Rent Agreements & Indian Law: A Step-by-Step Drafting Manual for Legal Experts

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A proper property rental decision requires careful consideration from both landlords and tenants. Constructing and drafting a reliable rent agreement stands as a fundamental requirement for finishing this procedure. A rent agreement functions as a protective measure that explicitly establishes the conditions of both parties' duties as well as their privileges. Rent agreements in India are supported by legal frameworks including the Indian Contract Act 1872 and the Transfer of Property Act 1882, and the Indian Registration Act 1908. The following post offers easy-to-understand instructions for creating a rent agreement while outlining its necessary components, along with reasons for correct agreement creation. The following section will present methods to prevent conflicts or disputes from arising between either the landlord or the tenant during the terms of their agreement.

What is a Rent Agreement?

A rent agreement represents the written documentation of conditions under which a property owner (landlord) establishes a relationship with a person who seeks to live in or use their property (tenant). This agreement contains every essential detail about the rental terms, including the amounts paid, and lengths of time, and ownership obligations and privileges. A specific purpose determines the preparation and execution of these agreements, including residential, commercial, residential-cum-commercial and industrial applications..

Indian Contract Act, 1872

Chapter 2 of the Indian Contract Act specifies what contracts are, which are voidable contracts and void agreements. Section 10 of the Act specified that all Agreements are contracts if they are made by the free consent of the parties who are competent to enter into a contract with a lawful object, which is not expressly declared to be void. In simple words, an agreement subject to ratification by others who are not parties to the contract, the contract itself is not a conclusive contract as decided by the Hon’ble Supreme Court in the matter of M.V. Shankar Bhat Vs Chaude Pinto (dead) by LRs reported in (2003) 4 SCC 86.

Who are the Parties to a Rent Agreement?

A typical rent agreement has two necessary parties:

1. Landlord – The owner of the property who is giving it on rent on certain terms and conditions.
2. Tenant  – The person taking the property on rent

As per Section 11 of the Act, both parties must be competent to contract, meaning they must be:

• Above 18 years of age

• Of sound mind

• Not disqualified by law by any law to which he is subject

It is important to note here that the definition of sound mind is given in Section 12 of the Act which says that, a person is said to be in sound mind for the making of contract, if, at the time when he makes the contract, he is capable of understanding and forms a rational judgment as to its effects upon his interest. Likewise, it can be derived from Section 12 of the Act that, if a person is usually of unsound mind, he may make a contract when he is of sound mind.

Lastly, the contents of both parties are a sine qua non, which is defined under Section 13 of the Act. The parties to the agreement should enter into the same under their free will and volition and should not be under any coercion, undue influence, or be subjected to fraud, misrepresentation.

Basic Ingredients of a Rent Agreement

To be valid and useful, a rent agreement must include the following details:

1. Names and addresses of both the landlord and the tenant. In the present-day scenario, it is advised to include the mobile number, email address, and Aadhar card number of the parties to the agreement. This is to be done so that in case of any conflict between the parties, the notices, as the case may be, can be served upon the adversary party through WhatsApp or email. 
2. Description of the property – Complete address of the property in question, including the Plot Number, Khata Number, Mouza Number, Ward Number, name of the Colony, City, and District. It is desirable to include the PIN code and every available property identification number.
3. Purpose of rental – In clear terms, the purpose of such rent is to be mentioned, as to whether the property would be used for residential, commercial, or both residential and commercial or industrial use. A clause must be included in the agreement stating that apart from the purpose mentioned above, the rented premises would not be utilised for any other purpose, and if it is contravened, then the agreement would come to an end.
4. Rent amount and payment date - The amount fixed for each month must be mentioned both in figures and words. Typically, the period of payment should be mentioned in that paragraph. For eg, the tenant would pay the monthly rent to the landlord by the 5th of each month; failing to do so may lead to termination of the rent agreement.
5. Security deposit – The Security Deposit is generally of 2 or 3 months, which is paid in advance to the Landlord before taking possession of the rented premises. A clause must be there as to how the Security Deposit would be refunded upon completion of the tenancy, whether the amount would be refunded in a lump sum or it would be adjusted towards the last months of the tenancy period.
6. Duration of the agreement – For example, 11 months. If the agreement is beyond 11 months, i.e., one year, then the registration of the rent agreement is mandatory as per Section 17 of the Registration Act, 1908.
7. Renewal clause – It must be stated in the agreement as to whether the agreement can be extended and, if so, what would be the modified conditions, subject to the approval of both parties
8. Maintenance responsibility – In clear wording, it must be stated as to who will take care of repairs, maintenance, etc, and what is the obligation of the tenant and what is that of the landlord.
9. Mode of payment - In the agreement for rent, there must be a clause reiterating the mode of payment. Whether the rent is to be paid by cash or through bank (NEFT) transfer, or by any other mode.
10. Usage restrictions – A clear clause regarding no subletting or illegal activities in the premises is a must
11. Termination clause – Notice period and terms for ending the agreement. In general, if the property is used other than agricultural or industrial purpose, the Transfer of Property Act, Section 106 provides that a 15-day notice is sufficient. In case the rented area is used for Industrial/agricultural usage, then a six-month notice period is mandatory. 
12. Alternative Dispute Resolution Clause: This clause needs to be inserted to prevent harassment of the parties due to any discrepancy during the tenure of a tenancy.
13. Signature of both parties and witnesses: Each rent agreement must contain the signatures of the parties to the agreement or their power of attorney holders. However, the signature of a minimum of two witnesses to the agreement is a must. 

