India's National Magazine
From the publishers of THE HINDU
Vol. 15 :: No. 08 :: Apr. 11 - 24, 1998
A Rent Act under review
The Maharashtra Government is in a bind over the Bombay Rent Act.
THE controversy over the Bombay Rents, Hotel and Lodging House Rates Control Act 1947, popularly known as the Bombay Rent Act, has landed the Shiv Sena-Bharatiya Janata Party Government in Maharashtra in an unenviable situation.
The Supreme Court, while delivering its judgment on December 19, 1997 on appeals filed by several property owners in Mumbai, said that the existing provisions of the Act that related to the determining and fixing of the "standard rent" (the highest rent the Act permits a landlord to charge) was "no longer reasonable". The court also said that the extension of these provisions beyond March 31, 1998 (the last day of the previous extension) would be "invalid" and "of no consequence".
The apex court expressed the hope that the State legislature would enact a new rent control Act with effect from April 1, 1998 taking into consideration, among other things, the model rent control legislation the Union Government circulated among the States in 1992. The Bench, comprising Justice J.S. Verma (the then Chief Justice) and Justices B.N. Kirpal and N. Srinivasan, said that there would have to be "very good and compelling reasons" for the Government to depart from the model law. It noted that counsel for the State Government had given it an assurance that the provisions of the model law would be taken into account while framing the new Act.
Since then, the State Government has come under criticism from tenants' lobbies. The Shiv Sena-BJP Government has been accused of having defended the Bombay Rent Act only half-heartedly in the court in order to facilitate the introduction of a piece of "pro-landlord" legislation.
The model law, besides providing for much higher rents than what is payable under the Bombay Rent Act, makes the eviction of tenants easier by providing for the setting up of a parallel judicial process with only one court of appeal after removing the civil courts' jurisdiction over the matter and summary litigation procedure. It also provides for severe curbs on the right of inheritance of tenancies.
During the Lok Sabha election campaign, the Congress(I) made the question of the Rent Act an electoral issue, particularly in the Mumbai South constituency, in an attempt to woo the tenants' lobbies. For their part, Chief Minister Manohar Joshi and Shiv Sena chief Bal Thackeray gave the tenants assurances that were plainly untenable in the light of the Supreme Court judgment.
On March 16, the Action Committee for Protection of Tenants' Rights, a powerful group consisting of tenants' and traders' associations and central trade unions, including the Centre of Indian Trade Unions (CITU), observed a bandh in Mumbai.
On January 19, the State Government filed a petition in the Supreme Court pleading for a review of the December 19 judgment. The petition stated that the March 31, 1998 deadline set by the Supreme Court for the enactment of a new law was "too close" and prayed for the grant of "adequate time". Review petitions and intervention petitions have been filed by the Federation of Old Buildings Cooperative Housing Societies, the Action Committee for Protection of Tenants' Rights and other organisations.
After hearing the matter on March 19 and 24, the Supreme Court declined to pass orders on the Government's request for permission to continue with the existing Rent Act beyond March 31. The Bench, comprising Chief Justice M.M. Punchhi and Justices Kirpal and Srinivasan, made it clear that the court would keep the Government's review petition pending until April 17, the date of the next hearing. This forced the Government to bring new legislation into effect by the end of March lest there be a legal vacuum on the rent question between April 1 and 17, if not beyond that date. The Government has therefore taken recourse to a temporary legislative measure that was passed by the State Assembly on March 26 pending the enactment of a unified rent control law applicable to all the regions of Maharashtra. (The Bombay Rent Act is applicable only to specified areas in those parts of Maharashtra that correspond to the Bombay State prior to its reorganisation; there are different rent control Acts for Vidarbha and Marathwada.) The new legislation, which expires on March 31, 1999, differs in only one aspect from the existing Act. It has an additional section that reads as follows: "On the date of the commencement of the Bombay Rents, Hotel and Lodging House Rates Control (Extension of Duration and Amendment) Act, 1998, a landlord shall be entitled to make an increase of five per cent in the rent of premises let before the first day of October 1987." However, whether the Supreme Court finds the temporary legislation acceptable or not remains to be seen.
WHAT is the "standard rent", which is at the centre of the controversy? Except in cases where it has been fixed under the rent control Acts of 1939 and 1944, and in special cases by the court under the 1947 Act, standard rent indicates the rent at which the premises were let on September 1, 1940. Where they were not let on that date, it means the rent at which they were last let before that date; where they were first let after that date, it means the rent at which they were first let.
