The subject of the case:

The ruling of the Supreme Constitutional Court in Appeal No. 24 of Year 20 (Constitutional), declaring the unconstitutionality of the first paragraph of Articles (1) and (2) of Law No. 136 of 1981, which regulates certain provisions related to the leasing of premises and governs the relationship between landlords and tenants.

Challenged Provisions:

The first paragraph of Article (1) of Law No. 136 of 1981:

“Except for luxury housing, the annual rent for premises licensed for residential purposes, effective from the date this law comes into force, may not exceed 7% of the value of the land and buildings, and the leased area for these purposes may not be less than two-thirds of the building’s total area.”

The first paragraph of Article (2) of Law No. 136 of 1981:

“The value of the land, with respect to the premises specified in the first paragraph of the previous article, shall be estimated based on the prevailing market price at the time of the building permit issuance. The value of the buildings shall be estimated according to the actual cost at the time of construction. If it is proven that the owner has intentionally delayed preparing the building for occupancy, the construction cost shall be estimated according to the prevailing prices at the time when the construction was initially expected to be completed, without prejudice to the right of the relevant authority to complete the works in accordance with the applicable regulations.”

Overview of the Impact of the Provisions Under Appeal Prior to the Ruling

As part of its efforts to address housing issues in Egypt during the first half of the last century, the state opted for legislative intervention to regulate and manage the landlord-tenant relationship. This intervention led to the enactment of several exceptional laws aimed at regulating the rental and sale of real estate and defining the relationship between landlords and tenants. These laws shifted the landlord-tenant relationship from being governed by the Civil Code to being subject to special legislation that comprehensively regulated various aspects of rental relations, particularly the core component of this relationship: rent.

Among these laws was Law No. 136 of 1981, which addressed specific provisions concerning the rental and sale of real estate and organized the relationship between landlords and tenants.

On May 12, 2002, the Supreme Constitutional Court ruled in Case No. 50 of Judicial Year 21 (Constitutional) that the final clause of the first paragraph of Article 1 of Law No. 136 of 1981, which stipulates “that the rented area for these purposes should not be less than one-third of the building area,” is unconstitutional.

The first paragraph of Article 1 of this law stipulates the rent value, specifying that the annual rent for residential units permitted from the date of implementation of this law cannot exceed 7% of the combined value of the land and buildings.

Additionally, the legislator did not allow the determination of the property value to be based on its market value, aiming to restrict the landlord from exceeding the limits set by the law. Instead, specific criteria were established for calculating the property’s value. As stated in the first paragraph of Article 2 of the same law, the value of the land for the units mentioned in Article 1 is assessed according to the comparable price at the time of the building permit, while the value of the buildings is based on the actual cost at the time of construction. If it is proven that the landlord intentionally delayed preparing the building for occupancy, the building costs are assessed based on prices prevailing at the time the construction was expected to be completed, without affecting the competent governorate’s right to complete the work following the relevant regulations.

As a result of these provisions, landlords were prevented from increasing rental values beyond the limits specified by the law. Over time, a widening gap emerged between a fair rental price and the value determined by law, especially due to high inflation rates, which have been increasing significantly alongside economic changes during the long period exceeding 40 years since Law No. 136 of 1981 was enacted. Consequently, rental values have become entirely misaligned with the market value of these rented units.

Judgment of Unconstitutionality

In light of the imbalance in the obligations between landlords and tenants, due to the low and fixed rental values for leased properties as determined by exceptional rental laws, the Supreme Constitutional Court considered the case concerning the unconstitutionality of the first paragraphs of Articles (1) and (2) of Law No. 136 of 1981. The court ruled “unconstitutional the first paragraphs of both Articles (1) and (2) of Law No. 136 of 1981, regarding certain provisions related to the rental of properties licensed for residential purposes from the date of implementation of this law.”

The Court’s decision was based on the premise that the exceptional rental laws for properties licensed for residential purposes involve two main principles: the legal extension of rental contracts and the legislative intervention in setting rental values. Both of these principles are not immune to legislative regulation. While the legal extension of rental contracts has a defined scope that limits the categories of beneficiaries, the determination of rent must always be based on objective criteria that aim to achieve a balance between the two parties in the lease relationship.

The Court further explained in its reasoning for the ruling that “the stability of rental values at a specific point in time, without adjustment over the course of decades since the date on which the rent was set, constitutes an infringement on the principle of justice and a disregard for the right to property.”

Impact of the Judgment of Unconstitutionality

The Supreme Constitutional Court did not stop at declaring the unconstitutionality of the contested paragraphs, but also exercised its power under Article 49 of the Supreme Constitutional Court Law. The court set the day following the conclusion of the current ordinary legislative session of the Parliament as the effective date for the implementation of its ruling. This was done to allow the legislator sufficient time to consider alternatives and establish guidelines for determining the rental values of properties licensed for residential purposes under Law No. 136 of 1981.

This decision deviates from the general principles of constitutional court rulings, which state that:

“A ruling of unconstitutionality of a provision in a law or regulation means that it cannot be applied from the day following the publication of the ruling unless the judgment specifies another date. A ruling of unconstitutionality of a tax provision, in all cases, has only direct effect, without prejudice to the plaintiff’s benefit from the judgment of unconstitutionality of this provision.”

By exercising its authority to set the timeline for the ruling’s effect, the Court aimed to mitigate potential economic impacts that could result from immediate implementation of the ruling without first establishing alternative regulatory frameworks that address the current economic and housing conditions.

The fifth and final session of the Egyptian Parliament began on October 1 of this year and is expected to last for at least nine months, as per Article 274 of the Internal Regulations of the House of Representatives, which states:

“The President of the Republic shall call the House of Representatives to convene for the annual ordinary session before the first Thursday of October. If no call is made, the House shall meet by virtue of the Constitution on the mentioned date. The ordinary session shall continue for at least nine months unless the House has started its work at a date that does not allow for the expiry of the specified period. The President of the Republic shall end the session with the approval of the House, and the session cannot be adjourned before the approval of the state’s general budget.”

Thus, it is anticipated that the legislative amendments to the contested provisions will be enacted by June 2025. If not, the ruling of unconstitutionality will be applied without implementing any organized regulations for determining rental values. This would result in the rental values of units leased under Law 136 of 1981 being adjusted to the market rental values for similar properties.

In light of this ruling and its implications for residential lease agreements, we recommend consulting one of our legal advisors specializing in Real Estate to understand the new rights and obligations and ensure legal contract compliance.