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Restrictions on Rental Increases at Lease Contracts Under Spanish, Dutch and Turkish Laws

May 2014 - Real Estate & Property. Legal Developments by ADMD Law Office .

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It is customary to increase rents at lease contracts annually almost all around the world. Generally, the main source of such increase is inflation of monetary currencies and revaluation of the properties leased. However, there are legislative restrictions at many jurisdictions, limiting such application or predetermination based on contractual freedom on rental increases.

These restrictive regulations mostly aim to protect the tenants assumed to be less powerful than the landlords economically and contain a social agenda. Accordingly, landlords cannot increase the rents (leases) and/or tenants may resist on such increases.

  The below outline aims to summarize such restrictions applied comparatively in Turkey, in the Netherlands and in Spain. 

Rental Increase Restrictions in Spain

 

"Ley de Arrendamientos Urbanos", the Urban Leases Act 29/1994 (ULA) forms the basis of the rules that regulate the leases of urban properties in Spain. According to Article 19 of ULA 29/1994, landlords are permitted to increase the rent if improvements are made, as long as the increase meets certain other standards and if the increase is less than 20% [the annual rental increase shall be calculated on the basis of the legal interest rate, increased by 3 points, applied to the total investment, less any public subsidies provided].

 

ULA 29/1994 was amended a number of times and more significantly very recently. On May 23, 2013, the Spanish parliament approved a law containing measures to achieve greater flexibility and promote the housing lease market in Spain which came into force on June 6, 2013 ( Law 4/2013).

 

The general principle of the new law is to allow the freedom of parties to contract to prevail. The new regime shall apply to lease agreements signed after June 6, 2013. Under the new law (Law 4/2013), the rents may only be subjected to revisions on each anniversary of the lease agreement. However, according to the amended Article 18 of ULA the parties are now free to set out the grounds of revising the rent. It is no longer compulsory to base such revision on the Spanish National Consumer Price Index (Indice de Precios al Consumo - IPC) during the first five (5) years of the lease. From the third year of the contract, the rents can be freely agreed between landlord and tenant, regardless of the IPC.

 

According to Spanish laws, the parties may agree on the procedure to calculate the rent update. However, when there is no agreement, the rent will follow the increase according to IPC. The only legal option to increase the rent each year by the official government inflation statistic on the anniversary of the initial rental. For the benefit of the tenant, an official website is available at: ine.es/calcula, which offers calculation methods for the renewal of the rent.

 

These new measures introduced in Spain are targeting to ease the renting process and help to change the mindset about leases. At the moment only 17% of all properties in Spain are dedicated to tenants under lease contracts that is quite below the European average of 30%.

 

Rental Increase Restrictions in the Netherlands

 

Book 6 of Dutch Civil Code (DCC) provides general rules on rental contracts and Book 7 of DCC is on specific lease agreements (rental agreements are governed by title 4, Book 7 of DCC and section 5 of DCC is about rental housing Articles between 232-282). The rental increases are also regulated by the Law on Housing Benefits (24 April 1997), the Regulation Law for Implementation, Law of Housing Rents Benefits (21 November 2002) and the Housing Rents Decree (18 April 1979).

 

The Dutch Tenancy Law makes a distinction between liberalization and controlled border type lease agreements. At liberalizing border type subject to Article 6:247 Dutch Civil Code, a landlord has more freedom to decide on the rental price since the rules for the maximum prices and rent increases do not apply. The liberalization limit for 2014 is ‚ā¨699,46.- In 2013, deregulation threshold was ‚ā¨681,02.- As to whether a lease is liberalized or not, only the commencement rent amount is decisive, not the current or updated one. The initial rent is the basic rent on the effective date of the rental agreement. If the initial rent is higher than the deregulation threshold in force on the date of the rental agreement, the rental agreement is assumed to be liberalized. If the initial rental rate is less than or the same to the limit of liberalization that time, the lease is regulated (is not liberalized). This latter type of rental is also called the ‚Äėcontrolled' sector.

