Rental Law

Rental law governs the rental of commercial and residential property. It is composed primarily of
state statutory and common law. A number of states have based their statutory law on either the
Uniform Residential Landlord and Tenant Act or the Model Residential Landlord–Tenant
Code. Federal statutory law may be a factor in times of national or regional emergencies and in
preventing forms of discrimination.

The basis of the legal relationship between a landlord and tenant is grounded in both contract and
property law. The tenant has a property interest in the land for a given period of time. If the
tenancy is long term or periodic, the tenant has the right to possess the land, restrict others
(including the landlord) from entering upon it and sublease or assign the property. The landlord–
tenant agreement may eliminate or limit these rights. The landlord–tenant agreement is normally
embodied in a lease. The lease, though not historically or strictly a contract, may be subject to
concepts embodied in contract law.

The landlord–tenant relationship is founded on duties proscribed by either statutory law,

common law or individual lease. Statutory law normally regulates which provisions may be
contained in a lease. Basic to all leases is the implied covenant of quiet enjoyment. This covenant
ensures the tenant that his possession will not be disturbed by someone with a superior legal title
to the land including the landlord. A breach of the covenant of quiet enjoyment may be actual or
constructive. A constructive eviction occurs when the landlord causes the premises to become
uninhabitable.

Housing codes ensure that residential rental units are habitable at the time of rental and during
the tenancy. Depending on the state, housing code violations may lead to administrative action or
to the tenant being allowed to withhold rent. The habitability of a residential rental unit is also
ensured by warranties of habitability prescribed by common and/or statutory law. A breach of
the warranty of habitability or a covenant within the lease may constitute constructive eviction
and allow the tenant to withhold rent, repair the problem and deduct the cost from the rent or
recover damages.

Unless the lease states otherwise, there is an assumption that the tenant has a duty to pay rent.
State statutes may provide for a reasonable rental value to be paid absent a rental price provision.
In commercial leases, rent is commonly calculated in part or whole as a percentage of the
tenant’s sales. Rent acceleration clauses that cause all the rent to become due if the tenant
breaches a provision of the lease are common in both residential and commercial leases.
Summary eviction statutes commonly allow a landlord to quickly evict a tenant who breaches
statutorily specified lease provisions. Self-help as a method of eviction is generally restricted.
Some states do not even allow it for tenants who have held over after the end of a lease.
Landlords are also restricted from evicting tenants in retaliation of action the tenant took in
regards to enforcing a provision of the lease or applicable law.

Federal law prohibits discrimination in housing and the rental mark

Rent control, seen by many economists as old-fashioned, has recently made a surprising
comeback in one group of high-growth, dynamic economies – the Gulf.

In December 2007 Dubai’s government toughened up its 2005 Rent Law and reduced the
maximum 2008 rent increase to only 5%. Abu Dhabi has likewise capped 2008 rent hikes at only
5%.

In neighboring Qatar, a rent freeze has been implemented while the government is determining
the new rent increase cap. For the past two years to February 2008 rent increases were limited to
10% annually

In adopting rent control the Gulf has moved in the opposite direction to the rest of the world.
Elsewhere, rent control regimes have generally been dismantled or softened since the mid-1990s.
R ent control has been removed in most of Eastern and Central Europe. Asia has also followed
the trend: China, Japan, Malaysia and Singapore have lifted rent controls since the early 2000s.

The Gulf measures have dismayed landlords, and alarmed property investors.

Below, the pros and cons of rent control regimes, which now exist in about 40 countries are
reviewed by the Global Property Guide.

The Global Property Guide believes that rent control is generally harmful, but it can be benign,
if:

1. It is implemented so that its market-restraining effects are modest

2. It helps to defuse public protest about high rents, and
3. It assists citizens by providing an agreed framework for contracts.

