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M. AMUDHA
FIXATION OF FAIR RENT – A
DREAM COME TRUE IN INDIA
INTRODUCTION
 A fair rent is a rent which is fair between the landlord and tenant and subject to
prevailing rent law of a locality, enacted by a legislative body of the state
concerned or central government.
 The basic objective of the rent control legislation is to protect the tenant
against exorbitant rents, arbitrary increases in the rent and ensure him security
of tenure.
 As housing is a State subject, different State Governments have framed their
own rent control laws.
RENT CONTROL
The practice of imposing a legal
maximum (rent ceiling) upon the
rent in a particular housing
market, below the equilibrium rent
is called rent control.
Rent control is an example of a
price set below the equilibrium
point. This is called a price ceiling.
In the graph below,
The equilibrium (market) price
of a rental unit = $1,800 per
month.
Government price = not more
than $1,000 per month
The lower-than-equilibrium rent causes the quantity supplied of rental units to decrease to 700 units, because suppliers have
less incentive to build and own rental units at the lower price. The quantity demanded increases to 1,200, because the lower
price encourages more buyers. This results in a shortage of 500 rental units (1,200 minus 700).
Quantity
Demanded
1200 units
Quantity
Supplied
700 units
DEBATES – RENT CONTROL
•DEBATES FOR
AND AGAINST
RENT CONTROL
There have been various
debates going on over
the years over the pros
and cons of rent control.
•While the proponents of
rent control laws
suggest that they
prevent landlords from
charging exorbitant
rents and evicting
tenants at will.
POSITIVE •The opponents suggest
that rent control laws, lead
to deterioration of existing
housing stock, increased
pullout of apartments from
the rental housing market
and thus reduced overall
supply.
NEGATIVE
FAIR RENT & STANDARD RENT
Fair Rent
•Fair Rent is the municipal valuation of the accommodation.
•However, it cannot exceed the standard rent, if any, fixed or determined under a Rent Control Act.
Standard Rent
•Under the Rent Control Act, Standard Rent is the highest possible rent of a particular property.
•Thus, where Rent Control Act is applicable, Standard Rent shall act as an upper ceiling on the figure
of Fair Rent.
TAMIL NADU BUILDING (LEASE AND RENT
CONTROL) ACT,1960.
FAIR RENT PROVISIONS
Under Section 4(2) of the act of
the act, either the tenant or the
landlord can file an application
for the fixation of fair rent.
On receipt of the application the
Rent controller will make an
enquiry and fix the fair rent
according to the principles laid
down under Section 4 of the Act.
In OSM Salih v. A.M.Salih 75 LW
511,
•The main object of this provision is to
mitigate the difficulties of the tenants and
at the same time to provide reasonable
return to the landlord.
Fixation of Fair Rent
 The total cost shall consist of
 The market value of the site in
which the building is constructed,
 The cost of construction of the
building and
 The cost of provisions of the
amenities specified in Schedule I of
the Rent control Act (as prevailing
on the date of application for
fixation of fair rent).
FAIR RENT IN RESIDENTIAL BUILDINGS & NON-
RESIDENTIAL BUILDINGS:
RESIDENTIAL BUILDING NON-RESIDENTIAL
BUILDING
FAIR RENT 9% 12%
AMENITIES 15% 25%
FORMULA:
FAIR RENT – RESIDENTIAL=
(COST OF BUILDING+MARKET VALUE)*9/100
FAIR RENT- NON RESIDENTIAL =
(COST OF BUILDING+MARKET VALUE)*12/100
MARKET VALUE OF SITE
Market value = (plot extent / built up area) x
guideline value
 Kaliammal & others v. Athi V/s.
Ramachandra & others, 1983 (II) MLJ 252.
 While computing the market value of
the site, the following two factors are
to be considered viz.,
 The portion of the site on which
the building is constructed,
 A portion upto 50 percent, thereof
of the vacant land, if any,
appurtenant to such building. The
remaining 50 percent of the
vacant land is to be treated as an
amenity.
The market value of the site
on which the building is
constructed should also be
taken into account while
fixing fair rent.
