“In many cases, rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” . Assar Lindbeck, Swedish economist (1972).If a Martian came to visit the city of Mumbai today, there are several things that would befuddle him. Right on top of the list would be the housing infrastructure of the city. How is it, he may ask, that the residents of one of the most vibrant and enterprising cities in the world largely live in a collection of slums and ramshackle, dilapidated structures, interspersed by only a few modern, well maintained buildings? The answer to this paradox does not lie in the lack of money, resources, expertise, or even land. A large part of the blame falls on a piece of seemingly well-meaning legislation that purports to protect the interests of Mumbai’s old tenants: the Maharashtra Rent Control Act, 1999..Rent control legislation has a long history in the city. It was first introduced during the British era after the First World War as an emergency, temporary measure to regulate the price of rental accommodation, which was perceived to have skyrocketed due to wartime inflation and shortages. These measures were reintroduced in the aftermath of the Second World War, and then continued after independence, when the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 was passed, this time to deal with the increases in rent due to the post-partition influx into the city. The Act fixed the “standard rent” that landlords could charge at 1940 levels, prohibiting them from charging any higher rent. Despite initially being conceived as a temporary, three-year measure, the Act was extended about 20 times over the next 50 years, without any adjustments to the standard rent fixed under the Act to factor in price rises or inflation. This led to the absurd scenario whereby the inflation of 8,200% between 1940 and 2000 was not factored in the rent fixed. This led to scenarios where middle or upper middle class tenants living in posh two-three bedroom apartments in South Mumbai were paying 1940-era rents of Rs. 200/- per month, whereas the inflation adjusted market rates of those flats would have been Rs. 5,000/- to Rs. 6,000/- per month. Mumbai’s landlords challenged the constitutional validity of the Act on the grounds that, inter alia, the fixing of the standard rent under the Act violated Article 14 (for being arbitrary and unreasonable), Article 19(1)(g) (for violating the landlords’ freedom of business) and Article 21 (for violating the landlords’ right to livelihood) of the Constitution. The landlords lost the challenge before the Bombay High Court. After a protracted legal battle, the Act was finally phased out in 1999, after the Supreme Court deemed the fixing of the standard rent without any provision for adjustment due to inflation to be arbitrary and unreasonable and violative of Article 14 of the Constitution..In the robustly worded judgment of Malpe Vishwanath Acharya v. State of Maharashtra AIR 1998 SC 602, the Supreme Court, speaking through Justice Kirpal, held that if an enactment,.“results in increasing injustice to one section of the society and an unwarranted largess or windfall to another, without appropriate corresponding relief, then the continuation of such a law which necessarily, or most likely, leads to increase in lawlessness and undermines the authority of the law can no longer be regarded as being reasonable. Its continuance becomes arbitrary.”.Following the directive of the Supreme Court, the government replaced the old Act with the Maharashtra Rent Control Act, 1999. Much like the old pre-1999 legislation, the new Act purports to protect the interests of tenants living in controlled property i.e. all pre-1987 property leased to tenants in the city. It does so by two main measures, first, by proscribing landlords from charging rent higher than the “standard rent” fixed under the Act at 1940 levels for many buildings, only allowing for a 4% per annum increase after the passage of the Act in 1999 and secondly, by severely restricting the landlord’s right to evict the tenant to a very few statutorily restricted grounds, and that too only after getting an eviction order from the court. The combined effect is to lock the landlords into a permanent, non-voluntary relationship with their tenants. The new Act is slightly friendlier towards the landlord as compared to the previous Act, but is still fairly discriminatory. To begin with, although the Act does allow for a 4% annual increase in rent from 2000 onwards, the standard rent has still been fixed at 1940 levels, meaning that no adjustments for inflation between 1940 and 1999 have been made under the new Act. Moreover, the 4% annual increase provided under the Act is wholly inadequate, given that the average annual inflation over the past decade has been close to 8%. It is clear that the Supreme Court’s verdict in Malpe Vishwanath Acharya v. State of Maharashtra has not been followed by the Maharashtra government while drafting the 1999 Act. A challenge to the Act is currently pending before a nine judge bench of the Supreme Court..That then, is the legal position. The economic effects of rent control legislation are well known. The first effect is to push the demand for rent controlled housing higher. This demand is not met by a commensurate increase in supply because landlords have no economic incentive to create additional rent-controlled housing. Moreover, tenants of rent-controlled housing tend to hoard their apartments since they do not have to pay the full price for these apartments; thereby further restricting it’s supply. The increased demand is funneled