GRTU – Position Paper on the White Paper; Rent Laws: The Need for Reform

When the White Paper was published, GRTU sought and continues to seek the views of commercial tenants and others interested in this important aspect of the commercial, retail and craft enterprise scene in Malta and Gozo. GRTU is the only national organisation that represents business interests at locality level in all towns and villages of Malta and Gozo and the sustaining of economic activity in the localities is a main platform of GRTU.  The comments of GRTU on the White Paper are highly influenced by this consideration.

On the basis of the comments received at GRTU so far and from the returns of surveys conducted among businesses that are affected by the proposals of the White Paper, and based on the survey conducted among a wide cross section of businesses operating from rented commercial premises, GRTU presented a paper for discussion by the National Executive Council. Resulting from this analysis and discussion, the GRTU has presented Government with the following views and recommendations.

1.      Separation of proposals between Residential and Commercial Rented Properties

The results of the survey indicate that the number of enterprises that will be affected by the changes proposed in the White Paper is very large. The GRTU's first comment is an expression of concern that no statistics and division of businesses by categories and localities affected have been provided in the White Paper to sustain the recommendations of the Working Committee.

The Executive Council of GRTU discussed the situation Government is presenting and the common feeling is one of great preoccupation starting from the fact that the proposals for Reform of Rent Laws for Commercial Properties are being included in the same package of proposals effecting the renting of Residential Properties. GRTU considers this to be a great error as the reforms refer to two situations that are very different. Different situation require different solutions.

Indeed while the proposals for the residential properties are detailed and provide possible solutions that logically emerge from the facts and figures published, the proposals for commercial properties present solutions that are sustained by no established statistics.

Recommendation 1: The Rental Laws Reform should be presented in two separate exercises: one referring to Residential Properties; the other referring to Commercial Properties. The Commercial Properties Rent Reform should at this stage be postponed and be represented at a later stage. 

2.      Independent Commission

Recommendation 2: The setting up of a Panel of Experts/Independent Commission composed inter alia of Architects and Lawyers that will include nominations from GRTU in representation of enterprise tenants of rented commercial properties. This Panel/Commission will study the issue in depth and will present proposals that whilst safeguarding the security of tenure of licensed commercial, craft and service, owner-managed enterprises, will ensure sustainable returns to property owners and the necessary fiscal incentives to encourage the evolvement of the property rental market. The Commission's new task will recommend how property owners` rights and the rights of security of tenure of enterprises operating from rented properties can co-exist to the benefit of enterprise and economic growth.

3.      Government owned property

The White Paper recommendations do not clearly distinguish between properties that are Government owned and those that are owned by the private sector. Property laws are in a number of ways different from these two sectors. Government has over the years used government own properties as part of its promotion of and assistance to entrepreneurial activity. Although Government property does not fall under the same obligations as do property which is privately owned the rents and conditions applicable on the market have evolved on similar lines and effectively a market has grown over the years capable of dealing with the law in operation.

The White Paper is very shallow in its analysis of the current state of the market for pre-1995 rented properties. 

Recommendation 3: Government should continue to consider private owned properties as distinct from government owned properties and these two sectors should be treated as separate. The use of Government property as a tool of assistance to enterprise, including preferential rental treatment, should continue within the framework of an agreed small business promotion strategy within the limits prescribed by state aid regulations. 

Recommendation 4: Government should not make any distinction in its support to enterprise between properties rented to self employed business and to enterprises registered as Companies or Civil Partnerships when these properties are rented for licensed enterprise purposes.

4.      Government intervention

GRTU has always sustained the idea that the legislator should not intervene when the intervention is not absolutely necessary; when intervention would create more harm to the economy and when the legislators` intervention is at the expense of contractual obligations reached between the two parties. The proposals in the White Paper have extended beyond this limit as Government is proposing that the legislator should intervene between two contracting parties, and is interfering with individual enterprises business plans based on existing contractual obligations reached within the framework of existing laws.

