It’s often the case that a landlord wants to raise the rent. Once a tenant hears the bad news about a rent increase, heated discussions often follow. Disagreements about renovations which are then used to justify an increase in rent is an issue of tenancy law which arises time and again. Here’s an overview of the ground rules to keep in mind when dealing with this complex issue.
Consider an actual example: A young couple has been living for 10 years in an affordable flat in an older building, and their rent is CHF 900 per month. One day, the landlord decided to replace the walls and floors, and in addition the kitchen and bathroom were long overdue for a renovation. The tenants, however, were shocked when they got a surprise in the mail: the owner plans to raise the rent, and in this case all the way to CHF 1460 per month.
Renovations and value-added investments are a major reason for such rental adjustments. There’s no dispute that flats must be renovated inside and out every now and then. Today sometimes strict laws and standards also come into play; it’s a stated political goal that Swiss apartment buildings in the future should consume less energy and have longer service lives.
Increasing rent – what formula to use?
When it comes to calculating rental increases, there are a few clear rules of thumb and «formulas». In case of doubt, either the owner, the tenant or both can get expert advice such as from an attorney specialising in tenancy law or from an association representing the respective parties. These calculations take into consideration the overall costs of a renovation plus the amount which can be attributed to value added, to amortisation, to interest on capital, etc. There is, however, quite a bit of leeway when it comes to key aspects such as to what extent changes are recognised as increasing a property’s value.
For example, if a flat is upgraded with a new balcony (where there previously was none) or with an additional new household appliance, the landlord is permitted to finance these costs fully through higher rent. «Additionally, according to a decision made by the Federal Court«, states Hans Bättig, an advocate working in Bern and a recognised expert in the area of tenancy law, «part of the cost of simply replacing old structural elements and appliances with new ones can be considered as adding value. The frequently heard argument that everything being done is nothing more than maintenance that has been put off for too long is no longer valid or applicable.» As regards major renovations, people often opt for a more simplified approach and adhere to certain guidelines. When it comes to what are called «comprehensive renovations» – in other words, as part of a very extensive and thorough upgrade – ordinances state that there is a range of 50 to 70 per cent, a range also accepted by arbitration bodies as well as courts dealing with tenancy law. In other words, if the landlord wants to raise the rent, the guidelines issue a value in per cent which falls within this range.
Maintenance is included
On the other hand, the continual maintenance of the building, cleaning and repairs, etc. are normally included in the monthly rent. In this regard, Bättig adds, «Simply replacing the wall covering or carpeting when it is not part of a comprehensive renovation is not considered added value, and instead it must be covered by general increases in the costs of maintenance.» These cost increases are generally passed on in the form of flat rate fees (0.5 to 1 per cent per year).
Do you want to increase the monthly rent, or have you as a tenant been personally affected by an increase? To make sure everything is justified, you need a thorough examination of the circumstances and, depending on the situation, a consultation. Private landlords who are not professional property managers and who want to ensure they do not make any procedural errors should obtain professional advice. In particular, trained real estate accountants, attorneys and other specialists are able to make an object judgement as to whether an increase in the monthly rent can be justified by value added or another reason.
Increasing rents: «prevailing neighbourhood rates»
Especially when it comes to older flats and rental agreements going back many years – from the point of view of the building owner – rents eventually tend to be lower than comparable flats which go on the market in the same neighbourhood. This arises, for example, when the owner must pass along increases in mortgage interest rates. Not considering renovations, discussions thus often deal with prevailing rates for rent in the neighbourhood and region. Many building owners raise such arguments when they increase rents. Attorneys and specialists report that in actual practice providing the necessary hard evidence is rarely easy. For solid, plausible proof, the landlord must identify five similar properties, all of which must actually have a higher rents yet be comparable in terms of location, how well they are equipped, age of the building, etc.
On the other hand, the building owner cannot point to an insufficient net rate of return as an adequate justification. According to applicable law, a landlord is permitted to earn a certain net rate of return – currently 2.25 per cent (always one-half per cent above the reference interest rate for mortgages, which is currently officially set at 1.75 per cent). Using this reasoning, a landlord can only block a reduction in the monthly rent. In contrast, raising rents because the net rate of return is insufficient is not permitted. Even when all documents are available, notes Bättig, calculating rates of return can be extremely complicated, and in practice there are few legal precedents.
Get the facts early!
The overall conclusion is this: When dealing with renovations and improvements to a rental flat, there is no avoiding looking for a fair way to assign some monetary value to true value added work vs. pure maintenance. Sometimes information also plays a role. The earlier and better tenants are aware of upcoming renovation plans and possible impacts on their monthly rents, the better are their chances for achieving an amicable agreement.