to the non-controlled sector, where prices sky rocket due to increased competition from buyers and limited supply. Supply is also restricted because landlords of non-controlled properties are apprehensive that their properties may be brought under rent control. The effect is compounded by Mumbai’s stifling planning regulations, specifically the Floor Space Index (FSI) regulations, which further artificially restrict supply. Some of the demand therefore cannot be met by the non-controlled sector and is met by slums. The other consequence of rent control is that it disincentivises the landlord from maintaining his property. The landlord does not have the appropriate incentives to repair or maintain his property, since he cannot get compensated for undertaking the repair works by charging a higher rent. This leads to badly maintained, dilapidated buildings that often collapse: a situation depressingly familiar to Mumbaikars, especially during the monsoon season. The end result is a situation where none of the stakeholders are happy: the rent controlled buildings are poorly maintained and often unlivable; the new non-controlled buildings are expensive and overpriced; and a vast section of the city’s population, which is unable to find affordable housing, is pushed into shanties and slums..The proponents of rent control pitch it as a David versus Goliath tale. Rent control legislation, they say, is meant to protect poor tenants against exploitation by landlords. Rent control legislation protects the interests of tenants living in around 20,000 buildings in the city, a group that lobbies forcefully and successfully to keep it’s existing privileges in tact. But what about the interests of the other 95% of the population, many of whom live in slums and many others who are denied affordable housing due to the exorbitant rents they have to pay on the non-rent controlled housing in the city? And what about the many who cannot move to Mumbai altogether due to lack of access to affordable housing? After all, the tenants protected by rent control are by no means uniformly poor and the class of people living in non-controlled housing- the very people who suffer the negative consequences of rent control- are by no means uniformly rich. The other argument made by proponents of rent control is that it protects existing communities and community ecosystems created by people who have been living in particular areas for decades. This is an interesting argument at first sight, but proves to be inadequate upon closer examination. It makes the folly of privileging the interests of the few over the needs of the many. Why would the ‘right to community’ of a few tenants trump the legitimate requirements of all of the city’s other residents to a clean, comfortable standard of housing? Is this ‘right’ to be privileged at all costs, especially when there is mounting evidence in the form of recurrent building collapses that the housing is no longer fit for purpose? And what of the ‘rights’ of the landlords to enjoy the fruits of the properties that they own and which are being denied to them by the law? We must also remember that rent control has other perverse effects. By depressing property prices, it reduces the amount that the government can recover by way of property taxes, reducing the funds available to it to improve the housing situation in the city. The rent control regime also extracts a significant administrative cost in terms of registering rental property, formulating elaborate mechanisms to fix rents and having an effective dispute redressal mechanism to deal with landlord-tenant disputes. The Law Commission of India noted in its 129th Report that the maximum numbers of disputes pending before courts are those relating to eviction, exerting a massive cost on the judicial system. When activists speak the language of rights, it is important to recognize that there are competing sets of rights involved in this matter. To my mind, it is clear where the balance of interests lie..The irony is that rent control legislation was meant to be a temporary, short-term solution has now become a permanent measure that is politically impossible to repeal. This despite the fact that there is near unanimity amongst economists across the political spectrum who agree that “a ceiling on rents reduces the quality and quantity of housing” (American Economic Association Poll, 1992). It seems to a classic case of “Nelson’s Third Law” in action: the contention by the late economist Arthur Nelson that the worse a government regulation is, the harder it is to get rid of it..A good law is one which creates the right incentives for it’s subjects so that they act in a manner that maximizes social welfare. By this definition, the Maharashtra Rent Control Act, 1999 is the very antithesis of a good law. It is arguably one of the major causes for the abysmal state of Mumbai’s housing infrastructure. As Mumbai grapples with the challenge of transforming it’s crumbling and decrepit infrastructure, many simultaneous investments and reforms are required. Slum rehabilitation, relaxing FSI norms, creating a well designed metro system, building more bridges and flyovers are all necessary ingredients to transform Mumbai into a world class, 21st century city. An important piece of the jigsaw is repealing the Maharashtra Rent Control Act, 1999 and liberalizing the city’s housing market. The government should act now..Parag Sayta is a corporate lawyer, born and raised in Mumbai, who recently completed his Masters in Law from Harvard Law School. He can be reached at paragsayta@gmail.com.
