Over the past few weeks, there has been discussions about the Landlord and Tenant Bill.
The Bill, as it seems seeks to appease a group of tenants, saving them from arbitrarily rent and utility increments.
This is totally understandable and I commend government for their quick (knee jerk) reaction, but government has totally missed the point, and is not resolving the problem.
In actual fact, they are making it worse, and in the process are going to destroy the property sector, and here is why.
Dollar Vs shilling rents
Downtown Kampala tenants are not suffering from arbitrary rent increments because they are being charged rent in dollars. On the contrary. Only 10 per cent of landlords in downtown Kampala charge rent in dollars. Majority of landlords charge rent in shilling, and it is this that is being arbitrarily increased over and above (by up to 300 per cent) the depreciation rate of the shilling against the dollar.
So banning the payment of rent in dollar is not the solution and the main problem is that the relationship between the landlords and the tenants in downtown Kampala is informal, unregulated and at best where formalised by way of a tenancy agreement, is not worth the paper it is written on.
Until it is made mandatory that all relationships between landlords and tenants are formalised, the issue of arbitrary rent increments will never be resolved, and certainly, not by insisting that rent is paid in shillings.
This will only serve to discourage property development most of which is funded in dollars because it is cheaper (8 per cent) than borrowing in shillings (20 per cent), and is also a short term solution to a long term problem.
The real issue here, is that under Ugandan law, a tenancy agreement does not supersede a sale of property.
This is to say that if Mukasa sells his commercial property to Nsubuga, all the tenancy agreements which were signed under Mukasa’s tenure as landlord, cease to be binding between the tenants and the new owner , Nsubuga (unless explicitly stated otherwise and mutually agreed by the landlord and tenant in the agreements).
Hence why, when properties are sold downtown, the first thing the new landlord will do is disregard the terms of the existing tenancy agreements, and increase the rent as he wills.
Tenants are left helpless with a choice to either pay, or leave. Again, nothing to do with dollar rent payment, but this an issue that the bill has not even taken into consideration at all.
A Bill for an Act
Moving onto the crux of this article, as the biggest property management firm in Uganda, Knight Frank applauds the proposal to have an Act which formalises and regulates the relationship between landlord and tenants.
Knight Frank has 1,731,000 square feet of commercial and 350,000 square feet of residential assets under management, and since we manage both parties, we fully understand all types of property leases, the rights and responsibilities of landlords and tenants, and cannot underestimate the importance of either in the successful development of the property sector.
In light of this, we represent the property sector, and are proponents of its successful development.
However, if the Bill is not drafted and framed with the diligence, expertise and understanding of property law and management, it is going to destroy the property market under the guise of trying to appease a small interest group which is in no way representative of the sector as a whole.
I will try and qualify this statement below by picking out a few clauses of the Bill and explaining the potential dangers they pose.
Residential Vs commercial properties
Best practice and empirical evidence show that commercial and residential users are legislated under separate regulations since residential and commercial tenants and landlords have different requirements. Take Kenya for instance which has the Rent Restriction Act for Residential Housing and Landlord and Tenant Act for commercial premises.
Format of agreement
The Bill proposes that the minister for Housing will prescribe the format which the agreement will take. However, in as much as this is feasible for a residential properties, it is not recommended for commercial leases which are more detailed and tailored to the specific requirements. Therefore the Act will not cater for a crucial niche of the property market.
Landlords cannot distress for rent
This removes the option of locking up premises or auctioning property to remedy breach of contract. This is in essence allowing the principle of Protected Tenancies to prevail, which is detrimental to the development of the sector because it is often abused.
The Bill states that verbal agreements are binding. How does one enforce the provisions of a verbal lease? Herein lies the very problem the Bill is trying to cure.
Signing the agreement
The tenancy agreement is signed 14 days after the tenant has taken occupation. This creates room for disputes since the tenant is in occupation prior to finalisation of the agreement. Tenancy agreements should be signed prior to taking occupation.
Repair of premises
The Bill proposes that a tenant is no longer required to keep the premises in good repair but that the landlord will maintain the internal premises. It does not go ahead to define the “premises”, “common areas” or “building”, and all are used interchangeably which is wrong.
The Bill proposes that the landlord will be responsible for all installation costs in connection to water, gas, sanitation, sewerage or other utility services. This works for small tenants or houses but not for large space users like data centres, cold rooms, or supermarkets were load requirements are specific to the nature of the business.
According to the Bill, a security deposit cannot equate to more than one month’s rent – whilst this is acceptable for residential property, it is not practical for commercial properties, which may have been designed and fitted out to the specifications of a particular tenant such as anchor tenants.
The above issues make it clear that perhaps government has, if it passes the Bill as is, missed the opportunity to regularise a largely unregulated sector and instead created more confusion in its attempts.
Other key issues
Abandonment of property
The Bill gives the landlord 45 days to react to a tenant’s abandonment of the property.
Which begs the questions that if the security deposit is only an equivalent of one months’ rent, how is the landlord expected to recover outstanding rent or expenditures on utility arrears exceeding the 30 day deposit equivalent?
The bill restricts rental increments to a maximum of 10 per cent per annum and rent payment in shillings. However, in instances where the landlord has acquired development financing in shillings at over 20 per cent interest rates, they will never be able to make their loan repayments. Likewise this does not take into account beneficial occupation or rent free periods were in effect the rental would escalate to more than 10 per cent in the first year, making the tenancy agreement void and the landlord at risk of imprisonment.
Consent to terminate
This Bill this can be given orally, this can only be disputable.
Judy Rugasira Kyanda MRICS, is a chartered surveyor and managing director, Knight Frank Uganda