We invariably come across doubts and apprehensions with respect to the ideal tenure of your contract when renting an apartment. While some insist on having an 11-month long tenure, others are comfortable with a 5-year contract. We at SimpLease attempt to unravel the mystery behind the 11-month contracts as well laying down the logic for a 5-year contract.
The legal position: The legal position is that a contract (called the Leave and License agreement) can before a maximum period of 5 years. If it exceeds 5 years, it is treated as Lease as opposed to a Leave and License .The rationale for restricting the contract term to less than 5 years is primarily on account of the sharp variation in stamp duty payable. If the contract is for less than 5 years, the rate of stamp duty is 0.25% of the total rental receivable including notional interest on security deposit. However, if the contract exceeds 60 months, it is treated as a lease as opposed to license wherein the stamp duty rate is 5% computed on 10% of the market value of the property. We give an example below to illustrate:
Market value of property: Rs 2 crores
Annual rent: Rs 40,000
Security deposit: Rs 2,00,000
Stamp duty for 5 years under Leave and License agreement:
= 0.25% X (40,000 rent X 12 months X 5 years +10%notional interest X 200,000 deposit X 5years)
Stamp duty for 5 years under Lease:
=5% X 10 % X 2,00,00,000 market value
The 11-month contract: There are several owners who insist on having an 11-month contract and renewing it every year. This belief stems from the old era when undertaking a 11 month contract would result in (1) saving on stamp duty by not registering the documents as only documents with 12-month had to be registered and (2) bypassing the Bombay Rent Act which gave protection to tenants from eviction.
However, in the current scenario, both the above premises are not applicable. The law has made it compulsory to register all Leave and License agreements irrespective of the tenure. In addition, Section 24 of the Maharashtra Rent Control Act gives specific power to the house owner to recover possession of the premises through summary proceedings before the Competent Authority. In addition, it makes a licensee is liable to pay damages at double the rate of the license fee or charge of the premises fixed under the Agreements of License. Thus, it is pointless to have an 11-month contract in the current scenario although the practice still continues in Mumbai. All we can say is that ‘Old habits die hard’.