METHODS OF ASCERTAINING STANDARD RENT

 

           Following are the two recognized methods employed for ascertaining the standard rent of a property:

• Comparative method
• Investment theory.

Each of the above of ascertaining the standard rent will now be briefly described:

• Comparative Method: In this method, the actual rents at which similar properties in the

locality are let out are studied and compared with relevant factors of the property under reference. From  the careful study and analysis of all such data, the standard rent of property under reference is decided.

          The success of this method depends on various factors such as:

• Carpet area of letting;
• Circumstances under which comparable rents were fixed;
• Fairness and reasonable of the comparable rents ;
• Planning of letting of similar properties;
• Planning and design aspects comparable premises ;
• Similarly of properties to be compared with respect to specifications of work, age of properties , degree of repairs , etc;
• Terms of tenancies ; etc.

It is also likely that on the material data of valuation , no premises in the locality might have

been let for the first time except the one under inquiry. Thus, the comparative method may be found unsuitable and unreliable in most of the cases and it may not afford a proper criteria for arriving at the standard rent of the property under reference.

• Investment theory; the owner or landlord has invested in land and structure and he

may be suitable compensated  for the same. Also, the various outgoings which are to be incurred by the owner for the rents to be realized by him are to be considered. Thus, the standard rent as per the investment theory is worked out as follows:

Standard rent=     return on investment made by the landlord + outgoings.

                   For investment made in land by the landlord , the market value of land is ascertained by appropriate method of valuation and it is appointed for the premises for which standard rent is to be decided . In a similar way, the depreciated cost of the existing structure on the relevant date off valuation is worked out. The reasonable returns on investment on land and structure are assumed by the Court and thus, the amount for the first part is decided. Usually the return on structural cost is taken about 1% higher than that on land. For leasehold land, the return is taken about 0.50% to 1% more than that on freehold land.

                   For the second part of the equation, the reasonable amount is worked out for the usual outgoings such as municipal taxes, repairs, maintenance, management, collection , sinking fund, insurance, etc. the outgoings are allowed on 9/10 of the cost of structure due to that fact that the owner will be able to realize an amount equal to about 10 per cent of cost as scrap value on the completion of economic life of structure.

 The sum total of first and second parts indicates the standard rent of the property under reference.