How the Supreme Court interprets wealth redistribution could affect lakhs of Mumbai tenants

Amidst the debates about the redistribution of wealth sparked during the election season, a critical case is being heard by a nine-judge bench of the Supreme Court. It pertains to Article 39(b) of the Constitution, which specifies that state policy should be directed towards ensuring that “the ownership and control of the material resources of the community are so distributed as best to subserve the common good”.

The question before the Supreme Court in the Property Owners Association vs State of Maharashtra matter is whether the “material resources of the community” can be interpreted to include even privately-owned resources.

This case is being monitored by lakhs of tenants in Mumbai. These are the statutory tenants protected by rent control provisions applicable to the city.

Why has Mumbai’s rent-controlled sector become the basis for a constitutional debate on property rights? And what is the perspective of the statutory tenants on this issue?

Rent control, dilapidated buildings

Mumbai has more than a century-old history of rent control. The first rent control act that applied to the city was passed in 1918. Since then, rent control has been in force under one law or another (except between 1928 and 1939).

In 1947, a highly protective rent act for tenants was passed by the Bombay legislature. The Bombay Rents, Hotel Rates and Lodging House Rates (Control) Act provided considerable protection to tenants from high rent levels, massive hikes and arbitrary eviction for the next 50 years. The act was amended to allow transmission of statutory tenancy rights to legal heirs living with the original tenant at the time of their death.

These provisions led to the formation of a multiclass, multiethnic base of statutory tenants in both the residential and commercial sectors of Mumbai. Within the residential sector, this base is spread across a range of premises from single-room chawls to spacious flats in apartment buildings.

The statutory tenants continue to be protected by the Maharashtra Rent Control Act, 1999, which replaced the Bombay Rent Act.

While rent control afforded tenure stability to tenants in the city’s heartland in face of escalating real estate prices, landlords stopped maintaining rent-controlled buildings, claiming that the low rents could not cover the high costs of undertaking repairs. This led to dilapidation of the buildings and structural collapses that resulted in grave losses of life.

During the Bombay city corporation elections in 1968, the problem of repairs and reconstruction were mentioned prominently in the manifestos of all competing political parties. Tenant associations and members of the state legislature also mounted public pressure.

In 1969, Maharashtra government passed a legislation providing for formation of the Bombay Building Repairs and Reconstruction Board that was tasked with the repair of dilapidated tenanted buildings through the levy of a repair cess on occupants. With this act, most rent-controlled buildings became “cessed buildings”. In 1976, after the Maharashtra Housing Development Authority Act was passed, the repair board was inducted as a branch of the authority.

Tenant-ownership scheme

The repair board provided respite to thousands of tenants living in cessed buildings. But it fell far short in its ability to maintain more than 19,000 buildings. Because of the lack of financial resources and the mounting burden of administration, the Maharashtra government sought to step back from directly carrying out repairs and reconstruction. Instead, it encouraged tenants to undertake structural repairs or reconstruction of old cessed buildings by promising to transfer ownership and collective control of these buildings to them.

By invoking Article 39 (b) of the Constitution, Maharashtra government inserted Chapter VIIIA into the MHADA Act, empowering tenants to become owners by paying 100 months’ rent as compensation to the landlord. The Maharashtra Housing Development Authority was given the task of acquiring such properties and handing them over to cooperative housing societies of tenants. Then, with consent of 70% occupants, the cessed properties could be redeveloped.

More than 16,000 buildings came under the purview of this scheme. Most were located in the island city of Mumbai.

The scheme caused consternation among landlords. The Property Owners’ Association challenged Chapter VIIIA stating that it was an unlawful acquisition of private properties by the state. After losing the case in Bombay High Court, the association appealed to the Supreme Court. In 1996, the Supreme Court issued a stay order on acquisition of properties under the contested clause.

Over time, the matter was referred to larger benches. It is in connection with this case that the court is currently reconsidering the ambit of Article 39(b).

