Transfer of Ownership in Pagdi System

The Pagdi system is a unique tenancy model prevalent in India, particularly in metropolitan cities like Mumbai, Delhi, and Kolkata. It dates back to the pre-independence era and continues to hold relevance due to its affordability and unique ownership dynamics. In this article, we delve into the nuances of the transfer of ownership in the Pagdi system, its legal framework, and its implications for tenants and landlords.

What is the Pagdi System?

The Pagdi system is a rental model where tenants pay a nominal rent to landlords while also enjoying partial ownership of the premises. Unlike traditional renting, the tenant has subletting and selling rights, although they do not own the land itself. This system was initially introduced to evade taxes during British rule but has persisted due to its affordability and benefits for tenants.

Pagdi System in Mumbai

Mumbai has the highest concentration of properties under the Pagdi system. As of recent estimates, around 7.5 lakh homes in Mumbai operate under this model. Areas like Colaba, Worli, Dadar, Lalbagh, and Peddar Road are known hubs for Pagdi properties. The system allows tenants to reside in prime locations at rents significantly lower than market rates, making it appealing despite its complexities.

Legal Framework of the Pagdi System

The Maharashtra Rent Control Act, 1999, legalises the Pagdi system and defines the rights and obligations of tenants and landlords. Section 56 of the Act permits the landlord to charge a premium (commonly referred to as Pagdi) during property transfers. The Act also provides tenants with the right to sublet or sell their tenancy rights, albeit with the landlord’s approval and payment of a specified share of the sale proceeds.

Inheritance and Transfer Rights

• Section 7(15)(d): Tenancy rights are inheritable by family members who were residing with the tenant at the time of their death.
• Testamentary Succession: Tenancy rights cannot be transferred through a will, as they are tied to the occupant and their family.

Transfer of Ownership in the Pagdi System

Transferring ownership in the Pagdi system is not as straightforward as in traditional real estate. It involves a tripartite agreement between:

1. The landlord,
2. The outgoing tenant, and
3. The incoming tenant or buyer.

This agreement ensures that all parties agree on the terms, including the payment of the Pagdi or premium to the landlord.

Key Considerations for Ownership Transfer in Pagdi System

Inheritance of Tenancy Rights

When a tenant passes away, tenancy rights can be transferred to a legal heir under the following conditions:

• The heir must have been residing with the deceased tenant at the time of their demise.
• The landlord cannot charge additional fees for transferring rights to legal heirs.
• The heir must request a fresh rent receipt in their name.

Transfer to Non-Blood Relatives

• Transfers to individuals outside the family are allowed but often require the landlord’s consent.
• The landlord typically charges 33% of the market value as Pagdi for such transfers.

Selling the Property

When a tenant wishes to sell their rights:

• They must pay a percentage of the sale proceeds (30-50%) to the landlord.
• The percentage varies depending on the property’s location and mutual agreements.

Sub-Letting

If the property is sub-let:

• The original tenant and landlord share the rent, generally in a 35:65 ratio.
• Sub-letting requires the landlord’s approval to avoid disputes.

No Objection Certificate (NOC)

• For transfers to non-family members, a No Objection Certificate from other legal heirs is often required.
• This ensures transparency and prevents future claims.

Legal Disputes

If the landlord refuses to transfer ownership:

• The tenant can file a declaratory suit under Section 34 of the Specific Relief Act.
• The suit seeks to affirm the tenant’s legal rights and enforce the transfer.

What is the Process of Ownership Transfer in Pagdi System

Step 1: Agreement Between Parties

A tripartite agreement is signed between the landlord, the outgoing tenant, and the incoming tenant. This agreement outlines:

• The amount of Pagdi or premium to be paid,
• The terms of the transfer,
• Any conditions regarding future ownership or tenancy.

Step 2: Payment of Premium

• The landlord receives the agreed Pagdi amount from the incoming tenant or the outgoing tenant, depending on the terms.
• This premium is a key aspect of the transfer process and ensures the landlord’s consent.

Step 3: Registration of Agreement

• The transfer agreement is registered to make it legally binding.
• Stamp duty and registration charges may apply, adding to the transfer cost.

Step 4: Issuance of New Rent Receipt

• The landlord issues a fresh rent receipt in the name of the incoming tenant, formalising the transfer.

Pagdi System and Redevelopment

Given the age and condition of most Pagdi properties, redevelopment is a pressing need. In Mumbai, redevelopment projects often provide tenants with new flats while allowing landlords to monetise their assets.

Incentives for Redevelopment

The Mumbai Development Control and Promotion Regulations (DCPR) 2034 offers:

• A minimum area of 300 sq. ft. for tenants.
• Additional Floor Space Index (FSI) for developers undertaking redevelopment.

Role of RERA

Pagdi properties may soon fall under the purview of the Real Estate Regulatory Authority (RERA), ensuring:

• Compensation for delays in redevelopment,
• Better accountability for developers and landlords.

Pagdi System Law and Taxation

GST Implications

Under the CGST Act, 2017:

• Pagdi or premiums charged during tenancy transfers attract GST.
• However, residential properties rented for dwelling purposes are exempt from GST under specific conditions.

Dispute Resolution

Tenants can seek legal recourse under the Maharashtra Rent Control Act for disputes related to transfer fees, NOCs, or rent increments.

Advantages and Disadvantages of the Pagdi System

Advantages

1. Affordable Housing: Low rents compared to market rates.
2. Ownership Rights: Tenants can sublet or sell their tenancy rights.
3. Legal Protection: Safeguarded under the Rent Control Act.

Disadvantages

1. Limited Ownership: Tenants do not own the land.
2. Financial Burden: High premiums for transfers or sales.
3. Maintenance Issues: Neglect by landlords due to low rental income.
4. Legal Complexities: Inheritance and transfer processes can be contentious.

Conclusion

The transfer of ownership in the Pagdi system is a complex process involving legal, financial, and procedural considerations. Despite its historical roots and benefits, the system poses challenges for both tenants and landlords. With regulatory reforms and redevelopment initiatives, the Pagdi system is adapting to modern real estate dynamics, ensuring its continued relevance in India’s housing market.