A review of the proposed Residential Leases Act

Most residential leases in force are likely to fall within two broad regulatory frameworks, both currently in force, regulated by one or the other depending on when the lease in question came into effect.

The first framework regulates leases granted before 1 June 1995 which were very much dictated by a set of strict rules that limited greatly lessors and lessee’s freedom to contract. All leases of urban properties entered into before 1995 were subject to the strict rent rules laid down in the Reletting of Urban Property (Regulation) Ordinance, Chapter 69 of the Laws of Malta – such as the rule that landlords could not refuse to renew contacts of lease, the rule that landlords could not increase rent unless permitted by a ‘rent regulation board’, and that clauses in contracts contrary to the provisions of the rent laws were null and void.

Before a set of amendments entered into force in 2010, these ‘old rent laws’ effectively deprived landlords of their right to property by giving tenants the right to renew each lease installment upon expiration almost indefinitely. Relatives living with the original tenant had the right to continue the lease upon the death of the tenant, and in so doing, assumed all rights originally available to the tenant, including the right to renew the lease.

Act X of 2009 sought to remedy this situation by introducing, in the Civil Code,(i) a set of provisions intended to transition pre-1995 leases into the modern framework. The idea is to ultimately give landlords the opportunity to regain possession of properties granted on lease before 1995 and to give them out on lease without any restrictions as before, not least because the old rent laws have been, on more than one occasion, declared unconstitutional by national and European courts alike. To transition these pre-1995 leases, the legislator narrowed the definition of ‘tenant’ and in so doing, created a cut-off by which leases could no longer be renewed by relatives of tenants, and by adding a preventive measure by imposing a means test to determine whether the person claiming a right to continue the lease truly requires the protections of the old rent laws.

The second framework regulates leases entered into after 1 June 1995 and eliminates all restrictions imposed by the old rent laws. This framework, which regulates all new leases(ii), simply gives lessors and lessees the freedom to contract as they wish, and, save a few ‘standard setting’ rules, such as the rule that all contracts of lease must be put in writing and contain (on pain of nullity) some defined requisites, contracts of lease are regulated by the provisions agreed between the parties – pacta sunt servanda (iii).

The provisions of the Civil Code concerning letting and hiring (Article 1525 et seq. of the Civil Code) generally apply only to determine matters on which parties remain silent in a written lease agreement.

Once the Residential Leases Act is enacted, lessors and lessees will become bound by a number of new obligations, including the obligation to register leases granted. However, the Act will not apply to all leases, as it will only apply to leases granted for residential purposes, and in turn, the term ‘residential leases’ is further qualified to exclude certain types of residential leases, such as leases of tenements in which lessees do not intend to establish their principal place of abode (save a few exceptions). Thus, commercial properties and generally properties in which lessees do not reside as their principal place of abode are seemingly excluded from the scope of the Act.

In a market in which rent prices are seemingly constantly on the increase, the idea behind this Bill is said to be to provide added security to tenants while ensuring that landlords remain, to an extent, free to contract.(iv)

The most important item on the agenda is to determine with more precision to which contracts of lease the Act will apply.

The general rule is that the Residential Leases Act will apply, once enacted, to all ‘leases of residential property’(v) that are entered into or renewed after the entry into force of the Act. Pre-1995 leases are specifically excluded from the scope of the Act. Leases exclusively for tourism purposes and leases for a secondary residential purpose or for a summer residence are excluded too from the scope of the Act.

Next, since as a general rule the Act will apply to all leases of residential property, it is important to determine what constitutes a ‘lease of residential property’. Unfortunately, the term ‘residential lease’ is not defined in the Bill. However, there is a definition of the term ‘residence’ in Article 2 wherein it is stated that ‘residence’ means ‘an apartment or building in which the lessee (…) resides in as his principal place abode’.(vi) This may possibly be construed as limiting the scope of the proposed Act only to leases that are granted with the intention of providing lessees a ‘principal place of abode’. This is important, because as we shall see, the Act will impose an obligation to register all ‘leases of residential property’ – meaning that if the interpretation that the definition of the term ‘residence’ should be applied mutatis mutandis to the term ‘leases of residential property’, then only those leases of properties intended to give tenants a ‘principal place of abode’ must be registered, whatever the term ‘principal place of abode’ might mean for the purposes of the Act (as, as we shall see, this term is not defined in the Bill).

