Index rent cost trap
The fear of rent rising with inflation
High inflation can lead to painful rent increases for index rents
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High inflation makes index leases attractive for landlords – and a cost trap for tenants. Because completely different rules apply to rent increases than to normal contracts.
Tenants with an index rent must fear a double price shock in the coming months. Because of the exploding energy costs, you are threatened not only with a hefty back payment and higher ancillary costs, like everyone else. The high inflation also means that your rent could also become significantly more expensive.
Because with index rental contracts, price increases are linked to general inflation. And it is currently severe: In April, the inflation rate rose to 7.4 percent, the highest value in more than 40 years. If inflation remained this high, landlords could increase the basic rent by this percentage every year. A frightening prospect for affected tenants.
Index rent on the rise
For years, the index rent was actually the unspectacular, solid alternative to the usual rent increase spiral. With this variant of the rental agreement, the landlord waives his right to increase the rent every few years in line with the local comparative rents. Instead, when the contract is concluded, it is stipulated that the consumer price index of the Federal Statistical Office should be decisive for rent increases. Since the mid-1990s, only mini rent increases of one to two percent per year have been possible. In 2020, the inflation rate in Germany was still 0.5 percent.
In recent years, nobody has thought it necessary to introduce any upper limits for index rents. All cap limits that apply to rent increases in ordinary contracts do not apply to index rents – not even the rent brake. That’s why index rents can now be increased by more than 15 percent in three years and above the local comparative rent, even in cities with a tight housing situation.
It’s no wonder that this type of rental contract, after years of being a niche market for landlords, is currently very popular again. Tenant associations in large cities such as Cologne and Hamburg report that every third or even every second lease that is currently signed includes an index rent. The Haus & Grund owners’ association also assumes that index rental contracts will continue to gain in popularity among landlords.
Rent increases despite rent control
After all, when the contract is concluded, the upper limits of a rental price brake must be observed. The rent may not be increased for a year, after which the first inflation adjustment can come, unless otherwise stipulated in the contract – for example an adjustment every two years. If the landlord has not increased the index rent for a few years, he can not only use the price increase compared to the previous year, but the complete price increase since the last rent increase. An existing rental agreement cannot be changed unilaterally into an index agreement.
The Haus & Grund owners’ association also points out that landlords can use index-linked rental contracts in order to be able to further increase the rent despite rent control. “In this case, an index rental agreement is concluded, the initial rent of which satisfies the regulations of the rental price brake. As part of the index increase, the rent continues to rise in accordance with the consumer price index.” Only a rent increase “that is so drastic that the future rent is 50 percent or more above the comparable rent is to be classified as rent extortion and is therefore inadmissible”.
The landlord must announce the increase in writing a few weeks in advance. The tenant cannot prevent them. He can only check that the landlord has calculated correctly. The Federal Statistical Office has one for this online calculator developed, the one is a bit clearer index calculator of the Hamburg landowners’ association.
Modernization costs can be allocated to a limited extent
Landlords can only allocate modernization costs for index-linked leases if they involve structural measures for which they are not responsible. According to the German Tenants’ Association, this is particularly the case with energy-saving measures such as insulating the roof, but not with the addition of a balcony or a bathroom renovation.
Theoretically, the tenant can also insist on a reduction in the rent with the index rent, should consumer prices ever fall. But that is not very realistic, at the moment one would be happy if inflation were a little less severe. Should inflation remain this high for a longer period of time, the calls for legal regulation will probably become louder. The tenants’ association has already introduced a cap for index contracts.
Sources: German Tenants’ Association / House & Ground / Index rent in the BGB / Destatis (inflation rate) / Destatis (calculator) / Landowners Association Hamburg