Residential leases: caps on indexation of rent in 25 different jurisdictions
Claudia S Mathiasen
Winsløw Law Firm, Copenhagen
Residential lease contracts are the legal framework for a tenant’s safe place: their home. The lease contracts are also an important part of the ecosystem of real estate investments. As residential lease contracts usually cover a long term, it is common to agree on an indexation of the rent to secure that the rent level is proportional to the general cost of living. This way, a real estate investment has the potential to be an inflation-secured investment. According to the Danish government, there are approximately 160,000 lease agreements in Denmark with an indexation clause.
A sudden change in the development of a reference index can cause a substantial change in the rent, if the rent is linked to such an index. Seen from the landlord–investor perspective, a property’s operating costs may also increase to some extent under these circumstances. From January 2022 to August 2022, the European net Consumer Price Index (CPI) has increased from 112.7 to 120.6 (7.9 points). The trend is the same in the US, where the CPI came in at 296.808 in September 2022, compared with 281.148 in January 2022. The Danish Net Price Index (NPI) has developed from 107.9 to 116.4, (7.2 points) during the same nine months. This is a drastic change compared to the development of the NPI in the six-year period from August 2015 to August 2021 during which the Danish NPI increased from 100 to only 105.5. The same levels of changes in the CPI are found in the rest of Europe and in the US compared to the last two decades.
In an attempt to protect residential tenants from the burden of rapidly increasing rent, the Danish government passed a fast-track change in the residential lease law to apply from 30 September 2022. The main change to the law is a four per cent cap on the indexation of the rent on residential leases based on the development of the NPI for 2022 and 2023, namely indexations that take effect until 1 March 2024, because the notice period is three months.
According to finance experts, the law has a severe impact on the valuation of residential properties. Especially on existing lease contracts, the cap may imply a reduction in the agreed and expected cash flow/rental income on the property. This means a transfer of values from landlords to tenants, both in terms of a reduced coverage of the landlord’s expected costs and a potential reduction of the valuation of the property, which was based on the terms in the existing lease contracts. Additionally, uncertain market conditions are likely to have a negative impact on the residential real estate market, if the assumptions based on already agreed lease terms are changed, and if investors prefer other properties such as logistic, retail or office buildings or other asset classes.
In Denmark, a large number of residential properties are owned by institutional investors, including pension funds. If the rental income on properties in a pension fund portfolio is reduced compared to the agreed rent, this could lead to a decreased value of the pensions customers’ savings. In other words, a cap on the rent may have a long-term effect on the value of pension savings.
Some jurisdictions already have mandatory caps on the indexation of rent. A particularly interesting perspective on the indexation of rent has been taken in Belgium by the Flemish Region. At the beginning of October 2022 the Flemish Region introduced a differentiated system where temporary freezing of the indexation of rent for residential leases is justified by a sustainability approach. This is done by linking the possibility of indexation to the realised energy level of the property.
The possibility of the indexation of rent in the Flemish Region will be retained for residential leases in buildings with energy level A+, A, B or C. For rental properties with energy level D, the possibility of indexation of rent is limited to 50 per cent for one year. For residential leases with energy level E or F and for buildings with an unknown energy level, any indexation of rent is excluded for one year. After one year, a correction for residential leases with energy level D, E or F remains. The purpose of this link between the indexation and the energy level of the property seems to be an encouragement to improve the energy level of the property and thus also the value of the property.
With the assistance from the officers of the International Bar Association Real Estate Section and some additional European law firms with cross-border activities, data have been collected from 25 different jurisdictions. The data are based on the following questions:
- Do rent indexation caps apply in the jurisdiction?
- What are the caps?
- On which properties do the rent indexation caps apply?
- Is there a limitation in the period in which the rent indexation cap applies?
Data on rent indexation caps in 25 different jurisdictions (13 October 2022)
Do rent indexation caps apply in the jurisdiction?
What are the caps?
On which properties do the rent indexation caps apply?
Is there a limitation in the period in which the rent indexation cap applies?
Jurisdiction and law firm
No. Rent indexation was prohibited until 2020 (in practice, rent indexation is not uncommon).
Residential leases are indexed by the average of two indexes: one which calculates the general prices for consumer goods, and another which reflects the increase in salaries. Commercial leases may be indexed by the index the parties may agree upon.
No. However, see comments.
For legally defined ‘old buildings’ there is a mandatory and statutory rent (Richtwertmiete; Kategoriemiete, ie, only such mandatory and statutory rent may be charged). An indexation clause is permissible, but such a clause can only ensure that in case of a newly adjusted mandatory and statutory rent (which will and can only be adjusted by the government), the new (generally higher) mandatory rent may be charged. Without such adjustment, the landlord cannot raise the rent to the inflation level. With the adjustment the rent may only be raised to the level set out by the government. The mandatory and statutory rent is normally adjusted every two years. Because of Covid-19, the government refrained from such an adjustment in 2020. The current adjustment was executed in 2022.
