Effects of Laws on Rent Control

-A case study of Mumbai’s Real Estate

Student’s Name: Module Leader:

Harsh Patel Mr. Satyajeet Panigrahi
312016007

School of Law,
Auro University,
Surat.
 INTRODUCTION
The number of rental homes in India has decreased considerably over the years, especially in
Mumbai, for numerous reasons, including the nature of the absurd rules and regulation
governing rent inflation and deflation. In Mumbai, a restrictive rent control law collecting
rents for protected properties leads to formal affordable housing shortages and land-market
distortions. At the time of first letting, the limit, known as the regular rent, it only permits 0ll
annual rises at rates far below the inflation rate thereafter. The paper explains how “First
generation" rental regulation in Mumbai has caused the current rental stock to be degraded,
almost preventing new housing being built for rent in the area, and led to informal activities,
such as pagdi or key money.

GENERAL RENT CONTROL LAWS

Rental control regimes around the world have progressed over the years from rigid, during
the World War II, to more practical controlled types. 1 The first was known as first generation
rent controls and the later was called second generation rent control. 2 Most economists
believe that first generation rent control hurt more rather than do good. First Generation rent
controls were issued specifically to aid the tenants during the World War II since the rates of
rents were pretty steep.3 Though they were supposed to be a wartime measure, they were held
even after the war in most of the cities. Some cities in low-income and low-middle-income
countries – like Mumbai, Cairo and São Paulo – have been subjected to similar restrictions at
the same time.4
Rent controls of first generation are defined by rents which remain unchanged once they have
been set.5 Any increase is only approved in extremely rare cases. Rents are usually held to a
level lower than the level of rent market rates. Additionally, the amended rents are far below
market rents over time. Furthermore the occupant is secured from eviction by first generation
rental controls.6 The tenant and his/her descendants will in fact continue to reside forever on a
rental decided at the rental property governed by rental agencies.7

1
Rent Control, Walter Block https://www.econlib.org/library/Enc/RentControl.html (last visited: 01.12.2020)
2
Ibid.
3
Mora-Sanguinetti, Juan. (2011). The Regulation of Residential Tenancy Markets in Post-War Western Europe:
An Economic Analysis. European Journal of Comparative Economics. 8. 47-75.
4
Ibid
5
Basu, K., & Emerson, P. (2000). The Economics of Tenancy Rent Control. The Economic Journal, 110(466),
939-962. from http://www.jstor.org/stable/2667859 (Last visited: 30.11.2020).
6
Ibid
7
Ibid
Rate-controlled tenants only pay a fraction of market rent and can't be evicted by the
landlord.8 Indeed, controlled units will be excluded from the rental housing market; as far as
the rent they pay and the market rent are concerned, tenants in protected units are subsidized
by their property owners. Low returns make maintenance of the property expensive for the
owner.9 There is also a discouragement to add value because this does not reflect well in the
returns of the owner.10 Properties gradually decay and assume a slum-like appearance. Low
profits are, inevitably, a disincentive to more rental investment.11

