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The Pagdi system is a rental arrangement or exchange between a landlord and a tenant. This system originated in the pre-independence era of India to help minimise additional taxes imposed by British rulers. Also known as the Pagdi-Kirayedar system, it is legally governed by Section 56 of the Maharashtra Rent Control Act of 1999. Under this section, tenants are recognised as co-owners of the property they occupy and have the right to sell or gain ownership of it.
The Pagdi system is a rental agreement, where, if you are the tenant, you are a co-owner of the property but not the land. You can enjoy the amenities of the property similar to the landlord. You also have the right to sell or sublet the property. After paying a lump sum premium to the landlord, the rent remains lower and fixed for the entire duration.
After you, as a tenant or co-owner, pay the landlord a lump sum, you can continue to use the same facilities and manage finances jointly. The rent remains unchanged for you and is lower than the market rate.
As a co-owner, you reserve the right to sublet or sell the property but have to share some percentage of the profit with the landlord. When subletting, you must pay 35%–65% of the rent to the landlord. When selling, 30%–50% of the amount needs to be shared with the landlord.
This system often results in losses for the landlord due to lower rent and restrictions on renovation or reconstruction.
The Pagdi system’s rules are based on traditional practices rather than general regulations. However, some rules commonly observed across India under this system are:
The tenant needs to pay a lump sum amount calculated as a multiple of the monthly rent as a security deposit
After paying the lump sum amount, the tenant does not have to pay any further rent
In certain cases, tenants can transfer their tenancy to their successors or children
The Pagdi system is based on informal agreements and does not involve a formal written contract
Tenants do not have the same legal rights as those under standard rental agreements and cannot challenge the landlord’s decisions
Renovation and maintenance are taken up based on the agreed terms and may not a shared responsibility between the landlord and tenant
The agreement can be cancelled by either party, with terms varying by community or location
Under this system, a written agreement may or may not exist, and the terms are primarily clarified verbally. As a tenant, selling the property requires obtaining a No Objection Certificate (NOC) from the landlord. Securing the landlord's consent beforehand is advisable to prevent complications.
Since no formal document outlines the terms, 30%-50% of the sale amount has to be paid to the landlord. In recent years, the government has been planning to replace this system with a more regulated framework.
The proposal includes bringing buildings under the Real Estate (Regulation and Development) Act, 2016 (RERA). This law aims to allocate funds for redeveloping older buildings within the Pagdi system. However, these funds may not be sufficient to purchase a new property.
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The process to transfer tenancy ownership in the Pagdi system includes four steps – agreement, payment, registration, and issuance. Check out the detailed steps below:
The landlord and tenants (current and new) enter into a tripartite agreement outlining the terms, premium amount, and conditions
The outgoing or incoming tenant makes a lump sum payment to the landlord as per the agreed terms
Registration of the transfer agreement is completed to legalise the transfer, which involves stamp duty and registration fees
The landlord issues a fresh receipt to the incoming tenant
This system is designed to regulate rental agreements while balancing the interests of tenants and landlords.
Pros
It provides specific benefits including:
In urban areas, tenants pay lower rents compared to market prices
Tenants have security through ownership rights, allowing them to sublet or sell the property
Tenants have a security of tenure
Cons
There are certain disadvantages of the system. These include:
Once the landlord receives the Pagdi amount, they experience losses due to the absence of rent payments
Tenants have the right to sell the property but not the land
Maintenance issues persist as it is not a shared responsibility
The property transfer process can be legally complex
The laws governing this system primarily include the Maharashtra Rent Control Act, 1999, and the Maharashtra Land Revenue Code, 1966. Additional relevant laws are:
The Rent Control Act, 1996
This act ensures fair rents and protection from eviction to prevent tenant exploitation. The rent fixed under this act has remained unchanged since 1947, leading to the deterioration of many properties due to a lack of maintenance.
Maharashtra Land Revenue Code, 1966
This legislation regulates land revenue administration in Maharashtra. It outlines procedures for land assessment, revenue collection, and dispute resolution. The law also establishes the framework for land classification and the rights of occupants.
Maharashtra Housing and Area Development Authority (MHADA) Act, 1976
MHADA is responsible for the development and management of housing in the state. It oversees affordable housing schemes, redevelopment projects, and slum rehabilitation. The authority also ensures proper planning and allocation of resources for residential infrastructure.
Maharashtra Rent Control Act, 1999
This act legalises the Pagdi system. Section 56 permits landlords to charge a sum during property transfers. It also grants ownership rights to sublet or sell the property. Section 7(15)(d) allows tenancy rights to be transferred to family members.
Due to the age and current condition of Pagdi properties, redevelopment is essential. Redevelopment projects provide tenants with new flats. The Mumbai Development Control and Promotion Regulations (DCPR) 2034 offer incentives for this redevelopment, including:
A minimum of 300 sq. ft. area for tenants as a new flat
Additional Floor Space Index (FSI) granted to developers undertaking redevelopment
This system is governed by specific laws and taxation regulations, particularly concerning GST and dispute resolution. Key provisions include:
Premium fees during tenancy transfer subject to GST
Residential properties rented out exempt from GST
Tenants seeking legal assistance for NOC, rent increments, and transfer fees covered under the Maharashtra Rent Control Act.
The Pagdi system is legal in India and is governed by the Maharashtra Rent Control Act of 1999.
This system allows for inheritance, as successors or family members can take over tenancy upon the tenant’s death.
A rent agreement is not required in the Pagdi system, as it follows traditional practices where terms are agreed upon verbally between the parties.
Pagdi tenants pay a lump sum amount to the landlord and, in return, can fully or partially enjoy ownership rights, sell, or sublet the premises.
To inherit tenancy rights under this system, a successor or family member needs to prove residency. This process must take place only upon the tenant’s demise, and once successfully verified, the property can be occupied under the same rental terms.
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