Assignment: Cases for Standard Rent Escalation

Submitted By: ANTRA AZAD

IIIrd year

INTRODUCTION
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Rent escalation clauses are standard parts of most commercial real estate leases. If your
company rents space, your rents are probably set up to go up automatically over time. While
escalations of a percent or two (or three or four) per year might not necessarily seem like a
big deal, they can actually have a large impact on your occupancy cost over the period of
time that many leases span.
 
Lease escalations come in a few different forms. Some leases have a single payment that
covers both a charge to the landlord for the use of space in his or her building and for the
costs of managing that space. Others have separate payments for rent and for operating costs.
Landlords can include rent escalation clauses that increase actual rent, operating cost
reimbursements or both.

Rent Escalation Clauses for Actual Rent: Rent escalations that are not directly tied to shifts
in operating costs typically take two forms. Some leases have clauses that define fixed
increases. These can take the form of a percentage, such as a 2 percent annual increase, or
they can be structured as a flat increase, such as having rent go up by 50 cents per square foot
per year. Variable increases are typically tied to an index that tracks the rate of inflation, such
as the Consumer Price Index (CPI). The timing of increases can also vary. While many
landlords like annual small increases, longer term leases may have larger increases spread out
in time, such as a 10 percent increase every five years.

Typically, a rent escalation system tied to the CPI or to another measure of inflation is
considered the most landlord friendly. The risk that your company takes in signing one of
these leases is that if inflation spikes, your rent could also spike. However, if you are able to
combine this lease with annual caps that limit how much it can go up -- such as setting the
increase as "CPI up to 3 percent" -- you could get the best of both worlds. In times of high
inflation, your lease goes up, but not too much, but when inflation is low, you end up with
little to no rent escalation to worry about.

Escalations for operating costs: If your lease breaks out operating costs, those expenses also
vary. Frequently, common area maintenance charges are billed on an annual budget basis. At
the beginning of the year, your landlord's management team calculates an estimate of what it
will cost to run the building. They then charge you your share of those expenses, split out on
a monthly basis. At the end of the year, they do a reconciliation and either reimburse you for

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your overpayments or send you a bill for underpayments. They also do a new budget for the
new year and adjust your payment accordingly, usually leading to a rent escalation.

Some gross leases that are supposed to include operating costs can also have a provision that
allows the owner to justify a rent escalation just for operating costs. Clauses like expense
stops and base years are written to establish a baseline of operating costs so that you can be
made to pay an increase over that baseline.

Understanding rent escalation clauses can be a challenging process. Working with an

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 CASES OF STANDARD RENT ESCALATION
1. D.C. Bhatia And Ors. vs Union Of India (UOI) And Anr. on 19 October, 1994

 This appeal has been heard along with a number of other appeals, special leave petitions
and writ petitions. Common questions of law have arisen in all these matters relating to
interpretation and constitutional validity of Section 3(c) of the Rent Control Act, 1958.

 The appellant thereupon filed a writ petition in the Delhi High Court challenging the
validity of the newly inserted Section 3(c) of the Act. The appellant's writ petition was
heard along with a batch of other writ petitions. By a judgment dated February 11, 1991,
the Delhi High Court held that Section 3(c) was a valid piece of legislation and did not
contravene any of the provisions of the Constitution. Following its judgment in Civil
Revision No. 470 of 1981 (Nirmaljit Arora v. Bharat Steel Tubes), it also held
that Section 3(c) was prospective and did not affect the cases that were pending on the
date it came into operation.

The Court ultimately held:

As we pointed out earlier, the argument based on protection of the weaker sections of the
community is entirely inconsistent with the protection given to tenants of non-residential
buildings who are in a position to pay much higher rents than the rents which those who are
in occupation of residential buildings can ever pay. We are, therefore, satisfied that Section
30(ii) of the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960 has to be struck down
as violative of Article 14 of the Constitution. A writ will issue declaring Section 30(ii) as
unconstitutional.