 

If the rental agreement is regulated, some statutory rules are applicable. Each year the Dutch government fixes the maximum rent increase amounts. Two main aspects play a role in determining rent increase ratios; valuation of the home and the reasonableness of the rent and the amendments thereof. If disputes between the tenants and the landlords arise, they can be resolved by Rental Commission that is an independent, national organization dealing with disputes over rent, maintenance and services. The decision of the Commission is final and binding upon parties.

 

The property valuation system (also called points system) based on the Housing Rents Decree (18 April 1979) is another system to fix reasonable rents used for housing. Such system could be used at litigation to resolve disputes. The Ministerial Regulation provides additional restrictions on rental increases as well. On March 13, 2013, such regulation was amended and the rental increase rates became dependent on incomes and as of July 1, 2013, the maximum rates for properties (single-family homes and apartments), households are subject to the following:

 

- incomes up to ‚ā¨33,614 4 are subject to rental increase ceiling of 1.5% + inflation;

- incomes between ‚ā¨33,614 and ‚ā¨43,000 are subject to rental increase ceiling of 2% + inflation

- incomes above ‚ā¨43,000 are subject to rental increase ceiling of 4% + inflation.

 

The rental increase percentages are calculated over the basic rent amounts. That is the rent without the cost of services such as maintenance and utilities such as gas, electricity and water. These restrictions on maximum rental increase are not applicable to liberalized lease agreements referred above.

 

Rental Increase Restrictions in Turkey

 

The lease agreements in Turkey are regulated mainly with the Turkish Code of Obligations No. 6098 (TCO), dated November 1, 2011 that entered into force at January 7, 2012 which sets forth a specific section for leases of residential and business premises. 

 

The TCO has implemented new provisions regarding the determination of rent amounts, renewal of rent amounts and  the declaratory lawsuits. The TCO regulates the leasing of residential and business premises in a very detailed manner.

 

In accordance with Article 339 of the TCO, which stipulates the leasing of residential and business premises, the lease of immovable properties for a term of six (6) months or less are subject to temporary use due to their nature and are not within the scope of the TCO. On the other hand, the lease agreements executed by governmental institutions and organizations are also subject to the provisions of the TCO despite the administrative law principles and procedures.

 

According to the Article 343 of the TCO, amendments against the lessee apart from the rent amounts, cannot be arranged following execution of the lease agreement. With such provision, later and arbitrary amendment pressure by landlords against lessees are prohibited.

 

In addition to that principle, the first sub-paragraph of the Article 344 sets forth that the validity of the agreement between the parties in relation to a rental increase rate depends on the amount of the increase that shall not be exceeding Turkish Producer Price Index (UFE). It is important to note that such provision is also applicable for lease agreements longer than one (1) year. The second sub-paragraph of the same Article states that in the absence of any agreement with respect to a rent increase, the judge will determine the rent for the new lease period taking into consideration the condition of the leased property complying with equity, and the UFE will be accepted as the maximum increase allowed. On the other hand, the third sub-paragraph of the Article states that the judge will determine the rent, whether there is an agreement between the parties or not, by taking into consideration the UFE, the condition of the leased property, comparable rentals, and equity principles if the lease period is more than five (5) years or the lease agreement is renewed after five (5) years in every fifth consecutive year.

 

Furthermore, if the rent is fixed in a foreign currency by the parties, there is a limitation on any increase in rent. Accordingly, no amendment may be made as to the rent before the consumption of a five (5) year term. The rent will be determined pursuant to sub-paragraph 3 of the Article 344 mentioned below, taking into consideration the monetary value of the foreign currency after five (5) years have passed.

 

The limitation period and the impact of any award via a lawsuit initiated for determining the rent are regulated with the Article 245 of the TCO. It is accepted that the lawsuit for determining the rent may be initiated at any time. However, the new rent determined by the court will bind the lessee beginning from the new lease period provided that the lawsuit is initiated at least thirty (30) days before the new lease period, or if the lessor has given notice with regard to an increase in rent in writing to the lessee within such period, it may be initiated until the end of the new lease period. In addition, if there is an article in the lease agreement stipulating a rent increase for the new lease period, the rent determined by the court in a lawsuit initiated before the end of the new lease period will also be valid beginning with the new lease period.