Inflation in Germany is at its highest level in decades. For several months now, the inflation rate has been around 5 percent; in March, it even reached 7.3 percent. Many commercial tenants are facing disproportionately high rent increases.
This is because most commercial leases contain rent adjustments that kick in when consumer prices rise. Why these index-linked leases are still fair and transparent, and what to look out for when signing a new lease.
Due to the current high inflation, many commercial tenants who have generally concluded agreements with index clauses must expect considerable rent increases. The terms "value guarantee clause" and "price clause" are also commonly used for index clauses. While the consumer price index (CPI) of the Federal Statistical Office (Destatis) has mostly recorded an increase of around 1.5 percent in recent years, many tenants currently have to expect increases of over 5 percent. In the past twelve months alone, the CPI climbed by 5.1 percent: in February 2021, it stood at 107 points. In February 2022, it stood at 112.5. This corresponds to an increase of 5.5 points or 5.1 percent. Economic experts estimate that the inflation rate could rise to between 8 and 10 percent over the course of the year.
The reasons for the rise in the cost of living are complex. First, there are the increased costs for heating oil, electricity, gas, and food, as well as price increases due to disrupted international supply chains as a result of the pandemic. With the war in Ukraine and the feared energy shortage, costs are likely to climb further.
Most commercial leases include a value guarantee clause stipulating that the rent will increase if the average cost of living exceeds a certain threshold within a certain period of time. "This means that the tenant pays an inflation adjustment based on the agreed base rent. Advance payments for operating and ancillary costs are excluded from these adjustments," explains Uwe Mortag, managing director of Larbig & Mortag Immobilien in Cologne.
A fixed threshold is intended to prevent even small CPI fluctuations, such as less than one percent, from triggering rent adjustments. In theory, the index could also fall, resulting in a rent reduction. However, this has been very rare in the past.
An index clause is a fair and transparent form of adjustment because it is easy to calculate and is based on statistical data from public authorities (third parties). As a result, index-linked contracts have become increasingly common in residential rentals in recent years. "I therefore do not believe that value guarantee clauses will be agreed less frequently in the future due to the current high price increases in the commercial sector," Mortag is certain.
As a rule, the CPI is used as the basis. In commercial leases, however, alternative statistical data such as the retail price index can also be contractually agreed as the base value. The Federal Statistical Office offers a calculation tool for all commonly used base values at Destatis.de, linked to the respective figures.
In the coming years, the construction price index may also become more widely used in the commercial construction sector. The continuing shortage of building materials and the resulting significant rise in construction costs mean that landlords can flexibly link the period between signing the contract and handing over the property to the tenant to the construction price index, thus taking the rise in construction costs into account in the rental agreement.
Two options for index-linked rent adjustments
There are two ways to implement rent adjustments in index-linked contracts. First, a genuine sliding clause can be agreed. This stipulates that the basic rent will automatically increase by five percent, for example, if the CPI rises by five percent. Further details must be specified for this automatic adjustment, otherwise the indexation agreement may be invalid. For example, the lease must be concluded for at least ten years, or the tenant must be able to extend the lease for at least ten years, or it must be agreed that the landlord will not give notice of termination during this period. Furthermore, no contracting party may be unreasonably disadvantaged by the value guarantee clause.
In the second case, known as a non-genuine indexation clause, the rent is not automatically adjusted on the basis of an index increase. Instead, the landlord and tenant are required to review the appropriateness of the rent if the underlying base values rise by a certain amount.
Although it is not necessary to inform the tenant of an automatic adjustment in the case of genuine index-linkage agreements, both contracting parties should nevertheless agree that the tenant will receive a recalculation of their rent in advance. "Otherwise, there is a risk that they will pay the old and therefore incorrect rent, which entitles the landlord to terminate the contract extraordinarily," warns real estate expert Mortag.
Do you quickly lose track of the topic of index-linked rent? Let our experts provide you with professional advice!
