New bill regarding cap on residential rent increases introduced

The bill for the new act proposing a cap on residential rent increases was introduced by the Danish Ministry of the Interior and Housing on 9 September 2022. The bill implements a political agreement entered into on 26 August between the Government, the Socialist People’s Party, the Social Liberal Party and the Red-Green Alliance.

If or when adopted, the bill will entail a cap of 4% on the annual rent increase based on the development in the Danish net price index for 2022 and 2023 for residential lease agreements that are subject to annual rent adjustment in accordance with the net price index. However, landlords may be entitled to claim additional rent adjustments subject to being able to document that the operating expenses related to the property have increased by more than 4% compared to the previous year.

Background

On Friday 9 September 2022, the Danish Ministry of the Interior and Housing introduced a new bill cap on rent increases in accordance with the Danish net price index. The new bill can be found here (in Danish).

The bill caps annual rent adjustments based on increases in the Danish net price index in both 2022 and 2023 at 4%. The purpose of the new provisions is to protect tenants against major rent increases caused by the current inflation.

Landlords may, however, increase the rent by more than 4% if able to document that the operating expenses related to the property have increased by more than 4%. Together with the new bill, the Ministry announced a new executive order, which in detail specifies which operating expenses the landlord may include when calculating the increase from the previous year.

In addition to the new rules on rent increases, an analysis will be carried out in order for a new rent adjustment index to be introduced. The new index is expected to come into force on 1 January 2025 and will, once introduced, replace the net price index as the basis for rent adjustments.

Rent increase to be capped at 4%

Under the current rules, landlords are entitled to adjust the rent annually in accordance with the net price index if such adjustment has been validly agreed in the lease agreement for the tenancy. This is generally agreed for residential tenancies in newly built properties, residential tenancies that have been converted into residential use after 1991 and substantially improved tenancies.

Pursuant to the new bill, the annual rent increase based on the development in the net price index for 2022 and 2023, respectively, will be capped at 4% per year. The new rules will only apply to residential lease agreements where the net price index has been agreed as the basis for rent adjustment (see above) and will not affect the rent adjustment for commercial lease agreements.

The development in the net price index was at 8.8% in July 2022, and thus – considering the current inflation rate – the new cap will entail a significant restriction in landlords’ access to adjust the rent for tenancies, for which adjustment in accordance with the net price index has been validly agreed.

Landlords will be entitled to adjust the rent by 4% per year based on the development in the net price index in both 2022 and 2023, which means that the proposed cap is not a maximum of 4% for the two years combined. If the development in the net price index is less than 4 %, landlords will only be entitled to adjust the rent in accordance with the actual development in the net price index.

Rules will apply to existing lease agreements and adjustments already effected

The cap on rent increases will not only apply to lease agreements entered into in the future, but also to lease agreements already in force. Furthermore, the cap will also apply to rent increases that have been effected before the new rules come into force.

Rent increases over 4%, which have been effected before the new rules come into force, will be capped with effect from the time, on which the tenant at the earliest could have terminated the lease agreement, calculated from the date on which the new rules come into force. Most Danish residential tenants have a 3-month notice.

As the new rules are expected to come into force on 30 September 2022, this means that for existing lease agrements under which a rent increase has been effected before the new rules come into force, the cap will apply from 1 January 2023 (assuming a 3-month notice period on behalf of the tenant). Rent increases higher than 4%, which have already been effected, may lawfully be collected until 1 January 2023.

Additional rent increases possible if due to higher operating expenses

Notwithstanding the cap, landlords may carry out higher rent increases than 4% subject to landlords being able to document that the operating expenses related to the property have increased by more than 4%.

The following conditions must be met in order for landlords to be entitled to increase the rent by more than 4%:

• The operating expenses must have increased to such an extent that a 4% rent increase does not cover the cost increase.
• Landlords may only include certain operating costs (taxes and fees; insurance, maintenance and administration costs; costs for utilities for common areas; janitor and cleaning costs; financing costs, including interest costs; and other costs that the landlord is able to prove have been necessary for the operation of the property).
• The cost increase must relate to the same calendar year as the calender year that the net prixe index relates to. If, for example, the landlord wishes to carry out rent adjustment for a month in 2022, the expense in 2022 must have increased compared to 2021.
• Landlords must prepare a table showing a comparison of the costs in the previous year and the year of adjustment.
• Landlords must be able to provide documentation for the increased costs.
• Costs that are not related to residential parts of the property may not be included.
• Landlords must notify the tenants in writing with a notice period of 3 months that the rent will increase by more than 4% due to higher increases in the operating costs.
• If a tenant objects to the rent increase, the landlord must bring the case before the rent control board in the Municipality of Aarhus (regardless of the venue of the property).
• The rent control board must within 3 months decide on the validity of the rent increase. During this period, the landlord may only enforce a 4% rent increase, but will be entitled to retrospectively enforce a higher rent increase if the board accepts this.

Regardless of the actual increase in the operating costs, the total rent increase (combining the net price increase capped at 4% and the additional increase caused by higher operating expenses) may not exceed the actual development in the net price index (e.g. 8.8% in July 2022).

Adoption of the new bill and its consequences

The new rules are currently expected to come into force on 30 September 2022.

Generally, the new rules will lower the rent adjustment that landlords will be entitled to claim and thus cause a rent loss for landlords that would otherwise have been entitled to adjust the rent fully in accordance with the development in the net price index.

The Danish Ministry of the Interior and Housing estimates that the rent cap will affect up to 160,000 tenancies and that landlords will suffer a total rent loss of approx. DKK 2.7 billion as a consequence of the cap.

As stated above, landlords may under certain circumstances be entitled to claim higher increases than 4 %. However, landlords claiming such additional increases will face an administrative burden (in documenting that an additional increase is justified) and a detailed notifying process, which must be carefully observed to avoid the rent adjustment being deemed invalid.

This is in contrast to the current rules on rent adjustment in accordance with the net price index, under which landlords must only inform the tenants that the rent will be adjusted in accordance with the development in the net price index.

Gorrissen Federspiel will carefully follow the further adoption process of the bill, and our Real Estate department will be at your disposal for any questions regarding the new rules.