Reforming the Urban Rental Law
Portugal’s urban rental market has gone through choppy times since the beginning of the 20th century. At that time, as was the case all over Europe, Portugal began to freeze rents and introduced the mandatory renewal of rental contracts which, in practice, has continued ever since.
It’s true that the 1990, 1995 and 2006 reforms improved things for landlords and future con- tracts which benefitted from a more open and independent regime for the parties involved, whereby rents were not frozen and the ter- mination of contract regimes could be freely negotiated. But the fact of the matter was that these reforms did not bring profound changes to old contracts (i.e. residential contracts before 1990 and commercial ones before 1995), which created a two-speed market (old contracts v new contracts), bringing all the inherent disadvantages with it.
Successive governments since the 1974 Revo- lution have been incapable of implementing genuine reform with dreadful effects both on the rental market and the country’s economy. A virtual lack of a residential rental market forced people to purchase their own homes.
The rental freeze, the mandatory renewal of contracts, the transference upon death of rental rights, and the virtual impossibility of terminating contracts to undertake profound works - which were the hallmarks of the old contracts regime - together with the poor functioning of the courts, which prohibit the immediate eviction of non-compliant tenants, have brewed an explosive cocktail.
Since the 1995 reform, the commercial rental sector has developed more rapidly than residential rental accommodation, with new players (developers and investors) taking advantage of new rules to come up with solutions that have enabled them to oper- ate in an almost normal market; but this is not enough to have an overall efficient and healthy market. The good news is that all this could be about to change and soon.
On December 30th, 2011, the Government presented the Portuguese Parliament with a bill proposal aimed at changing the urban rental law regime. This Proposed Law, which is currently being debated, and is expected to pass through parliament by the end of March (coming into force by the end of June), repre- sents a real break with the past.
The changes introduced by this Proposed Law are, in essence, the following: 1. With regards to blocked rents and mandatory renewals of old contracts, a mechanism has been created to update the rents and transfer the contracts onto the new regime, which is based on the principle of private negotiation (although with a regime rule in situations where agreement is not reached) and which contains a number of exception clauses for the most vulnerable cases ( those on low in- comes, over-65s, and those suffering a degree of disability over 60%), which will permit, in a relatively short period (of between 1 and 7 years), the termination of old contracts or, at least, the termination of rent freezing; 2. As to the automatic transferral of the right to rent on the death of the tenant, the possibil- ity of successive transferrals will be elimi- nated. It will be impossible to transfer the right to rent for anyone who owns their own house or is renting in the same municipal- ity, and a rule will be introduced which will transfer some of the old contracts to the new regime in the case of direct rental transfer- ence; 3. As to the regime of works in rented buildings, the possibility of ending the rental contact has been established for demolition and extensive works provided the tenant is informed as such. It has also been established that for contracts prior to 1990, when there is a lack of agreement between landlord and tenant, the termination of the contract only obliges the landlord to the payment of compensation to the tenant (except in cases whereby the tenant is 65 or over or disabled to a degree of over 60 per cent, in which case the landlord will be obliged to re-house them); and 4. With regards to eviction, a Special Eviction Procedure has been created which is generally arbitrational and which will take place in the new “National Rental Office”, establishing a number of rules too to ensure that in cases where it is necessary to appeal to the courts, the judicial processes will be speedy and efficient.
Despite there being various aspects to the Proposed Law which could and should be improved (the majority in parliament has already shown an openness to introduce improvements in the scope of the parlia- mentary debate that is currently underway). The solutions included in the Proposed Law, are overall very positive. The market will be more open, less regulated, more dynamic and securer, enabling it from now on to compete more equally with rental markets in other European Union countries.
The fact that we have moved away from a less developed market (which will naturally enable greater growth rates) and the fact that we are now going to be able to have the same kind of laws practised in more developed markets (which will necessarily mean greater security for the investment), means new op- portunities for investment for both developers and investors.