Some observations were also made in a passage in that judgment on which strong emphasis
has been placed by the appellants:

It certainly cannot be pretended that the provision is intended to benefit the weaker sections
of the people only. We must also observe here that whatever justification there may have
been in 1973 when Section 30(ii) was amended by imposing a ceiling of Rs. 400 on rent
payable by tenants of residential buildings to entitle them to seek the protection of the Act,
the passage of time has made the ceiling utterly unreal. We are entitled to take judicial notice
of the enormous multi-fold increase of rents through-out the country, particularly in urban
areas. It is common knowledge today that the accommodation which one could have possibly

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got for Rs. 400 per month in 1973 will today cost at least five times more. In these days of
universal, day to day escalation of rentals any ceiling such as that imposed by Section
30(ii) in 1973 can only be considered to be totally artificial and irrelevant today.

2. Abdul Jalil S/O Late Habib Ullah vs Special Judge, E.C.\

The question raised by the counsels for the landlords who have filed these petitions is
regarding enhancement of rent by interim orders or final decisions. Considering the fact that
rental value of the land and building (including residential accommodation as well as the
commercial buildings) under the tenancy has increased many folds. This Court by interim
order in exercise of its extraordinary power under Article 226 of the Constitution in some
writ petitions wherein they had lost from the Court below increased the rent/damages in writ
petitions filed by the landlords to do equitable and substantial justice between the parties.

 Interim orders were passed of the basis of plinth area, nature and material used in
construction average rent prevalent the locality etc. and the class of city. The interim orders
were passed in the petitions where the landlords had lost in the Court below, directing the
tenant to pay enhanced rent at par with the market rent as the Court felt that whatever may
have been the dispute in the Court below the owner/landlord must get the real rental value for
his building particularly when the rent freezed at the level of year 1972. Under the Uttar
Pradesh Urban Buildings (Regulation of Letting, Rent and Eviction), Act 1972 (hereinafter
referred to as UP. Rent Act) in view of various decisions of the Courts on the subject and
there being no analogous provisions to Section 21(8) for enhancement of the aforesaid Rent
Act in respect of landlords and owners of buildings otherwise than public buildings etc.
covered by the aforesaid Section 21(8) of the Act. Similarly relying upon the decisions of this
Court reported in 2004 (2) ARC 268 Vishram v. III Additional District Judge, Aligarh as well
as in 2004 (2) ARC 349 : 2005 (2) ARC 726 Gopal Prasad Agrawal v. Mahendra Singh
Chaudhary and Ors., directions were given for enhancement of rent or for payment of
damages in case the possession of a person is found to be unauthorized occupancy.

The Court held that- A person who occupies an accommodation under an allotment order
which is subsequently cancelled is liable to pay mesne profits in accordance with present
rental value of property. Case law reviewed. Even where the relationship of landlord and
tenant exists. Under U.P. (Temporary) Control of Rent and Eviction Act, 1947, it is
permissible and possible under Section 2-A or 5(4) of the Act1: for the landlord to get rent

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even at the rate prevailing in the locality for similar accommodation which may be much
more than 'reasonable rent' as defined under Section 2(f). If this is permissible under the Act
where the relationship of landlord and tenant exists, there is no reason to confine owner of
building to "reasonable rent" as defined under Section 2(f) while claiming mesne profits
against an unauthorized or trespasser. Obviously there is no question of any agreement taking
place between an owner and a trespasser or an allottee whom the owner does not accept as his
tenant and whose allotment order be successfully challenges. The remedies provided under
the Act for claiming rent at a higher rate than the reasonable rent prescribed under the Act
also cannot be invoked by the owner because these remedies are available only when the
relationship of landlord and tenant exists either by virtue of contract or by virtue of statute.
To grant an unauthorized occupant an advantage over authorized occupant would be most
unfair to the owner of the property and would also be against public policy and fair play.

