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Notice of rent increase in leases with varying prices per square metre

Notice of rent increase in leases with varying prices per square metre

This article deals with the question of whether or not a lessor – when informing a lessee of a rent increase through a notice letter – is bound by information herein concerning the price per sq. m., in the same way as the lessor is bound by the size of the rent adjustment/new rent in a notice letter.

One of the decisive factors for a commercial lessor’s ability to operate a profitable business is the lessor’s unilateral right/access to increase the rent agreed between lessor and lessee.

This access is regulated by section 13 of the Commercial Lease Act and it consequently follows from subsection 1 (1) that during the rent period both parties may demand that the rent be regulated to the market rent if the current rent is significantly lower or significantly higher than the market rent.

Apart from the material requirements to a rent regulation that are listed in the provision, the Act also includes a number of formal requirements to the notice letter and its contents.

Thus, it follows from section 13 (8) (2 and 3 sentences) of the Commercial Lease Act that the notice letter must be in writing, contain information about the size of the rent regulation and information about the complaints procedure. It furthermore appears from the fourth sentence of this provision that the notice letter is invalid if it does not contain this information, unless it can be proven that this omission has not resulted in a deterioration of lessee’s legal position.

However, the applicable legal effects of other information – apart from the mandatory information and requirements – being included in the notice letter do not appear from this provision.

In cases where this information is misleading in one way or another, the legal effects are clear. In these cases the notice letter is invalid.

However, the situations where the notice letter contains information – which is not mandatory – about lessor’s calculations of the new rent, i.e. information about the price per sq. m. used in the calculation may present some uncertainty as to the legal effects.

If this information is correct, it will only serve as information to lessee about the prices per sq. m. used by lessor when calculating the new rent and can therefore not be considered misleading and thus not result in the notice letter being disregarded.

What legal effects can then be ascribed to this information?

This becomes relevant in cases where an expert evaluation has been ordered by the court in order to determine the market rent for the lease since in these cases it often happens that the expert – even though he may reach almost the same market rent as listed in the notice letter – determines the market rent on the basis of other prices per sq. m. than the ones included in the notice letter.

Will lessor in these cases be bound by both the prices per sq. m. and the size of the new rent/the rent increase

Let us take an example:

Lessor has given written notice of a new rent of DKK 10,000 per month for a 30 sq m lease consisting of a) business premises of 10 sq m, b) a back room of 10 sq m and c) a basement of 10 sq m. Lessor has written in the notice letter that the lease has been calculated on the basis of a price per sq m of DKK 600 for a), DKK 300 for b) and DKK 100 for c).

As lessee does not accept the new rent, the case will go before the housing tribunal. In this connection an expert opinion will be prepared in which the expert estimates the market rent at DKK 10,000, but has reached this level of rent on the basis of the following prices per sq m a)DKK 500, b) DKK 200 and c) DKK 300.

Does it have any bearing on the size of the rent lessor is allowed to collect that he has based the rent level on prices per sq m that do not comply with the market rent or in other words is lessor considered to be bound by the prices per sq m mentioned in the notice letter and consequently cannot charge a higher price per sq m than listed in the notice letter?

If lessor shall be considered to be bound by the listed prices per sq m and thus cannot charge a higher price per sq m for the individual parts of the lease than what is listed in the notice letter and also cannot – as is ordinarily assumed – charge a higher rent for the individual parts of the lease than what is listed in the expert opinion, then lessor is suddenly only able to charge a considerably lower rent than in the notice letter.

Taking the example as basis, the assumption that lessor is also bound by the listed prices per sq m will mean that lessor will only be able to charge DKK 500 per sq m for a), DKK 200 per sq m for b) and DKK 100 per sq m for c), i.e. a total of DKK 8,000.

Despite the fact that lessor had given notice of a new rent of DKK 10,000 and the expert had also reached the decision that the total market rent was DKK 10,000, lessor will thus only be able to charge a rent of DKK 8,000.

This was exactly what lessee claimed before the municipal court/housing tribunal and the High Court in an as yet unprinted judgement of 10 March 2014.

However, both instances concluded that there was no basis for ascribing binding legal effects to the prices per sq m listed in the notice letter.

Consequently, lessor does not need to omit information about the basis of the rent calculation from the notice letter as long as the listed calculations/prices per sq m are a true and fair representation of the rent calculation.

 

You are most welcome to contact us for any further queries and you may contact our partner, attorney at law Mr. Niels Christian Døcker or attorney at law Lasse Juul Jakobsen.

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