Tuesday, October 16, 2018
Analysis & OpinionsFeaturedReal Estate

OPINION: The Landlord And Tenant Bill Unfit For An Act

By Judy Rugasira Kyanda

Over the past few weeks, the media (both print and digital) has been awash with news about the Landlord and tenant Bill that was drafted by the Ministry of Lands, Housing and Urban development, seeking to appease a group of tenants / traders under an umbrella association known as KACITA (Kampala City Traders Association) from the wrath of their ruthless landlords, who are arbitrarily increasing their rent and utility bills at will.

 

This is totally understandable, and I agree it is unethical, unacceptable, and outright theft for landlords to double, and in some instances, triple the rent of a property as and when they choose to.

There are some cases whereby rent has been increased 3 times in 1 year, and the response of these landlords to their tenants’ cries for help is “oba temwagala kusasula muvemu” ( if you are not willing to pay, leave).

I totally disagree with this practice which has been adopted by downtown landlords with impunity, and accepted by tenants under duress for fear of losing their premises.

I commend government for their responsiveness and quick (knee jerk) reaction in response to KACITA’s pleas, first by amending the Income Tax Act (albeit the wrong act) in 2017 which made it mandatory that all rent agreements are charged in Uganda Shillings, and more recently by drafting an (appalling) landlord and tenant bill which the Ministry of Housing Lands and Urban Development is pushing to be passed into an Act of Parliament.

 

However, government has totally missed the point, and is not in any way resolving the problem. In actual fact, they are making it worse, and in the process are going to destroy the property sector of Uganda, and here is why.

Dollar vs Shilling rents 

Sometime last year I wrote an article on dollar vs shilling rents and what this effect would have on the property sector of Uganda.

I also explained that downtown tenants are not suffering from arbitrary rent increments because they are being charged rent in dollars.

On the contrary, only 10% of the landlords’ downtown are charging rent in dollars.

The majority of landlords are charging shilling rentals, and it is the shilling rentals which are being arbitrarily increased over and above (by up to 300%) the depreciation rate of the shilling against the dollar.

So charging shilling rents and banning dollar rents is not the solution, we are barking up the wrong tree.

The problem is that the relationship between the landlords and the tenants’ downtown is informal, unregulated and at best where formalized by way of a tenancy agreement, is not worth the paper it is written on.

Tenancy Agreements 

Until it is made mandatory that all relationships between landlords and tenants are formalized, 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 US Dollars because it is cheaper (8%)  than borrowing in Uganda shillings (20%), 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 Mr. Mukasa sells his commercial property to Mr. Nsubuga, all the tenancy agreements which were signed under Mr. Mukasa’s tenure as landlord, cease to be binding between the tenants and the new owner Mr. 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 close their businesses.

Again, nothing to do with dollar rents, but with an issue which 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 formalizes and regulates the relationship between landlord and tenants. Knight Frank has 1,731,000 sq.ft of commercial and 350,000 sq.ft 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 of Uganda.

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.

  1. The proposed bill combines regulation for both residential and commercial properties. Best practice and empirical evidence from other countries have shown that commercial and residential uses are legislated under separate Acts since residential and commercial Tenants and Landlords have different requirements which cannot be addressed within the same law. Take Kenya for example they have the Rent Restriction Act for residential Housing, and Landlord and Tenant Act for commercial premises.

 

  1. The bill proposes that the minister for housing will prescribe the format / template which the agreement will take. In as much as this is feasible for a residential dwelling or small stores (which entail installation of movable fittings or storage of stock), it is not recommended for commercial leases which are more detailed and tailored to the specific requirements and agreements between the landlord and tenant. Therefore the act will not cater for a crucial niche of the property market.

 

  1. Landlords cannot distress for rent. This removes the option of locking up premises or auctioning property to remedy for breach of contract for the case of non-payment of rent. This is in essence allowing the principle of Protected Tenancies to prevail which are detrimental to the development of the sector because it is often abused.

 

  1. 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. This imply creates insecurity of tenure, arbitrary evictions and erratic rent increments for the vulnerable tenants the bill is trying to protect.

 

  1. 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 finalization of the agreement. Tenancy agreements should be signed prior to taking occupation.

 

  1. 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. “Premises” by law is the space demised for and occupied by a specified tenant. Common areas are the areas in a particular development or property in which no tenant receives individual benefit, i.e lobbies, staircases, gardens, etc. It is unsustainable that the landlord maintains the internal areas of the tenant premises. This also leaves room for neglect and abuse of the premises since the tenant is under no obligation to repair any damages.
  2. The landlord is 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. It will not be viable for the landlord to incur these costs and if they are passed on to the tenant, then the agreement is void as per the Act and the landlord could suffer imprisonment.

 

  1. Security deposit cannot equate to more than one month’s rent – whilst this is acceptable for residential property, it is not practical for commercial property which may have been designed and fitted out to the specifications of a particular tenant i.e anchor tenants.

 

  1. The bill states that a landlord can only react to a tenant’s abandonment of the property after a 45 day period. If the security deposit can only be equivalent to 1 months’ rent, how is the landlord expected to recover any outstanding rent or utility arrears exceeding the 30 day deposit equivalent? Likewise, this gives no consideration to the reinstatement costs of the premises.

