In continuation of the debate on initiatives to prevent short-term investments on the private property rental market, the government, the Socialist People's Party, the Red-Green Alliance, the Alternative and the Danish People's Party entered into a new housing policy agreement.

The agreement is to form the basis of the future regulation which especially property investors/lessors must be aware of as it involves a number of issues of importance to property investments and administrators, including issues which do not relate only to the right to make radical renovations.

The new act is expected to come into force on 1 July 2020, provided that the final bill makes its way through the Danish parliament's adoption procedure. The final regulation is therefore still unknown.

However, in our opinion, the considerations in the agreement seem challenged by the present rent legislation even though the new agreement forms the basis of an even stronger protection of the lessee than the present legislation.

Below, we will review a number of issues in the agreement which the involved or affected parties should give special consideration both of a practical and legal nature.

WAITING PERIOD CONCERNING RENT INCREASE AS A CONSEQUENCE OF RADICAL RENOVATIONS

The most important innovation in the agreement is presumably the five-year waiting period which is to apply five years from the acquisition of a property. In this waiting period, there can be no rent increases as a consequence of radical renovations in connection with re-renting of housing under section 5 (2) of the Housing Regulation Act. Furthermore, the possibility of a future renovation under section 5 (2) of the Housing Regulation Act will be conditional on a higher requirement for the property’s energy class.

It must be expected that a future limitation of the period when the rent may be optimised to the value of the premises under the present rules will have a negative impact on the proceeds of the property types in question and restrict the lessor's incentive to renovate older properties.
Continued right to general rent increase due to improvements
The agreement proposes that it is should still be possible to charge general rent increases due to improvements in connection with the increase of properties’ utility value.

The question is then whether the general rules on rent increases due to improvements may to a certain extent safeguard the investors’ interests in improving and renovating properties paid via a rent increase.

This may especially be interesting as improvements subject to a rent increase under Part IV of the Housing Regulation Act are also expected to increase the rented residences’ state and condition thereby constituting an improvement.

If the general rules on rent increases due to improvements can in practice bring the rent up to a level close to the value of the premises as the future maximum rent limit of radically renovated premises, the waiting period will presumably not result in substantial financial consequences, of which many lessors are afraid, and which the agreement actually proposes.

Waiting period may be reduced in case of energy optimisation

Under the agreement, lessors are also given a separate incentive to make energy improvements according to which the waiting period will lapse if investments in energy improvements are made of minimum DKK 3,000/m2, or if the property’s energy class is increased by minimum three energy classes.

It is doubtful, however, whether the rules will in fact give the lessors an incentive as the expenses relating to energy optimization will probably not fully match the potentially increased income which may be obtained by way of rent based on the value of the premises prior to the expiry of the waiting period. The additional rent will not cover both the expenses of the energy optimization and the expenses of the radical improvement.

MAXIMIZATION OF THE VALUE OF THE PREMISES

In addition to the rules on radical improvements, the agreement proposes a number of other changes in the rules on fixing of rent in the rent legislation.

however, it is not completely clear whether these changes are to apply in relation to fixing of rent under section 5 (2) of the Housing Regulation Act, or whether the changes are to apply to the fixing of the rent of residential leases. If a maximization is to apply only to section 5 (2) of the Housing Regulation Act and not the Rent Act, it should be expected that this may result in a potential distortion of the rent levels of section 5 (2) of the Housing Regulation Act and of residential leases in general.

In this connection, it is especially relevant to note that the lessors are subject to a smaller estimate when fixing the value of the premises which is now maximized without a materiality threshold. This means that the disproportion should not be material (in practice 8-10 %) before a lessee may demand that the rent be reduced to the value of the premises.

Whether this assessment of materiality becomes decisive in itself to the lessors’ future possibilities of adjusting the rent seems, however, difficult to determine finally. On the contrary, it is clear that if an absolute criterion is introduced this way stating that a lessor must reach the value of the premises, and a wrong estimate is not an option, the consequences of the rule will be extensive.

But if the intention is to ensure only that the maximum regulation that may be made is the value of the premises and that no room is thus left for any "bonus additional rent" "significantly above" the value of the premises, the consequence seems smaller as lessors are then still able to fix the rent at the value of the premises.

REDUCED BASIS OF COMPARISON BEFORE THE RENT TRIBUNALS

The agreement also proposes that when deciding on the value of the premises, comparable leases may only be leases which have already been subject to consideration by the rent tribunals which may substantially limit the lessor’s possibilities of producing evidence.

The agreement does not refer to any change of the basis of comparison before the courts, but depending on the final wording of the rules, it should be expected that more legal actions will be heard concerning fixing of rent if the rent tribunals’ basis of evidence is substantially more limited than the basis of evidence that may be produced before the courts.

If the rules are also changed in connection with a judicial review, the changes will presumably have serious evidential consequences to the detriment of the lessors as the burden of proof generally rests on the lessors in cases concerning the amount of the rent even though the lessee is claiming a reduction of the rent.

If the burden of proof can only be met by way of leases where the rent has been considered by the rent tribunals, it seems to be difficult to meet this burden of proof, and it will in fact be for the rent tribunals to fix the future rent level of private properties.

PROHIBITION AGAINST AGREEMENTS CONCERNING VACATION AGAINST COMPENSATION

Finally, a prohibition is introduced against the lessor offering money to a lessee for terminating or vacating the premises.

It will be interesting to follow the wording and enforcement of this prohibition as the agreement also states that the lessees should still be entitled to make a voluntary agreement concerning vacation which is expected to raise questions in practice as to when a lessee offers to vacate the premises and when a lessor offers the lessee to vacate the premises.

Based on the agreement, it is not possible to conclude whether a lessee may take financial compensation in connection with vacation if the vacation is the initiative of the lessee, but, in our opinion, the prohibition is expected, as a minimum, to involve material evidential difficulties.

The question is whether a lessor may in fact conclude such an agreement - even at the lessee's request - or whether this rule will reach a blind alley so that the lessee will not be bound by these agreements concerning vacation.

At the same time, it will be interesting to follow the consequences of lessor’s violation, if any. Will such agreements result only in invalidity or an expansion of the situations where penalties may be imposed on a lessor or he may be deprived of the right to rent or administer residences.

contacts

Michael Neumann

Partner

Rune Halkjær Ebbesen

Senior Attorney

Josephine Helene Windahl Pedersen

Assistant Attorney