The only exception to the rule that only leases of properties intended to give tenants a ‘principal place of abode’ shall be covered by the proposed Act are leases involving Gozo residents who are required to rent tenements in Malta on account of full-time employment, or to Malta residents who are required to rent tenements in Gozo on account of full-time employment there. This emerges from the second proviso of the definition ‘residence’ in Article 2 of the Bill that states that these tenements ‘shall be regulated by this Act’.(vii) This arguably means that despite that such persons will not be renting tenements with the intention to establish a ‘principal place of abode’, such leases will fall within the scope of the Act nonetheless (and must hence be registered as if they are ‘leases of residential properties’). Presumably, this proviso has been added to grant these persons the same protections afforded by the Act, meaning that the ‘principle of abode’ test would not apply to such leases, notwithstanding that they will fall within scope of the Act nonetheless.

But what does the term ‘principal place of abode’ mean exactly? The Bill lacks a definition of this term, and this might create issues in the future because it is possible that more than one interpretation is given to it. One position might be that this term refers to the place where a person intends to establish his residence in the long-term (perhaps using similar arguments as one would use when defining the term ‘domicile’), in the sense that the principal place of abode would be the ‘natural’ home one seeks to establish – the place a person would always return to even if such person potentially spends more time elsewhere. Here, the emotional connection with the place of abode is a predominant feature. Another possible interpretation is that this term refers to the place where a person spends most of his time, irrespective of the emotional connection to that place.(viii)

Take for example full-time students habitually residing in Gozo. The second proviso in the definition of ‘residence’ in Article 2 of the Bill seems to exclude Gozitan students who occupy tenements in Malta due to full-time academic pursuits – since, unlike Gozo residents residing in Malta in pursuit of full-time employment, who in terms of the said proviso are to be deemed to fall within scope of the Act, they are not specifically included in the proviso. This could imply that contracts of lease involving students from Gozo residing in Malta will not fall within the scope of the Residential Leases Act. Naturally, such position would greatly prejudice Gozitan students – and in view of the aims the Bill seeks to achieve, it would be ironic to devoid such persons the protections afforded by the proposed Act. One possible reason why the second proviso excludes Gozitan students is that contracts of lease involving Gozitan students occupying tenements in Malta are ‘contracts of residential leases’ in their own right since the Malta tenement will offer such persons their ‘principal place of abode’, and thus, they fall automatically within scope. However, if this were so – would the same argument not also apply to Gozo residents who occupy tenements in Malta due to full-time employment? Such persons would arguably be establishing a principal place of abode in Malta too, so why did the legislator feel the need to add a proviso to state that such leases shall also be regulated by the Act?

The matter is not very clear, and may cause legal uncertainty in some instances, such as in the case outlined above, possibly leading to inconsistent application of the law. Therefore, a clarification on this matter, even perhaps by adding a definition of the term ‘principal place of abode’, would be most welcome.

Finally, a number of provisions in the Bill deal with whether the Act, once enacted, will apply to leases that would have already been granted before the enactment of the Act. In this respect, there will be no obligation for leases granted before the enactment of the Act to be registered with the Housing Authority if they are no longer in force on 1 January 2021. Leases granted before the enactment of the Act but which will still be in force after 1 January 2021, or which will cease before 1 January 2021 but will be renewed beyond that date, must be registered.

The general rule is that all ‘residential lease contracts’ (as qualified in the previous section) made after the entry into force of the Residential Leases Act must be registered with the Housing Authority. Contracts of private residential leases which are not registered will be considered null, presumably with the effect that neither party would be in a position to enforce a claim against the other on the basis of that contract. The Bill allows a lessee to register the lease in lieu of the lessor, at the latter’s expense, if the lessor refuses or fails, for any reason, to register the lease.

Article 1531A of the Civil Code contains 5 essential elements that all leases of urban properties regulated by the second framework mentioned above must contain (on pain of nullity). These are:

1. A description of the property to be leased
2. The agreed use of the property let
3. The period for which that period will be let
4. Whether such lease may be extended and in what manner
5. The amount of rent to be paid and the manner in which such payment is to be made.

The Bill states that these five requisites must be included in all leases falling within the scope of the Act. As shall be seen, with respect to the period for which the property will be let, the Act will introduce certain minimums that parties to a contract cannot depart from.

