Rental reform imposes annual 5% cap increase and minimum one-year contracts

• Annual rental increases capped at 5%
• Minimum residential lease of one year
• Landlords will get tax credits for long-term contracts
• All rental contracts will have to be registered

Residential rental contracts will have a minimum duration of one year with property owners being offered tax credits for longer lets, government is proposing.

A new law covering private residential leases 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."

Joseph Muscat unveiling the rent reform law

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.

Excerpts from what the law is proposing on rental contracts

One-year contracts

• Compulsory registration
• Declare deposit and inventory
• Landlord free to fix initial rent
• Tenant cannot terminate in first two months
• No tax incentive
• Landlord has to give three months’ notice of termination
• No rental increase

Two-year contract

• Compulsory registration
• Declare deposit and inventory
• Landlord free to fix initial rent
• Tenant bound for first four months
• Tenant free to terminate with two months’ notice
• Tax incentive for landlord
• Landlord has to give three months’ notice of termination
• One rental increase of not more than 5%

Three-year contract and more

• Compulsory registration
• Declare deposit and inventory
• Landlord free to fix initial rent
• Tenant bound for first six months
• Tenant free to terminate with three months’ notice
• Tax incentive for landlord
• Landlord has to give three months’ notice of termination
• Annual rental increase of not more than 5%

Room renting and short lets

• Six months’ minimum that cannot be extended.
• Seven days’ notice by tenant to end the contract
• These apply only to non-resident workers, non-residential students, non-residents not seeking to establish long-term residence