According to a recent report by the Centre of Social & Economic Progress, one of the biggest paradoxes in the Indian housing market is the presence of high costs and high vacancy. Indian houses are expensive as compared to the income and yet vacant.
The report puts the urban vacancy rate at 12.4%. Poor contract enforcement and pro tenant laws have been cited by the report as possible reasons for the high vacancy rates in urban India. The report further goes on to add that a policy change in rent control laws would have a net welfare benefit and could reduce India’s housing shortage by 7.5%.
The Government of India had approved the Model Tenancy Act, a reform aimed at overhauling the legal framework residential renting earlier in the year 2020. The act brings clarity to the landlord tenant relationship by defining the roles, responsibilities and the recourse available to each stake holder.
The act has also specified the structure of the regulatory frame work – the setting up of the Rent Authority, Rent Courts and the Rent Tribunals and their respective powers which will address the key issue of contract enforcement and help improve the confidence levels of the landlords. The model tenancy act is currently awaiting implementation by the various state governments and union territories.
The inability of the landlords to enforce the tenancy contract and the archaic rent control act has resulted in the landlords not being willing to trust prospective tenants. This is where a rental guarantee or a rental bond as it is also known as can help
A rental bond is a guarantee in the favor of a landlord, that the Surety will fulfill the obligations under the tenancy agreement in the event of a default by the tenant. It acts as a replacement to the security deposit & covers unpaid rent, lock-in period if any, damage to the property over fair wear & tear, and unpaid bills as set out in the lease agreement.
Landlords need protection and they don’t have adequate means at their disposal to assess the credibility of the tenant. Hence the landlords had to resort to the practice of requiring the tenant to put up a security deposit at the time letting out their property. The amount of security deposit can range from 2-12 months’ rent, depending on the terms of the tenancy agreement & city of domicile. A rental bond addresses this specific need of the landlord for protection against loss and provides them with a cover far more superior to that of the traditional cash security deposit. The surety company conducts a thorough diligence on the prospective tenant and issues a bond only if it is satisfied about the credibility of the tenant. In the event of a default and a subsequent invocation of the guarantee, the bond pays up on the claim and proceeds to collect the same from the defaulting tenant.
In India, Landlords seldom get to know their tenants prior to the tenancy. Most Landlords meet their tenants only once or twice before letting out their property. A rental bond assures the landlord of a credit verified and an assessed tenant and hastens the process of building trust. A good tenant means no defaults, fewer disputes and timely resolutions. In fact landlords should be wary of tenants who are not able to put up rental bonds
Another key benefit of rental bonds to landlords is the guaranteed payments and protection against any unnecessary tenant-related hassles and disagreements. Since Rental bonds come with an institutional guarantee with all claims towards invoked guarantees being settled within 5 working days, it means complete peace of mind for the landlord.
Rental guarantees are extremely flexible instruments and can be customized to suit the needs of the landlord in terms of quantum and coverage. Since rental bonds guarantee the obligation of the tenant, they can be customized to cover family homes, co-living, hostel & paying guest accommodation as well.
Rental bonds do away with the need for security deposits and hence makes the property more attractive to the tenant. This ensures that the property is let out faster as compared to a property which insists on a security deposit. It has also been observed that a tenant is more likely to agree to a higher rent for a property of his choice if he doesn’t have to put up a security deposit thus increasing rental yield for the landlord.
Co-living operators who are accepting rental guarantees in lieu of security deposits have also witnessed an increase in tenant traffic and a significant reduction in its tenant conversion cycles. Tenants are more willing to commit to the tenancy contract with rental bonds. Rental guarantees have helped increase traction with property management companies as well. In fact about 95% of their new occupants have opted for rental bonds at the time of check in.
Getting a rental bond is easy!! It’s a simple and a completely online process – A rental bond can be issued in a matter of a few minutes. Rental bonds help landlords get the right tenant and bring about the desired change in renting behavior. They are also ushering in a new era of transparency, professionalism & liquidity in rental transactions.
Rental Bonds are the way of the future!!
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