The Legal Backbone

Here’s how Indian laws relate to rental agreements:

• Indian Contract Act, 1872 – Any rent agreement is a contract and must follow contract laws. It should be made with free consent and lawful consideration (Sections 10–23).
• Transfer of Property Act, 1882 – Section 105 defines a lease and lays down the rules for transferring the right to enjoy the property. It also provides a mandatory notice period in case of eviction by the landlord in case of any dispute or discrepancy between the parties
• Indian Registration Act, 1908 – According to Section 17, any lease for more than 11 months must be registered to be legally enforceable. 

Should You Register the Rent Agreement?

Yes, ideally. While rent agreements up to 11 months are usually made on stamp paper and are notarized, if your agreement is for 12 months or more, registration is mandatory under Section 17 of the Registration Act, 1908. Unless the Rent Agreement of one year or more is registered, it cannot be legally enforced and may cause trouble to the parties in Court proceedings.  Registering it gives the agreement more legal power and helps avoid disputes. However, even if the rent agreement is not registered, the notarized agreement possesses the presumptive value, which can be used as evidence in court, subject to the discretion of the Court. 

We will discuss the outcome of the non-registration of the rent agreement subsequently.

How to Mention the Schedule of Rent Area?

When the property is intended to be rented and is not a stand-alone area, and situated within a specific part of a building or housing society, then the Schedule of Rent area must contain the following details.

• Name of the Building and its address
• Floor number (if applicable)
• Room numbers or names (e.g., Bedroom 1, Kitchen, etc.)
• Built-up area (in sq. ft.. or sq. mtr.)
• Any exclusive/common areas included (like a balcony, parking, terrace, etc)

Example:

The premises consist of 2 bedrooms, 1 hall, 1 kitchen, and 1 bathroom, situated on the first floor of the building located at XYZ address, with a built-up area of 800 sq. ft., along with exclusive rights to use one two-wheeler parking space.

It is recommended to attach a floor plan as an annexure for clarity, however, it is optional.

How to Add a Rent Escalation Clause?

A rent escalation clause is a convenient way to deal with rising costs owing to recession. It means that the rent will increase by a fixed percentage after a fixed period. In general, the increment is proposed to be effected after one year i.e.12 months.

Example:

The monthly rent shall be ₹15,000 for the first 11 months. If the agreement is renewed, the rent shall increase by 10% upon renewal for the subsequent year.

Make sure both parties agree on:

• The frequency (usually annual)
• The percentage increase (often 5% to 10%, as the case may be)

Need for a Mediation Clause

In case the rent amount is less than one lakh per month, then the annual rent amount would be around 12 lakhs per annum. In this event, if there remains a mediation clause, in case of dispute between the tenant and the landlord, the matter could be referred to pre-litigation mediation, and the parties would be saved from the lengthy civil court procedure.

Need for an Arbitration Clause

Disagreements can happen during the subsistence of the rent period. Instead of going to court, the parties to the parties can invoke the arbitration clause to initiate the arbitration proceeding, which are generally time-bound proceedings and conclude within a span of six months only. However, it is to bear in mind that, if the monthly rent amount is around 1.5 lakhs or more i.e. more than Rs. 15 laksh or more annually, then the arbitration mechanism would be proved to be fruitful, otherwise the parties to the dispute would end up paying more amount for arbitration proceeding, which is mentioned as per Schedule IV of the Arbitration & Reconciliation Act, 1996. The ADR mechanism is preferable since it is Faster, Cheaper, Confidential, and expeditious.

Example Arbitration Clause to be incorporated in the Rent Agreement:

In the event of any dispute arising out of or in connection with this agreement, the parties shall first attempt to resolve it amicably. If not resolved, the matter shall be referred to a sole arbitrator appointed mutually, and the decision of the arbitrator shall be final and binding. The arbitration shall be conducted in accordance with the Arbitration and Conciliation Act, 1996.

Stamp Duty and Notarization

• Rent agreements need to be printed on non-judicial stamp paper of appropriate value.
• The stamp duty varies from state to state. It is advisable to consult a legal professional regarding the same.
• Notarizing the agreement adds credibility since it adds evidential value to it.

Conclusion

• An updated copy of the agreement must always be retained by the parties.
• It is essential to inspect the property's genuine ownership paperwork before approving the lease agreement.
• The terms should be written clearly along with mutual agreement. Terms and conditions that appear in writing remain the only acceptable arrangements for the agreement.
• Include photographic proof of how the rental property looked when tenants initially moved in to protect against future disagreements about property conditions at the end of the rental period.
• Transactions should be handled through bank transfers instead of rental payments as cash because transfers create comprehensive records. Such measures would support both parties when establishing their respective claims during a dispute.
• Although a rent agreement looks insignificant it functions as a fundamental document which ensures protection for landlords and tenants. By establishing clear terms and legal support together with proper clauses the rental arrangement helps establish harmonious relations between parties.
• The preparation of such agreements requires lawyer consultation along with thorough review of contents before executing the document

Reference:

1. Supreme Court Ruling on registration of lease deed and its impact during covid-19 time and post covid-19 era
2. Rent Control Act - Rental Agreement, Rights of Tenant & Landlord
3. All you need to know about rental agreements
4. Rent Agreement Generator
5. Rental Agreement Format - House Rent Agreement Sample and Terms