Different forms of rent control

Rent control in Sweden is an interesting example.Rents are set far below reasonable returns-on-
investment. A European University Institute (EUI) study calculates that:

 To make a 5% return on investment, a Swedish developer would need to set rents 70% higher
than allowed by the Rent Tribunal.
 Rents in all dwellings must match rents for alternative, comparable dwellings, based on size and
‘attractiveness’, primarily rents in low-rent municipal houses.
 Rents are little influenced by location, so that metropolitan units are specially underpriced.

The system lacks transparency and predictability, so that few new private sector apartments are
now being built in Sweden. Of the approximately 30,000 dwellings completed in 2006, only 36%
were intended for rental. In comparison, from 1990 to 1996 more than 50% of new dwellings
completed were intended for rental.

TYPES OF RENT CONTROL

1. Tenancy rent control

The most common form of rent control is where rents are initially freely negotiable but
there is a limit on the amount of rent increase (‘tenancy rent control’ or ‘second-
generation rent control’).

The maximum allowable increase is either:

o A fixed percentage (e.g. Dubai, Philippines, Pakistan, Tunisia),

o Or a fraction of the construction cost index (e.g. France) or consumer price index or CPI
(e.g. certain cities in the US, Italy, Netherlands, Spain, Switzerland, Colombia, Uruguay)
o Or a combination of the two (e.g. Canada).

Tenancy rent control is typically accompanied by vacancy decontrol – i.e., when the unit
is vacant, rents can be increased by any amount. Newly constructed buildings are usually
exempt from rent control.

2. Maximum rent systems

Sometimes the authorities determine the maximum rent, and apply it equally to new and
old tenancies. Often, the maximum allowable rent is a certain percentage of the property
value (enforced in India, Taiwan, Luxembourg, Jamaica, Dominican Republic, Syria, and
Costa Rica). The property valuation is typically based on historical cost and not on the
current property value, so that real rental returns fall over time.

3. Rent freeze systems (“absolute” rent control or “first generation” rent control)

Sometimes rents are kept at a pre-determined level, typically that of the year when the
law was introduced (such is the case in Qatar). For newly constructed units, no rent
increases are allowed after the unit is rented out.

Such laws were implemented mainly after World War II to avoid rapid increases in rent
due to increased demand from refugees or from returning soldiers. This type of rent
control has mostly been abolished, relaxed or is largely un enforced (e.g. US Virgin
Islands).

4. Split systems
 Here only a certain portion of the housing market is under rent control ; typically, rental
units for poor households or de-nationalized buildings (e.g. US, Philippines, Cyprus,
Czech Rep., Dominica, Aruba, Bahamas, Bermuda, Trinidad and Tobago, and Honduras).

5. Ineffective systems

While most rent control laws are biased towards tenants, some are actually benign due to
the way in which they are implemented – or not implemented, as the case may be. Non-
implementation is a surprisingly widespread phenomenon.

In some countries, there is a prescribed amount of rent increase - but the parties are free
to accept it or not. If one of the parties feels that the increase is too much or too little,
they can ask for the rental authority to adjust the rent (enforced in the province of
Quebec, Canada).

In others, the landlord can apply for a rent increase higher than the prescribed amount, if
he would otherwise experience hardship, or for capital recovery or renovation.

Inflation is also significant. In the Philippines average inflation is around 4% - 5% - but

the annual rent increase cap is 10%. This is largely benign, and gives landlords plenty of
room for capital recovery.

In other cases, the rent control law is largely unimplemented (US Virgin Islands,
Taiwan). In the Bahamas, for instance, rents for houses worth B$25,000 and below are
government-determined, according to a 1975 law, but no house in the Bahamas is now
worth so little.

In defense of rent control

A common (and much abused) justification for rent control is the right to housing, which is
sometimes protected by the constitution.

Another justification is to correct market inefficiencies such as information asymmetry and high
transaction costs. Because of the high cost of moving, tenants can arguably be pressured by
landlords to accept rent increases. Tenants may also be unaware of the real condition of units
until they move in. If the tenant complains, the landlord may threaten to increase the rent.

