The biggest expense in real estate is the opportunity cost! The statement can be justified with great confidence in today’s scenario when buying a property can be an expensive affair. The concept of Investment in Houses seems lost to today’s smart generation as it also adds additional monthly expenses like maintenance, insurance fees, taxes and more. ‘Rent’ is an easy way out. As opposed to the gigantic investment required for buying a property, not to mention the maintenance and other trivial charges, Rent is undoubtedly a convenient option. Renting a property may seem a bit simple with so many intermediaries like brokers, online platforms, but keep a vigil on the various basic and critical clauses to be incorporated in the formal rent agreement. Your stay as a tenant can be smooth only when you have the awareness and incorporation of all the mutually agreed clauses.
Defining Rent Agreement
It is a mutual agreement between the owner, termed as “Lessor”, and the tenant, termed as “Lessee”, to rent a property. The provisions relating to control of rent are specified in the “Maharashtra Rent Control Act 1999”.
Why rent agreement?
Avoid unwanted surprises as an owner and also as a tenant. Legally bound words give you an upper hand. It is of utmost importance that the rental agreement clauses be mentioned explicitly and make the deal crystal clear. A rent agreement is a legal document that binds both the parties in their limits and also provides rights to them. Therefore, it gives the right of “occupying the property” to the tenant and the right to receive a mutually agreed “Rent” to the landlord. In addition, mentioning mutual rental agreement terms and conditions eliminates any chances of dispute or disagreement at any point in time. Both the parties are at ease and are aware of their rights and limitations.
Important Rental Agreement Clauses
You must ensure that a few critical points are taken care of while preparing the rent agreement, especially when the rented property is commercial. All points mentioned below must be incorporated or talked about and clarified between the lessor and the lessee.
1. Security Deposit
There is usually a tradition of keeping some amount as ‘Security Deposit’ across various cities in India. It is generally ‘X’ number of times the monthly rent. The number can be discussed between the parties.. This amount is kept with the landlord for settling any dispute, meeting expenses towards repairs at the time of the tenant vacating the premises. Importantly, though it is implied that the security amount is refundable, it should be incorporated in the rent agreement as ‘Security Deposit is Refundable’. It is advisable to mention the terms and conditions under which the Security Deposit shall be used by the owner. Make the terms clear and avoid getting a big chunk cut down from your Security Deposit.
2. Payment of rent
The exact period of the rent to be paid should be mentioned in the rent agreement. That means whether the rent will be paid when the month starts, i.e. in advance, or paid after the month is over. This point occasionally becomes a point of dispute while the lessee vacates the premises, and should always be avoided. Also, it is important to state what would be the payment method. To maintain consistency, it is suggested that the mode of payment be kept the same throughout the tenure. In the case of missed rent, a buffer period should also be mentioned after which the owner is allowed to take action against the tenant and not before it.
3. Agreement Period
The agreement period is generally kept as 11 months and should be mentioned in the rent agreement. In case there is any lock-in period, that should also be mentioned. The lock-in period signifies that both the parties are bound by the agreement till that time. Of course, the agreement is open to increase or decrease of the tenure.
Generally, there can also be a provision that either party may terminate the agreement upon prior written notice to the other party. The dates and the notice period should be well discussed and should have an explicit mention in the agreement.
4. Area Description
Be it a tiniest of things, put it down on the legal paper.This goes for the owners who are renting out a certain part of the entire property. Distinctly describe the boundaries for the tenants and secure your right to the part of the property which is not out for rent. Explain the essentials like the rooms, available square feet, parking spot and other amenities.
“Who pays for What?” Answer this question in the agreement and you have a happy deal for yourselves at both the ends. It is the small things like leakage, piping, furniture (if any) which can lead to ugly spats while vacating. Most rent agreements do not talk about any penalties, but at the time of vacating the premises, disagreements or disputes occur in terms of the refund of security deposit. To avoid such disputes, a clause of penalty should be incorporated. It can be in terms of holding the property until the security amount is refunded.
6. Maintenance or Society Charges
These costs are not petty enough to be left unattended. Any maintenance or society charges wherever applicable and who will pay the same should also be mentioned in the rent agreement to avoid any conflicts.
7. Clause of Electric fittings, if any
Electrical fittings and fixtures provided by the landlord should be returned in the same state by the tenant at the time of vacating the premises. This clause should be mentioned in the rent agreement, stating the complete items in detailed quantity and condition.
An office space requires additional amenities like sufficient parking space, competent security, ample water supply, backups for lift and electricity, etc. Consider these amenities and mention their inclusion and exclusion in the agreement to avoid a petty brawl later.
9. Government taxes to borne by?
Property tax or Municipal taxes payment can be borne by either of the party and must be agreed on and mentioned in the rent agreement.
10. Damage Clauses
There is no point in playing the blame game. The most common tragedy occurs at the time of claiming the deposit. Any damage or loss of property and its repair must be done and the responsibility of the same should be mentioned, whether by the owner or the tenant, should be present in the rent agreement.
11. Right to Renew Clauses
If your agreement is for a longer period of time, it is highly recommended that you update the clauses on your agreement. If you are planning to extend the agreement, then it is only fair that keep you keep the agreement up to date. It should be mentioned in the contract as to who reserves the right to renew the contract and when exactly that can be done.
12. Alteration to Property
If not hear, walls definitely can talk. A little nail here or there can also be a reason to cut down your Security Deposit. Make sure if you are allowed to drill the wall, stick on the walls or paint the walls. Mention the do’s and dont’s in the agreement. A clear description of the kind of alteration to the property, allowed to the tenant, should be mentioned in the rent agreement to avoid any dispute.
Leave and License Agreement
You must have come across a term ‘Leave and License Agreement’, which is considered similar to ‘Rent Agreement’. You must not get confused by that as both the terms are different and carry different meaning and relevance.
As stated above, rent agreement is the ‘transfer of interest’ from the owner to the tenant, and the tenant can defend his rights over the property. It is both transferable and inheritable as the interest lies with the lessee. Though the agreement comes to end at the completion of the agreed period of the contract, the tenant can hold the property beyond the agreed period and that will not be considered as ‘unlawful’.
On the other hand, a ‘Leave and License Agreement‘ is just the permission of the landlord to the tenant to use the premises without the transfer of interest. If the tenant does not vacate the premises after the cessation of license, it will be considered as ‘unlawful’ and action can be taken on an immediate basis.
Find more details with deAsra’s the Leave & License/ Rent Agreement Checklist.
The association between a tenant and a landlord, especially when it is a commercial space must be cordial and one must keep it that way. The key to a successful rental agreement is that both parties be on the same page, literally and figuratively, and be completely aware of the rent agreement.