State-leased lands in Mumbai: government issues revised policy - International Law Office

International Law Office

Commercial Property - India

State-leased lands in Mumbai: government issues revised policy

March 28 2013

Introduction
New policy
Issues arising
Comment


Introduction

Approximately 1,577 properties in the city of Mumbai and suburban Mumbai have been granted on lease to private or public parties by the state government through the collector for Mumbai or the Mumbai Suburban District, or by the municipality. Leases are either of land alone or of land and the buildings or structures on the land; their duration varies from a number of years or decades to perpetuity. The rent reserved under the leases is based on the market prices or rents prevalent at the time of the grant.

By December 2012 approximately 666 leases had expired and many more are due to expire in the coming years. As the government was not accepting requests for renewal, after expiry of the leases, lessees continued in possession of their properties as 'tenants by holding over' under the Transfer of Property Act, on the conditions contained in the expired leases.

In formulating a policy for expired leases, the government had to decide whether primarily to re-enter lands or to renew leases. Furthermore, if it was to renew the leases, the government had to decide whether also to levy substantially higher, market-based rents (following the exponential rise in real estate values over the years).

Background

Recovering possession is a daunting prospect and most leased properties have multiple occupants who would be made homeless if the state reclaimed leased properties. The government therefore decided to renew leases, but at prevailing market rents and for a shorter term. Consequently, on October 5 1999 it passed a resolution notifying the above policy in relation to renewals, with an additional option for lessees to purchase their properties at market price.

The policy met with considerable opposition and was challenged in writ petitions filed before the Bombay High Court. After considering rival contentions, the court held that the resolution was defective and ordered its withdrawal on the grounds that lessees have a pre-existing interest in their lands as they have constructed buildings thereon that are in their use. It accordingly directed the state to devise a policy based on which:

  • lessees would have a (notional) 75% interest and the state a (notional) 25% interest in leased lands, on the basis of which revised rents should be determined; and
  • lessees would be given an explanation as to how revised rents have been calculated and provided with the opportunity to voice their objections.

In light of the above, the government recently published its revised policy.(1)

New policy

The policy will be administered by the collector concerned, under the direction of higher governmental authorities.

Collectors must initially send notices to lessees of expired leases (and leases due to expire in the next five to 10 years) offering them the option to purchase their lands by converting to Class II occupancies under the Maharashtra Land Revenue Code 1966, on payment of conversion charges.

Conversion charges will be calculated based on the market value of the land and will vary from 20% of market value for residential leases up to 30% for commercial leases or mixed-use leases. Conversion charges must be paid before the collector passes an order for conversion. Conversion orders also require prior approval of the Konkan divisional commissioner.

If the conversion option is not exercised and the lease expired before December 31 2011, it will be deemed to be renewed with effect from January 1 2012. If the lease expired (or is due to expire) after December 31 2011, it will be deemed to be renewed from the date of expiry. In both cases, revised rents will be levied and the lease will be renewed for a period of 30 years, commencing on the date of renewal.

Lessees are liable to continue paying rent unless they exercise the conversion option. If they fail to exercise this option by May 31 2013, on expiry their leases will be deemed renewed at the revised rent rates. However, until December 1 2014 lessees will have the option to elect to convert after renewal has taken place.

The revised (annual) rent fixed by the government will be at 2% (for residential leases), 4% (for industrial leases) and 5% (for commercial, or mixed-use leases) of 25% of the market value of the land stated in the government ready reckoner. Revised rents are subject to further enhancement every five years, on the same market value basis as above.

Leases for charitable, educational, social, cultural or medical purposes will attract residential rent, irrespective of the use of the leased lands.

Collectors must notify lessees of the basis of calculation of their revised rents and invite and hear objections. After this process has been completed and prior government approval obtained, a self-explanatory reasoned order will be passed, either accepting or rejecting the objections and fixing revised rents.

On renewal, collectors will execute and register a fresh lease deed based on (but not necessarily identical to) the covenants and conditions of the expired lease.

Lessees interested in changing land use or developing lands by utilising transferable development rights (a type of development potential) must:

  • obtain prior permission from the government;
  • obtain the recommendation of the local planning authorities; and
  • pay further premiums in line with prevalent government policies (these premiums are not stipulated by the new policy).

