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Panic among real estate investors: rent increase clauses voidable?

The District Court of Amsterdam has ruled in three judgments that agreed rent increase clauses in housing are unfair. As a result, the clauses are annulled and past rent increases are reversed. Also, the rent cannot be increased (again) for the remainder of the term of the lease. This has far-reaching consequences for current leases and the marketability of housing complexes. Reason why it is essential for landlords to carefully formulate (new) rent increase clauses.
 
Rutger Fabritius
20 September 2023
20 September 2023

Rent increase clauses voidable

In three proceedings before the Amsterdam District Court, the landlords claim payment of rent arrears (ECLI:NL:RBAMS:2023:2420, ECLI:NL:RBAMS:2023:3124 and ECLI:NL:RBAMS:2023:4800). Because the tenants are consumers and landlords are considered traders, the court examines ex officio (i.e., without the tenants' request) whether the agreed rent increase clauses are unfair within the meaning of the European Unfair Terms Directive. The clauses in question stipulate - in summary - that "the rent shall be increased annually by the consumer price index + a maximum of 5%.

Citing case law of the Court of Justice of the European Union, the judges consider that a rent modification clause based on the consumer price index is in principle fair. However, the clause in question does not only increase the rent with an inflation correction. Indeed, on top of that, an annual increase of up to 5% is possible. A valid reason for this 5% is lacking in the clause, according to the judges. This leaves the tenant at the mercy of the landlord. A landlord's defense that any additional increase applies as a market development correction is rejected. After all, this is not mentioned in the clause nor does it contain a clear and transparent explanation of how and under what circumstances this correction will be applied. Nor does it state that the tenant can terminate the lease if the landlord uses the modification option. It is also important that the clause can only lead to a rent increase and not a rent reduction. In view of this, the judges concluded that the rent increase clause is unfair and qualifies for annulment (Article 3(1) European Unfair Terms Directive).

  • NOTE: Examination ex officio against the European Unfair Terms Directive is only relevant in the case of - in brief - general provisions in a contract between a consumer and seller within the meaning of that Directive. With respect to the rental of residential premises, this will usually be the case. However, the question is whether a private landlord who lets one or two dwellings non-commercially qualifies as "a vendor acting within the scope of his private law professional activity. The Court of Justice of the European Union interprets this concept broadly.

What are the implications?

Annulment of the rent increase clause means that a freehold landlord loses the ability to increase the rent for the remainder of the lease. Here it is all or nothing: the clause is valid or voidable. In the case of nullification, the court may not modify or supplement the clause. This means that the landlord will not be able to invoke the agreed consumer price index increase in the future either.

  • NOTE. In the social sector, the legal possibility remains to submit a rent increase request to the tenant or - if the tenant does not agree - to the Rent Commission (Article 7:250 jo. 7:252 BW).

The question then arises as to whether the tenant can claim refunds for past rent increases. This is indeed expected to be the case. Indeed, nullification has retroactive effect. This means that any rent increase paid pursuant to an annulled clause is undue and (thus) recoverable by the tenant. For the future, the rent from before application of the clause in question will be due and remain due.

A recovery for nullification of an unfair term is subject to prescription. This three-year period starts to run at the moment the rent increase clause is applied (Article 3:52 jo. 6:235 paragraph 4 BW). This seems to limit the risks to three years back. In the proceedings before the Amsterdam District Court, however, this defense of limitation was not raised. It is also questionable to what extent this offers a solution. After all, prescription does not prevent the right to set-off (Article 6:131 of the Civil Code). A tenant may argue that undue rent increases that are older than three years should be set off. We do not rule out that a court will honor this claim. This only creates more ambiguity. Which rent will apply? The rent as it applied three years ago or the initial rent that may be older than three years? Either way, the potential consequences are far-reaching.

What can a landlord do?

Basically, a rent increase clause based on the consumer price index (or inflation adjustment) is permissible. Often, however, a landlord wishes the rent to also follow market trends. The aforementioned case law shows that to pass the "unfairness test," a rent increase clause must contain at least the following:

  • the grounds on which the rent - possibly in addition to the consumer price index - can be adjusted (e.g., market trends); and
  • A clear and transparent explanation of how the rent will be adjusted (preferably an objective measure); and
  • The landlord's obligation to provide clear and understandable information to the tenant prior to the rent increase; and
  • a real possibility for the tenant to terminate the lease if the power of amendment is exercised.

What is essential is that the tenant can foresee rent increases using clear and understandable criteria. This understanding must have been agreed upon when the lease was entered into. Formulations that the landlord "may" implement rent increases by "a maximum of ...%" are therefore in principle not permissible. This makes it insufficiently clear whether the landlord is implementing a rent increase and, if so, by what percentage. Irrelevant to this test is the actual implementation thereof or an explanation given afterwards.

In this regard, a major obstacle for landlords is that there is currently no objective measure available to determine the market development of housing rental prices. Let alone objective data available to determine this at the city or district level. In our view, what should ultimately matter is the market development around the rents of comparable housing units locally.

ROZ model housing rental agreement 2017

It strikes us that the rent increase clauses in the aforementioned rulings deviate from the 2017 ROZ model lease agreement living space, which is widely used in real estate practice. This model stipulates for an independent rental property with a deregulated rent that it is adjusted annually in accordance with the consumer price index and that the landlord has the right to increase the rent 'in addition and simultaneously by a maximum of ...%' (Article 5.2 of the model). Landlords should take into account that this provision does not hold either. In doing so, a landlord runs the risk that not only the "on top of and simultaneously" phrase will be nullified, but the entire Article 5.2 of the model (i.e., including the rent increase based on the consumer price index).

Supreme Court

Preliminary questions are expected to be submitted to the Supreme Court on the admissibility and consequences of rent increase clauses. Given the far-reaching consequences of voidability thereof, we welcome this. For the time being, however, it is uncertain how this will develop further in case law.

Opinion

As long as the Supreme Court has not ruled on this issue, landlords of residential property run the risk that rent increase clauses will be annulled retroactively up to three years in the past (and possibly even more if the tenant invokes set-off). In addition, it carries over into the future: the landlord cannot increase the rent annually (anymore).

If a landlord does not want to take any risk at all until that time, he would be wise to use only the consumer price index in (new) leases and not to include any additional uplift percentage. An uplift percentage is only permissible if the above four criteria are met. This is no easy task.

Landlords using the ROZ model lease agreement living space 2017, we recommend removing the last sentence from article 5.2 of this model or at least including it as a separate article (for example, as a special provision). In the latter case, the landlord in any case runs less risk that the annual rent increase based on the consumer price index will also be affected by the general nullification of the clause. Time will tell whether judges will go along with this.

Finally, the question arises whether this new development in jurisprudence also affects private landlords. For example, landlords who rent one or two dwellings non-commercially. It could be argued that the European Unfair Terms Directive does not apply to them. Our expectation is that courts will interpret the term "landlord" broadly, but it remains a gray area between business and private acting. In doing so, all circumstances of the case will be relevant.

 

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