 

  1. The bill is restricting rental increments to a maximum of 10% per annum and rent payment in shillings. However, in instances where the landlord has acquired development financing in shillings at over 20% 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% in the first year, making the tenancy agreement void and the landlord at risk of imprisonment.
  2. Consent to terminate can be given orally, this can only be disputable 12. To understand the impact of restricting rent to Uganda shillings, we have worked out a high level investment appraisal for a hypothetical commercial real estate project as per the table below.

One analyzing a USD financed project, and the other financed in Uganda shillings.

 

Assumptions

 

USD Project UGX Project
1.  Gross Built Up Area 48,360 48,360

 

2. Net Lettable Area 39,686 39,686

 

3. Construction Period  in months 24

 

24
4. Required Rate  of Return (RRR) 8% 25%
5. Financing Structure (Debt : Equity)

 

60:40 60:40
6. Assumed Loan Term Sheet 8% on a 7 year Tenor 20% on a 7 year Tenor

 

7. Break even Rental

 

USD 20.00/sqm/month UGX 108,000/sqm/month (US$30)
8. Net Present Value (NPV)

 

$32,152,123 UGX 47,603,114,275
9. Internal Rate of Return (IRR) 13.31% 30.63%

 

10. Annual rent Escalations

 

3.5% 15%
11. Annual Revaluation Gain

 

6% 6%

From the above table it is evident that the result of lending in USD or UGX where all the inputs are the same, i.e the required rate of return (RRR) for both projects which is the prime lending rate both in USD and UGX, for the same tenor, Debt Equity structure, same investment holding period, same annual revaluation gain and same construction period, returns the following results;

  • The equivalent USD break even rental for a UGX based development is USD30 per m2 compared to USD 20 for a USD based development. This means that the tenants have to pay more rent in order to achieve their monthly repayments if property developers considered borrowing in UGX .
  • The annual rental escalations for a UGX financed project would be in the region of 15% compared to 3.5% for a USD financed project annually. This will prove far more expensive for the tenant who will have to convert the dollar rent amount into shillings.
  • The viability for USD based project is more than double the UGX Project. The USD based project has a Net Present Value (NPV) of USD 32.2 Million compared to the UGX which is equivalent to USD 13.2 Million. This will definitely reduce investor appetite in real estate projects in Uganda especially if they can earn better returns in other markets.

These are a few of the glaring irregularities of the bill, which are indicative of the inherent flaws in its drafting.

It is evident that the drafters of this legislation have limited understanding of property law, property management and how the property market in Uganda functions.

As I stated earlier, there is desperate need for the regulation of the property market downtown, because this is where the malpractice and unethical conduct of landlords and tenants is rife.

Ironically, the “uptown properties” which are paying rent in US Dollars, and have clear and detailed lease agreements are not experiencing such issues because there is binding regulation and mutual respect between the landlords and tenants.

His Excellency the president made a valid point when he stated that there are several properties that are not being taxed, and yet tax revenues can be increased in the real estate sector. I totally agree, and the president is absolutely right. However, as the adage goes, “you cannot manage what you cannot measure”. Until the downtown property market is regulated, Uganda Revenue Authority will not be able to realise, let alone even collect any taxes from this sector. The tax revenue which can be collected from VAT and Capital Gains is invaluable, and yet despite the activity and property transactions taking place downtown, there is no database, or procedure for keeping track of change ownership given the unregulated nature of business being allowed to continue there.

The respective organisations (URA, KCCA, UMEME, ERA, NWSC, etc) should have a more collaborative working relationship instead of working in silos, because between them they have all the information they need to streamline revenue collection.

A central and robust database can be created starting with the Town planners office at planning approval stage where details of each development can be captured which will indicate the developer or proprietor, size and cost of the development, potential no of tenants, and thus potential rental income expected, and this can be updated annually.

As an example, KCCA has just finished their rating exercise for Kampala city. Their database should have an updated rent roll of each property downtown, the registered proprietors, and a host of other information which should help URA collect taxes.

The tax base will only be widened this way, instead of sweating the existing tax base to compensate for the huge numbers of eligible yet untaxed population in that sector.

Finally, I commend KACITA for bringing us thus far, for if they hadn’t cried foul, the urgent requirement for this bill may not have been appreciated and actioned.

However, to those responsible for drafting this legislation, please draft it with regard to the benefit of the property sector of Uganda as a whole, and not specific to a particular interest group.

Landlords and tenants are countrywide; we cannot simply focus on the interests of one pressure group who happen to have inroads to legislators at the expense and risk of the successful functioning and development of Uganda’s property market.

There are several highly qualified and experienced property professionals who are willing and able to offer their technical and practical expertise in the drafting of a bill Fit for An Act, and one that will stand the test of time.

 

Let us opt for excellence over average, and look beyond the demands and benefits of today’s short term gains, but work for the generations to come and for God and our Country.

Judy Rugasira Kyanda MRICS, is a Chartered Surveyor and Managing Director, Knight Frank Uganda.

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