Pagdi System: Check Transfer of Ownership, Laws, & Selling Property
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What is Pagdi system?

Pagdi is a customary model of tenancy in India that involves a tenant and a landlord, similar to other rental agreements. However, what sets it apart is that the tenant is also a co-owner of the property and has the right to sublet or sell the property.

Prevalent in cities like Mumbai, Delhi and Kolkata, the pagdi system is a type of rental tenancy. People started following the pagdi system in the pre-independence era to avoid paying excessive taxes to the Britishers. Also called the ‘pagdi-kirayedar’ system, the pagdi system today has reduced to very few areas in the country, but is legalised under section 56 of the Rent Control Act, 1999.

Scroll below to know more about the pagdi system.

How Does the Pagdi System Work?

In the pagdi rental system, the tenant is a co-owner of the property who enjoys all the rights of an owner like selling or sub-letting the property.

In the pagdi system law, the tenant pays a fee, premium or consideration to the landlord as a lump sum payment. On the other hand, the property rent remains unchanged for the tenant, which is much lower than the market rate. Also, as a co-owner, the tenant can sublet or sell the property whenever he wishes to.

If the tenant sublets the property, the rental income is shared by him/her and the landlord in the percentage of 35%- 65%.

Similarly, when the property is sold, the landlord (owner of the property) gets 30-50% of the sale proceeds, and the tenant takes the remaining.

Under the pagdi system law, landlords often suffer losses, as the rental of the buildings are drastically lower than market prices. Due to this, it is difficult for the landlord to maintain and repair the building when needed.

How to Sell Your Property to Buy a New Home Under Pagdi System?

Typically, the pagdi kirayadar system is carried out with verbal agreements. There is hardly any well maintained documentation, which makes the sale process easy and quick. However, if the tenant wishes to sell the house, it is recommended that he/she take the No Objection Certificate from the lender. It would be better to ask consent from the landlord about selling the house and transferring tenancy to avoid any inconvenience later. Though there is no thumb rule, he/she would have to transfer 30-50% of the proceeds to the landlord, which is a prominent practice in the pagdi system.

The government has been planning to abolish the pagdi system and replace it with a more regularised rental law for a few years. They plan to bring the buildings where the pagdi system is followed under the Real Estate Regulation Development Act, 2016 (RERA). The government also plans to redevelop old and dilapidated properties under the pagdi system. Though they would provide compensation for redevelopment, it might not be enough to buy a new house.

Instead, a better option to buy a dream house is, with a home loan. Home loans have an easy application process and flexible repayment tenures. At Kotak Mahindra bank, enjoy competitive home loan interest rates and low processing fees. For easy initiation of loan application and clarity on any aspect, Kotak’s expert can offer assistance.

How Does Transfer Of Ownership In Pagdi System Take Place?

The transfer of ownership or tenancy rights of "Pagdi" flats or premises can be achieved through the execution of a tripartite agreement between the landlord, outgoing tenant, and incoming tenant or owner. The landlord has the lawful right to charge a premium or "Pagdi" at the time of transfer, which is recognized under Section 56 of the Rent Control Act.

Pros And Cons of the Pagdi System in India

Advantages of Pagdi System in India

  • Low Rents: The Pagdi system offers lower rent to tenants than the current market rates in major urban cities.
  • Security of Tenure: The Pagdi system provides tenants with the security of tenure, allowing them to occupy the property indefinitely.
  • Co Ownership Rights: Tenants have the right to co own the property, though not the land, and have selling and sub-letting rights.

Disadvantages of Pagdi System in India

  • No Control over Rent: After paying the Pagdi amount, tenants have no control over rent. Landlords can increase the rent, and tenants have no legal recourse to challenge it.
  • Responsibility for Property Maintenance: Tenants are responsible for repairs and renovations of the property, which can be a financial burden, particularly for marginalized communities.

The Inclusion Of Pagdi System Under RERA

Per the Maharashtra Rent Control Act of 1999, developers in Mumbai who undertake the redevelopment of properties under the Pagdi system can avail themselves of specific benefits, including an additional discounted FSI (Floor Space Index) by the state government of Maharashtra.

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Frequently Asked Questions

Is the Pagdi system legal in India?

Although there are ongoing efforts to modernise or eliminate the outdated documentation associated with the Pagdi system, it was legalised under the Maharashtra Rent Control Act of 1999 and has been in effect since 2000, adhering to the new regulations for the Pagdi system in Mumbai.

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Is A Rent Agreement Required In The Pagdi System?

The Pagdi rent system is governed by a specific set of rules that apply to both the ownership rights of Pagdi system tenants and their relationship with the landlords. These rules include:

  • Absence of any lease or agreement between tenants and landlords.
  • Tenants have limited rights over the property but no ownership over the land.
  • Tenants may sublet the property in some cases.
  • Tenants have the right to sell the property with the landlord's consent, and in such cases, they are required to share a portion of the profits with the actual owner, i.e., the landlord.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.