Rental Bonds Bridge Trust Deficit Between Landlords & Tenants

Rental Bonds Bridge Trust Deficit Between Landlords & Tenants
Jul 2021 , by , in Interviews

Vikash Khandelwal, CEO, Eqaro Guarantees briefs Realty+ on the concept of Rental Bonds and its benefits for the rental housing segment in India.

What are rental bonds?

Rental Bonds are a guarantee to the landlord that protects them in case the tenant defaults on his obligations under the tenancy agreement. Rental bond is a 3-way agreement, issued by the Surety Company, 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.

What are the benefits of rental bonds – for tenant and the landlord?

According to a Knight Frank report, there are over 11 million residential properties lying vacant in the country. This is despite a massive housing shortage in the country. One of the main reasons is that the landlords would prefer keeping their properties vacant rather than trust unverified tenants. Since the Surety company conducts a comprehensive due diligence of the tenant prior to the issuance of the rental bond, the landlord is assured of a credit verified & assessed tenant. This goes a long way in helping bridge the trust deficit. Further, the rental bond also allows the landlord the flexibility of specifying the amount of the bond that would adequately cover his risk. 

Rental Bonds work for the tenant also. The security deposit that the tenant is required to put 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 amount of the deposit for things that are more important to him. Further, the tenant does not have to wait for the refund of the security deposit on vacating the premise. If the tenant has to shift houses, rental bonds do away with the need of putting up a security deposit even before he has got the previous one back. 

Can rental bonds address the concern of the high number of vacant residential units across India?      

Landlords need protection. Currently they don’t have the means to accurately assess the credibility of the tenant. Hence many landlords have opted to keep their properties vacant rather than let it out to troublesome tenants. Rental bonds provide the landlord with a credit verified and an assessed tenant and provide the landlord with a cover that’s far superior to that of the traditional security deposit. Rental bonds will help bridge the trust deficit thus encouraging more landlords to let out their property making them economically productive. 

How rental bonds can enhance the liquidity for the property owner

It’s a misconception that the landlord is looking for liquidity by way of a security deposit. Our experience with landlords has led us to believe that all that a landlord wants is a good tenant who would honour the terms of tenancy agreement. The security deposit is only a means of protection that the landlord has been taking for the want of a better alternative. With rental bonds, the landlord has access to a credit verified and an assessed tenant backed by an institutional guarantee to turn to in case the tenant defaults on his obligations. The rental bond essentially helps a landlord get good tenants, faster. Rental Bonds can help enhance the liquidity for the tenants as they do not have to pay hefty security deposit upfront which can be deployed for other productive purposes. 

Are there any government/Sebi regulations concerning rental bonds?

A Rental Bond is a guarantee issued on behalf of the tenant with the landlord as the beneficiary. The Indian Contract Act 1872 recognizes a contract of guarantee and hence the rental bond is a permitted and an enforceable contract under the laws of India.

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