If you have ever put a property on rent or have lived in a rented house, you must have signed a rent agreement. Have you ever wondered why most rent agreements are for a duration of 11 months? Often, neither landlords nor tenants and not even the real estate agents know why this is so. Let’s find out.
The rent agreement
Also known as a lease agreement, the rent agreement is a written contract between the owner of a property (the landlord) and the tenant who takes it on rent. The agreement specifies the terms and conditions based on which the property is let-out, such as: description of the property (address, type and size), monthly rent, security deposit, purpose for which property can be used (residential or commercial), and duration of the agreement. Its terms and the conditions can be negotiated but after it is signed, it is binding on both the landlord and tenant. It also specifies the conditions under which the agreement can be terminated.
Why 11 months
Most rent agreements are signed for 11 months so that they can avoid stamp duty and other charges. According to the Registration Act, 1908, the registration of a lease agreement is mandatory if the leasing period is more than 12 months. If an agreement is registered, stamp duty and registration fee needs to be paid for it. For instance, in Delhi, for a lease of up to five years, the stamp paper cost is 2% of the total average annual rent of a year. Add a flat fee of Rs100, if a security deposit is part of the agreement. For a lease of more than 5 years but less than 10 years, it is 3% of the value of the average annual rent of a year. For 10 years and more but less than 20 years, it is 6% of the value of average annual rent of a year. The stamp paper can be in the name of the tenant or the landlord. In addition, a flat registration charge of Rs1,100 is also to be paid by demand draft (DD).
If a property is let out for 24 months at a monthly rent of Rs20,000 for the first 12 months and Rs22,000 a month for the subsequent 12 months. The charges for registering this agreement would be: 2% of the average rent for 12 months: Rs5,040, (average monthly rent is Rs21,000, average annual rent is 21000*12 and 2% of that is Rs5,040).
Plus if the agreement includes a security deposit, add another Rs100 and Rs1,100 as registration cost—bringing the total cost to Rs6,240. This is not counting the professional fees due to lawyers or other intermediaries for all the paperwork.
It is to avoid paying these charges that many landlords and tenants mutually agree to not get the agreements registered. In case you want to register a lease, tenant and landlord can agree to share its cost.