Two other requisites introduced by the Bill which shall only be required for contracts regulated by the Residential Leases Act are:

1. The amount deposited by the lessee by way of security, for the performance of his obligations
2. An inventory attesting the conditions of the premises as well as the state of any furniture and appliance supplied by the lessor.

According to the Bill, in the absence of one or more of these essential requirements, the contract shall not be registerable – and as seen earlier on, a contract of lease not registered will be devoid of any legal effect since it would be considered null. Therefore, parties to a lease agreement regulated by the Act have to be very careful in ensuring that all information required is indeed supplied.

That being said, the last two requisites, namely the amount deposited and the inventory, merit a few comments. Firstly, it is unclear as to what would be expected from parties in the event that they agree that no deposit is to be paid by the lessee by way of security. On the one hand, the Bill is relatively strict in indicating that if the parties simply omit this from the contract, they will risk attracting a declaration of nullity. On the other hand, they may arguably include a declaration that ‘zero’ Euro is being deposited by way of security, but this would not be entirely correct since the requisite in Article 6(1)(b) of the Bill states clearly that the contract must indicate ‘any amount deposited’ – and a nil amount is not an amount deposited. The word ‘deposited’ presupposes a determinate amount that is not nil, and thus, this solution would neither be ideal nor correct. The inclusion of the words “if any” in Article 6(1)(b) of the Bill would clarify the matter, as parties who agree that no deposit is to be held by way of security, would be able to simply omit this requisite from the contract without giving rise to a possibility that the contract be declared null.(ix)

Secondly, whilst submission of an inventory might lead to registration of the lease, it is not entirely clear what the level of detail expected by parties in drawing up an inventory is. For instance, what would happen if eventually it transpires that the inventory was incomplete or inaccurate, or did not properly ‘attest the condition of the premises as well as the state of any furniture and appliance’? Would the competent authority revoke registration and render the lease agreement null? Guidelines by the Housing Authority, or perhaps template inventories with standardized terms, would certainly reduce risks of future unnecessary complications.

Contracts of lease regulated by the Act may not include any of the so-called ‘forbidden clauses’ listed in Article 7 of the Bill, the first of which refers to ‘automatic termination of the contract other than the non-fulfilment of the lessee’s obligations’ under the normal provisions of the Civil Code. Thus, for instance, a lessor who does not wish that his lessee organizes dinner parties for friends and family in the leased tenement, may not include a clause for the automatic termination of the lease if the tenant becomes aware that the lessee organized such a party, unless in so doing, the lessee fails to use the tenement as a bonus paterfamilias, which is one of the things lessees are bound by in accordance with the normal provisions of the Civil Code.

The Bill is silent on whether lessors may impose obligations on lessees, other than those contained in the Civil Code, assuming therefore that lessors may indeed lay down additional conditions. However, this is somewhat restricted by Article 7(1)(g) of the Bill which states that contracts of lease may not have clauses which limit the use one is ‘expected to make of a residence’. For conditions that are not ‘forbidden’ (and which may therefore be imposed on lessees), the proposed Act seems to be silent on whether a lessor may, as punitive measures, impose damages (whether pre-liquidated or otherwise) – assuming therefore, that damages may be imposed if a lessee breaches conditions of the lease – so however that the conditions so imposed are not expressly forbidden, in which case such conditions would be deemed to have not been included at all in the lease agreement.

The Bill differentiates between short private residential leases and long private residential leases. The main difference between these two categories of residential leases lies in the minimum contractual duration for each type of lease. Contracts for long private residential leases, which in terms of the Bill are leases ‘other than short private residential leases’, must be for a duration of at least 1 year. Any contract for a long private residential lease with a duration of less than 1 year will be deemed to have been concluded for 1 year.

The 1-year minimum duration does not apply to short private residential leases and short private residential leases may be for periods as short as parties agree – provided that they do not exceed six months. This 6-month maximum limit, over which short private residential leases are no longer considered as such, emerges from the definition in Article 2 of the Bill which defines ‘short private residential leases’ as leases of less than 6 months(x) meant for non-resident workers employed for less than 6 months, for non-resident students enrolled in courses of less than 6 months; for residents who would need to rent an alternative primary residence for a period of less than 6 months; and for non-residents needing to rent a tenement for a period of less than 6 months, provided they would not be seeking to establish their long residence in Malta. The Act will require short private residential leases to indicate the category within which the lease falls and to attest it through attached documentation – in the absence of which the contract will be deemed to be a long private residential lease.

