Wood and Red: What the New Rental Regulation Brings
For the first time in nearly 20 years, the legislator plans to amend the Law of Obligations in the section regulating relationships between landlords and tenants. Looking at these proposed changes more closely, there are both positive and negative aspects to them.
Mostly, the legislator wants to improve the landlord's position in the rental relationship. Namely, until now, rental regulation has been very heavily in favor of the tenant, and tenants are protected as if they were the weaker party, even though often both the landlord and the tenant are ordinary people with equal opportunities to protect their rights.
Below we highlight the most important points to keep in mind regarding the new rental regulation.
Contractual Penalty
For landlords, it is welcome to have the opportunity to demand a contractual penalty from tenants for violation of non-monetary obligations (for example, smoking on the rental premises, harboring a pet without permission, etc.).
The limited permission for contractual penalties is good because in such cases the landlord does not have to prove the damage that has occurred and can demand a penalty that was previously agreed upon with the tenant in case of breach of obligation. For example, it is financially very difficult to assess the amount of damage caused by disturbing neighbors, so a contractual penalty helps the landlord more easily enforce their claims in case of such a violation.
However, the landlord should keep in mind that the amount of the contractual penalty for one violation may not exceed 10 percent of the agreed monthly rent and also ancillary costs and building maintenance and improvement costs if the latter are to be borne by the tenant according to the agreement.
If there are more than one contractual penalties in one month, the amount that can be demanded from the tenant may be up to 20 percent of the agreed rent and ancillary costs and building maintenance and improvement costs if the latter are to be borne by the tenant according to the agreement.
A contractual penalty cannot be demanded from the tenant if it has not been previously agreed upon in the contract (the contract must contain a specific amount for each violation).
Higher Late Payment Interest Rate
Similarly, as of 2021, the landlord has the right to demand from the tenant a late payment interest rate up to 3 times higher than that provided by law, if a monetary obligation is delayed. This means that the landlord can demand from the tenant a late payment interest of up to 0.066% per day, which in the case of a 1000 euro debt would be 0.66 euros per day (19.8 euros for 30 days).
Simplified Termination of Lease Agreement
Some options for terminating a lease agreement also become easier in case the tenant does not fulfill their monetary obligations on time (for example, if the rent or deposit owed by the tenant exceeds the payment due for two months).
One Uus Maa client had a case where an apartment was rented to what appeared to be a respectable person. After a few months, however, he fell into debt with the landlord. It turned out to be a person who had changed their name, had a criminal history, and had previously fallen into debt on rental premises in a similar manner. However, the tenant was aware of the law and paid some of the rent, for example, every two months (to avoid owing rent for three months, which would give the landlord grounds to terminate the contract). As a bonus, the tenant also replaced the new mattress that the landlord had purchased for the premises with an old one. Under the new regulation, the landlord would have been able to start dealing with terminating the contract of a tenant in debt after just two months of non-payment.
However, the current draft still takes a more lenient approach, and the landlord must, for example, in case of two months' rent debt, give the tenant an additional deadline (14 days) to clear the debt. If the tenant pays off the debt during this time, the landlord cannot unilaterally terminate the contract. The landlord does not have to give an additional deadline only if they have already given it twice in the same year. Such a requirement for an additional deadline still seems to favor malicious tenants.
Right to Demand Higher Deposit
The law also changes slightly regarding the maximum amount of the deposit. Namely, according to the new regulation, a landlord can require that the tenant pays a deposit to the landlord to secure claims arising from the contract up to three months' rent or up to the amount of Estonia's average gross monthly salary published by Statistics Estonia for the calendar year preceding the conclusion of the contract. The choice depends on which indicator is higher.
The permission to demand a higher deposit is nice in itself, but if you look at market practice, very few landlords use the maximum deposit requirement. Rather, the trend in the market is to demand a one month deposit.
At the same time, the deposit is one of the few effective protective measures available to a landlord, so they should use it as widely as possible. The tenant has the right to pay the deposit in equal installments over three months, so for the tenant as well, a higher deposit requirement is not unduly burdensome. A tenant who does not want to pay a deposit at all or wants to do so at a minimal rate should raise the landlord's alarm, as this may indicate that the tenant is not sufficiently solvent to properly pay the rent or ancillary costs.
What should be included in the contract from 2021 for the landlord and what should the tenant watch out for?
In a lease agreement concluded in 2021, the landlord should note contractual penalties for any breach of obligations (for example, smoking, keeping pets without permission, disturbing neighbors, etc.). Similarly, also the late payment interest rate if you want to use a higher rate than provided by law (allowed up to a threefold increase).
Since according to the new draft, landlords are allowed to require a repair fund from tenants, they should watch whether they agree to this (the landlord should of course first include such a requirement in the contract if they want to demand it from the tenant). Later, the tenant cannot challenge the repair fund requirement, as they did before (according to the "old" regulation).
The tenant should also watch in what condition they must return the rental premises to the landlord upon termination of the contract. Namely, according to the new law, it is possible to agree that the tenant returns the premises in a condition where defects resulting from normal wear and tear are eliminated (or reimburses the cost of eliminating them).
The Draft Does Not Solve Many Practical Problems
A major problem that landlords have faced is related to possession of the rental premises. Namely, although a landlord can terminate the contract with a malicious tenant, if they do not move out, the landlord must go to court to get rid of the tenant (they cannot use self-help, i.e., they cannot enter the premises without the permission of the person in possession). In the case of malicious tenants, claims should definitely be enforced in court as quickly as possible. The sooner the landlord gets rid of an unwanted tenant. The new regulation does not improve this, so-called squatter problem.
Also, the new draft does not solve the problem of lien rights. Namely, one guarantee for a landlord is that they can pledge the tenant's belongings that are on the rental premises. However, this right is difficult to exercise, since the landlord cannot remove things from the premises, and if the tenant takes them away themselves, the landlord cannot effectively exercise lien rights.
For the landlord, it is also negative in the new draft that when the rental premises are transferred to another owner, the new owner can no longer terminate the lease if they urgently need to use it themselves (for example, want to live there). This will probably hinder the sale of rental premises to buyers who want to buy the property as their home. This possibility was removed from the new draft because it is believed that the relevant provision is difficult to implement. However, instead of removing it, it would have been possible to supplement the provision and make it more clearly understandable.
Summary
This draft seems largely cosmetic in nature. Several provisions regulating relationships between the parties have been improved, but the main issues that also generate the most discussion in society have been left out of attention. I consider the biggest problem to be that nothing has been done about the so-called squatter problem.
I hope that before 2021, further discussions will be held and, with the involvement of various stakeholders, solutions will also be found for the bottlenecks related to possession of rental premises, lien rights, and transfer.
Article source: Uus Maa Real Estate Office