Recommendation 5: Any reform should not interfere with any contractual obligation reached between two parties or where the possibility for a contractual agreement existed even if none of the parties preferred to make use of it and where no law prohibited action that contracting parties could freely adopt.

5.      Enterprise approach

Ever since the introduction of the safeguards referring to commercial properties rented to enterprise, the GRTU steadfastly insisted with different Governments that the safeguards available and sought by GRTU are safeguards to ensure the security of tenure of enterprise owners operating from rented commercial properties. The issue raised by GRTU has consistently been one related to the security of tenure of operating licensed enterprises as GRTU considers, as it is its prime responsibility to do that small and medium enterprises of whatever genre need legal safeguards against summary dismissals from their licensed premises and the indirect takeover of business operating from rented properties by the executors of the eviction.  

Recommendation 6: Any proposed reform package cannot be understood to be simply a package of reforms of rental laws.  Reforms that effect rented commercial properties should in the first instance be considered and intended as updates to the safeguards of enterprises provided by the legislature within the context of rental laws.

It is not acceptable by the GRTU that under the excuse of rental law reform important safeguards for small enterprises are wiped away.  

Recommendation 7: GRTU contends that in the same way that employees, and wage earners are provided with legal protection against unfair dismissal, self employed business owners whose livelihood, that of their families and of their employees depend on the enterprise operating from rented properties should continue to enjoy the safeguards that exist under current legislation ensuring that their livelihood will not depend on the whims of the property owner renting the enterprise property.

Recommendation 8: The underlying principle of the Reform should not be the Rental Laws but the Safeguards of Enterprises Operating from Rented Properties (rental laws being one set of instruments that provide a number of these safeguards).

6.      Giving a buying option

GRTU feels that the Reform should include incentives and options that give the possibility of a safe landing to the enterprises that will be very negatively hit by the Reform. GRTU proposes that the reform package should include precise forms that enable entrepreneurs in rented commercial properties to buy the property on favourable terms not unlike schemes that have been provided for tenants in Government owned residential properties.

Recommendation 9: Enterprises operating from rented commercial premises should be given the opportunity to buy and acquire the property at commercial value with discounts set according to the number of years the business has been occupying the premises. The business would also be allowed recognition for the investments done in the property. The credit for the number of years the property has been occupied together with the credits for the value of the investments done in the property should together obtain a maximum discount on the market value of the property of up to 50%. Suitable tax credits should be made available so that tenants would be encouraged to take this option. Moreover this option should apply irrespectively of whether the rented property is privately owned or Government owned.

Recommendation 10: the safeguards and options available for the purchase and acquisition of the property by enterprise tenants should apply irrespectively of whether the property is held by title of lease or of a lease subject to ground rent (cens).

7.      Succession of business

GRTU has over the last years raised the serious issue of succession of businesses. Unlike other countries Malta has little if any supportive schemes for the succession of family owned private businesses by members of the same family or by others.

Recommendation 11: The principle of succession of businesses in rented properties should be recognised and members of the family of the tenants or others nominated by the tenants as successors should be given the necessary safeguards so that the enterprise will continue to survive.

GRTU recognises supportive schemes for enterprise succession as very important for the future continuation of enterprise and for the fostering of entrepreneurship. 

8.      Business Turnovers

The recommendations as proposed in the White Paper make references to safeguards for tenants of commercial properties based on business turnover. GRTU believes that this distinction should not remain in any future set of proposals.

Recommendation 12: The safeguards to enterprise should recognise that all enterprise is important and all deserve security of tenure for the period that an active licensed enterprise operates from rented property. This irrespective of enterprise annual turnover.

9.      Index of rent and land evaluations

Recommendation 13: All indices for the establishment of rental values and acceptable property evaluations should be produced by an independent authorised authority that produces the indices on approved criteria. Evaluations should not be subject to the subjective measurement of individual experts operating on a case by case basis.    

10.  Casabottega

GRTU recognises that a number of small family businesses run their business from the same premises as their residence.

