‘Senseless’ Estate agents react to government rent reform

Proposed changes to the law regulating rent contracts have been met with some criticism by estate agents, who pointed out shortcomings related to the imposition of a rental increase cap and the setting of a relatively short minimum term before a tenant can terminate a contract.

Amongst the main features of the reform, the details of which were unveiled yesterday by Prime Minister Joseph Muscat, are the capping of annual rental increases at 5%, the setting of a minimum residential lease of one year, the requirement that all contracts are registered, and the provision of tax credits for landlords who offer long-term contracts.

In comments to Business Today, Douglas Salt, director of Frank Salt Real Estate, said the idea of offering tax credits was a good one, since it offered a good incentive.

He was far less positive about the 5% cap, however, saying that any form of rent control in the past had always had a “very negative” affect on the market.

Calling the cap a “senseless decision”, Salt remarked that while a 5% limit might have sense at this current point in time, conditions in the future might change in such a way as to make the imposed limit inadequate.

“Any artificial intervention in a market always has a negative impact,” he said, “It seems we have not learnt from the lessons of the past. Although 5% sounds reasonable, nobody knows what the future brings.”

He said that the cap would drive landlords to opt for one-year contracts instead of ones of longer duration, so as to be able to draw up a new contract after the year elapses, rather than renew an existing one and be restricted by the imposed increase limit. The tax incentives available for landlords who opt for contracts of two years or longer would not be enough to make up for the fact that annual increases are capped at 5%.

“This will lead to a lot of instability in people’s lives. […] Landlords might opt not to offer more than a one year contract, choosing to avoid a longer-term, since the tax incentives won’t be enough to make up for the earnings limit imposed by the 5% cap.”

Francis Spiteri Paris, founder and managing director of Perry Estate Agents, pointed to the clause within the reform which sets a minimum term of two-months before a tenant can terminate a rent agreement in the case of a one-year contract.

Spiteri Paris, while acknowledging that he had not yet had the time to delve in detail into the reform’s provisions, said that such a clause might be abused by tenants who enter into a long-term rent agreement, only to end it prematurely while still having benefitted from the cheaper rent rates associated with longer-term letting compared with short-term lets.

The provisions allow a tenant to terminate a one-year contract after the lapse of two months, subject to a one months’ notice period.

“The clause allowing a tenant to give notice of leaving after two months is a killer,” Spiteri Paris said, “It will cause a lot of confusion. A contract is a contract, and if a tenant is contracted for a year, they should have to stay for a year or else pay a fee.”

He also noted that having a tenant terminate their contract after just a couple of months would cause added expenses for landlords, since short-lets typically lead to general maintenance-related costs when changing from one occupier to the other.

When it came to some of the reforms other provisions, Spiteri Paris said that he “fully agreed” with the requirement that all contracts be registered. Moreover, while he said the idea of capping was a good one, the 5% ceiling was, “realistically speaking”, rather high, and that in practice most tenants would, regardless of the provisions, not have accepted any increase over 5%.

Rent reform highlights

Residential rental contracts will have a minimum duration of one year with property owners being offered tax credits for longer lets, according to the government’s proposals

The new law will be presented in Parliament on Wednesday afternoon as government moves to regulate the rental sector.

The Private Residential Leases Act will not impose a cap on rental payments and landlords will be allowed to fix the initial rent. However, for contracts that are two years or longer, annual rental increases will be capped at 5%.

Prime Minister Joseph Muscat said on Wednesday the reform was a response to the changes in society. “Until now the rental market was a jungle and we tried to address this problem. The rental sector is a small portion of the property sector but one that was causing disproportionate social problems and others of competitiveness.”

Muscat said the reform had to be viewed within a wider context of other reforms targeting various categories of people.

“We did not opt for a heavy-handed approach because the market would have rebelled like it did in the past when governments imposed themselves in the past. This experience guided us towards these reforms that incentivise landlords rather than penalise them to do something,” Muscat said, adding the reform had to take into account different economic cycles.

The new law will not apply to pre-1995 leases.

All rental contracts, including an inventory of the residence, will have to be registered. Failure to do so will result in hefty penalties.

Landlords currently pay a 15% withholding tax on rental income but the market is rife with abuse and tax evasion. Contract registration will seek to cut down on the black market.

The Housing Authority is tasked with overseeing this sector and enforcing the rules.

The law will not cover tourist accommodation, which will be dealt with in a separate law, and provides exceptions for short lets which have to be for a minimum duration of six months.

Landlords will receive yearly tax credits for rental contracts that are for two years and longer. The credits range from €200 for a one-bedroom apartment on a two-year lease to €500 for a three-bedroom apartment on a three-year lease.

The law also stipulates that landlords will have to give three months’ notice to tenants if they do not intend to extend rental contracts.

In those cases where a landlord fails to register a rental contract, the Housing Authority can initiate criminal action but the authority will also proceed judicially in the tenant’s name to impose a three-year lease at 75% the market value.

This measure is intended to protect tenants and give them an incentive to report abuse.

Housing Parliamentary Secretary Roderick Galdes said the reform was intended to give tenants stability, while providing landlords with incentives to go for longer-term contracts. “The registration of all rental contracts gives everyone peace of mind,” Galdes said.

Justice Minister Owen Bonnici said the reform will also include new rights to tenants and landlords when it comes to conflicts between them.

The new law is expected to come into force on 1 January next year with a transition period for running contracts. By 1 January 2021, all rental contracts have to be registered and adhere to the new regime.