Abstract

Rent control laws have been implemented in many countries to protect tenants from high rents and ensure affordable housing for all. The Indian State also adopted a socialist outlook post-Independence, which reflected a deep-rooted skepticism of markets and incumbent elites to bring about equitable outcomes. As a result, various rent control laws were enacted in states across the country to protect the rights of tenants and prevent elites from charging exorbitant rents. However, the unintended consequences of these laws have led to the shrinkage of the affordable rental housing market, effectively defeating the very purpose they sought to achieve. In this context, the authors have explored the impact of rent control legislation across states in India and shed light on the economics of price controls. This work offers valuable insights into the challenges of regulating rental housing markets and the unintended consequences of well-intentioned policies. The authors shed light on the economics of “price controls”, a manifestation of which is rent control. Thereafter, the authors lay out the common threads that run through rent control legislation across states in India and their impact on the housing market. The manner in which the rent control regime has distorted incentive structures leads to sub-optimal outcomes for all stakeholders. To address these challenges, the authors suggest abolishment of the rent control regime, replacing it with a regime that clearly defines the rights and obligations of tenants and an effective and efficient mechanism for enforcement of such rights. Such reforms would promote the availability of affordable rental housing in cities, which are important drivers of economic growth. The authors conclude by enjoining readers to critically view policies (and by extension, laws) through a wide lens so that lessons from the past inform India’s future policymaking.

1. Introduction 

Laws are a means of giving effect to inter alia the economic, social, and political objectives of the State. It naturally follows that they have been one of the primary means of giving effect to the vision of the Indian State [1] post-Independence. The statesmen of the time embarked on an ambitious project to transform Indian society and economy in a manner that  in their view/opinion would foster equitable growth and reduce social and economic inequality. At the heart of this project lay the Indian Constitution (“Constitution”), which reflected  the aforementioned ambitions. One of the pervasive principles enshrined in the Constitution was “socialism”. Simply put,socialism is a form of government where the means of production i.e., land, labour , and capital are, in theory, held by all its citizens. Although the word was formally added to the Preamble of the Constitution, by the42^ndAmendment in 1976, it was present in spirit right from the Constitution’sinception. In this regard, as far as land was concerned, states across the country introduced a raft of “land-reform” legislations immediately after Independence with a focus on agrarian landholding. This was with a view to redistributing land rights from the incumbents (e.g., zamindars), in whom landholding was concentrated to the less-privileged (i.e., peasants), who were seen as deserving a greater degree of rights with respect to the land they worked. Such was the State’s zeal to ensure the success of its land reform program that in the face of High Courts across the country holding such laws to be unconstitutional, itamended the Constitution soon after it came into force to make inter alia such land reform legislations immune from challenges before Courts. Broadly speaking, a deep-rooted scepticism  of markets and incumbent elites (in whom the property was vested disproportionately) to bring about equitable outcomes underlay the legislative policy of the Indian State post-Independence. It was felt that the incumbent elites would use their power to manipulate markets to preserve their position and impede any redistributive endeavor. 

As far as urban areas were concerned, one of the domains of State intervention was the rental housing market. Urban areas were poised to be one of the primary drivers of growth and could reasonably be expected to see a massive influx of migrants from smaller towns and rural areas in search of opportunities. A well-functioning rental market was required to ensure that migrants were able to find accommodation. Here too, the scepticism  of the State towards markets and elites came through. It was felt that left to their own devices, the elites would maximize their profits by charging exorbitant rents, rendering it impossible for those seeking rental accommodation to avail the same. As such, states across the country (in whom the power to make laws relating to “land” vested in the Constitution) adopted/enacted laws to protect the rights of tenants. While many of these legislations dealt with the rights of tenants and landlords more generally, the common thread across them was the element of “rent control,” which shall be the focus of this post.

2. The Economics of Rent Control 

Before proceeding further, it is apposite to note the following propositions drawn from economics from which this post flows: 

i) The market forces of demand and supply interact to arrive at theprice for a good or service.

ii) Marketsusually function well. 

iii) Governments should onlyintervene in the event ofmarket failures, which are of four types – public goods, externalities, information asymmetry and concentration of market power/monopoly.

iv) Human beings respond toincentives. 