The Bombay Rent Act, which applies only to private premises, provides that rent in excess of the standard rent is illegal except where an agreement entered into before September 1, 1940 provides for periodic increases. However, it does permit rent increases subject to certain conditions in the case of premises that receive the benefit of improvements or special additions, and premises that are subjected to special or heavy repairs.
With effect from 1987, a landlord has been permitted, subject to certain conditions, to increase the rent on premises in respect of which he or she is required to pay the government, a local authority or a statutory authority any fresh levies (or increase in existing levies) such as "rates, cess, charges, tax, land assessment and ground rent of land."
An amendment to the Act in 1987 provides for an exception to the rule of standard rent. Broadly speaking, this means that the provisions relating to the standard rent and permitted increases do not apply for five years to any premises, the construction or reconstruction of which was completed on or after October 1, 1987. On the expiry of the five-year period, the standard rent applicable to the premises would be an amount equivalent to a "net return of 15 per cent on the investment in the land and building and all outgoings in respect of such premises."
The life of the Bombay Rent Act has been extended around 20 times. In its December 19 judgment, the Supreme Court observed that a perusal of extracts from documents placed on record by the appellants, including reports of several committees and resolutions adopted at the All India Housing Ministers' Conference in 1987 and the Chief Ministers' Conference in 1992, "clearly demonstrates that the pegging down of rents to the pre-War stage and even thereafter is no longer reasonable." The reports referred to by the Supreme Court included those made by the Rent Act Inquiry Committee (1977), the Maharashtra State Law Commission (1979) and the Economic Administrative Reforms (L.K. Jha) Committee (1982).
Some of the points made by the reports and the resolutions were:
* The freezing of rents had deprived property owners of a reasonable return on their properties commensurate with the increase in the cost of living and the cost of building materials. Small property owners who had invested their lifetime savings in houses, partly for earning an income through rents, were hit particularly hard. According to one estimate, in the 1970s, 75 per cent of the landlords were people who were dependent on rent from their properties for their livelihood.
* If rents had not been frozen, new buildings would have been constructed and the proliferation of slums could have been contained in cities such as Mumbai.
* Old and frozen rents bear little relation to present-day maintenance costs, the current returns from alternative forms of investment or the prevailing market rents in respect of new accommodation.
* In cases where rents had remained frozen for five years or more, half the inflation that had taken place since the time of their initial determination should be neutralised.
* The rent control laws had led to the neglect of repairs and maintenance and had virtually frozen the municipal bodies' income from property taxes, which are based on rateable values, which in turn are a function of the prevailing rents.
* The freezing of rents has led to the emergence of practices such as 'key money' (payment of large deposits) that make rented housing less accessible to those who are less privileged.
The Supreme Court judgment cited the hypothetical case, presented by counsel for the appellants, of a landlord who was getting a rent of Rs. 1,200 a year, exclusive of municipal taxes, on September 1, 1940. According to the counsel's calculations, this landlord would receive only Rs. 800 a year in 1996 or 1997 and, as the value of the rupee in 1996 or 1997 was only 1/66th of what it was in 1940, in real terms the annual accrual to the landlord would have fallen from Rs. 1,200 to Rs. 12.12.
The judgment also cited the case of Ram Mahal, a building with 20 residential flats, in Mumbai. The building was bought by one of the appellants in 1955. "According to the appellant... the (present) total gross rent of the building which he receives is Rs. 1,72,032 per annum, while it incurs an annual expenditure of Rs. 1,92,235, consisting of BMC (Brihanmumbai Municipal Corporation) taxes, repairs, ground rent, maintenance charges... and the insurance premium. He is... suffering a loss of Rs. 21,213 every year."
The Supreme Court cited another hypothetical case to make the point that "tenants are, by and large, getting an unwarranted benefit." An assistant of the Union Government posted in Mumbai in 1948 would have received monthly emoluments totalling Rs. 485.50; the same person would be drawing Rs. 11,900 a month in 1997 after the implementation of the Fifth Pay Commission. If it is assumed that the rent he was paying in 1948 was Rs. 100 a month exclusive of repairs, he would be paying Rs. 170 a month in 1997. In other words, his liability on account of rent, reckoned as a proportion of his emoluments, would have fallen from about 20 per cent to 0.9 per cent over these 49 years.
However, the judgment also took note of the fact that landlords who were receiving "unreasonably low" rents took recourse to methods that were "slowly giving rise to a state of lawlessness" and expressed concern over the possibility of this "extra-judicial backlash" gathering momentum.
Unfortunately, the tenants' case appears to have been poorly presented before the court. The State Government was represented by only one advocate at the hearing of the appeals. According to an intervention petition filed by the Action Committee for the Protection of Tenants' Rights, the State Government "did not think it fit to brief the Attorney-General, the Advocate-General or the Solicitor-General (all of whom hail from Mumbai and are personally aware of the situation prevailing in Mumbai) to plead its case."
