Rent indexation of office space: what is it and how is it applied?
Nobody is waiting for it, but you know you can't get around it: the annual rent increase for your office space. The lease contract of almost every office contains stipulations about the annual rent indexation. In this blog, we will discuss what rent indexation of office space is and how it is applied.
What does rental indexation mean?
Rent indexation is an annual rent increase by an amount specified in the lease. Because the tenant and the landlord have already negotiated about it during the contract negotiations, rent indexation is not a subject that needs to be discussed. Rent indexation takes effect "by operation of law".
Rent indexation is not always the same. All kinds of legal limits are placed on the annual indexation of rental prices for residences. The government does this to protect residents from the powerful position of landlords. For business premises, different rules apply, depending on the type of premises. Broadly speaking, Dutch rental law recognises two types of business premises:
- Publicly accessible business premises with a point of sale (7:290 Dutch Civil Code). Think of shops and catering establishments.
- Other business space (7:230a, Civil Code)
Whether your business space belongs in one category or another has important legal consequences. Office space falls under the heading of "other business areas." The legislator has left this type of business space as free as possible. The rent is established during negotiations, there is no minimum contract duration; and the annual rent indexation is also established during negotiations. Without legal restrictions, a tenant and a landlord are (in principle) free to agree on what they want.
How high is the rent indexation?
The amount of rent indexation depends on the agreements made. Because freedom of contract applies, you can make any desired agreement on rental indexation. You can agree that the rent will never be indexed or that it will be increased every year by a fixed amount or percentage.
In the vast majority of cases, the Consumer Price Index (CPI) is used as the benchmark. The CPI is calculated by the Central Bureau of Statistics (CBS) and is the official measure of inflation. As the CPI is determined by an independent body, none of the contracting parties can influence the level of the rent indexation to their own advantage. It is never exactly clear what the current CPI is. Therefore, no ambiguities can arise.
When is rent indexation applied to an office?
Indexing the rent of an office is not a legal right. Rent indexation is therefore only possible when this is provided for in the lease.
Retroactive rental indexation
Normally, rent indexation is applied immediately when the agreed date (in the contract) is reached. In practice, however, it happens surprisingly often that landlords forget to apply rent indexation.
When the rental indexation of office space is contractually agreed, but not implemented, the landlord can claim it retroactively. Retroactive rent indexation is subject to the statutory limitation period of 5 years. If indexation has not taken place, the price difference over the past 5 years can be charged at once.
Do you think your landlord has forgotten to apply the annual indexation? Raising the alarm immediately in order to avoid a high additional charge. Have your accountant book the difference in the rent as "amounts still to be paid", in order to fill up a savings account to pay the additional payment.
Suppose you have concluded a rental contract for €100/m2. The contract states that the rent will be indexed each year on July 1. At the time the indexation was calculated, the CBS had calculated the inflation rate at 1.5%. The rent for your office space will then be increased by 1.5%. From now on, you will pay € 101.50 per square metre.
One year later, the rent will be indexed again. This year the inflation rate was again 1.5%. How much will the rent for your office be now? That depends on the calculation method chosen in the contract.
1. Fixed denominator method
With the fixed denominator method, the rent of the first year is the starting point for the rent indexation. In this example:
- First year rent: € 100 /m2
- Amount of indexation: 1.5% x € 100 = € 1.5 /m2.
- Rent current year: € 101.50/m2
- Rent next year: € 101,50/m2 + € 1,5/m2 = € 103/m2
2. Year-on-year method
The other commonly used calculation method is the year-on-year method. Here the indexation is calculated based on the current rent. In this example:
- Rent first year: not relevant
- Rent current year: € 101.50 /m2
- Amount of indexation: 1.5% x € 101.50/m2 = € 1.52/m2
- Rent next year: € 101,50/m2 + € 1,5225/m2 = € 103,0225/m2 (rounded off to € 103,02/m2)
The year-on-year method increases the rent slightly more than the fixed-number method. The difference increases slightly each year and is therefore mainly visible in long-term contracts.
Need help with rent indexation of office space?
In this blog we discussed the most important points regarding rent indexation of office space. Do you still have questions about the annual rent increase of your office? Call one of the office space specialists of Flexas.com!