Arbitration clause in rental agreements and how it can help landlords and tenants

While it is common for disputes to arise between landlords and tenants, we look at how an arbitration clause in the agreement can help both parties to resolve the issues amicably, while also avoiding costly and time-consuming litigation

Leave and License Agreements are commonly used, for renting of properties. For example, most people who graduate from college and join work in a new city, are bound to take a house on rent. To rent a house, one must sign a ‘Leave and License Agreement’ with the landlord (or licensor). This agreement stipulates the rental amount, period and other essential conditions.

While legal parlance demands that the words ‘licensor’ and ‘licensee’ be used in place of ‘landlord’ and ‘tenant’, respectively, we will use the latter for reasons of convenience. Leave and License Agreements will also be referred to as ‘Rent Agreements’, for the same reason. It may be noted that usually the words ‘landlord’ and ‘tenant’ would imply creation of tenancy rights, which are avoided in rent agreements. However, these terms will be used in this article, for reasons of simplicity.

 

 

Common disputes arising out of Rental Agreements

While many property brokers claim that Rent Agreements are an easy affair, this is not the case. Legal complications often arise at the end of the rental period, when the tenant has to vacate the premises. In such cases, landlords tend to adopt the unhealthy practice of forcing the tenant to forfeit the security deposit or making unreasonable deductions from the same. While this leaves the tenant short-changed, the winding nature of India’s civil litigation system, gives him zero incentive to sue.

Typically, disputes between landlords and tenants are observed in the following areas:

  1. Return or forfeiture of security deposit.
  2. Damage caused to the premises, fittings or misuse thereof.
  3. Premature termination of rent agreement.
  4. Delay in payment of rent.
  5. Unpaid dues and utility bills.

As landlords tend to keep a security deposit ranging from two to six months’ rent, parties do not see any incentive in taking the matter to court. As a consequence, several cases where landlords exploit tenants, do not see the light of the day, as tenants consider it easier to forfeit the security deposit and move on, rather than getting caught up in a prolonged legal battle.

See also: Rent Control Act: How it safeguards the interests of tenants and landlords

 

Arbitration as a means to resolve rental disputes

The rise of arbitration can however, offer a new avenue to settle disputes. An arbitrator is a person (usually a lawyer or retired judge), whom the parties can appoint by mutual consent, to hear and decide disputes among them. If the parties insert an arbitration clause in the contract and specifically name a person to act as the arbitrator, it will be valid and binding under the Arbitration and Conciliation Act, 1996 (also referred to as the Arbitration Act).

 

Fixed-fee arbitration to handle rental agreement issues

The security deposit in high-value rental deals, can amount to six months’ rent. In this case, appointing a fixed-fee arbitrator may seem feasible. Section 29B of the Arbitration Act provides for a fast-track procedure, wherein, the arbitrator decides the cases on the basis of written pleadings and submissions from the parties. Thereafter, he can call for further information, if necessary. Finally, an oral hearing may be held, only if the parties make a request, or if the arbitrator considers the same necessary. Thereafter, the case is closed for passing of the arbitral award or judgment. The entire procedure must be completed in a time-bound period of six months.

The fast-track arbitration procedure can be useful for resolving landlord-tenant disputes. Once the fee of the arbitrator is fixed at one months’ rent, he will be incentivised to hear and dispose of the matter on a timely basis. Further, the arbitral award will be valid and binding upon the parties, under Section 35 of the Arbitration Act and can be enforced, by filing an application for execution and enforcement before the local civil court, under Section 36 of the Act.

 

Alternative dispute resolution: The way forward

The recent amendments to the Arbitration Act in 2015, through which Section 29A and other provisions were inserted, have opened avenues for the people to avail of the benefits of arbitration, which was hitherto considered the preserve of large corporations with deep pockets for spending on sitting fees and legal batteries. Landlords, tenants and brokers can take the initiative, by including arbitration clauses in rental agreements. The government and the judiciary should also take the lead, by constituting panels of experienced lawyers and retired judges, who can take up alternative dispute resolution on a timely basis. Such measures will go a long way in alleviating the problems faced by landlords and tenants and fulfilling the constitutional mandate, which envisages justice for all and not for a select few.

(The writer is a practising lawyer in the Bombay High Court. He appears in diverse civil and criminal cases, as well as the Real Estate Regulatory Authority.)

 

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