“In many cases, rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” . Assar Lindbeck, Swedish economist (1972).If a Martian came to visit the city of Mumbai today, there are several things that would befuddle him. Right on top of the list would be the housing infrastructure of the city. How is it, he may ask, that the residents of one of the most vibrant and enterprising cities in the world largely live in a collection of slums and ramshackle, dilapidated structures, interspersed by only a few modern, well maintained buildings? The answer to this paradox does not lie in the lack of money, resources, expertise, or even land. A large part of the blame falls on a piece of seemingly well-meaning legislation that purports to protect the interests of Mumbai’s old tenants: the Maharashtra Rent Control Act, 1999..Rent control legislation has a long history in the city. It was first introduced during the British era after the First World War as an emergency, temporary measure to regulate the price of rental accommodation, which was perceived to have skyrocketed due to wartime inflation and shortages. These measures were reintroduced in the aftermath of the Second World War, and then continued after independence, when the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 was passed, this time to deal with the increases in rent due to the post-partition influx into the city. The Act fixed the “standard rent” that landlords could charge at 1940 levels, prohibiting them from charging any higher rent. Despite initially being conceived as a temporary, three-year measure, the Act was extended about 20 times over the next 50 years, without any adjustments to the standard rent fixed under the Act to factor in price rises or inflation. This led to the absurd scenario whereby the inflation of 8,200% between 1940 and 2000 was not factored in the rent fixed. This led to scenarios where middle or upper middle class tenants living in posh two-three bedroom apartments in South Mumbai were paying 1940-era rents of Rs. 200/- per month, whereas the inflation adjusted market rates of those flats would have been Rs. 5,000/- to Rs. 6,000/- per month. Mumbai’s landlords challenged the constitutional validity of the Act on the grounds that, inter alia, the fixing of the standard rent under the Act violated Article 14 (for being arbitrary and unreasonable), Article 19(1)(g) (for violating the landlords’ freedom of business) and Article 21 (for violating the landlords’ right to livelihood) of the Constitution. The landlords lost the challenge before the Bombay High Court. After a protracted legal battle, the Act was finally phased out in 1999, after the Supreme Court deemed the fixing of the standard rent without any provision for adjustment due to inflation to be arbitrary and unreasonable and violative of Article 14 of the Constitution..In the robustly worded judgment of Malpe Vishwanath Acharya v. State of Maharashtra AIR 1998 SC 602, the Supreme Court, speaking through Justice Kirpal, held that if an enactment,.“results in increasing injustice to one section of the society and an unwarranted largess or windfall to another, without appropriate corresponding relief, then the continuation of such a law which necessarily, or most likely, leads to increase in lawlessness and undermines the authority of the law can no longer be regarded as being reasonable. Its continuance becomes arbitrary.”.Following the directive of the Supreme Court, the government replaced the old Act with the Maharashtra Rent Control Act, 1999. Much like the old pre-1999 legislation, the new Act purports to protect the interests of tenants living in controlled property i.e. all pre-1987 property leased to tenants in the city. It does so by two main measures, first, by proscribing landlords from charging rent higher than the “standard rent” fixed under the Act at 1940 levels for many buildings, only allowing for a 4% per annum increase after the passage of the Act in 1999 and secondly, by severely restricting the landlord’s right to evict the tenant to a very few statutorily restricted grounds, and that too only after getting an eviction order from the court. The combined effect is to lock the landlords into a permanent, non-voluntary relationship with their tenants. The new Act is slightly friendlier towards the landlord as compared to the previous Act, but is still fairly discriminatory. To begin with, although the Act does allow for a 4% annual increase in rent from 2000 onwards, the standard rent has still been fixed at 1940 levels, meaning that no adjustments for inflation between 1940 and 1999 have been made under the new Act. Moreover, the 4% annual increase provided under the Act is wholly inadequate, given that the average annual inflation over the past decade has been close to 8%. It is clear that the Supreme Court’s verdict in Malpe Vishwanath Acharya v. State of Maharashtra has not been followed by the Maharashtra government while drafting the 1999 Act. A challenge to the Act is currently pending before a nine judge bench of the Supreme Court..That then, is the legal position. The economic effects of rent control legislation are well known. The first effect is to push the demand for rent controlled housing higher. This demand is not met by a commensurate increase in supply because landlords have no economic incentive to create additional rent-controlled housing. Moreover, tenants of rent-controlled housing tend to hoard their apartments since they do not have to pay the full price for these apartments; thereby further restricting it’s supply. The increased demand is funneled