As mentioned above, governments should intervene only when there is a market failure and if the proposed intervention leads to better outcomes than it would have been reached without them. However, as the concept of the “welfare state” started gaining traction in the early tomid-19^thCentury and the scope of government functions expanded, governments began to intervene even in cases where there was no market failure. This was coupled with an effort to deal with shortages in the supply of goods and services in the aftermath of the two World Wars through various interventions. One such intervention was “price control,” which is an economic policy of placing a minimum floor/base or maximum ceiling/cap on the price that may be charged for a good or service. This effectively leads to situations where the price is set not by the interaction of market forces but by the State, which imposes the control.Experience has shown that this has a distortionary effect on markets – while price floors have led to surpluses in the availability of goods and services, price caps have led to shortages.  Of the two controls, price caps are a more common phenomenon. More often than not, such price caps, which are hallmarks of socialist policy, are inevitably lower than the price that would have been set had the market forces been allowed to interact. Despite their distortionary effect on markets, there is still some debate about the desirability of price controls among economists. In the Indian context, price controls are set through laws (e.g. rent control laws, which shall be dealt with in further detail in this post) and executive orders (e.g. “Control Orders” relating todrugs,jute andsugarcane) and have been a mainstay in our policy ecosystem. It is pertinent to note that theMinimum Support Price (“MSP”) for certain agricultural products, which received widespread publicity when the now-repealed “Farm Laws” were published, is also a form of price control. So were the caps set on the prices of theCOVID-19 vaccines. 

Coming torent controls, while it has its origins in AncientRome,  rent control proliferated in modern times around the First World War mainly as a tool to tackle housing shortages. As far as India is concerned, the British introduced such controls in the presidencies of Bombay and Calcutta between 1918-1922. As mentioned above, post-Independence, most Indian states enacted or adopted rent control legislation. This was with a view to prevent landlords from charging extractive rents and enabling the provision of cheap and affordable housing to migrants. While these legislations have undergone change over the years, they still remain in force in major cities in the country.

3. Salient Features of the Indian Rent Control Legislation 

In this context, it is important to examine the salient features of rent control legislation in India, which are as follows: 

a. Maximum Rent Limits: Rent control laws set a limit on the maximum rent that landlords can charge their tenants. This cap may be fixed by the government or may be determined by a formula based on factors such as the size of the unit, the age of the building, or the prevailing market rents in the area. For example, in Mumbai,the Rent Control Act of 1999 limits the maximum rent that landlords can charge their tenants to 8% and 10% of the capital value of the property. 

b. Tenant Protection: Rent control laws in India provide certain protections to tenants, such as vesting the right to renew their lease, the right to challenge rent increases and protection against eviction. For example, in Chennai, theTamil Nadu Buildings (Lease and Rent Control) Act of 1960 provides that landlords cannot refuse to renew a lease without a valid reason recognized by the legislation, and tenants can challenge rent increases by filing a petition with the Rent Control Court. For example, in Delhi, Section 15 of theDelhi Rent Control Act of 1958 provides that landlords cannot evict their tenants for reasons other than those mentioned in the said Act, such as non-payment of rent or violating  the lease terms. 

c. Rent Increase Restrictions: Rent control laws often restrict the extent to which landlords can increase the rents of their tenants. For example, in Kolkata, Section 18 of thethe West Bengal Premises Tenancy Act of 1997 provides that the rent that was initially fixed can be raised by 5% every three years. 

d. Fair Housing Standards: Rent control laws in metro cities often require landlords to ensure that their properties adhere to certain standards to ensure that they are habitable. For example, in Chennai, the Section 17 of the Tamil Nadu Buildings (Lease and Rent Control) Act of 1960 requires landlords to provide basic amenities, such as running water, electricity, and sanitation facilities.

e. Establishment of Rent Control Authorities: Rent control laws establish Rent Control authorities to oversee the implementation of these laws and to resolve disputes between landlords and tenants. For example, in Bangalore, the Karnataka Rent Control Act of 2001 established the Karnataka Rent Control Tribunal to hear complaints and disputes relating to rent control. Such authorities also have the power to fix the rent payable in the case of disputes between the tenant and landlord.

f. Applicability and Exemptions: The application of rent control laws is circumscribed such as: 

i) Territorial Limits – For example, Section 1 of thethe West Bengal Premises Tenancy Act, 1997 is applicable within the territorial limits of the Kolkata Municipal Corporation (“KMC”), Howrah Municipal Corporation (“HMC”) and municipal areas within the meaning of the West Bengal Municipal Act, 1993. The state government has the power to extend its application to other areas by notification.

