Rental Agreement and important clauses
There are 2 primary types of rental agreements in India. "Lease Agreement" and "Leave and License Agreement."
The leave & license agreement is becoming very popular in recent times, as it has the following advantages:
- The legal ownership and the possession of the property remains with the landlord (called the Licensor)
- Easier to terminate and enforce compared to rent agreement
- No option of sublet.
- Governed by Indian Easements Act, 1882 and not Rent Control Act.
- Agreement ceases immediately in case of sale to a third party.
- Not transferable or inheritable
We will cover the clauses that should be covered, regardless of type of agreement. Please note that the agreement should be signed on non-judicial stamp paper (e-stamp paper in several states), there must be 2 witnesses and the date of the agreement and stamp paper should match to be legally admissible, in case of any disputes. If the agreement duration is longer than 11 months, it is considered a valid legal document only if registered. Registration charges are quite high and hence most rental agreements are usually 11 months or less in duration.
The major clauses and terms that should be covered in any agreement include:
I. Basic clauses such as identity of the parties, rent amount, deposit, escalation, validity, any penalties, etc
II. Responsibility of the parties - what each party should and should not do
III. Termination & dispute - under what conditions the agreement can be terminated, etc and how any disputes are to be handled.
Each of these sections is explained in detail below:
I. BASIC CLAUSES
- Identity of the Landlord, Tenant, Property - This section explains who the landlord are tenants are. These people are identified by birthdate, address and relations to other people (parents, spouse, etc). This is because the formats were created before India's unique identification system (Aadhar) was implemented. While it can now suffice to just add in the Aadhar number, we still stick to the older ways for consistency. The property is identified by its exact address and specifications.
- Period/Duration of the agreement - This clause identifies for which period the agreement is valid for.
- Escalation - This clause defines what happens after the period is over, and if both parties agree to continue for another term. It defines what would be the increase in rent for the next period. This protects both the landlord and the tenant from revising rents arbitrarily, and must be present in any rental agreement if there is an option to renew.
- Rent & payment date - This specifies the most important part in the rental agreement, which is what the rent payable every month will be and what will be the date of payment, and whether the payment will be in advance or in arrears. By "advance," it means the rent for the month is paid upfront when the month begins and by "arrears" its meant that the rent will be paid post the month ends.
- Rent Delay Penalty - This clause specifies what happens if the rent is paid later that the date specified and what penalty (if any) applies at that time.
- Security Deposit - Another super important clause in any rental agreement that talks about how much security deposit is to be paid and HOW the deposit will be paid (online, cheque etc).
- Allowable deductions from Deposit - This clause specifies that when the tenant vacates the property, what the owner can deduct from the deposit. Usually this includes any unpaid rent, unpaid utility bills, any painting, cleaning charges etc.
II. RESPONSIBILITIES OF PARTIES
- Use of property - This clause explains whether the property can be used for residential or commercials purposes. Commercial includes office, shop (retail), guest house etc. This is again an important clause in the rental agreement because a property is defined as commercial or residential by law, and property taxes and utility charges are according to the same - with commercial being higher. Hence using a residential property for commercial uses is illegal and can result in significant fines and penalties.
- Changes to property - This clause clarifies whether the tenant can make any changes to the property. It prevents tenants from making structural changes (breaking walls, changing electricity wiring, etc) which can have dangerous implications if not done properly.
- Responsibility for fixing damages/maintenance work - This clause if not stated clearly, can cause the maximum amount of dispute and is often a point of contention about what is acceptable for owners and tenants to pay. Usually it states that the tenant will take care of all minor issues and any damages caused by them and the owner will take care of any major and structural issues. However, owners and tenants tend to fight about what's minor and major as clearly this type of wording is subjective. It's better to make a list of the types of issues considered minor and major and add that to an annexure in the agreement, to avoid disputes.
- Right to sublet - Again, a super important clause for those who care about who actually lives in their apartment. Some tenants will sublet a room (or even the whole house) to someone else. This clause either restricts or allows that. If not present, it can be argued both ways, so it must be present for the benefit of both parties.
- Inspection by landlord - Every tenant desires that they be allowed to live in peace, without the landlord showing up un-announced and every landlord would like to have the authority to visit their property sometimes if they so desire. This clause usually states that the landlord can visit with prior appointment and with a X days notice.
- Association payment - This clarifies which party (owner or tenant) will be responsible for making the monthly or quarterly payments to the associations. The rental arrangement can either state that the tenant will pay a certain amount of rent to the property owner INCLUDING the association charges, in which case the owner is responsible for paying the association charges. On the other hand, if the rent is excluding the association charges, then it will state that the tenant will be responsible for this payment and it is separate from the rent. However, there will sometimes be adhoc payments for structural or major changes to the common areas collected from the sinking fund, and its usually the landlord's responsibility to cover this.
- Association rules - Again, it is imperative to include this clause especially for rental agreements of apartment or villa complexes, where there are significant rules of the society to ensure the peaceful living of all residents. It is important that the tenant adhere to these.
- Tax & legal payments - Properties have a property tax that need to be paid annually. There are also other charges such as legal documentation for transfer of ownership etc. It is usually stated that these are the responsibility of the property owner and the tenant shall have no liability to pay these.
- TDS (This is Tax deducted at Source) - Under specific conditions, tenants are required to deduct a certain amount of TDS and then pay the landlord. This TDS amount has to be paid to the government and filed. We have a separate chapter that talks about TDS on rent, where this is explained in more detail. Ideally, based on the terms of the agreement, the TDS clause and amount can be called out.
III. TERMINATION & DISPUTE
- Termination process - This clause in a rental agreement states HOW either party can communicate their intention for the tenant to vacate the premises. It usually states that either a registered letter or email needs to be sent to the other party.
- Lock-in - A lock-in clause states for the first X number of months, the tenant and owner are both "locked-In" to the agreement and cannot terminate. The owner cannot ask the tenant to vacate and the tenant must continue to pay rent and continue their obligations as per the rental agreement.
- Notice period - This clause states that if either party wishes to terminate the agreement, how many days or months in advance do they need to inform the other party. It is usually 1 to 2 months.
- Handover condition & terms - This clause clarifies what is the acceptable condition in which the tenant must hand over the property. Example, must the house be repainted and professionally cleaned? Must all damages be fixed and all electrical and sanitary points and fittings be in working condition etc. Again, a very commonly disputed issue in rental agreements, and hence best to add as much clarity as possible.
- Return of Security Deposit - This clause states that after the agreement terminated and the tenant vacates, in how many days the landlord needs to return the deposit to the tenant and the terms of the same. A penalty clause can also be added for any delays in returning this amount.
- Violation of agreement terms - This clause states what happens when any party violates the agreement. Usually it will mention that the parties have 1-2 weeks to fix the issue, failing which the agreement stands terminated.
- Dispute jurisdiction - This clause states that if there is a legal dispute between the 2 parties and the agreement is violated, in which court of Law a case can be filed. This is usually the same city as the property. An arbitration clause can also be added in the agreement, which is a simpler way of hastening dispute settlement if one should arise.
- Indemnity - An indemnity states that both parties will cover the loss incurred to them as a result of the wrong doing by the other party.