Tenant's Corner: Should Security Deposits Be Standardised?

Tenant's Corner: Should Security Deposits Be Standardised?

Tenant's Corner: Should Security Deposits Be Standardised?
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How much security deposit can you afford to pay? An unwritten rule, tenants are still unclear how much can landlord ask legally. At times, a tenant loses on a property simply because the security deposit is way too high. Take the case of Rakhi and Muralidhar Kumar from Bengaluru. “We were ready to pay Rs 65,000 as monthly rent for a two-storey in Indiranagar but the landlord demanded 10 months of security deposit. We couldn’t afford to part with so much money at a go and therefore started our house hunt elsewhere where it made more sense.”

Why is there a confusion on security deposits? Well, many aspects come into play, including:

  • What if there are unreasonable clauses due to which the landlord is not bound to return the amount when the tenant is finally moving out?
  • It is a tax-free deposit for the landlord but is a major drain on the tenant’s account.
  • What if the tenant plans to move out of the house due to an unforeseen difficulty which he/she gets to know only later?
  • There is no written rule about security deposits.
  • Security deposits paid in cash could also factor in as ‘invisible’ money circulating in the economy.

Why is the security deposit necessary?

On the Indian Real Estate Forum (IREF), we receive many issues related to security deposit. Take the case of Amartya Tripathi who says, “I was cheated of half the amount of my security deposit recently. The landlord cited reasons like repainting the house and repair work. Is it the outgoing tenant’s responsibility to pay for the repainting and repair of the normal wear and tear after two years of stay,” he asks.

While this is one story, another one goes like this.

Mriganshi Das writes, “I was flat hunting and I found a place in Chandivali, Mumbai. I liked the house and agreed to pay 16,000 as monthly rent and Rs 50,000 as the security deposit. I had also asked the landlord to provide me with a new fridge and keep it ready by the time I move in. We mutually agreed and I paid the security deposit to the flat owner while I took a receiving on the ID card copy of the owner and we agreed that I will move in from the beginning of the next month. We were supposed to get the agreement done two days before I moved in. Meanwhile, my husband got a transfer notice to another city and we are now bound to move out of Mumbai. Today when I informed the owner that we will not be shifting into the flat, he says he will not return the deposit and if at all he returns he will cut the amount of the new fridge that he purchased as per our request. Please guide.”

If you notice the difference between the two complaints raised above, the importance of security deposit is established. There are equal chances that tenants or the landlord may feel cheated. In the first case, the tenant was expected to pay for the repainting. On the other hand, a landlord expecting new tenants had to spend his money on something that they had asked for. The tenant, however, stepped back and did not keep his word. This establishes the need for a security deposit and a rental agreement which establishes the clauses, too. Any unreasonable clause can be questioned by the tenant even before he agrees to take up the place on rent.

Sample format

Ram Sinha, a realtor at Pinnacle says he favours this format whenever he leases a home:

The Licensee will pay a sum of Rs. __________/- (Rupees ____________________ Only) on execution of this agreement as and by way of Security Deposit for the observance and performance of the terms and conditions of this agreement. This deposit is subject to refund to the Licensee without any interest on expiry/revocation of this agreement and further subject to such deductions like unpaid Electric Bill, Telephone Bill, Cable Charges, Parking Charges, Pipeline Gas Charges, Compensation, repair etc., therefrom that the Licensor may then be entitled to receive and recover from the Licensee. The Licensor shall at the time of handing over the security deposit to the Licensee, retain a sum equivalent to three months of average electricity bills, Telephone Bills, Pipeline Gas Charges, and Cable Charges and Parking Charges, which shall be adjusted towards payment of unpaid electricity bills, telephone bills, Pipeline Gas Charges, Cable Charges, Parking Charges, if any, for the period the Licensee has been in occupation of the said flat.

This format also establishes clearly what is expected of the tenant and the deductions that he should be prepared for if he defaults. Sinha adds, “Licensee has to be careful in exchanging vacant possession of the premises only against receipt of security deposit. If he hands over the possession on good faith, without getting the deposit, the recovery of the security deposit can be a long haul for him.”

Also read: Landmark Court Decisions That Shaped Real Estate In India

Should security deposits be standardised?

Depending on what amenities a luxury house offers to a tenant, the maintenance of these features and amenities can cost anywhere between Rs 8-50 per sq ft. So, for instance, if the house is spread over 3,000 sq ft, the monthly maintenance will come to Rs 24,000 minimum. A smaller house with regular amenities may not command as much. Hence, security deposits by this logic cannot be standardised. However, the government can intervene and fix a base.

Recent reports claim that activists have been asking a standardisation and that it should be fixed at one to three months of rent. This was after news about landlords asking for 10 months of security deposit surfaced.

Prior to this, there have been instances where verdicts were in favour of the tenant. Consider these:

  • In 1996, in the K. Narasimha Rao vs. T.M. Nasimuddin Ahmed case, the bench ruled the following:

“Landlord not to claim or receive anything in excess of fair rent or agreed rent. - (l) Where the Controller has fixed or refixed the fair rent of a building -

(a) the landlord shall not claim, receive, or stipulate for the payment of (i) any premium or other like sum in addition to such fair rent, or (ii) save as provided in Section 5 or Section 6, anything in excess of such fair rent: Provided that the landlord may receive, or stipulate for the payment of,an amount not exceeding one month's rent by way of advance; (the same is true where rent is not fixed)

(b) Save as Provided in clause

(a), any Premium or other like sum or any rent Paid in addition to, or in excess of, such fair rent, whether before or after the date of the commencement of this Act, in consideration of    the grant, continuance or renewal of the tenancy of the building after the date of such commencement, shall be refunded by the landlord to the person by whom it was paid or at the option of such person, shall be otherwise adjusted by the landlord: Provided that where before the fixation or refixation of the fair rent, rent has been paid in excess thereof, the refund or adjustment shall be limited to the amount paid in excess for the period commencing on the date of the application by the tenant or landlord under sub- section (1) of Section 4 of sub- section (3) of Section 5, as the case may be, and  ending with the date of such fixation or refixation.

  • In 2015, a small-cases court cited the 1996 verdict in the case of Nimauthullah versus Rajan case where the landlord was asked to refund the excess money after deducting for defaults.
  • The Draft Model Tenancy Law of 2015 also read, “Save an agreement to the contrary, it shall be unlawful to charge a security deposit in excess of three times the monthly rent. The security deposit shall be refunded to the tenant within one month after vacation of the premises after making a due deduction of any liability of the tenant.”
  • In early 2017, a public interest litigation or a PIL was filed in the Karnataka High Court by an activist but because the petitioner was not sent to the Secretary of Housing, the matter was closed.

How businesses are banking on high deposits

Not just your home and your car, you can even take a loan for security deposits. There are companies that lend money for the purpose, while some organisations help their employees to pay the rental deposit if they have transferred them to a new city. Do note that as per the Income Tax laws I-T laws, if an employer pays rent to a landlord for accommodation provided to an employee, the `perquisite value' (taxable in the hands of the employee) will be the rent actually paid or 15 per cent of salary, whichever is less. If any amount is recovered from the employee, the perquisite value is reduced to this extent. The net perquisite value forms part of the taxable salary income of the employee.

In other countries

In England, a recent government proposal suggested that the security deposits that tenants leave with landlords or their agents will be capped at no more than one month’s rent. Can we have it in India too? Share your views. 

Join the discussion on Indian Real Estate Forum.

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