Cons of not making a rent agreement

Renting a property requires tenants and landlords to adhere to the tenancy laws and the relevant rent control laws in their state. The only way to give legal validity to the tenancy is by signing a proper written rental agreement. It helps the landlord secure their property and legally allows the tenant to stay in the rented property by paying a specified rent. Some people prefer informal or verbal agreements instead of formal agreements when renting a property, especially if it is a short rental period. However, signing a formal rent agreement is crucial and the document should be registered at the sub-registrar’s office if the tenure exceeds 11 months. Otherwise, it may have severe legal consequences for both parties. In this guide, we discuss the cons of not signing a rental agreement.

What is a rental agreement?

A rent agreement refers to a written legal contract signed between a property owner, also known as the landlord and a tenant to initiate the tenancy. The agreement contains the mutually agreed terms and conditions of the tenancy, including the rent to be paid, frequency of rent payment, security deposit, maintenance, termination, notice period, eviction terms, etc.

Why is registration of rental agreement important?

Registration of the rent agreement is mandatory in India, depending on the tenure of the tenancy. According to Section 17 of the Registration Act, 1908, the rent agreement registration is not mandatory if the tenure is for 11 months. It is crucial for both parties to have a rent agreement, which must be notarised, which will help them present their case and get a resolution in case of any dispute. However, registration of a rent agreement becomes mandatory as per the law if the tenures exceed 11 months. This also involves payment of the stamp duty at the prevalent rates in the respective state. A registered rent agreement can be presented in a court of law as valid proof in case of disputes between a landlord and the tenant.

Risks associated with not having a rent agreement

For tenants

• Eviction issues: Without a formal agreement, a tenant faces the risk of unfair eviction by the landlord. Since no written document specifies the eviction terms, the landlord can take advantage of the same and ask the tenant to vacate the property without any notice.
• Unclear rental and deposit terms: In the lack of a written rental agreement, a landlord could take advantage and charge rent arbitrarily. The tenants may also face the risk of losing their security deposit money without clear security deposit terms.
• Increase in rent: A landlord is not bound by any contract and may increase the rent anytime and without prior notice. This could create a financial burden for the tenants.
• Breach of privacy: Without specific clauses mentioned in the rental agreement, landlords may enter the property without proper notice to the tenant, leading to breach of privacy and disputes.
• No proof of residency: A rent agreement serves as an important proof of current address for any individual. Without rent agreement, tenants can find it difficult to obtain address proof for official purposes.
• No record of payment: Without a written agreement, landlords may make false claims over non-payment of monthly rent, creating problems for the tenant.

For landlords

• Damage to property: A rental agreement usually mentions who would be responsible for minor and major damages caused to the property during the tenancy. However, there will be no clarity in the lack of a formal agreement. The landlord faces the risk of incurring expenses in case of damages as they cannot force the tenant to pay for such expenses without a legal contract.
• Risk of vacant property: A tenant can vacate the property anytime without informing the landlord if there is no legal agreement specifying the consequences of such actions. This could leave the landlord without a tenant and incur losses until they find a new tenant.
• Defaults on rent payment: Without a formal agreement, a landlord cannot impose any fine or penalty on the tenant who fails to pay rent by the due date.
• Subletting issues: Subletting a property without the landlord’s approval can be a good reason for the tenant’s eviction. However, without a written agreement, a landlord cannot prove that the tenant who has subleased the property has violated the terms of the tenancy. Hence, it poses risks for the landlord, and it could also lead to legal issues.

Risks that tenants and landlords could face

Difficulty in getting legal remedy

A formal rental agreement that clearly specifies the terms and conditions is admissible in a court of law when any dispute arises between the landlord and the tenant. Without a proper legal document, courts may not recognise the claims made by tenants or landlords.

In India, there are rent control laws in different states that aim to protect the interests of tenants. Without a proper agreement in place, a tenant may lose protection under rent control regulations against any unfair practices by the landlord.

For landlords, eviction of a difficult tenant (e.g. one who is not paying rent, causing damage to the property, etc.) and taking legal action against them becomes quite challenging.

Unclear maintenance responsibilities

A proper rent agreement usually includes details about who would be responsible for ensuring the property’s maintenance, incurring expenses for major and minor repairs, paying maintenance charges to the society, etc. Disputes over maintenance responsibilities could occur between the landlord and the tenant in the absence of a formal agreement. It can also lead to confusion over who would pay for the utility bill payments.

Tax evasion by landlords

By not signing a rent agreement while renting out a property, a landlord may decide not to disclose their rental income when filing tax returns. This could be a possible way to evade tax and can attract penalties by the income tax department and other legal consequences.

