Rent increases in Germany are guaranteed by staggered or indexed rental contracts. In addition to the advantages, there are also some special features to be considered in tenancy law.
Graduated Rent vs Index Rent contracts in Germany: When renting out living space, the rental price is usually based on the square meters. With an index rental contract, on the other hand, the amount of the rent is based on a statistical value. Here you can find out what an index rent is, how it can be calculated and what distinguishes it from a graduated rent. What you need to remember:
- In the case of graduated rental contracts, the administrative effort is lower.
- Automatic rent adjustments defined in advance prevent conflicts with tenants.
- A good broker will advise you on all questions relating to graduated and indexed leases.
Graduated rent vs index rent contract: What is important?
Graduated rent contracts and index rent contracts in Germany contain regulations as to when and by what amount a rental price should change.
What is a graduated rent contract?
A graduated rent contract determines exactly when and how much a future rent adjustment will be. Graduated regulations apply with a maximum term of four years and can also be agreed within the framework of unlimited rental contracts. After a graduated rent has expired, the rent increase rules for comparable rents (§ 558 BGB) apply.
What is Index Rent contract?
An index rental contract links changes in the rent to the development of the consumer price index. If the cost of living increases, landlords can also increase the rent. Index leases can be concluded for an indefinite period.
The Consumer Price Index for Germany
The consumer price index for Germany shows the price change of a “shopping basket” typical for private consumers. This represents all goods and services purchased by private households. The weighting in the shopping basket is adjusted every five years to reflect consumer consumption habits. See www.destatis.de
Example of an index clause in the rental contract
An index clause reads, for example: “If the consumer price index for Germany determined by the Federal Statistical Office (base year 2010: 100 points) changes by at least four percent compared to the first month of the tenancy or compared to the month of the last rent adjustment, the rent changes by the same percentage.”
Index rent increase calculation example
- An index rent increase is determined using the following formula:(new index score : old index score x 100) – 100 = percentage rent increase (or rent reduction)
Example: When the lease was signed in December 2018, tenants and landlords agreed that rent adjustments would be made if the consumer price index changed by four percent. The initial rent was set at 1,000 euros.
- Consumer price index December 2018: 102.9
- Consumer Price Index May 2021: 107.9
- Between December 2018 and May 2022, the consumer price index increased by 5.00 percent to 107.9 index points. Therefore, the landlord can demand a rent increase of 5.00 percent, i.e. to 1,050.00 euros.
- The landlord can send his written request for an increase to the tenant in mid-July 2022. (The Federal Statistical Office needs more than a month to calculate and publish the index value for May 2022.)
- The tenant must pay the increased rent at the beginning of the month after next, i.e. from September 1, 2022.
- The calculation basis for future rent adjustments is the index level from May 2022 (107.9 points).
Graduated rent vs index rent contracts: advantages and disadvantages
Advantages and disadvantages of Graduated Rent contracts
|▶︎ Automatic rent adjustment|
No administrative effort during the current rental contract by specifying the times of the rent increase at the beginning of the rental relationship.
▶︎ Solid calculation basis
The clear agreement for the entire contract period offers planning security.
▶︎ Simplified form of rent increases
Problems and disputes when enforcing rent increases are avoided in advance.
▶︎ Comparative rent may be exceeded
Graduated rent amounts are only limited to a limited extent by the values of the local comparative rent. You may exceed this by up to 20 percent after the increase. (Section 5 Economic Criminal Law)
▶︎ Right of termination can be excluded
From the beginning of the contract term, the tenant’s right of termination can be excluded for a maximum of four years. (§ 557a paragraph 3 BGB)
|▶︎ No further rent increases possible|
During the term of a graduated rental agreement, rent increases such as B. not permitted after modernization. (§ 557a)
▶︎ Failure to pay rent increases
In practice, it often happens that tenants do not pay rent increases. Missing amounts can only be reclaimed for the last three years.
▶︎ Inflation is not taken into account
If inflation rises sharply, graduated rents offer only limited protection against inflation-related declines in the value of rental income.
Advantages and disadvantages of Index Rent contracts
|▶︎ Rent inflow with the same purchasing power|
Index clauses (value maintenance clauses) protect landlords from an inflation-related decline in the value of rental income.
▶︎ Rent index is not taken into account
The initial rent for the index contract can be up to 20 percent above the rent index. (§ 5 economic criminal law 1954) The rent can then theoretically be increased every year as the cost of living increases.
▶︎ Unproblematic rent
increases There are no justifications that are usually required for the increase – a reference to the price index is sufficient.
timing of rent increase The index clause initially makes it unclear when the rent will change.
▶︎ High administrative
effort An index rent increase must be asserted “in text form” and a calculation of the required rent change amount must be attached to the letter. (§ 557b paragraph 3 BGB). The rent adjustment only comes into effect at the beginning of the month after next after receipt of the rent change request. (Section 557b paragraph 3 sentence 3 BGB)
▶︎ Delayed entry into force of changes
The rent adjustment only comes into effect at the beginning of the month after next after receipt of the rent change request. (Section 557b paragraph 3 sentence 3 BGB)
▶︎ No further rent increases possible
During the term, further increases,
e.g. excluded by modernization.
▶︎ Risk of index decline
If the consumer price index falls, the tenant has a right to a reduction in rent.
Graduated rent vs index rent contracts – what is recommended?
▶︎ Advantage tenant? or Landlord?: Graduated rent contracts are usually more advantageous for the landlord than index rents. Landlords who are interested in the least possible administrative effort for rent increases often choose a graduated rent, since the times and the rent increase amounts have already been agreed upon in the rental agreement.
▶︎ Tenant’s right of termination: While the tenant’s right of termination can be excluded for up to four years in the case of graduated rents (§ 557a Paragraph 3 BGB), the tenant’s right of termination is not restricted in the case of indexed leases. Landlords normally choose an index lease if they want to carry out renovation measures in the near future.
▶︎ Future rent increase: With graduated rents, landlords can usually achieve larger rent increases than with index rents if the monetary value is stable. However, in 2022 every landlord assumes that inflation will rise sharply in the future and the long term. They will therefore opt for an index lease.