If a lease deed contains a covenant requiring the lessee to inform the collector of its interest in renewing before expiration, the lessee must pay a fine of 10% of the market value of the land before initiation of the renewal process.

Prior permission of the government is required for transfers or assignments of leases. The government will also be entitled to recover (as a transfer fee) unearned income equivalent to one-eighth of the market value of the lands. Transfer fees are also payable if lessees have transferred without prior permission.

Renewals of leases of gymkhanas (clubs) and playgrounds, and of temporary leases in suburban Mumbai, are not governed by the policy.

Issues arising

An in-depth examination of the policy throws up a number of questions and issues, due to both the absence of necessary detail in certain cases and various omissions, inconsistencies and ambiguities.

For example, while the conversion option appears to entitle lessees to acquire 'ownership' of their lands, and may protect them from increased rents over time and having to approach the government for further renewal after expiry of their leases, the offer does not equate to a pure freehold title; a Class II occupancy entitles the government to levy land revenue or non-agricultural assessments (ie, taxes) and impose restrictions or conditions on the use, enjoyment and transfer of the land, including fines or premiums for transfer. Furthermore, collectors are mandated to stipulate the format of conversion orders on 'regular terms and conditions' and to consider:

  • the terms and conditions of the original (expired) lease;
  • the provisions of the code and its rules; and
  • prevailing government policies, resolutions and orders applicable to Class II occupants.

This subjectivity could result in new or onerous conditions being imposed on the use, enjoyment and transferability of converted lands.

The policy does not mention whether conversion charges will be levied on the value of buildings if they originally formed part of the lease. It is also unclear whether transfer fees will apply to all renewed leases, or only where the expired lease contained restrictions or conditions on transfer (ie, whether the government will introduce restrictions or conditions on transfers in the new lease that were not contained in the expired lease).

In addition, the government is entitled to charge a fine or premium for regularising unauthorised transfers. However, it is unclear whether such fines would be levied even in cases where a lease was transferable. There has been considerable controversy over the government's imposition of fines, premiums and transfer fees where leases do not expressly prohibit transfers, require government consent or stipulate payment of fines, premiums or transfer fees. In this respect, the courts have held that the government is not entitled to claim a premium for transfer in the absence of an express prohibition contained in the lease. Furthermore, no provision of law currently applicable entitles it to do so.

It is also unclear as to whether the proposed fine of 10% of the market value, chargeable at the time of renewal, will apply solely to leases that have already expired or also to leases that will expire in future.

Under the renewal option, lessees are entitled to an explanation of the calculation of their rents and can object and be heard. However, lessees opting for conversion have no right to redressal.

The policy presupposes that lessees of leases expiring over the next five to 10 years will be in a position to decide shortly whether to opt for conversion. This is a difficult proposition as such lessees would have to estimate and commit to a future (uncertain) financial liability (ie, the conversion charges payable by them would be based on the market price of their lands as at the time of expiry). If the lessees cannot decide, and fail to exercise the conversion option by December 1 2014, the option will not be available to them in future.

Comment

While the policy may not be welcomed with open arms by all lessees, it is progressive and strikes a reasonable balance between the fiscal objectives of the state and the needs of its lessees. As a result, the state should recover reasonable returns compared to the paltry rents it has received thus far, and lessees will have the opportunity to regularise their title without having to pay the full market price.

However, it is imperative that lacunae in the policy and conditions that are unclear, ambiguous or open to differing interpretation are suitably addressed and clarified, not only to avoid difficulties in implementation, but also to preclude disputes or even litigation. The government should also consider reviewing some of the strict timelines imposed by the policy in order to:

  • enable its effective implementation;
  • grant lessees the time to take informed decisions regarding the selection of an option; and
  • allow lessees to make available the necessary funds to meet the resultant financial obligations.

For further information on this topic please contact Viren Miskita or Mani M Miskita at MT Miskita & Company by telephone (+91 22 2204 4238), fax (+91 22 2282 8456) or email (viren@miskitaco.com or admin@miskitaco.com).

Endnotes

(1) Government Resolution Land 2505/M 405/L-2 (October 12 2012) and Government Errata Land 2505/____ 405/J-2 (January 17 2013).


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