Renting a residential property can be a good source of monthly income for homeowners. However, before letting out a property, homeowners are required to have proper rent agreements in place to avoid any hassles in future.
Further, a rent agreement is also good for tenants as it protects them from any arbitrary decision of the landlord; such as asking the tenant to immediately vacate the property or increasing the rent amount midway during the agreement period. This article answers important questions related to rent agreements as a brief guide for a fool-proof renting experience.
What is a rent agreement?
A rent agreement is legally referred to as ‘leave and license agreement’. It is a legally binding document which outlines and records the terms and conditions agreed upon between a licensor and licensee for grant of such license.
A rent agreement is basically a “license in relation to an immovable property is a permissive right, without transfer of possession (in law) of temporary nature granted by an owner/ landlord (legally referred to as ‘licensor’), to the person seeking such permission, to use and occupy such immovable property for residential/ commercial/ industrial purposes,” says Apoorva Bhadang, Partner at Vesta legal.
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What are the details a rent agreement must include?
According to Abhinay Sharma, Managing Partner, ASL Partners, the following are the key details a rent agreement must include:
- The time period for which the rent agreement has been entered into;
- Right to get the agreement renewal;
- Lock-in period to ensure that the tenant is not thrown out just after one or two months for better rent;
- Rent whether it is inclusive or exclusive of other charges;
- Notice period to terminate the tenancy;
- Right to repair/ make changes in the property and to what extent
- Dispute resolution clause
Adding to the above, Rohan Rai, Associate Partner at RR Legal Partners LLP, says the rent agreement clause can have details like:
- Interest-free Security deposit and its swift return upon vacating the property
- Purpose of Use (so that the tenant can’t use it for business purposes, in which case, establishment license and/ or change of use may be required)
“Another important clause that hasn’t found its place in rent agreements till now is sublet. Usually abroad, such clauses are used, for instance, if the tenant wants to temporarily move out for 2 months, then he can sublet. Thereby saving money and easing the housing pressure,” says Rai.
Bhadang says rent agreements should also include the following:
- Termination clause setting out express conditions which will determine a license agreement;
- Obligation to pay stamp duty and registration charges.
- Due date of payment of license fee and the consequences (including liability to pay interest) in the event of default by the licensee.
What should be the duration of the agreement?
It is usually 11 months. But if it is more than 11 months, then it is required to be registered.
“The rent agreements are commonly executed for an initial term of 11 months. This duration is often preferred as it allows flexibility and convenience to the landlord as well as to the tenant to review and adjust the terms after the initial term expires. However, the actual term of a rent agreement can be negotiated and agreed upon by both the landlord and the tenant, as per their specific needs and preferences,” says Bhadang.
Should homeowners renew rent agreements after every 11 months?
Yes. However, the agreement can be for even more than 11 months but then it is compulsorily required to be registered.
“If the agreement is not renewed, the concerned tenant will be called tenant at sufferance. As per the Transfer of Property Act, it basically becomes a month-to-month tenancy which can be terminated by giving a 15 days notice. These days even Apartment Associations have made it mandatory to renew the agreement once expired,” says Sharma.
According to Bhadang, in India, it is common for the licensor/landlord and tenant to enter into a rent agreement with an initial term of 11 months. However, this is not a legal requirement, but rather a common practice.
“The landlord and tenant can choose to renew the rent agreement after the initial period of 11 months. Renewing the agreement is a matter of mutual consent and understanding between the parties, and it allows both the parties to make any necessary adjustments to the terms or the rent,” says Bhadang.
Can a homeowner increase the rent amount during the rent agreement period?
Legal experts say it is not possible to increase the rent midway unless the tenant has agreed to it.
“In most cases, a landlord cannot unilaterally increase the rent during the fixed term of a rent agreement. However, some rent agreements include a rent escalation clause, which allows for periodic, predetermined rent increases at specified intervals (e.g., annually). Further, if both parties agree, they can negotiate and mutually amend the terms of the rent agreement, including the rent amount,” says Bhadang.
Is it necessary to have a notarised rent agreement?
Legal experts say there is no legal sanctity of a notarised document. “It merely affirms the fact that a notary has put his stamp which is a rent agreement. For an agreement to be given legal effect, it is required to be stamped as per the applicable stamp duty and if it is of more than 11 months then it is required to be registered as well in addition to it being stamped,” says Sharma.
Are notarised rent agreements considered valid in courts?
Same as above. The rent agreement without paying the requisite stamp duty will have no evidentiary value.
What should be the minimum stamp value/price on rent agreements?
The stamp duty varies from state to state. It is better to consult an expert before purchasing the stamp paper.
For instance, according to Bhadang, Article 36A of Schedule I of the Maharashtra Stamp Act, 1958, provides that the stamp duty to be paid on the rent agreement (where the term does not exceed sixty months with or without a renewal clause) shall be at the rate of 0.25% of the total sum of:
a. The licence fees or the rent payable under the agreement; plus
b. The amount of non-refundable deposit or money advanced or premium; plus
c. Interest is calculated at the rate of 10% per annum on the refundable security deposit.
In the event the rent agreement is for a term exceeding sixty months (with or without renewal clause) the stamp duty applicable would be the same as is leviable under clause (ii), (iii) or (iv), as the case may be, of Article 36 of Schedule I of the Maharashtra Stamp Act, 1958.
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Apart from the rent agreement, what are the other precautions homeowners should take before letting out their flats?
Police verification, If the tenants have pets, whether they are registered with the concerned authority or not etc.
“Although not yet found its place in India, a local resident can be required to be a guarantor. It protects a landlord against the risk of rental default,” suggests Rai.
Disclaimer: The above content is for informational purposes only based on the inputs shared by legal experts/commentators quoted in the article. Please consult your legal advisor in case of any confusion or dispute related to rent agreements.