Rate of depreciation – schedule II
Class Type of Building Rate of Depreciation
1. Building built in lime mortar and in which teak has been
used through out
1.0 percent
2. Building built partly of brick in lime mortar and partly of
brick in mud in which teak has been used
1.5 percent
3. Building built in mud and in which country wood has
been used.
2.0 percent
4. Building which are inferior to those of class 3. With brick
in mud un-plastered walls and mud floors and in which
cheap country wood has been used.
4.0 percent
Calculation of
Depreciation Where,
 A = total cost of construction of building,
 r = Rate of depreciation per annum,
 n = Age of the building and
 P = the final depreciated value of the building.
P = A (100-r)/100)n
Amount of Depreciation = A –
P
Change in fair rent
When the fair rent of a building has been fixed or re-fixed under this Act, no further increase in such fair rent shall
be permissible
except in cases where some addition, improvement or alteration has been carried out at the landlord’s
expense and if the building is then in the occupation of a tenant, at his request.
The fair rent increased shall not exceed the fair rent payable under Rent Control Act for a similar building in the
same locality with such addition, improvement or alteration and it shall not be chargeable until such addition,
improvement or alteration has been completed.
Where, after the fair rent of a building has been fixed under this Act, there is a decrease or diminution in the
accommodation or amenities provided, the tenant may claim a reduction in the fair rent as so fixed.
SHORTCOMINGS
Fixation of standard/ fair rent as a percentage of the cost of construction is a major disincentive for
those wanting to invest in rental housing as it gives a very low rate of return as compared to other
assets.
It is difficult to evict a tenant once the house has been rented. Thus, the fear of losing perpetual
control of their houses might lead them to withdraw their vacant premises from the rental market,
leading to reduced supply.
It is difficult to resell a tenanted house from which it’s difficult to evict tenants. This reduces liquidity
in the market for ownership housing.
leading to formation of black, uncontrolled rental housing markets. The rents in these markets are
much higher than they would have been in absence of rent controls.
Implementation of Rent Control laws also involves substantial administrative costs. All rental
property must be registered, elaborate mechanisms to fix rents must be formulated and a dispute
settlement body established.
Fixation of fair rent

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Fixation of fair rent

  • 1. M. AMUDHA FIXATION OF FAIR RENT – A DREAM COME TRUE IN INDIA
  • 2. INTRODUCTION  A fair rent is a rent which is fair between the landlord and tenant and subject to prevailing rent law of a locality, enacted by a legislative body of the state concerned or central government.  The basic objective of the rent control legislation is to protect the tenant against exorbitant rents, arbitrary increases in the rent and ensure him security of tenure.  As housing is a State subject, different State Governments have framed their own rent control laws.
  • 3. RENT CONTROL The practice of imposing a legal maximum (rent ceiling) upon the rent in a particular housing market, below the equilibrium rent is called rent control. Rent control is an example of a price set below the equilibrium point. This is called a price ceiling. In the graph below, The equilibrium (market) price of a rental unit = $1,800 per month. Government price = not more than $1,000 per month
  • 4. The lower-than-equilibrium rent causes the quantity supplied of rental units to decrease to 700 units, because suppliers have less incentive to build and own rental units at the lower price. The quantity demanded increases to 1,200, because the lower price encourages more buyers. This results in a shortage of 500 rental units (1,200 minus 700). Quantity Demanded 1200 units Quantity Supplied 700 units
  • 5. DEBATES – RENT CONTROL •DEBATES FOR AND AGAINST RENT CONTROL There have been various debates going on over the years over the pros and cons of rent control. •While the proponents of rent control laws suggest that they prevent landlords from charging exorbitant rents and evicting tenants at will. POSITIVE •The opponents suggest that rent control laws, lead to deterioration of existing housing stock, increased pullout of apartments from the rental housing market and thus reduced overall supply. NEGATIVE
  • 6. FAIR RENT & STANDARD RENT Fair Rent •Fair Rent is the municipal valuation of the accommodation. •However, it cannot exceed the standard rent, if any, fixed or determined under a Rent Control Act. Standard Rent •Under the Rent Control Act, Standard Rent is the highest possible rent of a particular property. •Thus, where Rent Control Act is applicable, Standard Rent shall act as an upper ceiling on the figure of Fair Rent.
