WHAT IS THE PAGDI SYSTEM IN INDIA.?

INTRODUCTION

The Pagdi system is a traditional tenancy model in India. Like other rental arrangements, it also involves a tenant and a landlord; however, the difference is that the tenant is also the co-owner of the property, enjoying the subletting and selling rights

A popular practice, India saw the pagdi system gather speed during British rule. Metropolitan cities like Mumbai, Delhi, and Kolkata have had the pagdi system for years.

What is the Pagdi System?

A form of tenancy, the pagdi system flourished in the former times because prior to 1999, there was no need to get into a contract with the landlord for a lease. Rent receipts took care of the whole process. Year after year, the rents would remain the same, as though it was never impacted by inflation. Although the Pagdi system is a widely prevalent rental model in India, it is slightly different from the typical renting arrangement. The tenant here is also the co-owner of the property and pays a nominal rent, compared to the general ‘ask’ rates in the market. Besides, the tenant also enjoys additional rights of sub-letting and selling the property.

Example of pagdi system

There are two parties, A and B. A is the landlord, and B is the tenant. Here, A has a property that B is interested in and wants to buy.

According to the Pagdi rental model, B would pay a lumpsum principal amount to A, also referred to as Pagdi. In exchange, A would ensure that B enjoys around 60-70 percent lower monthly rentals and has the property’s co-ownership, however, with specific terms and conditions.

As the co-owner, the tenant has the right to sub-lease or sell the property after an agreed time period. However, in the case of sub-letting, the preceding tenant and the owner share the rental income, usually at a 35:65 ratio. Whereas in the property sale, the owner takes around 30-50 percent of the proceeds, and the remaining belongs to the tenant. This provision not only ensures profits to the owner but also reduces tax implications.

Need for Pagdi system

As history goes, the Pagdi system was started in the British era to avoid paying excessive taxes. But this system has lived through more than that and survived to this new age. As we have discussed above, the advantages and disadvantages of this system are better able to understand the need for it in today’s real estate scenario.

Real estate prices are booming in major metropolitan cities like Mumbai, Delhi, and Kolkata. About 35% of people staying in any city are floating population i.e. they don’t belong to the city and are living only to earn their livelihood or carry out their businesses and have no intentions of buying a property.

They only want to stay in the city for work and they rent a property. This is mostly the working-class population who don’t have money to buy a property or do not want to invest in a permanent abode in the cities. They don’t wish to fall into the legalities of agreements and the registrations of the agreement thereafter, and /or don’t want to pay higher rents. Therefore, they opt for a less cumbersome option of tenancy, i.e. the Pagdi system.

This system was also more favorable as it did not encompass taxation laws. But with the new GST law Pagdi system is brought into the ambit of services. The tenancy premium earned on the transmission of tenancy rights invites GST provided the exception given vide Sl. no.12 of notification no. 12/2017 of Central Tax (Rate) dated 28th June 2017 on ‘services by way of renting of residential dwelling for use as a residence’.

The Government had issued a circular (Circular No.44/18/2018-CGST dated 2nd May 2018) where the department has noticed the controversy that stamp duty and registration charges are charged on transfers of such tenancy rights, and such business deals and thus should not be subjected to GST, is not applicable.

Simply because a transaction or a supply includes execution of documents which may necessitate registration and payment of registration fee and stamp duty, would not disqualify them from the ambit of supply of goods and services and from GST. The transfer of tenancy rights cannot be treated as a sale of the parcel or structure affirmed as neither a supply of goods nor of services in Schedule III, para 5 of CGST Act, 2017. Hence, the said activity shall be considered under the scope of GST.

Is Pagdi system legal?

According to Section 56 of the Rent Control Act, 1999, this consideration paid to the landlord as a fine, premium, or consideration (Pagdi) was legalized. The act provides authorization for a tenant to receive any amount in consideration to relinquish or transfer his/her tenancy rights. The landlord or any person acting or purporting to act on behalf of the landlord could receive any fine, premium, or other like sum or deposit or any consideration (refers to Pagdi) in respect of the grant, or renewal of a lease of any premises, or for giving his/her consent to the transfer of a lease to any other person. 

As per the Maharashtra Rent Control Act of 1999 which came into effect on March 31, 2000, the system was made legal. Section 56 of this Act deemed it legal as it reads as follows:

1. The tenant or any person acting or purporting to act on behalf of the tenant to claim or receive any sum or any consideration, as a condition of the relinquishment, transfer, or assignment of his tenancy of any premises;
2. The landlord or any person acting or purporting to act on behalf of the landlord to receive any fine, premium or other like sum or deposit or any consideration in respect of the grant, or renewal of a lease of any premises, or for giving his consent to the transfer of a lease to any other person.