3. Babulal Fakirchand Agrawal vs Suresh Kedarnath Malpani And Ors:

Landlords have presented suit for eviction against the tenant on the grounds that the premises
are required by the landlords reasonably and bonafide for their own use and occupation, the
tenant is using the suit shop for the purpose other than for which it was leased and has also
committed default in payment of rent of the suit premises. Trial Court negatived the plea of
the landlords based on the ground of bonafide requirement and change of user however,
decreed the suit on the ground that tenant has committed default in payment of rent. Appeal
presented by tenant to the District Court has been dismissed and the decree of eviction
against tenant on the ground of default in payment of rent has been confirmed.

 The learned Judge in the present case has taken the view that "once a notice under section
12(2) of the Bombay Rent Act is given terminating the tenancy on the ground of non-
payment of rent, the landlord is entitled to file a suit and maintain it and in case the
conditions of section 12(3)(a) are satisfied, he is entitled to a decree under section 12(3)(b) of
the Act, if the tenant has not availed of the protection afforded by that provision" and that
once the notice is issued, "what reliefs can be given are provided for by section 12(3)

As has been concluded by the Division Bench in the matter of Narhar Vs. Narmadabai
(Supra), once the tenant pays the entire amount demanded by the landlord by notice issued
under section 12(2), the notice becomes ineffective and, in case, the landlord {15}
cra76.10.odt wants to claim possession on the ground of arrears of rent for the period other

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than the period covered under the notice, it is obligatory for him to issue a notice once again
in view of mandate of section 12(2) and claim arrears. Service of notice demanding rent for a
specified period required under section 12(2) is a condition precedent for presentation of suit
and landlord cannot be permitted to deviate from the mandatory requirement and claim
eviction taking recourse of section 12(3)(b) of the Bombay Rent Act.

The aforesaid view of the Division Bench in the matter of Narhar Vs. Narmadabai appears to
be in conflict with the view expressed by the another Division Bench in the matter of
Chandiram Ahuja Vs. Akola Zilla Shram Wahtuk Sahakari Sanstha (supra). It does appear
that although the attention of the court while dealing with the matter of Chandiram was
invited to the decision in the matter of Dhansukhlal (supra), however, the attention of the
Court was not invited to the judgment in the matter of Narhar Vs. Narmadabai. The issue
before the Division Bench in Chandiram's case is concerning interpretation of section 15 of
the Maharashtra Rent Control Act. As has been recorded above, the provisions contained in
the repelled Bombay Rent Act and the Maharashtra Rent Control Act are identical and the
decisions rendered interpreting the provisions of section 12 of the Bombay Rent Act are
relevant for consideration. It must be noticed that if the tenant is desirous of claiming
protection under section 15(1) of the Maharashtra Rent Control Act, he must demonstrate his
readiness and willingness to pay the rent i.e. the quantum of rent which forms the subject
matter of landlord's grievance. While interpreting words "readiness and willingness to pay"
one has to be {16} cra76.10.odt mindful of the provisions of section 15(3) which mandates
the tenant to pay or tender in Court regularly such standard rent or permitted increases till the
suit is finally decided and also pay cost of the suit as directed by the Court.

4. Atma Ram Properties (P) Ltd. vs M/S. Escorts Ltd.

The brief facts of the matter as stated in CS (OS) No.1422/2006 are that the plaintiff has filed
this suit for recovery of Rs.20,00,000/- as arrears of rent for the period from 01.05.2006 to
30.06.2006 in respect of the suit property, also for recovery of rent for the period from
01.07.2006 till the final adjudication of the case @ Rs.10,00,000/- per month and for a decree
for Rs.30,000/- as interest for the period from 01.05.2006 to 30.06.2006.

The plaintiff is the owner of the building named Atma Ram Mansion (formerly known as
Scindia House), Connaught Circus, New Delhi and it had given the suit property admeasuring
about 6,000 square feet to the defendant on lease with effect from 01.01.1962 at a monthly

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rent of Rs.820/- and even today the monthly rent of the said property payable by the
defendant to the plaintiff is approximately Rs.1,060/- only, which is very less compared to
the present market rate. The plaintiff states that the prevailing market rate of rent for property
similar to the suit property, is estimated at Rs.10,00,000/- per month including property tax
but excluding other charges.

