The State of the Rent system in the Czech Republic - Part I

With just three months to go before the Czech Republic holds parliamentary elections one of the issues certain to resurface in pre-election debates is the question over regulated rent vs. deregulation. Although most of the parties in parliament are dedicated to pushing some form of further reforms in the housing market, there is still a marked difference in possible solutions that would, once and for all, create a level playing field for all involved, tenants and landlords alike. Jan Velinger has a look at the continuing "saga" of rent regulation vs. deregulation in this week's Talking Point, part one of a two part series.

It's one of those things that can set-off a heated debate in any Czech pub every single time - the issue of rent control vs. rent deregulation, a topic heavily politicised in the past in the media, now in the news again. With general elections just three months away, the discussion over rent regulation vs. deregulation looks certain to become one of the major topics of pre-election debate. Even twelve years after the fall of Communism the Czech Republic still lacks legislation that would, once and for all, reform the housing market and bring it in line with other European states. Whoever wins the next election, or forms the next coalition government, will inherit the responsibility of finally bringing the rent issue to a long-term resolution. But what kind of character that resolution will ultimately take, remains to be seen: there are at least two very different competing visions at stake...

First, some details: to date the Czech housing market remains to some measure a hybrid, which stands half in rent regulation, half out. Firstly, and most importantly, the Czech Republic's real estate market has only been partially liberalised, and half-measures have created some very curious circumstances, that many observers say amount to a free market anomaly. The most obvious contradiction of free market principles is the continuation of regulated rent in the case of countless tenants living in privately owned apartments. It is a situation explained by circumstances surrounding the Czech Republic's restitution law from 1991. The law not only returned property stolen by the Communists to former owners, but also gave renewed owners responsibility for tenants they could never have presumed they would have. And because roughly a third of Czech households live in rented flats, either municipally or privately-owned, the continuation of regulated rent in the case of "inherited tenants" by the previous right-of centre, as well as current Social Democrat government, was aimed at maintaining a social status quo. The most extreme interpretation was that rent regulation in its current form, blocked the return of "19th century-style robber barons", who might have charged tenants exhortative rates.

It's arguable that if they could, some landlords would do so. But even over such fears, and leaving possible exaggerations behind, there is no longer any avoiding the fact that the form of rent control implemented in the Czech Republic to date has been ruled discriminatory against private owners in general, handicapping not only their ability to cover the costs of maintaining and renovating property as required by law, but hamstringing the chance of owners to make a reasonable profit. It is a point that the leader of the opposition party Freedom Union Hana Marvanova emphasises was recognised by the Czech Constitutional Court two years ago.

But Mrs Marvanova is quick to add:

"The constitutional court did not rule against rent control as such, but against its present form to date."

All of which opened the door for the creation of new legislation on rents, regulated or otherwise remained to be seen. In 2000 the Constitutional Court gave the minority Social Democrat government an eighteen-month interim period in which to prepare a new law that would recognize the rights of owners as well as tenants, but the law failed to pass in parliament. According to Mrs Marvanova:

"The problem with the Social Democrat's proposal was that it was just as unconstitutional - as law - as the rent regulation system before it annulled by the court. The Constitutional Court, for example, had also said that if tenants were incapable of paying their rent, that it was unacceptable that the social cost be covered by the landlord, it was not possible to want that of the property owner. Social support and compensation are the role and the basic responsibility of the state, and it is up to the state to take care of the problem. The Social Democrat's bill proposal absolutely ignored this fact set forth by the Constitutional Court."

This is a view that is backed by Libor Dellin, a representative of the Association for Apartment Owners, which has long defended the rights of property owners in what Mr Dellin sees as an uphill battle:

"The responsibility for the social side of the issue, as confirmed by several international pacts, must be taken by the state. As the Czech Consitutional Court ruled two years ago, it is unacceptable for the state to leave the social burden on the shoulders of private owners. Our legislation is a dominant leftover from Socialist legislation, in which there remain elements that in civilised and just societies would be absolutely unthinkable."

While it is hardly surprising that Mrs Marvanova, as an opposition politician, or Mr Dellin, a representative of owners, have a very different view on the subject of rent regulation vs. deregulation from the Social Democrats,the Constitutional Court's ruling leaves little room for doubt. Had the Social Democrat government not been a minority, and had it been able to pass the bill through parliament, the issue might already have been moot. But under the circumstances the Czech Republic entered this year without any new legislation in place on the subject of rents, leaving the Finance Ministry little choice but to find a legislative loophole in the form of a by-law. A by-law which temporarily set at least some standard for continued apartment rental rates and rent growth. Stanislav Krecek,a Social Democrat member of parliament, says that the government's hands are tied:

"The government has little other choice considering that a bill which would have satisfied the majority was not passed in parliament. For practical reasons the Finance Ministry has decided on a bylaw. The solution is not ideal, but it is the only current guarantee that rents will also go up. If it weren't for that, then property owners would not be able to raise rents without coming to a mutual agreement with tenants, which would freeze up the situation overall."

Now, it seems, even this temporary solution will fall. Two weeks ago the Czech Republic's public ombudsman Otakar Motejl, asked the Constitutional Court to annul the Finance Ministry's bylaw as unconstitutional on the basis of four hundred complaints put forward by property owners, and it is highly likely that the court will rule in favor. Once again the future of rent legislation will be on the table for discussion. Where the Czech Republic will go from there, depends largely on who wins the next election. One thing is clear: the governing Social Democrats and the opposition Freedom Union have very different opinions on what direction rent legislation should take, an issue that will be looked at next time in Talking Point.