Therefore, a land owner could confer a kind of ownership to the tenant for a deposit of money. This partial ownership means that the tenant has a certain right over the property but not the land. In this case, the part-owner can even sublet the premises but the rent that he gets must be divided between the actual owner of the property and the part-owner that is the first tenant. The original owner gets to earn a little extra, because of such a provision.

Do pagdi properties come under RERA?

The government has been contemplating bringing pagdi properties under the Real Estate Regulatory Authority, which will provide the same benefits and protection to home buyers as available for regular properties. As per the current understanding, tenants in pagdi properties are co-promoters of the project. Given that most of these are old properties, there is a need to redevelop such units.

Once pagdi properties come under the jurisdiction of the Real Estate (Regulation and Development) Act (RERA), such tenants would be entitled to compensation if the project is delayed. As of now, the Maharashtra Housing and Area Development Authority (MHADA) collects a tax from such tenants and provides help with the repairs of pagdi properties.

The functioning of the Pagdi system and transfer of ownership in the Pagdi system

In the Pagdi system, the only differentiating element is that the tenant becomes a part-owner of the premises and not of the land. This tenant continues to pay rent to the owner as long as he/she is not sub-renting the premises. Additionally, the tenant has the choice to sell the said property nonetheless the tenant will have to give a percentage (between 30 to 50%) of the gross sale amount to the landlord. 

In the case of sub-letting, the old tenant who now is an owner and the original landlord of the property shall share the rent amount amongst themselves, usually at a 35:65 ratio. This facilitates for the landlord to make some money off his/her asset while evading taxes. The old tenant profited as well and the new tenant rented the premises at a very nominal rent. As there is no prescribed law about charges to be paid to a landlord for a No Objection Certificate.

For instance, in the Pagdi system, if a current tenant wants to sell his/her home for Rs.10 lakh, he/she is obliged to pay somewhere between 3 to 5 lakhs to the landlord. Needless to say, he/she enjoys restricted rights because the landlord collects nominal rent and accordingly gives the receipts.

Rules for inheriting tenancy rights under the Pagdi system

Section 7 (15) (d) of the Maharashtra Rent Control Act, 1999, states that a tenant’s family member who has been living with the dead tenant at the time of his/her death shall be eligible first from the family as the successor to succeed the tenancy. Upon the demise of a current pagdi tenant, the tenancy rights can only be transferred to that legal heir(s). The new tenant (legal heir) can request the landlord to issue a fresh rent receipt in the heir(s) name(s). But testamentary succession is not possible, as tenancy rights are peculiar to the tenant and therefore a tenant cannot bestow his/her tenancy rights under a Will. 

Therefore, the family member who desires to claim the tenancy rights of the demised tenant must show evidence that he/she was perpetually living with the deceased tenant at the time of his/her demise. Only such a family member will get precedence over all other members of the family for the bequest of such tenancy rights over the premises.

Advantages of the Pagdi system

1. It is a legalized form of tenancy under the provisions of the Maharashtra Rent Control Act, 1999.
2. Lower rents than the current market rates in major metropolitan cities Mumbai and Delhi.
3. The tenant can be a co-owner of the premises but not of the land.
4. The tenant as a co-owner of the property has both subletting and selling rights.
5. Transferable tenancy to family, with conditions. The tenant’s family member who has been living with the deceased tenant at the time of his/her death shall qualify first from the family as the successor to succeed the tenancy.
6. In case of redevelopment, the tenant can be a co-promoter

Disadvantages of the Pagdi system

1. The tenant can be a co-owner of the premises but not of the land. So, there is no satisfaction of being the owner of the property.
2. Owners take lump-sum premiums but over the period of time many years into the tenancy, the ratio goes disproportionate. 
3. Rents are very low for the premises in the prime locations of the metropolises.
4. Lower rentals do not incentivize landlords enough for maintaining these structures, and hence they remain neglectful concerning maintenance and other repairs.
5. Tenants have to spend from their own pockets for the renovations and repairs of the premise.
6. Tenants may have to go forth with the redevelopment of the property.

An amendment should be made to this system.

