Thinking of taking a property on lease or Rent? If the answer is affirmative, do not forget to complete the legal formalities which may include entering into a rental agreement.
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What is a Rental Agreement?
A rental agreement is a legal document signed by the landlord and the tenant who desires to have the property for lease or rent, under certain fixed norms and conditions.
What is the purpose of a rental agreement?
It is prepared in order to avoid any misinterpretations in the future. Most of us may be aware of the basics of this process as we have entered into this transaction at least once in our lives. This agreement is drafted on a stamp paper. There are basically 2 types of rental contracts in India, one is the lease agreement which lasts for a minimum of 12 months, and the other is the lease and license agreement which lasts up to 11 months.
What is the procedure to make a rental agreement?
There are certain guidelines one must abide by to prepare a rental agreement.
Draft the rental deed:
This includes certain clauses where both the landlord and the tenant could negotiate over and decide what goes into the contract. Once finalized, a deed is drafted.
Printing it on stamp paper:
This requires the purchasing of stamp paper of the required value and printing the draft on it.
The landlord and the tenant will have to sign at their designated places in the contract in front of two witnesses who will also sign the deed.
Finally, the contract can be registered at the local sub-register office.
What are the clauses to be incorporated in the rental agreement?
Details of the tenant and the Landlord:
The main purpose behind the incorporation of this clause is to enable identification of the parties. This would be of vital importance in case of serving the notice and any legal proceedings.
Rent and Premium:
The rent and the premium need to be predetermined in order to secure the rights of the tenant. This clause should also include the details of the periodicity and also the due dates for the payments. When and how the agreement can be renewed, by how much will the rent go up at the time of renewal, whether there is a scope for renegotiation of the rent, and so on should be mentioned.
Duration of the tenancy:
Typically, rental agreements are entered for a period of 11 months. However, longer periods are also permitted. The duration of the tenancy has to be specified particularly and it has to be predetermined to avoid ambiguity at a later stage. It is also recommended to mention the lock-in-period which neither the tenant nor the landlord could terminate the agreement. The agreement must also mention the consequences of termination by the parties prior to the lock-in-period.
Mode of the rental payment:
The mode of payment could be prepaid i.e., in advance, or postpaid i.e., after utilization.
Amount of security deposit:
This is another set of amounts apart from the amount that is to be paid by the tenant for utilization of the premises. This amount is collected and kept as a reserve with the Landlord which would impose a great responsibility for the systematic utilization of the premises.
List of fittings, fixtures:
The agreement should have a description of the premises taken on rent such as the floor or the apartment number, area of the house, number of rooms, bathrooms, living area, and so on. If it is a furnished house and has fixtures such as beds, sofas, tables, chairs, wardrobes, number of fans, air conditioners, lights, and so on. This is to ensure identification and accountability.
Maintenance Charges and other Charges:
Since the property is owned by one person and possessed by another person, the question is as to who shall be liable to pay for such additional charges. It is better to predetermine the allocation of the costs.
Payment of Bills and Other Charges:
The agreement should provide for the details as to who shall be responsible for the payment of bills and other charges.
Alteration of premises:
A tenant generally has no right to make any changes to the premises or boundaries of the rented property. If there are any such rights to alter the premises, the same has to be mentioned in the agreement.
Prohibition of certain activities:
The agreement must clearly mention what activities are prohibited and the consequences of violation.
Signature and Registration:
The document needs to be attested, signed, and registered. Law mandates registration of the rental agreement, the duration of which is one year or more or which has to be renewed yearly. However, it is advised to get the agreement registered in order to be entitled to legal remedy in case of any dispute.
How does the leasing differ from Commercial to Residential?
Mistakes to avoid while making Rent Agreement
Duration of Lease:
It is very important to specify the duration of the lease in the rent agreement. Any mistake on the part of the landlord can prove costly to the landlord. If you are renting a residential property you should enter in leave and license agreement with an 11-month lease. This lease period can be of longer duration in case of a factory, office premises, mall, or cinema hall.
Termination clause and Notice period:
A Rent agreement should clearly specify the termination clause and notice period. The termination clause should be two-sided so that either of the parties can terminate the contract for any reason. The notice period is kept for one month or three months.
One common mistake observed in the agreement is the absence of a lock-in clause. Lock-in clause says that tenants cannot leave the rented property before the specified period. In case the tenant decides to leave the rented property before the lock-in period he/she needs to pay the rented amount for the lock-in period as specified in the rent agreement.
Security Deposit clause:
The agreement should clearly specify the security deposit amount and refund condition. It should also specify that under what condition the deposit amount shall be deducted.
The agreement should clearly specify the rent amount and grace period applicable to the payment. You should also specify the mode of payment like cash, cheque, or internet transfer.
Payment Default Clause:
The agreement should clearly specify the payment default clause or payment delay clause. It should clearly mention the applicable penalty amount and consequences of default.
Repair work during Occupancy:
The repair clause should be clearly specified in the rent agreement. It should say that who will be responsible for the repair. It should also specify under what time conditions the occupant is accountable for reporting damage for repair.
- Who prepares the rental agreement?
The rental agreement is prepared by a real estate agent hired by the landlord and the tenant. In order to legalize the rental agreement, they need to sign the contract in front of two witnesses who are non-beneficiaries of the property.
- How to extend the lease agreement in India?
This agreement allows the extension past its end date. There is a certain procedure to be followed to extend the lease.
i) Gather the original lease.
ii) Approach the other party.
iii) Send the addendum.
iv) Sign the addendum.
- What is the stamp paper value required for the rental agreement?
The agreement should be either for commercial or residential purposes only. The value of the stamp paper must be of Rs 100/- or 200/-. The stamp duty is 1% of the total rent and includes the deposit paid annually.
- Is it unusual to not sign a lease until the move-in date?
Yes. The property is not committed to the occupation of the tenant until he signs the lease deed as the contract is not executed unless the deed is signed.
- Can the rental agreement be terminated in between?
The rental agreement is generally terminated upon expiry of the agreement but it can also be terminated during the period of the tenancy. The rented property can then be left according to the lock-in-period. The tenant should ensure that he collects his deposit from the owner.