RENT CONTROL ACTS IN MUMBAI

Rental control was a factor in India, when it was implemented in order to protect tenants from
inflation and evictions, after the First World War. 12 The Bombay Rent, Hotel and Lodging
House Tasks Control Act of 1947 controlled rent in Mumbai for several decades after the
Second World War.13 It expired in 1973, but was extended consequently until 1999.
According to the 1947 Act, rents in leased properties should continue on or below the regular
rents decided by a court or the supervisor or by the rents on 1 September 1940 for the
properties in question. The said act of 1947 severely limited the rental growth rate and
allowed for minimal rises in compensation and improvements carried out by landlords, where
the increase was often decided by courts. 14 The Bombay Rental Act was amended in 1987,
meaning that regular contracts for rent would not apply to premises built or restored after
October 1987.15
There were unintended implications of the Bombay Rent Act.16 Reluctance by the owners to
safeguard their property under rent control resulted in a preference under the Indian Easement
Act of 1882 for short-term contracts (11 months) under which the owner would pay the
license fee for the right to occupy, thus bypassing all rental issues. 17 Those contracts for
8
Wadhva, K. (2002). Maharashtra Rent Control Act 1999: Unfinished Agenda. Economic and Political Weekly,
37(25), 2471-2475, from http://www.jstor.org/stable/4412277. (Last visited: 30.11.2020).
9
Ibid, pg.no. 2472
10
Ibid
11
Ibid
12
Bertaud, Alain (2011), Mumbai FAR/FSI Conundrum: The perfect storm: the four factors restricting the
construction of new floor space in Mumbai, (last visited: 30.11.2020) at
http://alainbertaud.com/wpcontent/uploads/2013/06/ AB-Mumbai-FSI-ConundrunRevised_June-2013_kk-ab1.
pdf
13
Ibid, at pg.no. 5
14
Pethe, Abhay, Sahil Gandhi, Vaidehi Tandel and Sirus Libeiro (2012), “Anatomy of Ownership and
Management of Public Land in Mumbai: Setting an Agenda Using IAD Framework”, Environment and
Urbanization Asia Vol 3 No 1, pages 203–220
15
Ibid.
16
Rajack, Robin, Abhay Pethe, Peter Ngau and Shrikant Barhate (2013), “The Political Economy of Urban Land
Management: Evidence from Mumbai and Nairobi”, Annual World Bank Conference on Land and Poverty.
17
Id at 16.
leases and licenses were thriving and operating at market rates that were more or less
prevalent. In 1973, the Rent Act was amended to make both leave and licenses regulated,
acknowledging that short-term leave and licenses became common and without doubt
encouraged by the possible success of the transfer. 18 Over a fraction of the former fee, former
license holders might apply to relieve and create standard rents.19
Another outcome of the act was an increase in key money or pagdi practices (which means
turban in Hindi and implies honor to the person receiving it). 20 The new tenant pays a lump
sum under this plan, which is related to the market value of the rental property for change of
tenancy (normally about 80 per cent of the market purchase price of property in the same
locality).21 One-third of this sum shall be payable by the landlord, and the rest by the
outgoing occupant, to alter the name of the rent receipt. 22 These proportions are consistent
with the rental law power structures. Incidentally, tenanted properties may be inherited to the
landlord without payment.

Existing Act
It is a very well-known fact in the real estate market and legal world that the rent law can
vary from city to city. The Maharashtra Rent Control Act was passed in 1999.23 The act
extends to the whole country and applies a single rent control law to each city in
Maharashtra.24 Under this Act, the court shall set and fix standard rent rates. The previous
Bombay Rent Act would not change drastically. The standard rent remains limited and rises
are limited.25 Standard rent under this Act is defined as the rent calculated in accordance to
the previous Rent Acts plus 5%, or the rent of properties let up on or before that date on or
after 1 October 1987 or for those let up after this date, the rent of properties first let down.26
In such cases, it should be remembered that the rent later became the normal rent. 27 Courts
usually, if requested to set rent, make it 12.5% annually of construction cost plus land cost by

18
Phatak, Vidyadhar (2002), “Developing Land and Real Estate Markets: The Case of Mumbai Metropolitan
Region”, reprinted in Mumbai Reader 07, Urban Design Research Institute, Mumbai
19
Ibid
20
Patel, Shirish (2005), “Housing Policies for Mumbai”, Economic and Political Weekly Vol 40, No 33, pages
3669–3676
21
Ibid at pg. no. 3674
22
Ibid see Table 2.4.
23
Maharashtra Rent Control Act, 1999.
24
Id at 16
25
Ibid
26
Wadhva, K. (2002). Maharashtra Rent Control Act 1999: Unfinished Agenda. Economic and Political
Weekly, 37(25), 2471-2475, from http://www.jstor.org/stable/4412277. (Last visited: 30.11.2020).
27
Id at 24.
the date of construction.28 As from the date that the regular loan is set the 1999 Act provides
for an annual increase of not more than 4%. 29 When property owners make special additions
or changes, rents may be increased by 15% of the expenses.30 The act protects tenants from
eviction on unfair grounds; it recognizes pagdi as legal; and it exempts leave and license
agreements from rent control.31
The current Rent Control Act has not relieved property owners and continues to imply the
reduction in rents at very low annual rates. No effort is being made to develop a gradual
parity between regulated rents and market rents or to decommission property whose tenants
do not wished to be protected by the Rent Control Act.

