The Mexican Standoff – Landlords & Tenants!

The Mexican Standoff – Landlords & Tenants!

Coronavirus is not just a health hazard, but also an economic and financial pandemic. One of the sectors that are adversely affected by the COVID-19 is real estate. The lockdown has given a major blow to the already wounded real estate sales with developers stalling their projects. But if that was not enough, it has also affected the rental sector. The real estate rental sector is, what we can call, at a Mexican Standoff! A Mexican Standoff by definition is a situation when no one in the standoff can achieve victory. Similarly, the landlords and tenants are in a situation where no one is at an advantage.

Read about the Effect of COVID-19 on the Indian Economy!

The Government Advisory Regarding Rentals in India

Central & State Governments on 29th March 2020 released an order under the Disaster Management Act 2005 requesting landlords to forgo rent for a month. The central and state leaders further added that landlords should not evict tenants during this time of crisis. If any landlord demands rent or forces the tenant to vacate, then they could face strict action. In some states, if a landlord forces the tenant to vacate then they could even face a jail term of 1 year.

The Standoff between Tenants & Landlord

The advisory seems to favour the tenant, but that is not exactly so! The government is requesting the landlords to not ask for rents during this time. But eventually, as the lockdown eases and we move towards normalcy, the dues would need to be cleared. And that’s where the catch is! The economy is showing signs of a slowdown, and the job market is already filled with uncertainty. Those that are already employed are getting a reduced salary. In the current situation, a lot are living on their savings. When the time comes, not everybody would be in a position to pay the two to three month rent together. They might get an option to distribute the rent over a period of time, like an EMI, but the current job market doesn’t guarantee anything! A lot of migrant workers are looking to go back to their home town. Those who did move out and were not able to reach, are stuck at rest camps. Those who were able to reach their hometown, are without any income but with the load to care for their families. In turn, the expenses are rising, the income is decreasing, and the future is grey! Therefore, the tenants are not too well off. Even with the relaxation to pay later, they are not saving enough to pay later!

The landlords are not better off either! The government order has asked them to forgo the rent but does not provide them with any other source of income. Some landlords might have an alternate source of income, but not all of them do. Some senior citizens rely on the rental income and like everybody else, they also have expenses. With most of the transactions happening in-cash, landlords also need liquidity.

That is not it, the landlords have to also deal with eviction. Two cases arise here. First, if the lease ends during the period of lockdown, the landlord cannot force the tenant to move out. The tenant is not under any obligation to sign up lease extension. After the lockdown, the tenant is not under the obligation to pay for the extended stay. This accounts for the loss of income, which could add to the woes of the landlord. The second case where the tenant does not pay for the time the lockdown is in force, then after the lockdown, due to any reason, they are not able to pay further. In this case, the landlord is again at a loss. They are stuck with the tenant. If they ask the tenant to vacate, then they lose the forgone rent. And if the let the tenant stay, then they are not sure when they would be able to recover the loss.

Need for Rental Regulation

The real estate market is in dire need of regulations. The RERA act has brought some reforms but that is only enforceable to big builders. There is a lot needed in the secondary sale market and rental market. Investors and market gurus had already downgraded the residential rental market because the rate of returns was low as compared to other countries. The COVID-19 has further marked the market in bold black.

The commercial segment is still secure as firms and businessmen go through a fine-tooth comb before signing the lease. They make sure all the points are covered and both the parties are not at a loss. The worst hit in the segment is always the individuals. They do not have the experience to escape every pitfall or the funds to hire legal experts. Commercial contracts have a ‘force majure’ clause to protect against natural calamities. But residential lease don’t! Most of the time, residential leases are not even properly drafted. Owners are not aware of various laws enacted to protect them and neither are tenants. The reason the returns in the market are low because transparency is missing.

Also read about Challenges faced by Buyers in the Indian Market

The reason markets in countries like the US and UK give better results because the process has been standardized by the Government. The citizen must follow the procedure to get into a lease contract. Having studied and experienced more developed real estate markets, Instant Home has designed its platform to ease the search for tenants and cover all the grounds for landlords. We have legal and finance experts to make sure that both the parties in every real estate transaction are secure and the deal is completely transparent.

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