CEV EDUCATION SERIES

Important Case Laws on principles of valuation of Real Estate – ALL YOU NEED TO KNOW

Sorab D. Talati Vs. Joseph Michem, Appeal No. 101 0f 1949 in R.A. Application No. 805 of 1948

Background

In the year 1947, when the Rent Control Act of 1947 was enacted for the first time, methodology of working out Standard Rent was not given in the act and hence in this case, Court evolved valuation principles for fixing Standard Rent. In this case Court approved of investment theory of estimation of rent and for the first time decided that comparison of yield on investment in land and building should be made with returns on investment on Gift Edged Security which is to be adopted as basis for fair return.

Valuation Related Extract of the judgement

Court stated that “On a consideration of all the prevailing circumstances and the fact that the prevalent return on Gilt Edged Security is slightly over 3%, we think that a net return of 4.50% on the value of land and 5.50% on the cost of buildings cannot be considered in any sense unreasonably large or excessive for a landlord to expect in respect of his investment in an immovable property”. In this case Court allowed 1-1/2% higher return on land value and 2-1/2% higher return than yield on Government Security as fair return on building cost while fixing Standard Rent of the premises.

Conclusion

The court approved of investment theory to fix standard rent of the rent controlled premises. Return or yield from Gilt Edged Security is the basis for determining the fair return to the landlord for his investments in land & buildings.

Rent Control Acts of other States of India had different provisions for Standard Rent. However all these other acts also provided for investments theory as basis of rent fixation. View of linking yield in real estate with yield on Govt. Security was changed by Supreme Court as late as in 1983 in case of Union of India V/s. Smt. Shantidevi (A.I.R. 1983 S.C. 1190). In said case, S.C. approved of comparison of the yield in real estate investments with the other forms of investment also in addition to yield on Govt. Securities.