CONSEQUENCES OF SUCH A RENT CONTROL LAW IN MUMBAI

Owing to the difficult eviction and successive generations of tenants living in the same rental
premises and strict city rent controls; have caused the current rental stock to continue to
dilapidate , "muddle property rights" and does not incentivizes new investment. 32 Very low
returns to property owners have adjusted their incentives to retain their land. 33 In some cases,
tenants undertake repairs and maintenance of their premises; but since repairs and
maintenance are legally the responsibility of landlords, the condition of many rent-controlled
properties is dismal.34 The persistent dilapidation of properties coming under the purview of
rent control act has prompted the state government set up a Mumbai Building Repairs and
Reconstruction Board.35 This body is responsible for collecting "repair cess" from such
properties. Which are also knows as "cessed properties", and undertakes to make necessary
structural repairs or reconstruction.
The city had approximately 16,000 buildings cessed in March 2008. 36 Finally, the Board's
failure to carry out the repair ultimately prompted the State to allow private developers to

28
Basu, Kaushik and Patrick M Emerson (2000), “The economics of tenancy rent control”, The Economic
Journal Vol 110, No 466, pages 939–962
29
Ibid at pg. no 945
30
Ibid.
31
Ibid at pg. no. 956
32
O’Hare, Greg, Dina Abbott, and Michael Barke (1998), “A Review of Slum Housing Policies in Mumbai”,
Cities Vol 15, No 4, pages 269–283.
33
Ibid
34
Ibid
35
Pethe, Abhay, Sahil Gandhi, Vaidehi Tandel and Sirus Libeiro (2012), “Anatomy of Ownership and
Management of Public Land in Mumbai: Setting an Agenda Using IAD Framework”, Environment and
Urbanization Asia Vol 3 No 1, pages 203–220
36
Maharashtra Housing and Area Development Authority (n.d.), History, at https://mhada. maharashtra.gov.in/?
q=board_
refurbish the land cessed in exchange for certain property benefits. 37 However these measures
were only successful intermittently and many rent-controlled buildings continue to decline
apart from the detrimental impact on the city.38
The consequence of rent controls gave birth to undefined rights on property, with extremely
difficult eviction and generations of tenants residing in the generations of tenants residing in
the rent controlled premises.39 This stopped these units from being transferred on to the
formal markets. Informal practices such as the pagdi system have arisen after such a lock-in.
landlords have the option of selling the whole house, but obviously finding the buyer for
leased buildings practically impossible for the said rent controlled properties.40
Reduction in profitability as a result of perhaps frozen low rents has resulted in a breakdown
in the provision of new private rental properties.41 It can be said as a remark that formal rental
housing is virtually at ground zero, and residential buildings are almost largely for
ownership.42 Rent control beneficiaries therefore are established protected tenants, at the
expense of property owners who are in effect subsidizing tenants and more significantly, at
the expense of the increasing population, who are denied some form of rental
accommodation.43
While leave and license agreements in the formal housing sector have been growing since
1999, the numbers are limited and invariably cater to the upper income groups. 44 The leave
and license has not yet been extended could be due to the concern that the government might
again, as it has done before, declare leave and licenses to be subject to rent control.45

CONCLUSION AND SUGGESTIONS

This part of thе articlе suggеsts somе dirе nееd for rеforms to rеvivе thе hеalth of rеal еstatе
in Mumbai which has bееn dеtеriorating from dеcadеs. This part of thе articlе has bееn