ii) Quantum of the Rent drawn – Premises drawing rent below a certain monetary threshold may be covered. For example, the Section 3 of theWest Bengal Premises Tenancy Act applies to premises let out (A) for residential purposes carrying less than Rs. 2,000 as rent and (B) for non-residential purposes carrying less than Rs. 3,000 as rent, if situated within KMC or HMC limits. In all other places where the Act applies, premises carrying rent less than Rs. 1,000 are covered.

iii) Exemption to Government property – One exemption that is largely uniform across such laws are buildings owned by the government or public sector undertakings, which are governed by thePublic Premises (Eviction of Unauthorized Occupants) Act, 1971.

g. Caps on security Deposits: Rent control laws in India may regulate the amount of security deposit that landlords can charge their tenants. For example, under the Section 22, Delhi Rent Act, 2020, landlords of commercial properties areallowed to request a security deposit of a maximum of two months’ rent while for non-private properties, the security deposit can be up to one month’s rent. InMumbai, according to section 11 of the The Model Tenancy Act, 2021 security deposits cannot exceed two months’ rent in the case of a residential property and six months in the case of a non-residential property.

4. Effects of Rent Control Legislation in India 

As mentioned before, while there is some debate about the merits of price controls, there is consensus among economists across divergent schools of thought about theundesirability of rent control. Swedish economist Assar Lindbeck, known for his socialist leanings, has gone as far as saying that “rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.” 

In the Indian context, the negative consequences of rent control are well documented, especially with regard  toMumbai. It is one of the factors that have driven upreal estate prices in thecity. The experience of other major Indian cities with rent control is similar, if not identical, to Mumbai. It must beremembered that humans respond to incentives and the incentives set by the rent control regimes in various states are largely the same. The permissible rates of rent revision are much lower than the prevailing rate of inflation and have acted as a disincentive to landlords to make improvements in the premises leading to fall in their value. Further, given that rents have frozen, landlords holding vacant premises have been dissuaded from letting out their premises as doing so would be economically unviable. This is reflected in data from 2011 Census of India, which demonstrated asteep decline in the share of urban rental housing from 54% in 1961 to 28% in 2011. The situation has been exacerbated by the long pendency of tenancy disputes before courts/tribunals constituted specifically for this purpose. This dissuades landlords further from letting out premises, since quick resolution of disputes, in the event they arise, are a remote possibility. Further, given that there is a dearth of affordable housing in the market due to rent control, demand has gravitated to the uncontrolled housing market, where housing is in comparatively shorter supply, driving up prices in that segment. Finally, developers and landowners in cities have no incentive to build affordable housing and have instead taken to building housing projects in the premium or luxury segment targeted at the High-Income Groups. 

Every stakeholder is a loser from this regime – house owners are deprived of fair rent at market rates they would otherwise have been entitled to, existing tenants are living in premises that are in a dilapidated condition, prospective tenants are deprived of sufficient supply of affordable housing, and the governments are deprived of property tax (which is linked to value of the property, which in turn is linked to their condition).

5. Conclusion 

As demonstrated above, the system of rent control has several undesirable unintended consequences on the housing market in cities. It is reiterated that cities are a major contributor to economic growth, spurred in large part by migrants, who move to cities in search of better opportunities and for whom availability of affordable housing is essential for sustenance and high productivity. 

This begs the question of how we move away from the rent control regime. The answer lies in putting in place a regime where the rights of both, the landlord and tenant, are clearly defined and an efficient adjudicatory mechanism is put in place for enforcement of such rights when disputes arise, without any intervention on fixing of rents. In this regard, theModel Tenancy Act, 2021 (“Model Law”) published by the Union Government was a step in the right direction, ticking most of the boxes. While the Model Law still empowers the Rent Authority to determine “revised rent” on an application by either the landlord or tenant in case of a dispute, the statutory cap on revision of rent has been done away with. Although the Model Law may not beperfect in all respects, it is a good place to start. However, given that land is in the legislative domain of the states under the Constitution, the Model Law, as the name suggests, is purely recommendatory and the onus is on the states to implement the law. Unfortunately, as of July 2022, only4 states have adopted the Model Law. Abolition of rent control, after all, is a sensitive issue. While the benefits of such a move are dispersed (across a large group seeking rental housing in cities), the losses are more concentrated (among existing tenants of rent-controlled premises). Since the latter group is smaller and more clearly identifiable, they have been able to organize themselves into tenant associations to assert their rights, control the narrative and prevent any policy shift. These associations have been more effective in having their voice heard. It is incumbent on the states to engage with these groups, address their concerns and shift the narrative by emphasizing how the benefits of a move away from rent control far outweigh the benefits. Here, the role of the larger legal and policy community in laying the ground for a policy shift cannot be emphasized enough. 

