Rent Agreement is also known as Rental Agreement or Leave and Licence Agreement. Due to high property prices & floating population there is always a huge demand for property on rent. In my previous post on Real Estate, i highlighted 10 Benefits of Staying on Rent. To enjoy these benefits, you have to take a house on rent :). Rent Agreement is signed between Owner and the Tenant. Rent Agreement can signed on a regular stamp paper of Rs 100 / Rs 200. In some places like Mumbai, most of the Rent Agreements are registered in sub-registrar office. Cost of registration is equally borne by the owner and the tenant. Format of Rent Agreement is normally standard and brokers are Single Point of Contact for same. I observed that tenants don’t give too much importance to Rent Agreement clauses. As a thumb rule, you must check clauses of agreement you are signing even if it is short term agreement or not of much relevance. To avoid any future dispute it is important to include following 11 Clauses in Rent Agreement.
Rent Agreement and Imp Clauses
1. Security Deposit: For different cities, value of security deposit is different i.e. no of times the monthly rent. In Mumbai, 10 months security deposit is must whereas in NCR, security deposit of 5-6 months is OK. This security deposit is refundable but i observed that in some cases there was dispute on the same. In Rent Agreement, it was not clear whether security deposit is refundable or non-refundable. You should always mention that “Security Deposit is Refundable“. You may ask for separate payment receipt of security deposit with details of cheque no, date and signature of the owner.
2. Rent is Prepaid or Postpaid: Another grey area in the Rent Agreement. Recently, one of my client vacated the flat and owner demanded rent for last month. He was under impression that he is paying advance rent as he paid one months rent before shifting in the house. Finally after so much hassle and pulling out all the bank statements, he proved that rent was paid in advance. In Rent Agreement, it is usually mentioned that rent will be paid on or before 5th of every month. After some time tenant lose track. You should always mention in Rent Agreement whether Rent will be paid in advance or after the month is over.
3. Lock in Period: These days owners are insisting on clause related to lock in period in rent agreement. Normally Lock in Period is of 6 months but the clause is included smartly to retain lock in period for renewal of Rent Agreement in future. Ideally there should not be any lock in period in rent agreement and owner / tenant can serve one month’s notice to vacate the flat.
4. Penalty for delay in Refund of Security Deposit: This is biggest pain point for any tenant to get refund of security deposit. Usually amount is huge and common excuse of owner is that he has invested the amount and he will refund in a month’s time. Worst part is when owner know that tenant is moving out of city then it is being done intentionally. In Rent Agreement, it should be clearly mentioned that security deposit is due at the time of peaceful possession to the owner by the tenant. If owner fails to refund the security deposit then tenant can retain the possession of flat without paying any rent. Owner is also liable to pay compensation of Rs 1000/= per day till security deposit is refunded for causing inconvenience to tenant.
5. Maintenance Charges: Another point of dispute. It should be clear in Rent Agreement that who will bear the maintenance charges and whether it is included in rent or not. It is beneficial for owners to keep maintenance charges separate from rent as it will help in taxation purpose. This arrangement will reduce their income from house property. For example, if rent is Rs 20k and maintenance is Rs 3k. In case owner charge Rs 23k as a rent then this amount will be income from house property. Suppose maintenance is charged separately then income from house property is Rs 20k.
6. Non-Maintenance Charges: Apartment associations keep charging additional amount for corpus fund, sinking fund, painting of apartment etc. All these heads should be borne by the owner only. Reason being, payment under these heads add long term value to the property. These charges cannot be attributed as maintenance charges. In Rent Agreement, it should be clearly mentioned that non-Maintenance Charges will be borne by the owner.
7. List of fittings and fixtures: As a tenant, in Rent Agreement you should always include the fittings and fixtures provided by owner in working condition. For example No of fans, Geysers, Tubelights, AC’s, CFL’s etc. Tenant should handover all fittings and fixtures in working condition at the time of vacating the flat. All these details should be included in the Rent Agreement.
8. Govt Taxes: There is dispute between owner and tenant on who will bear the Property Tax and other Govt / Municipal taxes. There is no right or wrong answer as the tenant is occupying property therefore depending on mutual understanding these taxes can be borne by either party. Mostly these taxes are borne by the owner. There should be clause in Rent Agreement regarding the same.
9. Wear, Tear and Damages: In Rent Agreement, you should include a clause that tenant is only liable to bear the cost for damages which are not part of natural, reasonable and normal wear & tear of the property. With ageing of property, natural wear and tear is but obvious. Normally there is a dispute between owner and tenant only on wear, tear and other damages.
In many cases, owners include clause to deduct cost towards painting of the flat from security deposit. This is open ended clause and it should be quantified by mentioning absolute value (max). Normally cost of painting is limited to Rs 20,000. Therefore it should be clarified and mentioned in the rent agreement.
10. Terms for Renewal: To avoid any dispute in future, there should be a clause in Rent Agreement regarding renewal of agreement if both parties mutually agree. This clause include % increase in rent, deposit etc.
11. Brokerage: Last but not the least, it is not beneficial for the brokers, real estate agents etc if tenant stay for longer period. Therefore they came out with an innovative idea of charging brokerage at the time of renewal of Rent Agreement. Secondly, owners would like to keep brokers in good humor as they have to deal with them in future. In short, You should discuss brokerage with owner and include a clause in Rent Agreement that brokerage is one time. At the time of renewal of agreement, there will not be any payout to broker. An owner may pay to maintain his relation with broker.
I received feedback from my readers that i don’t write much on rental properties therefore i have decided to write regularly on rental properties. Hope you liked the post. If i missed any crucial point, you may add the same through following comments section.
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