  • 7. TAMIL NADU BUILDING (LEASE AND RENT CONTROL) ACT,1960.
  • 8. FAIR RENT PROVISIONS Under Section 4(2) of the act of the act, either the tenant or the landlord can file an application for the fixation of fair rent. On receipt of the application the Rent controller will make an enquiry and fix the fair rent according to the principles laid down under Section 4 of the Act. In OSM Salih v. A.M.Salih 75 LW 511, •The main object of this provision is to mitigate the difficulties of the tenants and at the same time to provide reasonable return to the landlord.
  • 9. Fixation of Fair Rent  The total cost shall consist of  The market value of the site in which the building is constructed,  The cost of construction of the building and  The cost of provisions of the amenities specified in Schedule I of the Rent control Act (as prevailing on the date of application for fixation of fair rent). FAIR RENT IN RESIDENTIAL BUILDINGS & NON- RESIDENTIAL BUILDINGS: RESIDENTIAL BUILDING NON-RESIDENTIAL BUILDING FAIR RENT 9% 12% AMENITIES 15% 25% FORMULA: FAIR RENT – RESIDENTIAL= (COST OF BUILDING+MARKET VALUE)*9/100 FAIR RENT- NON RESIDENTIAL = (COST OF BUILDING+MARKET VALUE)*12/100
  • 10. MARKET VALUE OF SITE Market value = (plot extent / built up area) x guideline value  Kaliammal & others v. Athi V/s. Ramachandra & others, 1983 (II) MLJ 252.  While computing the market value of the site, the following two factors are to be considered viz.,  The portion of the site on which the building is constructed,  A portion upto 50 percent, thereof of the vacant land, if any, appurtenant to such building. The remaining 50 percent of the vacant land is to be treated as an amenity. The market value of the site on which the building is constructed should also be taken into account while fixing fair rent.
  • 11. Rate of depreciation – schedule II Class Type of Building Rate of Depreciation 1. Building built in lime mortar and in which teak has been used through out 1.0 percent 2. Building built partly of brick in lime mortar and partly of brick in mud in which teak has been used 1.5 percent 3. Building built in mud and in which country wood has been used. 2.0 percent 4. Building which are inferior to those of class 3. With brick in mud un-plastered walls and mud floors and in which cheap country wood has been used. 4.0 percent
  • 12. Calculation of Depreciation Where,  A = total cost of construction of building,  r = Rate of depreciation per annum,  n = Age of the building and  P = the final depreciated value of the building. P = A (100-r)/100)n Amount of Depreciation = A – P
  • 13. Change in fair rent When the fair rent of a building has been fixed or re-fixed under this Act, no further increase in such fair rent shall be permissible except in cases where some addition, improvement or alteration has been carried out at the landlord’s expense and if the building is then in the occupation of a tenant, at his request. The fair rent increased shall not exceed the fair rent payable under Rent Control Act for a similar building in the same locality with such addition, improvement or alteration and it shall not be chargeable until such addition, improvement or alteration has been completed. Where, after the fair rent of a building has been fixed under this Act, there is a decrease or diminution in the accommodation or amenities provided, the tenant may claim a reduction in the fair rent as so fixed.
  • 14. SHORTCOMINGS Fixation of standard/ fair rent as a percentage of the cost of construction is a major disincentive for those wanting to invest in rental housing as it gives a very low rate of return as compared to other assets. It is difficult to evict a tenant once the house has been rented. Thus, the fear of losing perpetual control of their houses might lead them to withdraw their vacant premises from the rental market, leading to reduced supply. It is difficult to resell a tenanted house from which it’s difficult to evict tenants. This reduces liquidity in the market for ownership housing. leading to formation of black, uncontrolled rental housing markets. The rents in these markets are much higher than they would have been in absence of rent controls. Implementation of Rent Control laws also involves substantial administrative costs. All rental property must be registered, elaborate mechanisms to fix rents must be formulated and a dispute settlement body established.