This is applicable mainly in India. The Rent Control Act, in India, prohibits the owner to charge excess rent than as prescribed under the law irrespective of market rent prevailing. The standard rent is the rent which would be permissible under the law to be charged to a tenant. The rent Act applies to premises let for residence, education, business, trades, storage, etc. Rent in excess of certain rent, even though the free market may support, it is not allowed under the Act.
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The standard rent consists of the return to the owner for his investment in land and building plus the outgoings on the same as usual.
The outgoings generally allowed by the Hon’ble Court are:
- Sinking Fund
- Collection and Management charges (if any).
- Municipal taxes.
- N.A. Assessment etc.
Now, the net return on the cost of construction and value of freehold land are as follows:
On cost of construction – 6½% or as per market condition
On value of land – 5½% or as per market condition
However, looking to the present circumstances, such as “High rate of interest in money market and the increased rate of return on investment in other sectors, I have adopted the net return on the cost of construction at 9% and on the value of the land at 8%.
Repairs are usually allowed at ½ % to 1% on the 9/10th cost of construction of a building depending upon its life, class of construction etc. For RCC framed structure its life shall be about 60 to 100 years and have one can adopt repairs at ½ % of the 9/10th cost of construction.
It is allowed at 3 to 4% basis on 9/10th of the cost of construction, for the future of the building. The outgoings are adopted on 9/10th of the cost and not on the full cost of construction as after its economic life shall be over, the owner can get 10% of the cost as its scrap value i.e. from the sale of old building materials. Sinking fund at 3½% for the future life of 60 to 100 years will be 0.11% of the 9/10th cost of construction of the building.
But nowadays many state Government are not strictly enforcing the act, as because of artificial constraints of a draconian act, it has discouraged people renting their property resulting in the actual shortage of housing stock. It also demotivates landlords from repairing and maintaining the old rented houses, as the return in terms of rent is never sufficient to cover such costs. This has resulted in the big stock of poor dilapidated buildings which are on the verge of collapse with tenants living under constant to life threat and in miserable conditions.
However, nowadays many state governments have started amending their laws so as to be fair to investors and owners and also simultaneously protecting old and poor tenants.