Legally defined ‘old buildings’.
In Brussels there are proposals in Parliament to provide for a cap of 2 per cent for (social) housing.
In the Flemish Region the indexation is linked to the energy level of the property as described above.
The rent can be adjusted by inflation only after a period of 12 months.
Yes, most Canadian provinces have enacted ‘rent control’ legislation that limits the frequency and monetary amount of rent increases imposed by landlords. Many provinces issue a yearly guideline which factors the current inflationary environment (for example, in Ontario the annual guideline is pegged to the CPI). During Covid-19 many provinces implemented eviction bans and moratoriums on rent increases, the majority of which have since expired.
Caps vary across provinces and may be further regulated at the municipal level (see below).
Residential. However, there are some general exclusions across provinces; for example, in Ontario, new buildings, additions to existing buildings and most new basement apartments that are occupied for the first time for residential purposes after 15 November 2018 are exempt from rent control (Schedule 36, Restoring Trust, Transparency and Accountability Act 2018).
Most provinces with rent control legislation update their prescribed guidelines for rent increases on an annual basis, however, exceptions exist.
Giese & Partner
Winsløw Law Firm
No. However, the Danish government has suggested a cap on the indexation of rent. As of 15 September 2022 the changes in the law on residential leases are being processed in a fast-track process in the Danish Parliament.
A cap at 4 per cent per year (based on indexation of rent due to the development in NPI in 2022 and 2023) is suggested with effect on 30 September 2022. Exemption only if the landlord proves to have a higher increase in costs on the property (not interests).
The suggested cap is for residential properties only.
The suggested cap is for 2023 and 2024.
From 1 January 2025 an alternative index for rent adjustments should be introduced.
Hadef & Partners
Yes. There is a Dubai Land Department rental calculator where tenants can calculate their rental increase: https://dubailand.gov.ae/en/eservices/rental-index/rental-index.
The level of rent increase is subject to how much below the average a tenancy is:
(Dubai Decree No 43 of 2013).
Mills & Reeve
Not on short-term residential leases or any commercial leases. Ground rents on new long residential leases (generally 21 years or longer) above a peppercorn (ie, zero) were abolished earlier in 2022.
Yes (Law of 16 August 2022).
The variation of the index cannot exceed 3.5 per cent.
(i) Residential leases and (ii) Commercial leases on retail premises and only if the tenant is a ‘small or medium company’ as defined in EU Regulation N°651/2014 of 17 June 2014.
Yes: Retail = period running between Q2 2022 to Q1 2023 (inclusive). Residential = period running between Q3 2022 to Q2 2023 (inclusive).
Heuking Kühn Lüer Wojtek
No. However, indexation caps are being discussed.
Fox Mandal & Associates
No country-wide cap on indexation of rent. Different Indian states have different rent control laws, which specify the standard rent and the permitted increase thereon.
Different Indian states have different caps on the permissible increase in the standard rent which may be determined under the specific rent control act or other allied statutes or fixed by an adjudicatory authority. For instance, in the state of Maharashtra, the Maharashtra Rent Control Act 1999 allows for an increase in standard rent up to 5 per cent.
The state-specific rent control acts broadly apply to residential premises and commercial premises with state specific exceptions carved out in case of the latter. The Model Tenancy Act 2021 is prescribed for residential and commercial buildings, except for hotels, lodging houses, dharamshalas (lodging for pilgrims), inns and for industrial-use buildings.
Not applicable. However, as per common practice, the revision of rent is done on a yearly basis.
Cocuzza & Associati
No. However, see comments.
Usually lease agreements provide for an annual update of the rent based on inflation which is linked to a specific index (ie, Istat, consumer prices for blue- and white-collar households). However, there is a favourable tax regime for residential leases (ie, cedolare secca) adhering to which no adjustment of the rent to the inflation index may be requested to the lessee for the whole duration of the lease.
The tax favourable regime applies only to residential leases.
No. However, see comments.
The maximum amount that a landlord may charge in rent may not exceed five per cent of the amount, the landlord has invested in the property.
The restrictions apply only to accommodation used as the main place of residence rented out to natural persons.
If a real estate qualifies to be a ‘luxury real estate’, rent revision on basis of indexation possible under certain conditions.
Cannizzo and Basham, Ringe y Correa
Not a general national cap. However, there is a cap in Mexico City (civil codes are different for each state of Mexico).
