Landlords beware: rent indexation does not apply under certain circumstances!

The court ruled that the clause in question was unfair under European law, preventing both previous and future rent indexations from going ahead. A landmark ruling, with far-reaching legal consequences.

The dispute

This case involved a rental agreement between private tenants and a professional landlord. The original rent of €865 per month had been increased over the years to a monthly rent of €1,534.75. Due to personal and business circumstances, the tenants accrued rent arrears of €4,425.27. The landlord claimed payment of rent arrears, dissolution of the rental agreement and eviction from the rented housing. The tenants acknowledge the rent arrears, but wish to continue living in the rented housing and reach a payment arrangement.

However, the case took a surprising turn. The rent indexations were based on the following clause from the rental agreement:

“The rent will be increased for the first time on 1 July following the date of commencement of the rental agreement, and thereafter annually on 1 July, by a percentage to be determined by the landlord, being the percentage change in the monthly index figure for the month of February of the Consumer Price Index (CPI), all households series, determined on the most recent time basis, calculated in accordance with paragraph II of this provision, plus a maximum of 5% (of the percentage increase to be determined by the landlord).”

Therefore the rent is first increased annually based on the CPI and then increased by an extra percentage. A provision such as this is not unique. The widely used ROZ model (2017 version) contains a similar provision in Article 5.2 in combination with Article 16 of the applicable general provisions.

Directive on unfair terms in consumer contracts

The clause was assessed by the court (ex officio) in light of the Directive on unfair terms in consumer contracts (93/13 EC) (Richtlijn betreffende oneerlijke bedingen in consumentenovereenkomsten). This European legislation protects consumers from unfair terms in contracts with an economic operator. These are provisions that have not been individually negotiated, such as general terms and conditions or certain standard agreements. The Directive includes an annex called the ‘blue list’. This is an indicative non-exhaustive list of terms that may be considered unfair. A term is unfair if the balance of rights and obligations is significantly skewed to the detriment of the consumer (in this case the tenants).

The court stressed that, in principle, a rent adjustment clause is fair if the indexation is based on the CPI and if an explanation of how the rent adjustment is calculated has been provided. However, if the rent is increased by another 5% on top of this increase without further justification, the balance has been significantly skewed to the detriment of the tenant in violation of good faith.

Legal effect

In response to the coronavirus pandemic, the Dutch government also introduced a maximum rent increase for non-subsidized housing. Where a rent adjustment clause resulted in a higher percentage than the maximum rent increase percentage. The clause was partially void and the rent could only be increased by the maximum permissible increase percentage.

The situation differs in this case. The court ruled that the entire rent adjustment clause is unfair under European law and should be disapplied entirely.

This not only means that the landlord can never again increase the rent based on this clause, but also that all rent increases in previous years should not have taken place. This in turn means that the original rent of €865 still applies, resulting in the tenant paying far too much rather than too little. The bottom line is that the tenant has a claim against the landlord, rather than the other way around. The landlord’s claims are therefore dismissed.

Conclusion

This is the first published ruling. Neither the Courts of Appeal or the Supreme Court have ruled on this particular rent adjustment clause. It is also questionable whether the outcome is desirable. Since many rental agreements contain such a clause and the ruling creates ambiguity and legal uncertainty.

Nevertheless, landlords would do well to take the ruling into account for the time being. After all, the implications are far-reaching and have a major impact on the expected return when letting out residential accommodation.

Update 5 October 2023

Needless to say, the same Court of Amsterdam that gave landlords a grilling with its recent rulings on unfair terms, ruled on 26 September 2023 that good tenancy under Article 7:213 of the Dutch Civil Code (Burgerlijk Wetboek) may entail that the tenant has to accept a reasonable substitute rent adjustment clause. This is a welcome clarification of the legal consequences of the strict application of Directive 93/13 EC discussed above.

Prudent landlords would otherwise be well advised to limit indexation to the CPI for the time being. Until the preliminary questions are answered by the Supreme Court.

More information

Do you have a legal question? Please do not hesitate to contact me or one of the other specialists at GMW advocaten to discuss your options.