Is a verbal rental agreement legally binding?

In India, verbal agreements between landlords and tenants are quite common, especially when the rental tenure is less than one year.  Both parties generally discuss all the terms and condition, and the property is rented. One should note that a verbal rental agreement does not have legal validity and it could be breached by either party at any time. For example, a landlord can ask the tenant to vacate the property without notice or the tenant can leave the property mid-term or delay the rent payment. Moreover, the property is rented for more than one year, it becomes mandatory to have a written and registered rental agreement for the tenancy to have legal validity.

Are online rent agreements valid?

In India, online rental agreements are considered legally valid if they fulfil certain conditions:

• Both the landlord and tenant have agreed to the terms and conditions of the tenancy.
• The document is duly signed (digitally signed) by both parties.
• The online portal that is used to create the online rent agreement should adhere to the relevant regulations in India.
• The agreement should be printed on a stamp paper or have an e-stamp affixed on the front page.
• The online rent agreement is legally binding only if it is registered. It protects the rights of the landlord and the tenant in case of disputes.

How to create a rent agreement online?

• Go to the relevant portal and download the rent agreement template online
• Provide details related to the tenant, landlord, property address, and terms and conditions as discussed by both parties.
• Make the payment to complete the online registration of the agreement. This includes payment of the applicable stamp duty (as determined by the respective state government), convenience fee and delivery charges and the Goods and Services Tax (GST).
• The rent agreement will be printed on a stamp paper. It will delivered to your house within three to five working days. The online rent agreement having the e-stamp can also be obtained on email.
• The rent agreement should be shared with both parties. The document can be signed digitally. The Section 5 of the Information Technology Act, of 2000 makes digital signatures legally valid.

How to register rent agreement online?

The process of registering the rent agreement and the stamp duty rates usually differs from state to state. Let us take an example of rent agreement registration in Delhi.

• Prepare a draft rental agreement with complete details such as landlord’s name and property address, tenant’s name and address, rental tenure, rent amount and other terms and conditions.
• It should be verified by both parties.
• Print the agreement on a stamp paper. Nowadays, it is necessary to get an e-stamp of the total stamp duty value calculated based on the applicable rates and get the agreement printed.
• E-stamps are regulated by the Stock Holding Corporation of India Limited (SHCIL) and can be obtained from a registered stamp vendor. One can also obtain it from designated banks or the nearest SHCIL branch.
• Alternatively, e-stamping can be done by paying stamp duty online (only up to Rs 500) without a physical stamp paper.
• Visit the official SHCIL website at https://www.shcilestamp.com/estamp_statedelhi.html to find details such as procurement centres, online payment procedures and locate SROs.
• To register the agreement, visit the Sub-Registrar’s Office (SRO) under whose jurisdiction the property is located. Pay the relevant registration charges at the office. Both the parties must be present along with two witnesses and they must sign the document before the sub-registrar. Make sure to carry relevant supporting documents such as sale deed, passport photos, identification and address proofs, etc.

Stamp duty and registration charges for rent agreement in Delhi

• If the tenure is less than five years, a stamp duty of 2% of the consideration value is applicable
• If the tenure is between five to 10 years, a stamp duty of 5% of the consideration value is applicable
• If the tenure is 10 to 20 years, a stamp duty of 5% of double the consideration value is applicable
• Registration charges of Rs 1,100 is applicable

Tips for tenants and landlords when signing a rent agreement

• Before finalising a rented property, prospective tenants should physically visit the property to check for any construction quality issues.
• They should ensure the property, including electrical outlets, water connection, and plumbing fixtures are in proper condition. In case of any damages, they must report it to the owner and get it repaired before moving in. One can click pictures of the property in advance to avoid any disputes.
• Before moving in, a tenant should check with the landlord if the previous tenant has cleared the previous maintenance charges and utility bills. In case the property is in a housing society, it is advisable to obtain a no-objection certificate.
• Tenants should carefully read all the terms and conditions mentioned in the rent agreement, including tenancy duration, rent payment due date, security deposit amount and its refund, maintenance responsibilities, charges for parking and other amenities in the society, termination clause, etc.
• In India, people usually go for an 11-month rent agreement to avoid the task of registration and incurring registration charges.

Housing.com News Viewpoint

Following the legal procedures when renting a property will protect landlords and tenants from potential legal disputes. This includes the preparation of a rental agreement and getting the document registered if the tenure exceeds 11 months. The rental laws and the registration charges may differ depending on the state where the property is located. Hence, one should have a thorough knowledge of these rules and regulations. One can also approach a legal professional to find additional information and understand the process of preparing a rental agreement.

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