 The observations of the Supreme Court although are noteworthy and are also indicative of
the effect that the same could have been done by the Apex Court under its plenary powers.
But, as the said observations have been dealt with by Division Bench of this court being
contextual in nature and cannot impact the case premised on the Act. Thus, I have to endorse
the said view expressed by Division Bench and consequently the said judgment does not aid
the case of the plaintiff.

No further submission is left unanswered. In view of the discussion done above, it can be
safely said, the suit in the present form is barred by the law i.e. Section 50 read with Section
6A of the Act.

Both applications being IA No.14067/2007 in CS(OS) No.1422/2006 and I.A. No.7775/2008

5.  Santosh Vaid vs. Uttam Chand:

The Division Bench authoritatively has now settled the said question by observing that the
authority of Raghunandan Saran (supra) declaring the provisions ultra vires does not entitle
the landlords to increase the rents on the basis of the market value. Similarly the Division
Bench also holds that the view in Pearey Lal (supra) is not correct. The learned Division
Bench observed this in following words :

A Division Bench of this Court in Raghunandan Saran Ashok Saran held that Sections
4, 6 and 9 of the Delhi Rent Act relating to standard rent had not taken into account
the huge difference between the cost of living in the past and the present time and did
not pass the test of reasonableness and had become obsolete and archaic and
accordingly struck down the same. However the only effect of the said judgment is
that a tenant could not apply to have the standard rent thereof determined and thus
could not avoid paying agreed rent, as he was able to before this judgment.

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Undoubtedly, the Division Bench, while so striking down the said provisions, did
observe that the said provisions dealing with the standard rent did not take into
account the rise in the consumer price index and the huge costs required for
maintaining the tenanted premises and there was no justification for not updating the
frozen rents but all this was in the context of striking down Sections 4, 6 and 9 only.
Thus the said judgment cannot be said to be a judgment on the proposition that
landlords are entitled to have the rent increased as per the consumer price index or
rate of inflation." (Emphasis Supplied) "It would thus be seen that Pearey Lal cannot
be said to be an authority in favour of the right of a landlord to have the rent increased
to bring it at par with the consumer price index or to account for the rate of inflation.
It is the settled position in law (See Jitendra Kumar Singh v. State of U.P. (2010) 3
SCC 119) that a judgment is a precedent on what it decides and not on other things.
Though certain observations of wide sweep were certainly made in the said judgment
but that judgment also towards the end accepts that the Court cannot tell a tenant to
pay the rent at the present day market value. (Emphasis Supplied) "Mohd. Ahmed
(supra) was also a case were the Supreme Court gave certain suggestions/laid
guidelines to minimize landlord-tenant litigation. The same were again in the context
of UP Rent Act. The same also have no application to the position as prevailing in
Delhi."

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 CONCLUSION

Signing a commercial lease is a major step for your business. For many tenants, a rent
escalation is a yearly occurrence. They can come in two basic types -- fixed and variable --
although they can also come into play when your lease comes up for renewal. While some
tenants are able to avoid them, they are usually an unavoidable cost of occupying real estate
and need to be managed and planned for. With this guide, you will be able to navigate your
commercial rent escalation clauses.

The rental laws in India needs to be revised to protect the owner and his/her property from
the tenant.

Special areas of focus should be on terminating old tenancies, removing constraints on

The market forces should be allowed to determine the rental amounts and the owner must
have full protection for his/her property. This will go in long way providing security to the
landlord and also reduce the deposit amount required with the lease agreements.

If these laws are enacted and strictly enforced, there is every chance that more investors will
want to enter the real estate market to utilize the rental fees as income. This is especially for
the commercial sectors. The tax law always need to be revised so that renting for properties
becomes a financial viable option. Amendments in the Rent Acts of the several states are a
progressive move.

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