Standard contracts perform a service to both landlords and tenants. In many cases in modern
society, the state intervenes in contractual relations between individuals in order to provide
simplicity, clarity, and order. Both landlord and tenant are helped if standard provisions exist, for
instance, which determine what should be agreed on - the initial rent, rent adjustments, date of
payment, penalty for delays, conditions for eviction and such. These can provide both flexibility
and security.
The problem with rent control

The principal argument against rent control is that it tends to distort economic incentives, leading
to inefficient distribution of resources.

 Rent control reduces the incentive of landlords to supply rental units. Rental units tend to be in
scarce supply under rent control. Ironically this leads to an escalation of complaints against the
landlord class. Vacancy levels tend to be relatively low and a vailable units tend to be rented
only under strict conditions, again aggravating relations between landlords and tenants.
 Rent control discourages landlords from maintaining and repairing units till the end of a
tenancy.
 There is also an incentive for landlords to discriminate against tenants likely to stay for a long
time, like retirees or couples with children.
 In some countries, landlords collect key money to offset the losses occasioned by rent control.
 Rent control tends to lead to bullying and illegal behaviour by landlords. If rent increases are
allowed between vacancies, landlords will try to evict tenants in any way possible. This will likely
translate into demands for government protection for tenants, i.e., into a further layer of
bureaucracy and policing.
 Tenants in tenancy rent controlled units are less willing to move to other places, despite the
possibility of earning higher wages.

-According to a study by Basu and Emerson (2000), “t he removal of rent control can not only
increase efficiency in the rental market, but can also lead to a general lowering of rents, making
all tenants better off.”

Lessons for rent control

When might rent control be desirable? Where it will help provide all parties with contractual
certainty.

Global Property Guide believes that rent control can be harmless or even (in some cases) mildly
beneficent, where it occurs in the context of standardization of contract structures, designed to
increase market certainly and to provide guidance for citizens.

However as noted before, rent control should be minimalist.

1. The rent control scheme should be simple.

It should be easy to determine if the unit is covered by rent control or not. It is generally
easier to determine if the unit is covered by rent control if the basis is the actual rent, and
not property value or construction cost. Using furnished vs. unfurnished for rent control
delineation can also lead to confusion.

2. The basis should be transparent.

 Using the CPI or inflation as the basis for rent increases is generally desirable, because it
is transparent. Most central banks and statistical agencies regularly report inflation.

Using a formula that only the rent tribunal can understand and configure creates abuse
and corruption.

3. The rent control system should allow capital recovery.

The rent increase structure must allow landlords to recover their investments and certain
costs. Without this basic precondition, private housing investment will grind to a halt,
with all the attendant evils mentioned earlier.

4. The scheme should be predictable.

If the allowable rent increase is changed annually, then the government must announce it
early to allow landlords and tenants to negotiate and evaluate their options.

5. The rent control scheme should be easy to implement and enforce.

Decisions must be easy to execute and implement. Given the cyclical nature of the rental
market, prolonged litigation and eviction proceedings can lead to substantial losses for
the landlord and/or immense distress to the tenant.

6. Special courts can help

The legal system is an important variable. In most countries in Europe, and countries with
English common law systems, a rent tribunal or rent board hears complaints regarding
rent adjustments. The decision can only be appealed to the tribunal itself. The process is
usually swift and efficient.

In many other countries, on the other hand, cases related to rent adjustments are handled
by generalized courts and can be appealed to the highest courts – which usually means a
cumbersome and expensive process.

Canada, for instance, has a reasonable system. Although the laws appear to be pro-tenant, the
system is not entirely disadvantageous to landlords. Allowable rent increases are based on each
province’s CPI, allowing regional disparity.

A landlord can usually petition for a rent increase above the "rent increase guidelines" set for the
province. Landlords doing so have to apply to that province's rent authority. Landlord-tenant
disputes are resolved by the provincial (small claims) court system, or through a
tribunal/arbitration system. The system is very efficient.