Over the last few years, we have seen an increasing number of judgments, issued both by the Maltese Courts as well as by the European Court of Human Rights, condemning old, regulated leases as unconstitutional and in breach of landlords’ fundamental rights on account of the low return the property is capable of yielding (by way of regulated rent) compared to its value on the market. The awareness of the general public about potential remedies has also increased as a result of these jurisprudential developments and the attention they have received by the media.
Forced landlord-tenant relationships, and tenancies enjoying the protection of the law at rental values which were practically frozen in time, result from various legal sources, foremost among them the Reletting of Urban Property (Regulation) Ordinance and the Housing Decontrol Ordinance.
The first dent into the system of protected leases came a number of years ago when temporary ground rents that had been converted into residential leases by operation of law were declared to be in breach of the owner’s right to the enjoyment of his possessions because the use of the property was controlled by law in a way which did not balance the interests of the owner with the general interests of the community. A similar conclusion was drawn with respect to various properties that had originally been requisitioned by the Government, eventually creating a protected lease in favour of the tenant. It is significant to note that many of these pronouncements came after the amendments introduced in 2009 which had slightly raised the rent of residential tenements, indicating that in many cases the said increases were insufficient to offset the landlord’s disadvantage. Commercial leases originating before 1st June 1995 saw a more significant increase mechanism with the 2009 amendments and were even given a cut-off date in 2028 when such leases would cease to be automatically renewed. However, even these commercial leases have been put to the test and there are now a handful of judgments finding violations of the rights of the owners of commercial premises leased prior to 1995.
Remedies for Constitutional breaches concerning unfair rent
Owners are virtually never content with a simple declaration that their fundamental rights have been breached and, generally speaking, where it finds a violation, the Court will usually make a monetary award to compensate the owner for the fact of the violation as well as to compensate for some of the pecuniary damage he sustained over the years. What landlords remain concerned about is their prospects for the future, since the Constitutional courts have declared that it is not for them to fix the rent for the future and that they can only give a remedy for the violations suffered up to the date of the judgment.
However, recently the remedies awarded by the domestic courts have also seen an interesting development. Whereas the early judgments condemning old leases as unconstitutional would simply award a sum in compensation and refuse to evict the tenant, more recently the Courts began to adopt a half-way compromise solution by generally choosing to refrain from making an eviction order while at the same time issuing a declaration to the effect that, following the judgment, the tenant may no longer use the impugned legal provisions to claim a title over the landlord’s property. This would mean that thereafter the landlord would have to take the tenant to court again, this time demanding eviction before the competent court, which would usually be the Rent Regulation Board. In fact, there are now precedents where landlords successfully evicted their tenants on the basis of a previous judicial declaration condemning their title as unconstitutional. Landlords could even file their claim for eviction as a ‘special summary procedure’ whereby the Board would only allow the defendant to defend the case if he manages to show at the very outset that he has a worthwhile defense. In practice, the Board is not always easily swayed to hear the case summarily, and many instances where the landlord was successful in obtaining an eviction by special summary procedure are in fact cases where the tenant failed to make an appearance in court and to contest the request to hear the case summarily. There have however been other cases where the tenant, even upon making an appearance, was denied the right to defend the eviction claim. Thus, the process could be a little cumbersome, but (at least until a few months ago) it had the potential to achieve the desired result for the landlord.
Recent legislation and the 2% rule
Recently, however, new legislation has been enacted which necessitates that owners re-think their course of action, at least where residential leases are concerned. The Controlled Residential Leases Reform Act, Act XXIV of 2021, came into force on 28th May 2021, purporting to alleviate the burden on landlords whose properties are still subject to controlled residential leases. The amendments of May 2021 follow those which had been introduced in 2018 where the possibility of increasing the rent to 2% of the market value had been granted in certain particular cases falling under the Housing Decontrol Ordinance. With the May 2021 amendments, the legislator has now made it possible for the lessor of premises leased as a dwelling house before 1st June 1995 to demand that the rent be reviewed to an amount not exceeding 2% per annum of the free and open market value of the dwelling house and to demand that the Rent Regulation Board establish new conditions regarding the lease. A fresh revision could be requested after the lapse of 6 years from when the new rent was fixed, or whenever the economic circumstances of the tenant change.
The Housing Authority is to be notified of these proceedings and has the right to participate fully as intervenor in the proceedings. In these cases, a tenant is entitled to the benefit of legal aid provided by the Housing Authority.
At the outset of the proceedings, the Board will carry out a means test on the tenant, evaluating the income and capital of the tenant according to Regulations published under Article 1622A of the Civil Code. For the purposes of carrying out the means test, the Board is also empowered to take into account assets which the tenant would have disposed of maliciously with the intention of hiding these assets.
If upon running the means test the Board finds that the tenant exceeds the thresholds established in the Regulations, it will give the tenant two years to vacate the premises, while establishing the amount of compensation to be paid by the tenant for his occupation of the premises during that period.
If, on the other hand, the tenant’s means are within the thresholds established in the Regulations, the Board will proceed to review the rent. The Board can also order that an increased rent be paid during the pendency of the action. Upon pronouncing definitive judgment, the Board will declare the amount of the revised rent, which cannot be in excess of 2% of the free and open market value of the property. That rent may subsequently increase according to the regulations published by the Minister responsible for housing from time to time.
