What if the apartment owner doesn’t pay-back the deposit ?

I had earlier written about the options one has to find a house in Mumbai. It is tough but one has to do the ordeal. There is no choice really. I just came across this story which I thought was important to share.

I had mentioned if you rent a house, you have to pay a deposit to the owner. The amount varies from places to places. Like at most places it is 10 months rent but in more expensive areas you pay something like 4-5 month or a fixed amount say Rs 2 Lakhs etc. This deposit is like a security you place with the owner and you are supposed to take care of his/her house.

Now, this money is a free-float for the flatowner and he is only entitled to pay you the actual amount. He can save it is a fixed deposit, invest in equities etc and keep the returns to itself. So apart from rent there is an added source of earning. But is it is a huge amount and it is important that the owner pays back the amount.

Now there are two situations-

  • Your term is over and it isn’t renewed- if the owner doesn’t pay the deposit back, then one can refuse to vacate the flat (though am not sure how many are successful)
  • You might have to leave the house because of a job change/place change etc – This is a trick situation as you have to leave but the term isn’t over. And now if the person doesn’t payback the deposit what do you do? What is the recourse?

I know somebody who was trapped in the second situation and the poor person didn’t know what to do. The owner said he had invested the money in equities and lost it and was unable to pay. He had to move to a new house as office was very far from the new workplace. So, he had to find a new apartment for rent, pay the deposit and rent and also haggle with his previous apartment owner to pay-back the deposit. And in all this he had to manage his office as well!  All know nothing can be done as there is no legal recourse. I am sure many in Mumbai and elsewhere must have faced this problem. But there is no way out.

In India, the legal system is so poor that everything comes to a standstill. You have a complaint, stay with it. Only those who have enough energy can run after the courts for redressal. But overall, it is really pathetic.

I had earlier raised an issue why Indian companies have such poor after sales service? One very good way to assess how bad the situation is to visit all these companies after sales service outlets. Huge frustration everywhere. One very important reason is that they know even if you have a complaint, the company is actually doing you a favor by rectifying it. As we have a poor legal system most companies know they can get away with these abysmal standards. 

The importance of an effective legal system is extremely important. There is huge evidence how certain legal systems lead to better financial system and a better economy. People know they can’t get away if they have signed a contract. In India, the sanctity of the contract is hardly respected. We need to address this urgently as contracts are central to a functioning market- based economy. Otherwise we will never see the kind of infrastructure, financial system etc which we keep debating endlessly. 

7 Responses to “What if the apartment owner doesn’t pay-back the deposit ?”

  1. Praveer Says:

    A former co worker of mine is facing a very unique problem. Her Husband is in London so she is going there. Her housing lease is through her company. When she called her Landlord and told him that she will be vacating the house, he got extremely upset and hyper. Consequently he had a heart attack and expired on the way to hospital. Now his wife is refusing to payback the deposit and claimimg this happened due to my friend decision of vacating the house.

    With no legal redressal system in place such incidents are consistently marring the allready difficult housing problems faced in Mumbai. There is an absolute monopoly of brokers and this is only adding to this chaos.

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  5. Avid reader Says:

    Your friend could make a deal with another interested tenant, get the deposit money from the new tenant and hand over the lease to him. Of course, he must involve the landlord in this deal.

    I am amazed that the deposit is 10 months’ rent. That is a lot of money. It shows you how transactional costs increase in societies where trust is less. I had read a comment about Japan which stated that Japan eliminated a lot of transactional costs even during the days of relative poverty simply because it was a society where trust was high. So, it is not just the legal system but also culture that plays a role in this.

    There have been many instances where the tenant did not vacate the rental property for decades. Recently, there was a news item about renters in Connaught Place in Delhi paying a hundred rupees a month and not vacating their shops for decades. It works both ways. Basically, people who flout the law win.

  6. Amol Agrawal Says:

    Avid Reader,

    That would be ideal but finding a tenant is difficult.

    I agree trust is a big factor but am not sure whether it could lead to such a huge 10 months rent. It is a big cartel and everyone asks of the same. So it is either take it or leave it.There are others waiting. I am sure this deposit has increased over the years.

    Because of many “tenant not vacating incidents” the lease agreement is just for 11 months. After that you either renew or find a new place. So all this adds to the costs as well.

    The practices in Mumbai housing markets needs to be evaluated urgently and somekind of regulation needs to be imposed. All these talks over modern financial markets in India/Mumbai can happen later.

  7. Delhi Real Estate Says:

    If the apartment owner doesn’t return the deposit , you can initiate legal action if you have a written agreement and receipt. But before that try to solve the problem amicably , Your real estate broker can be helpful, take him into confidence.

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