Supreme Court answers preliminary questions about rent increase clauses

The Supreme Court recently gave judgment in preliminary ruling proceedings on rent increase provisions that are commonly used in liberalised tenancy agreements. The key question was whether a provision that allows annual rent increases based on the consumer price index (CPI) plus a surcharge of up to 3% is unfair according to the Unfair Contract Terms Directive (Directive 93/13/EEC) and, if so, what consequences this may entail. The Supreme Court ruled that this provision is not unfair as such, but also clarified what the possible consequences would be if such a provision were indeed considered unfair. In this News Update, we will briefly discuss the highlights of this preliminary ruling.

Splitting the indexation clause and surcharge clause

First of all, the Supreme Court ruled that the surcharge clause and the indexation clause should be assessed separately. Indexation clauses and surcharge clauses serve different purposes. An indexation clause aims to compensate for inflation. A surcharge clause generally serves to compensate for a landlord's cost increases that exceed inflation levels and to align rent with a house's value development. Therefore, a surcharge clause's unfair nature can and must be assessed separately.

Rent increase clause is not unfair

A clause that provides for the annual application of a rent surcharge of up to 3% above CPI indexation is not an unfair term in the Supreme Court's view, except in individual cases involving additional circumstances. According to the Supreme Court, this percentage can reasonably be necessary to enable the landlord to achieve the aforementioned purposes of the surcharge clause, while the financial implications are foreseeable for the tenant at the time of concluding the tenancy agreement and the annual rent increase by this maximum percentage usually remains within acceptable bounds. Tenancy agreements for residential space are continuing performance contracts that are usually concluded for a prolonged period of time. Landlords can only terminate them on limited grounds. In view of all this, landlords have a legitimate interest in being able to annually adjust the initial rent.

The Supreme Court did not make any findings on surcharges above 3%, but it is reassuring that it apparently had no doubts about the possible necessity and fairness of clauses providing for a surcharge percentage of up to 3%. Deputy Procurator General Wissink noted in his opinion that he considered it conceivable that surcharge percentages of 4% to 5% are not unfair either. Consequently, in our view a good case can be made that a (maximum) surcharge percentage of, for example, 5% is likewise not unfair.

Implications of any unfairness

If it is established that the surcharge clause is unfair, the clause will have to be disapplied and the situation that the tenant would legally and actually have been in without that clause will have to be reinstated. A rent increase based on a surcharge clause that has been found to be unfair is therefore impossible, in the past as well as in the future. Further, all rent increases paid by the tenant based on an unfair surcharge clause will have been paid unduly.

Accordingly, if a surcharge clause is unfair and the court is allowing a claim for payment of rent arrears, the court will, of its own volition, have to apply a deduction to the amount of unpaid rent instalments to be awarded, equal to the rent increases based on the surcharge clause. This does not necessarily mean that the court can only award the initially agreed rent. After all, past indexations based on an indexation clause not found to be unfair will continue to apply. Finally, the Supreme Court ruled that the court cannot of its own volition set off a tenant's debt due to rent payment arrears against the tenant's claim against the landlord for undue payment of past rent increase payments based on the unfair surcharge clause. The law indicates that this set-off must be specifically invoked.

The Supreme Court's judgment is available at ECLI:NL:HR:2024:1780 (in Dutch).