With the aim of balancing the rights of tenants and landlords, and of establishing standards for rental housing services, the Rental Housing Market Development and Regulation Act ("Act") took effect on June 27 this year. The key provisions of the Act are summarized as follow:

I.        Scope of Application: The Act is applicable to all "rental housing", i.e., buildings leased or to be leased for housing purposes, except for those used in any of the following scenarios, as they are different from regular rental housing:

1. Where the rental housing is used for purposes in connection with leisure or travel;

2. Where the rental housing is operated and managed by the government or a designated organization or agency established by the government;

3. Where the rental housing is operated and managed by a cooperative; or

4. Where the term of the lease is less than thirty days.

II.      Control over Contractual Terms: The Act sets out restrictions on the terms of lease contracts to balance the rights of tenants and landlords. Major restrictions are summarized as follows:

1. Mandatory and Prohibitory Provisions: The Act authorizes the competent authorities to set out mandatory and prohibitory provisions for lease contracts. Any terms that contradict such mandatory and prohibitory provisions will be invalid. All such mandatory provisions will automatically become an integral part of all lease contracts, regardless of whether they are set forth in the contract or are verbally agreed upon between the parties (Article 5 of the Act).

2. Exclusion of the Cap on Rent: Pursuant to Paragraph 1, Article 97 of the Taiwan Land Act, in cities and municipalities, house rentals shall not exceed an amount equivalent to an annual interest of 10 per cent on the total declared value of the land and the buildings thereon. If the rent exceeds such amount, the competent authorities may order the landlord to reduce it to within the limit prescribed above. In consideration of the gap between the market value and the assessed and published  land value or the assessed building value, and of the fact that such assessed values might not properly reflect certain housing property's earning-capacity value, the Act has excluded the above-mentioned cap on rent so as to allow market mechanism to set the rent (Article 6 of the Act).

3. Amount of Security Deposit: Article 7 of the Act stipulates that the amount of security deposit for a lease may not exceed the equivalent of two months' rent, which is consistent with Article 99 of the Taiwan Land Act.

4. Landlords' Obligation to Provide Explanations: As prescribed by Article 429 of the Taiwan Civil Code, unless otherwise agreed upon between the parties or except for certain customary obligations, landlords shall be responsible for the repair of the leased premises. The Act further requires landlords to explain to their tenants, before the execution of the lease contract, the items and scope that the landlords are responsible for repairing, and to provide the tenants with his/her contact information to be used if the need for repair ever arises.

5. Obligation to Formalize a Sublease: As landlords in Taiwan customarily allow tenants to sublet the leased building, the second half of Paragraph 1, Article 443 of the Taiwan Civil Code provides that unless otherwise agreed upon by the parties not to sublet, the tenant may sublet a part of the leased building to others. However, the Act stipulates that the tenant cannot sublease the rental housing in whole or in part without prior written consent of the landlord, thus constituting an exception to the foregoing rule.

6. The causes of termination, methods of termination and notice period applicable to landlords and tenants under lease contracts (Articles 10 and 11 of the Act):

(1)Tenants' Right to Early Termination: The Act is a "special law" under the umbrella of the Taiwan Civil Code. The tenants' early termination rights under the Act are generally similar to those prescribed under the Civil Code, except that the Act has a special provision to allow a tenant to terminate a lease contract early if he or she "needs long-term treatment and care to recover from any diseases or accidents".

(2)Landlord's Right to Early Termination: Pursuant to Article 100 of the Taiwan Land Act, an indefinite-term lease of housing in "cities and municipalities", whether used as residence or place of business, may only be terminated early due to an occurrence of the specified terminating events, of which the scope is narrower than that prescribed under the Taiwan Civil Code.

The Act is a special law specifically set forth for the leasing of houses; its application therefore shall take precedence over the Taiwan Land Act and the Taiwan Civil Code in respect of matters related to the leasing of houses. Hence, landlords may terminate the lease early under any of the following circumstances, provided that the relevant documentary proof and a termination notice shall be delivered to the tenants within the timeframe required by the law:

(a)Where the tenant has damaged the premises or the ancillary equipment therefore, and failed to repair such damages or provide compensation therefor;

(b)Where the tenant has failed to pay the rent or any fees, to the extent that the accumulated amount thereof has exceeded the amount of two months' rent, and has also refused to settle such delinquent payment upon the request of the landlord;

(c)Where the tenant has sublet the premises to others without the landlord's written consent;

(d)Where the landlord needs to take back the premises for the rebuilding of the premises; or

(e)Where the lease may be terminated early in accordance with the law.

III.    Establishing a Regulatory Scheme for Rental Housing Services

The Act sets out provisions governing the management and activities of the rental housing service industry and requiring rental housing service practitioners to obtain professional certifications. The Act also introduces regulations governing the "rental housing management business" (the "Management Business") and the "rental housing subleasing business" (the "Subleasing Business") and requires service providers of these businesses to incorporate a company and to obtain a special license, in order to assist landlords and tenants in handling the complex tasks of managing rental housing properties and clarifying the rights and obligations between the parties.

According to a Q&A list made available by the competent authority in respect of the "industry aspect" of the Act, the Management Business and the Subleasing Business differs in their nature of business, scope of activities, and source of revenues. The key differences between them are as follows:

1. Nature of Business: Operators of the Management Business are engaged by the landlords to manage all affairs related to the landlords' rental housing properties. On the other hand, operators of the Subleasing Business sublease the premises, which they have leased from their landlords, to others for housing purposes and manage the leasing of such premises. By comparison, operators of the Management Business "manage the premises on behalf of the landlords" while operators of the Subleasing Business "manage the premises in the capacity of a sub-lessor" instead of on behalf of, or being engaged by, the landlords.

2. Scope of Activities: "Rental housing management activities" operated by the Management Business include inspecting the condition of the premises and equipment therein, handling the hand-over procedure, collecting and managing the security deposit and the rent, carrying out daily maintenance and repair, dealing with disputes, etc. On the other hand, operators of the Subleasing Business, in addition to the "rental housing management activities" described above, also carry out "leasing and subleasing" of rental housing properties; that is, operators of the Subleasing Business shall execute lease contract separately with their landlords and their sub-tenants, and therefore have the additional responsibility of performing the lease contracts, as compared to operators of the Management Business.

3. Source of Revenues: Operators of the Management Business generate revenues from charging an agreed upon management fees, which is usually a certain percentage of the monthly rent of the rental housing property and specified in the management service agreement between the landlords and the service operators. Meanwhile, operators of the Subleasing Business generate revenues from the difference between the rent they pay the landlords and the rent they charge the sub-tenants, but have to assume the risks of not being able to find sub-tenants to sublease the premises the operators rented from their landlords.

Real estate brokerages have now been allowed to conduct rental housing services without having to incorporate another company to do so. If a real estate brokerage intends to provide rental housing services, it only needs to, following the enforcement of the Act, file an application to include "rental housing management business" and "rental housing subleasing business" into its registered business scope, put up the operating bond, designate the management personnel for the rental housing services, enroll in the industry association and obtain the relevant registration before it can start conducting the rental housing management business and rental housing subleasing business.