Mexico’s Civil Code provides the possibility that the parties may agree on an increase in the amount of the rent, specifically for residential properties, which may not exceed ten per cent of the amount agreed upon as monthly rent. Thus, when in a lease agreement for a residential property, the parties agree on an increase of an amount exceeding ten per cent, the Mexican Supreme Court of Justice has determined that the rent increase will be valid up to the limit established by law (ten per cent), and the excess will be null and void. As for commercial properties, Mexico City’s Civil Code does not expressly establish any rent caps, therefore the increase shall be as determined by the parties in the specific contract.
No, due to the cost of living crisis. There is a statutory limit on the frequency of rent increases for residential properties that was introduced a couple of years ago to try to address New Zealand’s housing affordability crisis.
No more than one rent review in a 12-month period.
Wardynski & Partners
No. However, see comments.
A cap at two per cent has been suggested at the beginning of September 2022.
Under the Private Housing (Tenancies) (Scotland) Act 2016, Scottish councils have the power to ask Scottish ministers to designate Rent Pressure Zones (RPZ). These are areas subject to restrictions regarding increase of rent – a rent indexation cap for the localised area included in the RPZ. However, currently there are no RPZs in Scotland.
The situation in Scotland is now under review, with an ongoing consultation ‘A New Deal for Tenants’ in place. The government plan to use this consultation to draft a housing bill, to be put before Parliament in 2023, which could involve rent controls.
Rents under private residential tenancies of properties within an RPZ cannot increased by more than the level of the CPI, plus one per cent.
The cap also allows landlords to include an amount of rent to reflect any improvements made to the let property, by applying to a Rent Officer to determine how much additional rent they can add.
The cap does not apply to initial rents.
To apply to have an area designated as an RPZ, councils must prove that:
These caps only apply to private residential tenancies, the tenancy agreement introduced in Scotland in 2017.
Regulations that designate an area to be an RPZ cease to have effect five years following the date they come into force.
No RPZs have yet been introduced.
Giese & Partner
Two per cent.
Until 31 December 2022.
Bär & Karrer
Residential leases in Switzerland are linked to a reference interest rate (volume-weighted average of all outstanding residential mortgages) and allow the landlord to charge cost increases to the tenant only to a limited extent (40 per cent). As interest rates have decreased over the last decade, rent has also decreased (for existing leases) for some time, also because the inflation was zero per cent from 2012 to 2021. As the reference interest rate reacts slowly, and because inflation for 2022 is expected to be around 2.5 per cent only, but can only be charged to 40 per cent, a cap on rent is not yet a topic in Switzerland.
Private rental sector: CPI + one per cent (in 2022, 3.3 per cent).
Social housing: CPI (in 2022, 2.3 per cent).
Private rental sector and social housing.
Private rental sector:
1 May 2021 to 1 May 2024.
Social housing: annually.
The United States
Arnall Golden Gregory
No country-wide indexation of rent, but certain large cities (eg, New York City) have had ‘rent control’ for years. A pan-US residential rent control is unlikely.
Necessary to assess across multiple municipalities.
Necessary to assess across multiple municipalities, but in New York City they have been in effect for decades.
Examples from Canadian provinces:
There is no statutory limit on rent increase amounts, however, landlords must comply with minimum notice requirements, and at least 365 days must have passed since the commencement of the tenancy or last increase for a rent increase to be effective.
The landlord may only raise the rent once every 12 months (but not in the first year of the tenancy) by a percentage equal to inflation. For 2022, the allowable percentage is 1.5 per cent.
Amendments introduced in 2021 to the New Brunswick Residential Tenancies Act restrict a landlord from increasing rent in respect of a weekly, monthly, yearly or long-term tenant to the same amount as comparable units in the same building or by what is reasonable among comparable units in the same area.
Nova Scotia enacted changes to the Residential Tenancies Program recently, which included implementing a rent cap of two per cent each year from February 2022 to December 2023, applicable to existing residential leases.
The Ontario guideline for 2022 is 1.2 per cent for rent increases between 1 January and 31 December 2022 – in certain circumstances, the guideline amount can be increased by up to three per cent by application to the Landlord and Tenant Board or mutual agreement between landlord and tenant. Pursuant to the Residential Tenancies Act the guideline for any calendar year shall not be more than 2.5 per cent.
Prince Edward Island
The Rental of Residential Property Act provides that lessors are restricted from increasing rent more than once in a 12-month period, and that the amount of rent increase shall not exceed the prescribed percentage amount established by order of the Prince Edward Island Commission. The allowable percentage increase for 2022 is one per cent for heated premises, non-heated premises and mobile home sites in mobile home parks.
There is no limit on rent increase in Quebec in 2022, however, landlords may only increase rent once every 12 months.