Inflation-Protected Leases

Many property owners have probably tried to raise their rents after the publication of Berlin’s latest Rent Table. An endeavour that can prove more complicated on the ground than you would think. For it is hardly enough to pen a letter to the tenant saying that the rent will be brought up to the level of the new rent table.

Rather, you need to address a formal request for a rent increase to the tenant, and obtain the tenant’s express consent to the rent increase. My experience as landlord has been that such letters will, as often as not, be answered by the tenant only after several reminders or go unanswered altogether. Some tenants will flat-out refuse their consent, while others may agree to a certain amount. This partial consent is sometimes justified and sometimes not – and each case needs to be reviewed.
The long and the short of it, however, is that you cannot raise the rent without the tenant’s consent – which must be requested to be granted in writing. If all else fails, the landlord has to sue for the tenant’s consent. This will involve a major effort, cost plenty of time and money, and naturally strain the relationship to the tenant. Most landlords – me included – have a vested interest in being on good terms with their tenants.

That being said, rents do need to be adjusted from time to time, because inflation alone would otherwise cause the rent to reduce itself in economic terms even if the nominal amount remains the same.
I believe that the fairest solution for lessor and lessee both are leases whose rent hikes are tied to the growing costs of living, meaning the inflation rate. It is an approach called “indexation.” While being standard for office real estate, “index clauses” or “escalation clauses” are still the exception for residential leases. In this segment, few landlords are actually aware of the option to negotiate inflation-indexed leases.

The truth of the matter is that the option represents the fairest type of contract for either side: The tenant can rest assured that the rent will not outpace inflation. Normally, the law permits rent hikes by up to 20 percent over a three-year period, yet a landlord tied to an indexed lease may not go ahead and raise the rent within the limits of the legal ceiling even if the rent table was to report brisk growth all of a sudden. As it were, the tenant’s situation is made safer.

The property owner, in turn, hedges his or her investment in an apartment block against inflation. Above all, the arrangement does away with the aforementioned costly rent-increase requests, and the landlord will no longer have to chase after tenants to obtain their consent, as the rent is automatically adjusted year after year.

Landlords are well advised to weigh the advantages of it against the one-time benefit of a hefty increase that would bring the rent up to level with the latest Berlin rent table. In some cases, it may be sensible for both sides if the landlord abstains from exploiting the permissible rent increase potential in return for a consensual conversion of the lease to include an indexation clause. So if you take a long-term view as a landlord, it will most likely pay off in the long run to forgo the temptation of a one-time rent hike.