By introducing an automatic renewal of a lease in default of a notice, the Bill introduces a significant obligation on lessors. While the general rule is that a private residential lease will terminate upon the expiration of its term, the Bill specifically says that if a lessor does not give at least 3 month notice to lessees, then the lease will be deemed to have been renewed for a further period – which would be for a duration as the original lease. This is an express departure from the current legislative framework regulating post-1995 leases.

The obligation to give notice of termination applies only to long private residential leases. Short private residential leases will cease ipso jure on the expiration of the term expressly agreed upon, and, in accordance with Article 1566 of the Civil Code, ‘it shall not be necessary for either of the contracting parties to give notice to the other’.

With the proposed Act, while parties will be free to stipulate the rent, any eventual increases may only take place yearly and must not exceed the Property Price Index recorded by the NSO(xi) for the year immediately preceding the increase.(xii) In any case, in terms of the Bill, it will not be possible to increase the rent by more than 5%.

Potential Implications of the Proposed ‘Enforcement Procedure’

Part III of the Bill introduces the notion of a ‘de facto lease’ which, in essence, means any lease that should be registered and regulated in terms of the Act but which is found to be unregistered or non-compliant with the Act. The notion of an ‘Enforcement Procedure’ is also introduced, and this essentially refers to the right of the Housing Authority to ‘require the person granting a de facto lease to comply with the rules’, presumably meaning the right of the Housing Authority to force the lessor to register the lease and comply with the Act in all applicable aspects.

Then, the Bill seems to suggest what the author believes to be a very peculiar provision concerning de facto leases. The relevant provision is being reproduced hereunder:

21 (1). Without prejudice to any other remedy in terms of this Act, in the event that a person served with an enforcement notice under article 20 fails to comply with any of the requirements of such notice within the time therein specified, the Housing Authority may file an application before the Board(xiii) demanding that, if the Board is satisfied that a de facto lease exists between the parties, a written contract be entered into for a period of three years at a rent which does not exceed seventy-five (75%) of the market rental value of the tenement.

Effectively, this provision introduces a punitive measure in the case that a lessor grants a de facto lease and fails to comply with the competent authorities to register the lease and generally comply with the Act. The way this measure is structured seems to involve compulsory dispossession of the property for a period not originally agreed between the parties. Is it possible that this provision, once enacted, will amount to a breach of the right to peaceful enjoyment of the property or to an unjustified control of the use of property, rights protected both by the Constitution of Malta and the European Convention on Human Rights?(xiv)

While it is accepted that States have a right to enforce laws as they deem necessary to control the use of property ‘in accordance with the general interest’,(xv) the measure ‘must be lawful, be in the general interest and be proportionate, that is to say it must strike a “fair balance” between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights’(xvi)

While one cannot dispute that the measure would be ‘lawful’ since it would clearly be based on an act of parliament validly enacted, questions might arise as to whether the measure pursues a ‘legitimate aim in the general interest’, especially in view of the fact that it is clear that the purpose of Article 21 (1) of the Bill is not to serve a social purpose – but to place a punitive measure on defaulting lessors. The proposed Act as a whole can be said to be serving a social purpose – and the unconstitutionality of the Bill as a whole is not being contested. However, the punitive element in Article 21 (1) of the Bill may give rise to contestations as to the constitutionality of that article alone.

Moreover, the Bill already proposes an effective remedy to ensure that leases falling within scope of the Act are registered. In fact, Article 4(3) states that if the lessor fails to comply with the obligation to register the lease, the lessee may proceed to register the contract himself at the expense of the lessor. In view of this, can it truly be said that interference in lessors’ right to enjoy their property strikes a fair balance with the aims Article 21(1) seeks to achieve?

Instead of venturing into uncharted waters that may possibly stand challenged in future claims, the legislator should simply rely on pecuniary penalties to deter lessors from failing to register leases and comply with the Act, which incidentally are proposed in Part V of the Bill. Another possible solution would be to oblige lessors to include, in contracts of lease regulated by the Act, a provision to make lessees aware that the lease ought to be registered in terms of the Act and that lessees have a right to register the lease themselves at the expense of lessors if the latter fail to do so. This would simplify matters greatly and avoid unnecessary complications involving the constitutionality or otherwise of the proposed Article 21(1) of the Bill.