to the non-controlled sector, where prices sky rocket due to increased competition from buyers and limited supply. Supply is also restricted because landlords of non-controlled properties are apprehensive that their properties may be brought under rent control. The effect is compounded by Mumbai’s stifling planning regulations, specifically the Floor Space Index (FSI) regulations, which further artificially restrict supply. Some of the demand therefore cannot be met by the non-controlled sector and is met by slums. The other consequence of rent control is that it disincentivises the landlord from maintaining his property. The landlord does not have the appropriate incentives to repair or maintain his property, since he cannot get compensated for undertaking the repair works by charging a higher rent. This leads to badly maintained, dilapidated buildings that often collapse: a situation depressingly familiar to Mumbaikars, especially during the monsoon season. The end result is a situation where none of the stakeholders are happy: the rent controlled buildings are poorly maintained and often unlivable; the new non-controlled buildings are expensive and overpriced; and a vast section of the city’s population, which is unable to find affordable housing, is pushed into shanties and slums..The proponents of rent control pitch it as a David versus Goliath tale. Rent control legislation, they say, is meant to protect poor tenants against exploitation by landlords. Rent control legislation protects the interests of tenants living in around 20,000 buildings in the city, a group that lobbies forcefully and successfully to keep it’s existing privileges in tact. But what about the interests of the other 95% of the population, many of whom live in slums and many others who are denied affordable housing due to the exorbitant rents they have to pay on the non-rent controlled housing in the city? And what about the many who cannot move to Mumbai altogether due to lack of access to affordable housing? After all, the tenants protected by rent control are by no means uniformly poor and the class of people living in non-controlled housing- the very people who suffer the negative consequences of rent control- are by no means uniformly rich. The other argument made by proponents of rent control is that it protects existing communities and community ecosystems created by people who have been living in particular areas for decades. This is an interesting argument at first sight, but proves to be inadequate upon closer examination. It makes the folly of privileging the interests of the few over the needs of the many. Why would the ‘right to community’ of a few tenants trump the legitimate requirements of all of the city’s other residents to a clean, comfortable standard of housing? Is this ‘right’ to be privileged at all costs, especially when there is mounting evidence in the form of recurrent building collapses that the housing is no longer fit for purpose? And what of the ‘rights’ of the landlords to enjoy the fruits of the properties that they own and which are being denied to them by the law? We must also remember that rent control has other perverse effects. By depressing property prices, it reduces the amount that the government can recover by way of property taxes, reducing the funds available to it to improve the housing situation in the city. The rent control regime also extracts a significant administrative cost in terms of registering rental property, formulating elaborate mechanisms to fix rents and having an effective dispute redressal mechanism to deal with landlord-tenant disputes. The Law Commission of India noted in its 129th Report that the maximum numbers of disputes pending before courts are those relating to eviction, exerting a massive cost on the judicial system. When activists speak the language of rights, it is important to recognize that there are competing sets of rights involved in this matter. To my mind, it is clear where the balance of interests lie..The irony is that rent control legislation was meant to be a temporary, short-term solution has now become a permanent measure that is politically impossible to repeal. This despite the fact that there is near unanimity amongst economists across the political spectrum who agree that “a ceiling on rents reduces the quality and quantity of housing” (American Economic Association Poll, 1992). It seems to a classic case of “Nelson’s Third Law” in action: the contention by the late economist Arthur Nelson that the worse a government regulation is, the harder it is to get rid of it..A good law is one which creates the right incentives for it’s subjects so that they act in a manner that maximizes social welfare. By this definition, the Maharashtra Rent Control Act, 1999 is the very antithesis of a good law. It is arguably one of the major causes for the abysmal state of Mumbai’s housing infrastructure. As Mumbai grapples with the challenge of transforming it’s crumbling and decrepit infrastructure, many simultaneous investments and reforms are required. Slum rehabilitation, relaxing FSI norms, creating a well designed metro system, building more bridges and flyovers are all necessary ingredients to transform Mumbai into a world class, 21st century city. An important piece of the jigsaw is repealing the Maharashtra Rent Control Act, 1999 and liberalizing the city’s housing market. The government should act now..Parag Sayta is a corporate lawyer, born and raised in Mumbai, who recently completed his Masters in Law from Harvard Law School. He can be reached at paragsayta@gmail.com.