Once the decision of the Board is issued, fixing the new rental conditions, the tenant will have fifteen days to decide whether or not to accept the new conditions imposed by the Board. If the tenant refuses those conditions, he will be bound to evict the premises within a time frame to be fixed by the Board. Any intention to refuse those terms on the part of the tenant must be expressed clearly in a judicial letter filed within said time-frame of fifteen days. If no such judicial letter is filed, the presumption is that the tenant has accepted the new terms.
A similar procedure applies under Chapter 158, the Housing Decontrol Ordinance. As previously stated, the 2% rule had already been introduced in Chapter 158 in 2018, but it applied only in the case of leases created by virtue of a previous title of emphyteusis or sub-emphyteusis which commenced before 1st June 1995. Now, following the amendments of May 2021, the rule applies to tenants of dwelling-houses enjoying a title of lease which commenced before 1st June 1995 in virtue of the provisions of the Housing Decontrol Ordinance, whether or not such title of lease was established in virtue of a previous title of emphyteusis or sub-emphyteusis.
The 2% rule in practice
The May 2021 amendments are still very fresh, but the case-law compiled so far in relation to the 2018 amendments may give us an indication as to how the Board is likely to apply its discretion when it comes to increasing the rent. Judging by the cases decided on the basis of the 2018 amendments, the general trend so far is for the Board to establish the rent at somewhere between 1% and 2% of the market value, although the Court of Appeal in a fairly recent case took note of the Constitutional Court’s remark in separate proceedings that it would be ideal in such cases for the Board to steer closer to the maximum of 2% with the aim of maintaining a reasonable amount of proportionality between the rental value on the market and the threshold imposed by law.
The consequence of the 2018 amendments and particularly (given their much broader application) the 2021 amendments, is that landlords of old residential leases claiming that the current rent is in breach of their fundamental rights are now faced with the possibility that the Court presiding over a Constitutional claim might deem that, at least for the future, the landlord has an ordinary remedy at his disposal, in the form of a potential claim before the Rent Regulation Board to raise the rent. These amendments are also bound to create some inconvenience for landlords who had already filed Constitutional proceedings before May 2021 but who had not managed to obtain a final judgment prior to the amendments. The new changes to the law could also present an obstacle in the way of owners who, having already obtained a declaration of a violation from the Constitutional Court, had not yet managed to secure an eviction before the Board. Tenants will surely attempt to use the new legal provisions to their advantage, while Landlords will want to consider carefully which judicial avenues to explore when addressing their concerns about the low rents they are presently receiving.
Of course, a central question remains whether the rent fixed by the Board is sufficient to put an end to the violation. While there is an argument for saying that the answer to this question will very much depend on a case by case basis, another way of looking at it is to ask whether the maximum which the Board can fix is in itself sufficient, that is to say: is 2% of the value of the property ever enough, given the rental rates on the Maltese market today? So far the domestic Courts have had sparse opportunities to deal with this latter question. In a recent Constitutional case (Albert Cassar et vs Prim Ministru et, decided on the 20th of January, 2021) the court opined that even after the 2018 amendments the landlord in that particular case still did not have an adequate remedy at his disposal and consequently did not need to proceed before the Rent Regulation Board to demand a raise of up to 2% because that procedure was in itself based on a law that violated the landlord’s fundamental rights, at least in the circumstances of the case at hand. However, this decision is presently subject to appeal and it remains to be seen what view the Constitutional Court will take in this regard. Meanwhile, in a judgment delivered on the 30th of June 2021 in a case in the names Zarb vs Caruana et the Constitutional Court, reversing the judgment of the lower court, found that the 2018 amendments did not breach the owners’ rights in the circumstances of that particular case.
Some other aspects of the May 2021 amendments
The May 2021 amendments also state that the landlord may apply to the Board to resume possession of a tenanted dwelling house if he requires the premises as a residence for himself or any of his ascendants or descendants. A number of conditions apply, foremost among them being that the tenant owns suitable alternative premises and is not over 65 years of age. This remedy is without prejudice to the lessor’s right to demand the termination of the lease if the tenant’s means exceed the threshold established by the means test. The new law has also altered the rules concerning who is entitled to continue the lease following a tenant’s demise; however that in itself would be the subject of a separate lengthy discussion.
In the meantime, another breakthrough judgment was recently delivered by the Constitutional Court in the area of rural leases. On the 23rd of November 2020 the Constitutional Court in a case in the names J&C Properties Limited vs Nazzareno Pulis et found that the legal provisions allowing tenants of rural leases to continue to hold land at rental values far below the property’s worth on the rental market were in breach of the plaintiff’s fundamental rights and, consequently, it declared that the tenant in that particular case could no longer rely on those legal provisions to hold the property. The landowner subsequently filed proceedings before the Agricultural Leases Control Board which pronounced the eviction of the tenants on the 30th of July of this year. The latter judgment is now subject to appeal.
The law and jurisprudence concerning regulated rents is therefore very much alive and close monitoring of its evolution is of fundamental importance in advising the interests of affected persons.
This article is not intended to constitute legal advice and neither does it exhaust all relevant aspects of the topic.