The Bill proposes the establishment of an Adjudicating Panel which shall have jurisdiction to decide disputes involving a number of matters, such as questions of repairs, liability of lessees for damages, and disputes relating to the retention or reimbursement of any amounts left by way of security deposit. For a matter to be brought before the Adjudicating Panel, the clam must not exceed the value of EUR 5,000.

Other than some of the notable additions referred to the above, the Bill seeks to cast in stone other conventional rules that today are widely accepted as standard rules of practice in the sphere of letting of immovables, especially letting of residential tenements. Among these is the practice that lessors ask for an advance payment equal to the value of one month’s rent (which, if the Act is enacted, may not be exceeded), and that rent is freely stipulated by the parties (subject to the new restrictions on the maximum increase of rent).

The Bill seeks to introduce ‘standards of fairness, clarity and predictability in contractual relations.’ While there is no doubt that ideally all legal relationships, not least those involving lessors and lessees, are fair and based on the principle of good faith, the proposed Act goes a step further in achieving this by limiting, to an extent greater than before, parties’ freedom to contract. Whether, in so doing, the objectives of the Bill will be reached is a matter yet to be determined. In the meantime, legislators would do well to sift the Bill thoroughly to identify any possible shortcomings, including those identified in this paper, and propose suitable remedies to ensure proper application of the law in accordance with the spirit with which the Act is being proposed.

This article should not be construed as providing legal advice to the reader. Should you require legal advice, you are kindly asked to contact the author directly.

(i) Chapter 16 of the Laws of Malta.
(ii) That is, until the proposed Bill 91 of 2019 enters into force.
(iii) Pacta Sunt Servanda is a legal principle which stipulates that contracts between parties, constituting law between them, must be honored.
(iv) Whether this objective will be reached by the enactment of Bill 91 is a different matter entirely.
(v) In this article, we may refer to this simply as ‘residential leases.’
(vi) The full definition in Article 2 reads: ”Residence” means an apartment or building, in which the lessee, or his spouse, civil union partner, cohabitant or a member of his family up to the second degree, resides in as his principal place of abode.
(vii) See the definition of ‘residence’ in Article 2.
(viii) This second interpretation of what ‘principal place of abode’ may mean would involve a calculation of the amount of days spent in the place in question. In the Glossary of Tax Terms of the OECD Model Convention, which Malta frequently uses in concluding double tax agreements with other jurisdictions, this concept is referred to as ‘habitual abode’, which is described as ‘one of the criteria used to resolve the problem of dual residence. It refers to the period of time a taxpayer spends in each country’.
(ix) Article 6(1)(b) of the Bill would read, should the proposed words be included: “All private residential lease contracts made after the entry into force of this Act shall be made in writing and shall include the following requirement….(b) If any, any amount deposited by the lessee by way of security, for the performance of his obligations”, ‘if any’ being the words the author proposes to be included in the Bill.
(x) Note that the wording in the definition in Article 2 states “less than 6 months” rather than “6 months or less”, as if to imply that contracts of a duration of exactly six months (and not a day shorter) are long, not short, private residential leases. Whether this is intentional or an innocent oversight in the drafting of the Bill is unclear – but goes to highlight how careful one has to be in drafting residential lease agreements, especially if parties want the agreement to be a short private residential lease.
(xi) National Statistics Office.
(xii) The NSO publishes a Property Price Index each quarter. According to Article 14 of the Bill, for the purpose of increasing the rent in accordance with the Act, the Property Price Index of a particular year has to be determined by calculating an average of the previous four quarters recorded until the date of the increase.
(xiii) Rent Regulation Board, established in accordance with Chapter 69 of the Laws of Malta, and which in terms of the proposed Act shall have the power to determine force lessors to enter into three-year contracts of lease.
(xiv) Article 37 of the Constitution of Malta states that ‘no property of any description shall be compulsorily taken possession of, and no interest in or right over property of any description shall be compulsorily acquired’. Article 1 of the First Protocol for the Protection of Human Rights and Fundamental Freedoms states that ‘every natural or legal person is entitled to the peaceful enjoyment of his possessions”.
(xv) Article 1 of Protocol 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms.
(xvi) See among others Case Cassar vs Malta, no. 50570/13, § 107, ECHR 2000-I