Ironically, the tenant-ownership scheme was not received very enthusiastically by the tenants. Firstly, because it placed the responsibility for repairs solely on the tenants irrespective of their economic power to undertake them. Secondly, it offered only limited proprietorship, which meant that the freedom of cooperative housing societies to sell ownership rights was restricted.

Ownership rights

By the late 1990s, the demand for ownership rights became prominent in the struggles of protected tenants, especially at critical junctures when rent control protections for statutory tenants were set to be diluted by judicial pronouncements or urban reforms.

The principal basis of the demand for ownership rights by statutory tenants is the pugree argument. Pugree is a premium paid by tenants to the landlord for using the premises. It emerged as a way by which the owners would evade the heavy wealth tax under colonial rule.

Though proscribed by rent control laws, these receipt-less pugree transactions remained a fairly common way of buying and selling statutory tenancy rights. A new tenant would pay a lump sum amount almost equal to the market price of the property to the sitting tenant. The landlord would pocket around one-third to half of that amount for issuing the rent receipt in the name of the new tenant.

For the protected tenants, the pugree payment amounts to building an equity in the rent-controlled property and confers a peculiarity to the statutory tenancy situation in Maharashtra. The practice of pugree was legalised under the Maharashtra Rent Control Act. Since then, statutory tenants have embraced the pugree tenant identity in order to mark their distinction from ordinary contractual tenants.

Besides pugree, there are other payments made by statutory tenants to maintain the stability of their tenure and premises. They pay property taxes for the premises. Many have also incurred considerable expenses to carry out major repairs and alterations to the premises. These payments have also contributed to the sense among the pugree tenants that they are equity-holders.

There are obvious reasons why ownership is more lucrative than tenancy rights in a buoyant real estate market. While the pugree system allows for tenancy rights to be sold, the income derived from the transaction has to be shared with the landlord to get the name changed on the rent receipt – in some cases by as much as 50%. If tenants become owners, they could tap into the entire marketised value upon sale of premises. In addition, ownership rights would allow tenants to avail of loans, as most banks do not lend against collateral of pugree property.

Ageing tenants staying without family members are concerned that they will not be able to pass the tenancy rights to their heirs upon their deaths. It is seen as unfair that the equity that they have built in the rent-controlled properties over decades, and even generations, would amount to nothing.

However, it is not simply economic calculations that underlie the clamour for conversion of statutory tenancy rights into ownership rights. There is mounting frustration at the various forms of harassment to which tenants have been subjected by landlords – especially new owners who have purchased buildings with the intention of redevelopment and want the old tenants out.

Moreover, tenants have become apprehensive as the landlords and their powerful associations are tapping legal and political channels to bring about decontrol of rents. Landlords have appealed against the provisions of the Maharashtra Rent Control Act that continue to protect tenants from major revisions in rents and eviction, a matter which is also pending before the Supreme Court.

The judgement in the present case concerning the transfer of ownership to tenants would influence the judicial interpretation of the legality of rent control protections. It is feared that removing these protections would lead to large-scale eviction and displacement of Mumbai’s tenants who have been staying in rent-controlled premises for decades, even generations.

Given the stakes involved, Mumbai’s statutory tenants are striving to make their voices heard. Meetings of tenants are being organised and political support is being sought. Tenant-activists are vehement in their emphasis that pugree tenants are not mere beneficiaries of a welfarist rent control policy but should be seen as quasi-owners who have paid for their tenancy rights.

As the Supreme Court judges consider the finer aspects of interpreting Article 39(b), these tenants ponder anxiously over the snowball effect the judgement could have on the future of rent control protections and, by extension, their ability to continue to live in the city.

Paankhi Agrawal’s doctoral dissertation is titled “Struggles for Decommodifying Housing: Protected Tenants and Rent Control in Mumbai, 1918-2018.” Her email address is paankhi.agrawal@gmail.com.