The Pagdi system is prevalent since the pre-independence period. Pagdi system is like a renting system. In the pagdi system, the tenant becomes the part-owner of the house, but he is not the owner of the land. For Instance, there are two parties X and Y. X is the landlord and Y is the tenant. If Y is interested in buying the property of X, then under the pagdi system, Y will have to pay a lump sum principal amount to X as Pagdi. Here X would ensure that the Y enjoys lower monthly rents (irrespective of the market rates in case of rent) and also has a co-ownership of the property. The tenant pays rent continuously as long as he is in possession of the house. Section 56 of the Rent Control Act 1999 has legalized the pagdi system. The Government is planning to bring the buildings that are controlled under the pagdi system under the purview of Real Estate (Regulation and Development) Act 2016. The Ministry of Housing and Urban Affairs has drafted a Model Tenancy Act 2019 in order to balance the interest and rights of both the owner of the property as well as the tenant. It will also create an accountable and transparent ecosystem for renting the land in an efficient and disciplined manner.
The pagdi system works in the following way mentioned below. There are two options available to the tenant under the pagdi system. They are as follows:
The tenant has an option to sell the property, but then he has to give a certain percentage of the gross amount that has been received after selling the property to the owner of such property. The percentage varies between 30% to 50%. For Instance, if the tenant under the pagdi system had sold the property for Rs. 30,00,000 and the percentage is between 30% to 50%, and then the tenant will have to give Rs. 9,00,000 to Rs. 15,00,000 to the owner of the property.
The tenant also has an option to sub rent the property, but then the old tenant (who is now the landlord) has to give a certain percentage of gross amount (rental amount) that has been received after sub renting the property to the owner of such property. The rental amount is shared between the old tenant and the owner in a ratio of 35:65. For Instance, if the tenant under the pagdi system had sub rent the property for Rs. 10,000 then the old tenant will have to give Rs. 6,500 (65% of 10,000) to the owner of the property and will keep Rs. 3,500 (35% of 10,000).
Benefits under the Pagdi system
One of the benefits of the pagdi system is that it helps in keeping the prices of houses in check, and the speculation is under control. The pagdi system also gives assurance to ordinary people to receive affordable houses. The landlords and the tenants also use the padgi system to avoid taxes. Under the pagdi system, the tenant has to pay a nominal rent every month as compared to the market rent rates. Hence, under the pagdi system, the tenant also enjoys the rights of the part ownership.
The Maharashtra State Government has proposed amendments to the Maharashtra Rent Control Act 1999. According to the proposed amendments, the properties under the pagdi system will have to pay the rents that are based on the current market rates. The current market is over 200 times more than the rent that is currently paid by the tenant under the pagdi system. For Instance, the tenants under the pagdi system pay a rent of Rs. 500, whereas the market value of the same property is Rs. 50,000 or more. The pagdi system ensures that the tenant will have to pay the nominal rent only even though there is a rise in inflation or in any other cases where the market fluctuates. In case if the buildings that are controlled under the pagdi system comes under the purview of Real Estate (Regulation and Development) Act 2016, then the tenants will also enjoy the same protection as it is available for the Homebuyers. Hence, the pagdi system is the traditional tenancy rental model which is still prevalent in India.