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Monday, April 23, 2018

RENT RESTRICTIONS ARE A BAD IDEA

A few weeks ago the cabinet Okayed the Landlord-Tenant Bill to bring greater equity in the tenant-landlord relationship.

The proposed law is intended to replace and broaden the Rent & Restriction Act that was passed in 1949 and is currently in place.

Judging by the way the current bill was drafted, it is safe to say that it came from the pressure applied by tenants, especially those renting business premises. It is no wonder then that the Kampala City Traders Association (KACITA) is at the forefront of the lobby to see it passed into law as is.

Tenants in the down town malls have long complained of exploitation by their landlords, who raise rents arbitrarily, charge in hard currency and often do not provide the basic amenities like parking, washrooms and utilities to their tenants.

Hence the most nefarious clauses of the bill, which seek to discourage the charging of rent in dollars, restrict annual rent increments to 10 percent and prevent the arbitrary eviction of tenants at the landlords’ whim.

The landlords on the other hand argue that all these eventualities were covered in the old law, which when accompanied with a tenancy agreement, would more than cater for their tenants’ rights.

Like many other things that go wrong around us or to us, we often don’t think of seeking legal redress. I can bet few readers, even of this column, have an updated tenancy agreement for the occupancy of their homes or places of business.

"That being said the law in its current state, where it restricts landlords to charging in shillings, not asking for more than three months in advance, prevents rent increments of more than 10 percent annually and within intervals of less than 12 months while popular with tenants will actually create the situations that government is trying to avoid...

In crudely trying to control rents they will frustrate investment in the sector, reduce supply rentable properties and force prices up anyway.

Of course the supporters of the law will say these are just scare tactics, but history has born this out.
To begin with this issue of rent controls has come up in the last three decades and was thankfully shelved promptly.

In the early days of this administration some socialist leaning people in government were pushing for rent caps in Kampala and a banning of dollar rents. They used the usual socialist rhetoric of these being anti-people, retrogressive blah, blah blah. Thankfully the argument was nipped in the bud.
With this one decision private investment in the sector ballooned and while we have no yet bridged the housing deficit we have fewer if any middle class families crammed into garages or one room hovels.

One of the reasons the deficit has not been bridged is the lack of long term funding for real estate developers and the high mortgage rates. As a way to get around it investors have borrowed in hard currency where mortgage rates are in single digits. As a way to mitigate their foreign exchange risk they pass the risk to the tenant.

The fact that this goes on is a sign that the shortage persists. In an environment of adequate housing the competition would force the foreign exchange risk on the landlord rather than the tenant.  It has happened before.

"Many years ago mobile operator Celtel used to charge for airtime in dollars. They argued the same that their investment was funded with foreign money and therefore consumers should be charged likewise. Another foreign firm MTN came along and started charging in shillings – even though their financing was sourced abroad, and that was the end of dollar phone bills...

While there is more discomfort for tenants when the currency goes against them, as more and more people invest in the sector that will soon be taken care of.

And finally restricting the duration of tenancy to less than three months is similarly unnecessary.
In the hard days landlords would ask for twelve months in advance and you could take it or leave. 

With the increasing stocks of houses this requirement has come do to even a month. The reduction did not come out of the goodness of the landlords’ hearts but a direct response to increased housing supply, market forces.

While such a bill may give government some short term political gains, they need to show leadership and legislate for the long term good of the economy rather than for political expediency.


In the mean time tenants need to exercise their rights as stipulated in current law and local governments need to ensure all building meet their respective building codes.

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