any pressing priorities, he must compare the monthly rent against the maintenance outflows. When deciding to choose the flat in which he would live and the flat to be let out, the owner should compare factors such as location, age, neighbourhood, common amenities, size, facilities, outgoings or expense towards maintenance etc of the flat, proximity to amenities and connectivity.

If these are better, it is wise to stay in that locality and let out the other property. Initially, the yields versus outflows may have a gap, but can eventually be squared as rents would increase with time.

Rent calculation

The rent is usually based on the capital value of the premises. It is usually 2.5-3 per cent of the market value. For example, if a 2 BHK flat of 700 sq ft commands a market valuation of R30,000 per sq ft, then the capital value is about R2.10 crore.

The 3 per cent of this value is R6.3 lakh per annum translating into a monthly rent of R52,500. The flat owner should set a target of R50,000 to R60,000 depending on other value factors.

If a building is in a prime location with good proximity, garden or parking , compound, lift, security etc and the flat is well painted, with decent furniture and fixtures, good ventilation and sanitation etc the same flat may fetch up to R80,000 per month.

The customer is ready to pay more for such flat is because one, he does not have to spend anything on amenities and secondly, he gets better life style by just paying a marginal increase. “Usually people prefer to pay more for the furnished flats instead of raw ones even if they are available at cheaper rents,” says Krishna Pande, an Mumbai-based broker who specialises in rental deals.

The Paperwork

The services of local real estate agents are preferable to advertisements in newspapers or websites. The broker gives human face to the deal and acts as a mediator for the entire process. He gets potential customers through his database or broker’s network.

The selection is based mainly on location and rent. He will inform you of the prevailing market rates and may correct your asking price if need be. He usually charges one month rent as his brokerage. However, if the same party or licensee continues to extend the stay, the brokerage can be reduced to half of that amount.

The broker may assist you in negotiations, rent finalisation as well as deposit amount, confirming the mode and period of payment, finding the antecedents of the customer, execution of agreement, registration, and police verification. For owners with spare flats that have to be regularly rented out, having a fixed broker is usually beneficial as renewals are regular and in some cases, brokers can be appointed on monopoly basis or sole-renting arrangements. Further, brokers themselves advertise the property through newspapers and websites and their expertise would be invaluable in evaluating the prospects.

When finalising a rental transaction, one comes across three types of legal documents: rental agreement, lease deed and leave and licence agreement. One of the three is executed when a property is given on rent. However, the three types of documents are different in their objectives, but are used interchangeably, which is incorrect.

When a flat is given on a period of 11 months or less, it is governed under the leave and licence agreement. There is no transfer of interest, only permission is granted to stay on the property.

The draft of leave and license agreement is also available on the various websites but there is always something more specific about that particular flat or the owner or the deal which needs to be added to the agreement and that is where the legal expert comes in.

If the tenure is more than 11 months then registration is compulsory. In fact, it is in the best interest of both the parties to register the document irrespective of the tenure as only the registered documents have legal validity in the case of any dispute. The usual practice is that the cost of registration, stamp duty and other legal expenses are equally divided between the licensor and licensee.

The maintenance, taxes and other major structural expenses are borne by the licensor while minor repairs are the responsibility of the licensee.

Registration of the tenant details with the police is also a mandatory requirement. In addition, the owner should also take the prior permission from the society to enter in to such an agreement.

The society may charge ‘non-occupancy charges’ besides your regular maintenance charges. Though the society has no legal power to deny the owner from renting out his premises, many societies create hurdles in the name of communal bias, pets, eating habits, marital status etc. However, these cannot stand in the court of law.

— anshumali.ruparel@expressindia.com

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