Recommendation 14: The Reform should recognise these particular situations and provide the necessary safeguards so that these self employed entrepreneurs do not lose both their residence and means of livelihood.

An important basis of the Reform remains the protection that the law gives to a trader/ craftsmen tools as being the source of the person's income and cannot therefore be forfeited under any pretence whatsoever. For independent private business the premises from which the enterprise operates is an essential tool of his enterprise.

Recommendation 15: The GRTU recommends that the premises from which a business operates is considered a vital tool for enterprise and therefore the premises should enjoy the same safeguards under the law as the tools and equipment utilized by the enterprise tenant for the generation of his and his family's income.

11  Change of use

The rapid changes taking place in the Maltese economy are necessitating the change of genre of business for a substantial number of old established enterprises. This transformation is today being precluded or restricted as enterprises operating from rental properties fear the loss of the enterprise safeguards that they enjoy under current laws should they seek to move on from one genre to the other to better meet current and future enterprise needs.

Recommendation 16: The proposed Reform should extend security of tenure for tenants who progress from one genre of business to new genre of business utilising the same rental property. This safeguard should by subject to a framework of acceptable and prescribed forms of compensation to property owners.

12  Removal of demarcation date

Recommendation 17: The reform should do away with the distinction currently existing between pre 1995 and post 1995 rental situations. The agreed package of safeguards for enterprises operating from rented properties should, unless contractually agreed differently, be equal irrespective of whether the rental arrangements were reached pre or post 1995.  

13  Return to the original investment made

Recommendation 18: In their deliberation the Panel of Experts assessing property evaluations and rent indices should consider important facts like the original cost of construction or purchase value of the building and the returns enjoyed by the property owner as rents and other remuneration and premiums paid over the years by the tenant for privileges granted under the same rent/lease arrangement. The current market values of rented properties should be considered as secondary to the returns enjoyed on the original investment.

14 Tightening of non use of commercial rented properties by tenants

Rented commercial properties are very often situated in village cores and other prime locations. A tenant who chooses to pay the rent regularly but does not operate his enterprise is thus hindering other enterprises form establishing their enterprise in those premises.

Recommendation 19: Recent court judgements evicting tenants form rented commercial properties due to non-use should be confirmed by legislation in the case of enterprises which have not been in operation capriciously for a minimum period of two (2) years.

15 A lower tax bracket on income derived from rented commercial properties that fall within the reforms

Recommendation 20: The GRTU in spite of the reforms imposed by the safeguards herein proposed in order to encourage the rental of commercial properties market is proposing the introduction of a fiscal incentive for property owners whereby a final withholding tax of 5% is levied on income derived form rent from commercial properties which fall within the reforms.

16 Alternative dispute resolution

Recommendation 21: The GRTU also firmly believes that any disputes arising in relation to rent commercial properties further to the reforms should be resolved in as short a time span as possible in order to avoid the warping of the market and enterprise due to such lengthy passage of time. Thus reference to any special Rent Boards should be avoided and disputes referred to Arbitration for expedient and inexpensive awards to be delivered.

GRTU Executive Council is presenting these proposals as a preamble. GRTU will be presenting more detailed proposals to the Panel of Experts/ Independent Commission should Government accept GRTU's presentation to postpone the proposed reform of commercial property rents. GRTU strongly urges Government to accept GRTU's recommendation to postpone a final decision on the Reform of rent laws effecting Commercial Properties rented to enterprise to a future date after the whole issue has been better researched and recommendations made by the Panel of Experts/ Independent Commission as recommended by GRTU.

GRTU expects that the recommendations of the Independent Commission would be more representative of the multiplicity of contracts that have evolved throughout the years than the limited package of recommendations included in the White Paper- Rental Laws: Need for Reform.

GRTU expects that the security of tenure and safeguards for enterprises in rented properties that have been the basis of enterprise support throughout the years will be improved upon and updated to meet current and future needs of enterprise and entrepreneurship within the framework of an evolving free enterprise economy.