The Shiv Sena-BJP Government appears to have realised now that it would be politically costly to ignore the interests of the tenants. The statement of objects and reasons annexed to the Rent Control Bill that was introduced in the State Assembly on March 26, 1997 and received the President's assent on March 31, 1997 seems to bear this out. It says: "The conditions requiring control of rents and protection from eviction of all protected tenancies continue to exist." The significance of this assertion can be gleaned from an extract from the statement of objects and reasons annexed to the 1947 Bombay Rent Bill: "The latter Act (the Bombay Rents, Hotel Rates and Lodging House Rates (Control) Act, 1944)... was intended to check an inflationary rise in rents... in areas in which, owing to war conditions, there was an acute scarcity of accommodation... The conditions which led to the enactment of these measures continue... and it is, therefore, essential that effective control should be continued until sufficient progress has been made with building operations to provide adequate and suitable accommodation for the largely increased population of the areas..."
Mumbai's population rose from 29,94,444 in 1951 to 99,25,891 in 1991. Given a population increase of this magnitude and the fact that the availability of land in Mumbai for housing purposes is severely limited by virtue of it being an island, it is difficult to envisage the population of the metropolis being "adequately and suitably" accommodated in the foreseeable future.
The 1998 statement of objects and reasons says:
"It is imperative that... rent control and protection against eviction must continue in a just and fair manner, otherwise there will be enormous social unrest, social strife and disruption... The escalations of rent as structured in the Model Rent Control Legislation cannot be regarded as a fair and just solution to the problem of acute scarcity of accommodation, especially in cities such as Mumbai, Pune...
"The effect of these escalations would increase the burden on protected tenants/occupants... the rent itself would become more than 22 times... if the present burden of property and other taxes, which is on the tenants, is taken into account, the burden... would increase manifold.
"Adopting the rates and structure for escalation together with a rate of return of even 6 per cent would result in an overwhelming body of protected tenants/occupants being unable to meet the increased burden...."
The model rent control legislation provides for fixing the standard rent on the basis of a certain percentage return on the total cost - the market value of land when construction began plus the cost of construction and the cost of any renovations or major repairs that may have been undertaken.
To arrive at the standard rent for any given year, the rent so calculated is to be increased by a certain specified percentage - 4 per cent between 1950 and 1960, 6 per cent between 1960 and 1970 and 8 per cent from 1970 onwards being suggested for Delhi. Charges relating to maintenance, amenities and taxes payable are to be added on a pro rata basis. The neutralisation of inflation to the extent of between 25 and 100 per cent over a period of up to seven years is also envisaged. This would call for a phased increase of the standard rent.
The model law would exempt from rent control all tenancies where the lease extends beyond 20 years and premises carrying more than such monthly rental value (ranging from Rs. 1,500 to Rs. 3,500) as may be specified by a given State. It provides for exemption for 15 years for newly constructed or reconstructed premises and all premises that have been lying untenanted for seven years or more.
The premise that the income earned by Mumbai's landlords from their property has been decreasing as a result of rent control needs to be examined more closely. The pugree system, under which a landlord receives an illicit lump sum payment (which is related to the market value of his premises) every time there is a transfer of tenancy, is prevalent in Mumbai. Besides, landlords have made enormous gains by creating additional floor space and converting residential premises into commercial ones, authorised or otherwise, and the sale of development rights.
The intervention application filed by the Action Committee for the Protection of Tenants' Rights notes that most of the land in the island city (corresponding roughly to the southern two-fifths of Mumbai) is leasehold, the lessors being the State Government, the Brihanmum-bai Mumbai Corporation, the Mumbai Port Trust and other state agencies. The lease rents paid by landlords have increased only marginally, if at all. Property values in the island city appreciate because of the value of land, and this is not the case with old buildings "whose economic life is virtually over," the application says.
As regards the case of Ram Mahal that was cited by the appellants to prove that landlords were getting a raw deal under the rent control regime, the application filed by the Action Committee has an interesting story to tell. According to the application, the present landlord bought the building for Rs. 5 lakhs in 1955; between 1970 and 1998 he permitted ten transfers of premises. "It may fairly be assumed that pugree was received by the landlord," the application states. Also, the landlord has converted two ground-floor flats into commercial premises; one is occupied by a restaurant and the other has been given on tenancy to a relative of the landlord, who has in turn sub-let it to a bank. "Under these circumstances," the application states, "it may be fair to assume that the landlord... has recovered over Rs. 5 crores on the investment of Rs. 5 lakhs."