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This article is more than 6 month old.

Explained: What is a rental bond and how does it work?

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Simply put, a Rental Bond is a guarantee to the landlord that protects him in case the tenant defaults on his obligations under the tenancy agreement.

Explained: What is a rental bond and how does it work?
Home ownership has always been a coveted dream for most Indians. For a long time, the social fabric of the country has been woven around the family’s financial security being linked to house ownership. The trend however seems to be changing. A large part of the current generation would prefer to rent a house rather than get locked into lengthy mortgages. Apart from the preference shifting from ownership to renting, work-related mobility has also resulted in an increased demand for rental accommodation.
Pursuant to the tenancy agreement, landlords require a security deposit at the time of renting out their premises. This security deposit which ranges from 2-3 months rental in Delhi NCR to 6-8 months in places like Mumbai & Bengaluru is meant to protect the landlord in case the tenant defaults on his obligations.
The default could be in the form of payment of rent, utility bills, damages to the property, or the tenant vacating the property before the expiry of the lock-in period leading to financial losses for the landlord. The landlord has no other form of security other than the security deposit. The laws currently in force are archaic and are viewed by the landlords as being pro-tenant. Moreover, the landlord has no means of assessing the credibility of the tenant at his disposal.
This has led to landlords opting to keep their properties vacant rather than dealing with troublesome tenants and brokers. As per a report by Knight Frank, there were over 11 million houses lying vacant in the country.
Obviously, residential renting required a better solution than a security deposit. Rental Bonds provides precisely that!! So, what exactly are rental bonds?
Simply put, a Rental Bond is a guarantee to the landlord that protects him in case the tenant defaults on his obligations under the tenancy agreement. The bonds are bought by the tenant with the landlord as the beneficiary. While the rental bonds can be customised to the requirements of the landlord and the tenant, they usually cover the following -
• Unpaid Rent
• Unpaid rent for the balance of the lock in period
• Unpaid utility bills
• Damages to the property over fair wear & tear
Since the surety company conducts a comprehensive due diligence prior to the issuance of the rental bond, the landlord is assured of a credit verified & assessed tenant. The landlord also enjoys the flexibility of specifying the amount of the bond or the penal sum as it is also known, that would adequately cover his perception of risk.
It works for the tenant also. The security that he puts up with the landlord remains locked in during the period of the tenancy. With a rental bond, he only has to pay a small guarantee fee which helps him retain the liquidity for things that are more important to him. Further, where the tenant has to move from one house to another rental bonds will obviate the need of the tenant being required to put up a security deposit while he waits for the refund of the previous security deposit.
This has come as a huge relief especially under the current circumstances where the pandemic has depleted the financials numerous families.
What’s more - by virtue of the rental bond, the landlord and the tenant now have an opportunity to carry forward their good tenancy track record to their subsequent tenancies.
Rental Bonds as an instrument works for both the landlord as well as the tenant, complements the provisions of the recently approved Model Tenancy Act and thus will assist in institutionalising residential renting in India.
The author, Pankaj Bhansali, is COO at Eqaro Guarantees. The views expressed are personal
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