37
Indian Express (2014), “MHADA to monitor redevelopment of cessed buildings”, 19 July, available at
http://indianexpress.com/ article/cities/mumbai/mhadato-monitor-redevelopment-ofcessed-buildings/.
38
Ibid
39
https://cleartax.in/s/rent-control-act Updated on Mar 05, 2020.
40
Wadhva, Kiran. “Maharashtra Rent Control Act 1999: Unfinished Agenda.” Economic and Political Weekly,
vol. 37, no. 25, 2002, pp. 2471–2475. JSTOR, www.jstor.org/stable/4412277. Accessed 7 Dec. 2020.
41
Rent Stability in the Private Rented SectorFinal Report, 2014. Pg. no 38
42
Ibid
43
Ibid
44
Patel, Shirish (2013), “Life between Buildings: The use and abuse of FSI”, Economic and Political Weekly
Vol 48, No 36, pages 68–74.
45
Ibid at pg.no.71
dеrivеd from many othеr viеws that bеliеvе that rеnt control laws have and will always havе
irrеvеrsiblе damagе to thе rеal еstatе markеt and еconomics of Mumbai.
Firstly, rigid first-gеnеration rеnt controls of thе sort that еxist in Mumbai havе had
catastrophic rеpеrcussions for towns. Rеforms should also concеntratе on two objеctivеs: to
updatе currеnt rеntal housing stock and to includе incеntivеs for invеstmеnt in nеw rеntal
housing. Thеsе two goals includе a rangе of tactics that takе into account thе nееds of all
major stakеholdеrs. World еxpеriеncе also shows that good changеs arе thosе that arе bеing
еnforcеd progrеssivеly. At prеsеnt, housеholds bеlonging to diffеrеnt lеvеls of incomе
rеcеivе rеnt-control insurancе. Unfrееzing and updating еxisting rеntal housing units could
continuе by withdrawing protеction from thosе for which it is not justifiеd. For this rеason, a
mеans tеst can bе usеd to assеss thе prеssurе on thе occupant of thе markеt rеnt and how it
appliеs to his incomе. Tеnants that do not nееd protеction may bе sеparatеd into thosе who
havе chargеd pagdi aftеr 1999. Sеcurity may rеmain for thosе who paid pagdi for a cеrtain
numbеr of yеars from thе datе of paymеnt aftеr which it cеasеs to еxist. For thе othеrs,
protеction would bе еliminatеd to incrеasе rеnts gradually but stееply, with high ratеs of
growth, until thеy rеach markеt ratеs. In casе rеsidеnts nееd to bе covеrеd, policiеs will
proposе plans for co-opеrativе managеmеnt and modеrnization of thе rеntal units bеtwееn
landlords and tеnants. Policy may also bе implеmеntеd to providе rеsidеntial vouchеrs to
nееdy rеntеrs in ordеr to discouragе thе ownеr from subsidizing thе tеnant.
Sеcondly, sеcond gеnеration rеnt controls should bе passеd, with rеnts rising stеadily, bеyond
inflation, bеforе a dеfinitе, fair proportion of thе markеt rеnts is mеt. Sеcond-gеnеration rеnt
controls would also mеan that rеnts can bе rеsеt bеtwееn tеnanciеs.
Thirdly, In thе casе of nеw rеntal housing, thе rеturns should providе rеturns lucrativе
еnough to еncouragе intеrеst in rеntal housing. Еncouraging thе construction of rеntal
housing nеcеssitatеs crеdiblе lеgislation so that no nеw rеntal construction can еvеr bе
subjеct to rеnt control and rеntal housing is not discriminatеd against by mеans such as
highеr propеrty taxеs. In addition, any upgradе should bе dееmеd to bе еqual to a nеw
building and as such, thе rеnt control should bе abolishеd. Much of which would еntail thе
passagе of a nеw statutе to rеplacе thе еxisting onе; that would not bе achiеvablе by thе
еxеcutivе ordеrs of thе prеsidеnt, bеcausе thеy could еasily bе rеpеalеd by anothеr
govеrnmеnt.
Fourthly, any ovеrhaul of thе currеnt rеnt control systеm must bе rеasonably еasy to еnforcе.
Thе problеm is that of dеmocratic viability. Wе should еxpеct strong rеsistancе from possiblе
losеrs – that is, from tеnants subsidizеd by thе еxisting schеmе, еspеcially rich and powеrful
pеoplе who cannot pass thе tеst of mеans to apply for continuеd and largе rеnt subsidiеs.
Hеrе, maybе thе dangеr of placing thеir namеs in thе public domain can sufficе to supprеss
thеir opposition to thе movе.