An important effect of the Rent Act was that the value of all tenanted properties fell in the market substantially and it remained at an artificially low level for a very long period of 40 to 50 years.
Persons desiring to invest funds in sound securities with fair return stopped building houses for rental income as rented immovable property was no more considered sound security but was treated as a liability or diminishing asset.
Even after the expiry of the physical life of the building, it could not be demolished. If the building collapsed on its own, even then tenancy rights of tenants did not extinguish but it remained in force. (Vide Tribhovandas V/s. Chimanlal, Gujrat High Court GLR/1971/556). The landlord proposing new building on such cleared land was bound by law to give premises to tenants of a collapsed building on rental basis. Similarly, tenants of structure washed away due to flood or collapsed under earthquake had first right as tenants in the new building built on the plot. (Vide Krishna Laxman V/s. Narsingh Rao, Bombay High Court BLR/1973/29). Tenants in the collapsed buildings of Gujrat will have similar protection.
- From a valuation point of view, these two provisions totally extinguished the value of land to the owner in all Rent Act-affected areas provided the property was fully developed. As there was no reversion of land back to landlord, there was no reversionary value of the land. The land value was artificially brought to zero due to the tenancy and Rent Act. This fact was duly endorsed by Calcutta High Court in two cases. C.I.T. V/s. Ashima Sinha, 116 I.T.R and C.I.T. 26 and C.I.T. V/s. Anup Kumar Kapoor, 125 I.T.R.684 of 1980.
- What remained was only frozen rent income from the property and hence under the rental method, only structure is valued on the basis of the rental method. Under the rental method, land value is adopted at Nil value in Rent Act affected areas.
- On the other hand provisions of Rent Act prohibits ejectment and rent increase. It is a case of lifetime tenancies and even thereafter. Land never reverts back free to the landlord. It is therefore proper to take the reversionary value of the land at Nil value in Rent Act affected premises.
Example:
A landlord owns a building that is fully rented to 12 tenants. The plot area is 600 sq. m. The land is fully utilized in 3 floors of buildings. Rent is Rs.1800/- per month. Property taxes are Rs.5400/- per year. N.A. tax Rs.300/- per year. Insurance Rs.600/- per year. The building is 80 years old. Tenants are protected by provisions of the Rent Act. Repairs may be taken as 10% of gross rent & collection & management charges at 4% of gross rent.
Sol: Study of the above data clearly indicates that even though the building is 80 years old, the net yield will have to be capitalized in perpetuity. We have to assume that tenants will not vacate the premises for 100 more years and that they may keep the building duly repaired for said period. We have also to assume that land will not revert back to the landlord for 100 years.
Value of above property ‘A’ would worked out as under :
Gross Annual Receivable Yield: Rs.1, 800 × 12 = Rs.21,600
Less : Outgoings.
Property taxes = Rs. 5,400
N.A. tax = Rs. 300
Insurance = Rs. 600
Repairs 10% G.R. = Rs. 2,100
Collection & Management 4% = Rs. 864 = Rs. 9,324
Net Receivable Yield = 21000-9324=Rs.12,276
Capitalise yield in perpetuity at 10.5%
= 12,276 × 100/10.5 = Rs.1,16,914/- Say Rs.1,17,000/