Further, it also must be noted that a shift away from rent control must be accompanied by a focus on devising an effective dispute resolution mechanism to resolve landlord-tenant disputes. The general inadequacy of judicial capacity in India extends to tenancy disputes as well. Despite the setting up of specialized fora for resolving such disputes, pendency remains inordinately high and has contributed to the shrinking of the rental market. The answer to this might lie in giving parties to tenancy agreements the option of having their disputes adjudicated in arbitration instead of approaching the authority prescribed under the Act. The Supreme Court inVidya Drolia has held that landlord-tenant disputes are arbitrable except in cases where a forum is specified under a special law (e.g. Rent Controller under rent control legislation). Any new law governing tenancies can allow parties the option to opt out of the dispute resolution mechanism prescribed thereunder and go for arbitration. While higher costs involved in arbitrations may inhibit tenants from opting for it, limits can be set on various heads of cost such as arbitrator’s fee depending on the value of the tenancy to make arbitration viable. Further, the landlords may be mandated to pay a larger share of the arbitration costs in general and the entire share of said costs in cases where they suffer an award unless circumstances warrant otherwise. The time-bound nature of arbitrations may also make it an attractive proposition for the landlord as well as the tenant. On the whole, it is reasonable to posit that such a regime would lead to better outcomes. The finer details of such a regime can, of course, be crystallized through consultations. 

To conclude, at a broader level, the authors hope to leave the readers with three takeaways: 

Firstly, the analysis of laws should not be restricted to constitutionality. This is a fallacy the legal fraternity is prone to. While the constitutionality of a law is a very important test, many laws, which are otherwise constitutional, still lead to suboptimal outcomes. Rent control laws, which, despite being in furtherance of a Constitutional objective, have led to negative economic and sociological consequences, are a point in case. To do so, the legal fraternity needs to equip itself with frameworks to analyze policy decisions (and by extension, laws) through a wider lens.

Thesetwobooks are a good place to start.  

Secondly, policy decisions and laws should not be judged on intentions but on outcomes. Many laws, while well-intentioned, have had a deleterious effect in reality. This holds true not only with regard to rent control laws but a catena of legislation. Further, many of these outcomes, though unintended, were entirely anticipatable. It is not enough to fall back on the cliched Indian adage that “policy is good but the implementation fell short”. Implementation and unintended consequences, after all, have to be factored in at the time ofpolicy-making. 

Finally, it is now amply clear that the Indian State took on more responsibilities than it could deliver effectively and efficiently. This is true across domains. We must reimagine the role of the State and the functions which it should (and should not perform) perform. It is beyond dispute, though, that the delivery of justice is an essential sovereign function that cannot be divested. Here too, thependency of cases which plagues our judiciary leaves a lot to be desired. It is, therefore, essential that we embrace alternate dispute resolution mechanisms over which the judiciary can exercise a regulatory function, so that cases are disposed of at a faster rate while ensuring that justice is done. For pending disputes, settlement through mechanisms such as Lok Adalats should be encouraged. 

India is about to enter an epoch oftremendous opportunity. To make the most of it, it is important that we learn from our mistakes and ensure they are not repeated. In doing so, the legal community has very important role to play. Therefore, it is essential that we equip ourselves with diverse frameworks to analyze past policies and propose new ones. It is hoped that this post plays a part in setting us on this path. 

Endnotes

[1] The term “State” for the purposes of this post refers to the Republic of India and includes the “states”, i.e., the federal units which together constitute the State.

Disclaimer 

The views, thoughts, and opinions expressed in the Blog Post belong solely to the Authors, and not necessarily to their employers, organizations, committees, or other groups or individuals to which they are affiliated.

About the Authors 

Mr. Srinjoy Bhattacharya is a Principal Associate in Dispute Resolution practice group at Khaitan & Co., Kolkata office.

Ms. Parishti Kaushik is a third-year law student at Gujarat National Law University and an Associate Editor at IJPIEL.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Muskaan Singh

Senior Editor: Abeer Tiwari

Associate Editor: Parishti Kaushik

Junior Editor: Ishaan Sharma

Preferred Method of Citation  

Srinjoy Bhattacharya and Parishti Kaushik, “Rent Control Laws in India – A Case of Dissonance between Expectation and Reality” (IJPIEL, 23 March 2023) 

<https://ijpiel.com/index.php/2023/03/23/rent-control-laws-in-india-a-case-of-dissonance-between-expectation-and-reality/>