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reinier.russell@russell.nl +31 20 301 55 55Several times last year, the Amsterdam District Court annulled a clause in lease agreements that gave landlords the freedom to increase the rent by more than the inflation rate. This voided all rent increases from the beginning of the lease. But is this a correct interpretation of European consumer law?
A private tenant of a property on the open market is generally considered as a consumer. This has far-reaching consequences if the landlord starts litigation against this tenant. This is because the court is then obliged to consider whether the clauses in the lease agreement and its general terms and conditions meet the protection offered by European consumer law. Even if the litigating parties do not raise this issue themselves.
In some high-profile cases, the Amsterdam District Court annulled a number of commonly used clauses for determining rent increases, interest and collection costs, claiming they fell under the prohibited unfair terms. As a result, these clauses were never part of the lease agreement. Thus, the landlord can no longer collect rent increases, interest, penalties and collection costs. The fact that a commonly used rent increase clause has also been judged unfair has caused much unrest among landlords. Not only do they run the risk having to pay money back to tenants, but the presence of a potential claim by a tenant can also affect the resale value of a property.
As property prices can rise faster than the average rate of inflation, many commercial landlords use a clause that allows them to increase rent by more than the rate of inflation. This often involves an additional increase of up to 5%. Such a clause is included, among other things, in Article 5.2 of the Council for Real Estate Affairs’ (ROZ) model lease agreement for residential accommodation. In addition, article 16 of the General Provisions to this model agreement excludes the possibility of rent reduction.
According to the Amsterdam District Court, both clauses are unfair. The rent increase regulation gives the landlord the freedom to determine the amount of the additional increase. Moreover, there is no ground for this arrangement. The tenant cannot do anything against this rent increase and even the possibility to terminate the rent in protest against the rent increase is missing. Incidentally, the Court correctly noted in this regard that termination, even if it were regulated in the lease, is not really an option for the tenant. Another, let alone cheaper home will not be easily found in Amsterdam. Finally, the regulation allowing only rent increases disturbs the balance between landlord and consumer-tenant.
The interest clause also is null and void. Late payment of lease is 1% per month, thus 12% per year. A reason why the interest rate is so much higher than the statutory interest rate (2% per year in 2021 and 2022) is missing.
The lease agreement contains a penalty clause that places a fine of € 25 per day on each violation of the lease agreement. There is no maximum amount for these penalties. The court also annuls this clause.
Finally, the regulation of extrajudicial collection costs also fails the test of the court. The minimum cost has been set at € 125 instead of the legal maximum € 40. Moreover, here too there is no maximum, thus allowing the landlord to charge unlimited collection costs.
As a result, the landlord is only rewarded the original rent and is not entitled to the rent increase, interest, penalties and collection costs.
This ruling and several similar rulings are causing quite a stir and lack of clarity among landlords. This is reason enough for the Amsterdam District Court to ask some preliminary questions to the Supreme Court. This allows the Supreme Court to quickly answer the questions and avoids the need for further proceedings on appeal and cassation.
In particular the sanction of full nullification of the clause, making no rent increase possible at all, feels unfair to landlords in the overstrained Amsterdam real estate market. Not illogically, therefore, the question arises whether it would not be better to annul the clause in part, as then at least the rent can be increased by the inflation rate. After all, a full annulment of the clause would also hit those landlords who in practice have always raised the rent by no more than the rate of inflation. Which is allowed within the limits of the Unfair Contract Terms Directive.
One of the consequences of the annulment of a clause is that it therefore never became part of the contract. This means, therefore, that there was never any ground for rent increase. Under European law, the court must put consumers in the position in which they would be without the clause. Therefore, landlords could be obliged to repay all rent, which is more than the original rent and also not be allowed to increase rent in the future. The Amsterdam District Court would like to know whether this reasoning is correct.
The question is whether a rent modification clause is fair comes up especially in cases where a landlord wants to collect rent arrears. Then, of course, it would be painful if it turned out that the landlord had to pay the tenant more in unjust rent increases than the tenant had to pay in rent arrears. This can be particularly true in the case of long-term leases. Again, however, that does not seem to be the intention. Therefore, the District Court asks whether the Court may limit itself to awarding the initial rent over the claimed rent arrears. Or does the Court also have to order the landlord to repay the undue rent increases from the beginning of the lease?
The Court stated that there is no statute of limitations on the repayment obligation yet. After all, before the recent rulings, consumers did not yet know they were entitled to reclaim the overpaid rent. Moreover, according to European case law, sellers can only invoke the statute of limitations if they have first informed the consumer-buyer of the unfair nature of a comparable clause that has been annulled by the court. Because the Unfair Contract Terms Directive came into force on 31 December 1994, landlords can in principle have to repay rent overpaid up to almost thirty years back.
Finally, the Court asks whether legal certainty might be a reason to nevertheless set limits on the period over which the tenant can still reclaim undue rent increases. After all, when the government liberalized rents as of 1 July 1994, it did not alert landlords to the European directive that came into effect at the end of the year. It never did so later either.
Although most of these questions assume that the rent increase clause will indeed be annulled, this does not mean that it will also be the expected answer from the Supreme Court. The fact is that with the possibility of partial nullification of the clause, a number of follow-up questions will no longer arise, whereas they will be relevant in the event of full nullification.
It will be some time before the Supreme Court answers the questions raised. Until then, when rent arrears mount, landlords would be wise to first have a check that the lease does not contain a potentially unfair arrangement for rent increases. Otherwise, they run the risk of potentially having to repay more unjust rent increases than they want to collect in rent arrears. The Court may also decide to stay the case until the Supreme Court has answered the preliminary questions raised.
For new lease agreements, it seems prudent for the time being not to make use of the arrangement for changing the rent as included in the ROZ’s model lease agreement for residential accommodation. After all, this contains the possibility of increasing the rent by more than the rate of inflation. Also the third paragraph of Article 16 of the General Provisions of the ROZ models seems to be no longer useful. This section has been annulled by the Court, as it excludes the possibility of rent reduction.
As a landlord, do you have any questions regarding this blog? Do you want to have your existing lease agreements reviewed for potentially voidable clauses? Do you have a dispute with a non-paying tenant? We will also be happy to help you with other questions related to real estate and rent. Please contact us:
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