As inflation bites, tenants' groups decry rise in index-linked rents

Sharp criticism of trend towards index-linking of residential lease agreements

The trend towards the index-linking of new residential lease agreements in Germany has been sharply criticised by the nationwide tenants' association Deutscher Mieterbund (DMB) as being socio-politically unjustifiable.

The DMB reported last week that in Germany's larger cities, index-linked rents were agreed on an average of 30% percent of new contracts last year. For Berlin, a city with a tenancy rate of 90%, the DMB suggested that up to as high as 70% of leases signed last year included an indexation clause.

In an index-linked lease, the landlord can increase the basic rent if prices rise overall, with the reference value being the consumer price index of the Federal Statistical Office. Typically, the rent does not increase automatically, but only when the landlord makes use of the index clause. Once a year, the landlord is allowed to increase the basic rent in line with the general inflation rate. There is no upper limit.

Drawing on reports from its local branches in the the big cities of Berlin, Hamburg, Hanover, Cologne, Frankfurt and Düsseldorf, with more than 232,000 consultations annually, DMB president Lukas Siebenkotten said: "Tenants are increasingly seeking out our advice centres with questions on the subject of index-linked rent, and the proportion of consultations on this has more than doubled within a year."

In 2021, the number of DMB consultations with tenants relating to index-linked clauses in residential leases was about 10%-15% of cases, and it was effectively negligible in 2020 and the years before that. When inflation was low, the rise in the cost of living was generally below the permitted level of rent increases, often around 3% annually, and often not exercised by the landlord. Last year inflation in Germany was officially 8%.

According to Siebenkotten, "Many landlords are now taking full advantage of the possibilities for inflation adjustment in existing leases and have increased their tenants' cold rent by up to 15 percent in the crisis year of 2022 alone. The enormously increased costs for heating and electricity are added to this. Index rents have become an unacceptable cost trap in the face of high inflation and rising energy prices and must also be limited more in the portfolio."

The federal Construction and Planning Minister, Klara Geywitz, has spoken out in favour of limiting rent adjustments that are linked to inflation. "Index-linked rental contracts ARE a problem", she said last November, with many tenants having no choice but to sign such contracts given the shortage of affordable housing.

"Hamburg's proposal for a cap of 3.5% per year shows how it's possible for neither tenants nor landlords to be unreasonably burdened," Geywitz said (a reference to the state of Hamburg's proposal to cap rents, currently being debated by the Bundesrat, German's Upper House). It is also conceivable, she said, not to link index rents to the development of the general price level, but to another benchmark. "One could, for example, also choose the net cold rent index as a reference point," Geywitz suggested. "This is also an official index determined by the Federal Statistical Office."

Her party colleague, the Justice Minister Marco Buschmann, was quoted last December in the Rheinische Post newspaper as being against any reform of rent indexation, on the grounds that in previous years tenants with such clauses in their contracts had got away lightly when inflation was at 1% or 2%, a rising more slowly than comparable allowable rent increases.

His view is that the so-called Mietspiegel, or reference rent in a locality, should be treated separately to the rate of consumer price inflation, to avoid 'baking in' price rises caused by extreme inflation into the overall acceptable level of localised rents. Landlords exercising their right to increase rents by the rate of inflation - where permitted - trump any restrictions on rent increases dictated by the Mietspiegel. This has an overall negative effect on the level of rents, pushing them up in the long term.

Not suprisingly, many landlords are in favour of index-linked rental agreements, and against any short-term government interference in tenancy law. Landlord association Haus und Grund argues in favour of index-linking, pointing out that landlords have to bear the full cost of inflation in maintaining their properties, which they have to finance through incoming rent. The clarity inherent in an index-linked contract serves as legal security for future income. As Inka-Marie Storm, chief counsel at Haus und Grund, puts it: "When it comes to classifying a rented apartment in the category of a rent index, there are often disputes between tenants and landlords." Index rents, on the other hand, are unambiguous.

Additionally, the imposition of a 3.5% cap would impact landlords differently, argues Haus und Grund. Landlords can always opt NOT to impose the full extent of consumer price inflation in any given year, giving them more flexibility in smoothing out rental income over several years. Another advantage of non-interference, they argue.