Index-linked rental agreement: definition, benefits, application
Landlords who want to counteract the effects of inflation are well advised to regulate tenancies using an index-linked tenancy agreement. This form of tenancy agreement is based on the official consumer price index, which applies to private households. The price index is determined at regular intervals by the Federal Statistical Office and increases as the inflation rate rises. The methodology of the index-linked rent is therefore easy to explain: if the cost of living rises, landlords can increase the rent accordingly. However, even with the index-linked rent, the rent can only be increased at intervals of at least one year. A rent increase is not automatic; the landlord must announce it in text form. However, the tenant’s consent is not required for the increase to be valid. The use of index-linked rental agreements has both advantages and disadvantages for landlords and tenants.
Calculation of the index-linked rent
The main difference between index-linked and graduated rents is that the rent increase in a graduated rental agreement is precisely defined in advance. In the case of an index-linked rent, it is based on the price index, which can vary and cannot be predicted precisely. A combination of graduated rent and index-linked rent in one contract is permissible in principle, but only if there is no overlap between the increase facts. The calculation of the index-linked rent essentially requires two values. One is the index value at the time the tenancy agreement was concluded or the last rent increase and the other is the current index value. The index-linked rent is calculated by dividing the new and old index values and multiplying them by one hundred; the hundred is then subtracted from the result. An example of the index-linked rent, if the previous rent was 720 euros, the old price index was 107.2 when the contract was concluded and the new one is 108.6, can therefore look like this: (108.6 / 107.2 x 100) – 100. This formula results in a percentage price increase of 1.31%. The rent increased by this percentage is therefore € 729.43. It makes sense to consult a sample index-linked rental agreement in which the calculation formula is already defined. You can find templates for this quickly and easily on the Internet.
Circumventing the rent cap for index-linked rents
Index-linked rental agreements offer landlords the opportunity to circumvent the rent cap, as the legislator has exempted index-linked rents from the rent cap. This only applies to new rentals of properties. The decisive factor is that the rent agreed in the rental agreement for the index-linked rent is below the rent cap. This creates what is known as grandfathering for landlords, under which the rent freeze does not have to be taken into account when increasing rents and the rent may also be higher than the amount of the rent freeze. This is an option for landlords, especially in times of rising inflation, to adjust their income to the inflation rate, even if a rent freeze has been set for the place of residence.
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Advantages and disadvantages of index-linked rents
The basic advantage of this variant of a rental agreement is that you, as the landlord, can make the rent increases stipulated in the index-linked agreement even if the rent is already at the usual local rent level or has already exceeded it. The index-linked rent also creates a certain degree of planning security, as you can better absorb general price increases by adjusting the rental income. However, depending on how the rental market develops, these advantages can also become disadvantages. This is the case, for example, if the local rent increases more than the level of inflation. This cannot be offset by the index-linked rent. If the cost of living falls, a tenant is also entitled to a rent reduction. Another disadvantage: costly renovation or repair work may not be included in the rent as part of the index-linked rent for residential property. A modernization rent increase is therefore excluded, unless the modernization is carried out due to legal requirements.
This term refers to a specific type of rent that is not adjusted to the comparative rent, but to the consumer price index. It is therefore based on the cost of living for private households in Germany. If an index-linked rent is to be agreed in the contract, the tenants must be in agreement, although the rent increase is also permitted without the tenant’s consent.
An agreed index-linked rent creates transparency for both parties, as its amount is based on objective and comprehensible values that can be viewed by the tenant and landlord. It therefore offers the least potential for conflict compared to other forms of tenancy agreement. It also creates planning security for both parties, as drastic short-term rent increases are not possible. In times of rising inflation, the index-linked rent also offers a landlord the option of absorbing the price increases through the increased rent and also setting the rent above the level of the local comparative rent.
This form of tenancy agreement can be advantageous for tenants, for example if the local comparative rent according to the rent index would allow extreme rent increases. Tenants do not have to expect any increases due to modernization measures. However, it is possible under certain circumstances that higher rent costs may be incurred even though the quality of living is not increased.
The rent may only be increased once a year. There must be at least twelve months between two rent increases. The increase must be in line with the price index. Before a landlord increases the rent, he must consult the index, as the maximum rent increase may only be based on the change in the consumer price index.
The consumer price index forms the basis for rental agreements. It is published annually by the Federal Statistical Office and can be viewed by anyone on the authority’s website. The oldest known index value should be used as the basis for rent changes. You can determine the permissible increase using the formula (current index level / old index level x 100) – 100.
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