Some new laws and regulations have ensured the Pagdi system being streamlined by getting the structure of this tenancy into its fold and trying to restructure the process and most of the problems arising from this system. Some of those are discussed below

Pagdi properties under RERA

The government has been meaning to acquire pagdi properties under the Real Estate Regulatory Authority (RERA), which will offer the equivalent assistance and security to home buyers as offered to regular properties. As per the present scenario, tenants in pagdi properties are co-promoters of the development. Assuming that most are old properties, there is a necessity to redevelop such units.

After Pagdi properties come under the authority of the RERA, such tenants would be eligible for compensation if the development is delayed. As of now, the Maharashtra Housing and Area Development Authority (MHADA) collects a tax from these tenants and offers help with the upkeeps of Pagdi properties.

Pagdi Properties Redevelopment in Suburbs

The Pagdi property redevelopment rules in Mumbai Suburbs are different from that of Cessed tenanted buildings in Island City. There is a TDR system and other redevelopment systems in the suburban areas of Mumbai.

In the City, there are rules for minimum carpet area for these tenants, whereas for suburban areas, the tenants merely have the right to the prevailing occupied area. Furthermore, for cessed buildings in Mumbai, the redevelopment is done principally under D.C. Reg. No.33(7) whereby the tenants become landlords while in suburbs the landlords are not obligated to offer ownership to tenants in redeveloped buildings and can keep them as tenants.

Pagdi system in Mumbai:

In 2019, the Maharashtra government permitted a discounted additional Floor Space Index (FSI) to developers who were amenable to take on redevelopment of the pagdi properties. However, this would cause a loss of approx. 50% of the revenue for the Brihanmumbai Municipal Corporation (BMC) and a final decision on this matter is yet to be taken. The 2018 BMC guidelines stated that those already living in non-cessed buildings prior to 13th June 1996 are entitled to new flats if the property goes for redevelopment. Even if the tenant had transferred the ownership officially and lawfully to the new tenant, the new tenant would be eligible for the same benefits. 

The proposed Model Tenancy Act:

The suggested Model Tenancy Act will permit landlords to enforce whatsoever rent and increase it as they may think fit. It will be applicable to all tenants, occupancies, and premises, and will not safeguard even those who in the past have paid higher ‘Pagdi’ (security which is nearly equivalent to the market price of the premise given on rent) to landlords to dwell in tenanted premises. Many tenants may have paid for the repair and maintenance of the properties over the last 10 years.

Process for revision of rents

1. The landowner shall give notice in writing three months beforehand the revised rent becomes due.
2. If a tenant, who has been given notice of a proposed raise in rents, fails to give the notice of termination of tenancy to the landowner, in such an event the tenant shall be deemed to have accepted whatever rent increase has been suggested by the landowner.
3. In case the premises have been rented for a limited period, rent may not be increased during the term of the tenancy period except the increase in the amount or process of working out the surge is particularly established in the Tenancy Agreement.
4. The tenant shall not directly or indirectly sub-let or allot, entire or part of the premises for a rent that is higher than the rent or the equivalent to the rent, charged by the landlord to its tenant.
5. Where the landlord, subsequent to the commencement of the tenancy and with an agreement with the tenant has sustained expenses on account of improvement, addition, or structural alteration in the premises occupied by the tenant, which does not comprise of upkeeps of the essentials to be carried out, the landlord may upsurge the rent of the premises by a sum as agreed between the landlord and the tenant, before the initiation of the work and such rent increase shall become operative from one month after the completion of work.

CONCLUSION

The Pagdi system is a rental model in some parts of India. The Pagdi system started in the British era, under this system, the tenant is also the co-owner of the property.

In the Pagdi system if the tenant is paying annual rent and has proof of the rent payment then the owner has no right to evict the tenant from the property. In case the owner asks you to vacate the property you can immediately serve him the legal notice by providing the rent receipts. If still, the situation is not on your side, then you can also move to the competent court under Delhi Rent Control Act.

FAQ

Father purchased the shop in 1996 in the pagdi system. the owner of the building has sold the building and The new owner wants us to leave the shop. What rights do we have to ask for money as the new owner of the building is forcing us to leave the shop

1. Your father has not purchased the shop. He had taken it on rent as per the pagdi system,

2. You enjoy full tenancy right on the said shop from where you can not be evicted without due process of law,

3. Never make the mistake to skip payment of rent to the new owner if you have been officially informed about the sale of the property,

4. Lodge a police complaint immediately against the new owner for attempting to illegally evict you by applying force.under copy to the S.P

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