Bill introducing a two-year rent increase cap passed

On 22 September 2022 the Danish Parliament passed an urgent bill introducing a two-year rent increase cap of 4% annually with respect to residential leases for which rent adjustment in accordance with the net price index has been agreed. At the same time, an executive order on the calculation of such increase in the reasonable and necessary expenses relating to the property was also passed. The Act will impact the real estate sector significantly in the coming years. 

The bill will affect residential leases (including existing leases) for which adjustment in accordance with increases in the net price index have been agreed and will come into force on 30 September 2022.

The legislative intervention is expected to affect around 160,000 residential leases, and this way landlords will not be entitled to adjust rent by more than 4% annually during a period of two years, unless they can provide documentation that the 4% increase will not cover an increase of the property’s “reasonable and necessary” operating expenses compared with the operating expenses the year before. The operating expenses are to be calculated in accordance with the executive order passed.

If rent is adjusted by more than 4%, a landlord must enclose documentation for operating expenses already when submitting the notice of rent adjustment, following which the tenant (or an elected tenants’ association) may have the adjustment tried by the rent tribunal in the municipality of Aarhus within three months and (possibly afterwards) by the courts. The landlord cannot collect the part of the rent adjustment that exceeds 4% until a final decision or ruling is available.

As opposed to the real estate sector, the Danish Ministry of the Interior and Housing estimates that the exemption will only be used in relatively few cases.
In connection with the urgent reading of the bill there has been doubts as to whether the rent cap will apply as long as only one month during the adjustment interval concerns the development in either 2022 or 2023. The wording of the 
Act has given that impression. However, the following appears from the Ministry of the Interior and Housing’s comments in the legislative material of the Act that:
“The month and the year on which the development is based determine whether the rent cap is applied. If rent is adjusted as of 1 July 2023 due to the development in Statistics Denmark’s net price index from March 2022 to March 2023, such adjustment will be subject to the rent cap because the adjustment relates to the development for 2023, as it takes March 2023 as its starting point. On the other hand, it is noted that if an adjustment is made as of 1 July 2024 using the development in Statistics Denmark's net price index from March 2023 to March 2024 as a starting point, such adjustment till not be subject to the rent cap, as the development thus concerns March 2024, which is not included.”

Plesner notes in that connection that accordingly it may be advantageously for landlorsd in new leases to enter into an agreement that adjustment is to be made on 1 March based on the development in the net price index from January to January. If you do so, you will avoid being affected by the rent cap in connection with the adjustment on 1 March 2024, which will be an advantage, assuming that the net price index still exceeds 4%.

However, if the most frequently used adjustment period is maintained, where adjustment is made as of 1 January based on the development in the net price index from October to October, the adjustment as of 1 January 2024 will still be subject to the 4% cap for a period merely relating to 2022 and 2023 because the net price index is published at the latest on the 10th day of the month following the collection period. It means that - as opposed to adjustment as of 1 March 2024 - you are affected by the rent cap, as the month on which the development is based is in 2023.

On that background, it is Plesner's recommendation that landlords plan the time of adjustment in new leases so that they are already completely released from the regulatory intervention as of March 2024.

It is also noted that when rent is to be adjusted following expiry of the rent cap, the landlord cannot make a subsequent adjustment with respect to the part of the net price index which exceeded the 4% and was not adjusted in accordance with the exemption. Accordingly, it is now clear that the landlord's loss of rent is not limited to the two years but may leave its mark for years to come - in particular in relation to leases having a long average term.

In spite of heavy criticism and numerous questions about the bill's potential element of expropriation, the Danish government insists that the intervention will not “generally” amount to expropriation, even if the government cannot dismiss that expropriation may be involved in certain situations. As substantial losses will undoubtedly be inflicted as a result of general intervention in existing private contracts and with a very limited safety valve for taking individual considerations, it is obvious that the intervention will give rise to expropriation issues. In case of expropriation, it follows from section 73(1) of the Danish Constitutional Act that such expropriation can only take place against “full compensation”.

It is Plesner’s immediate assessment that the intervention has some element of expropriation because it directly and targeted sets aside terms already agreed and limits the property owner's remuneration for the right of using the property. At the end of the day, the final decision depends on the Danish Courts’ assessment of the scope of section 73 of the Constitutional Act.

The Ministry does not immediately appear to have carried out a thorough analysis of this, which must be considered highly reprehensible when taking into account the vital effect of the law reform and the amount of the values involved.

Plesner keeps close track of developments, including the disputes which will be caused by the intervention, and not least whether any landlords will institute proceedings and claim damages for expropriation.

See the passed bill [in Danish].

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