Rent Increases and Decreases

Monthly

Newsletter

October 2021

Real Estate

Josef Caleff, Yves Jeanrenaud

Key Take-aways

In a recent decision, the Swiss Federal

Supreme Court has changed its previous

practice: A surcharge of 2% to the refer-

ence interest rate is now permissible for

the net return as long as the reference

interest rate is equal to or below 2%.

According to the Zurich District Court

of First Instance, impairments to the

tenant's business caused by the gov-

ernment measures to fight the COVID 19

pandemic do not constitute a defect in

the leased property.

Where the initial rent includes a sur-

charge of "significantly more than 10%",

it is presumed abusive. Further, the

standard of reasonable doubts to refute

the presumption was lowered.

Monthly Newsletter / October 2021

1 Introduction

In recent years, a number of court rulings have been issued

on rent increases or reductions, particularly in connection with

business closures due to Covid measures. In addition, political

efforts are underway to reform this area of tenancy law. This

newsletter provides an overview of the legal framework and

recent developments.

2 Rent Increases

2.1 Legal Framework

In principle, a landlord is free to increase the rent in an ongo-

ing tenancy. The landlord must notify the tenant of the rent in-

crease at least ten days before the start of the notice period on

a form approved by the canton, and provide reasons for such

increase. The rent increase is null and void if the landlord fails

to comply with these requirements. The same applies if the

landlord threatens to give - or gives - a notice of termination at

the same time as the notification.

In the case of residential and commercial premises (with

the exception of holiday homes, luxury apartments, publicly

subsidized apartments), the tenant may challenge the rent in

crease if it is abusive. A rent increase is abusive if it leads to an

abusive rent. A rent is abusive if it results in a excessive return

of investment from the rental property or if the low return on

investment is based on an obviously excessive purchase

price. As a rule, rents are not abusive if, in particular, (i) they

are within the range of the usual rents in the locality or neigh

borhood; (ii) they are justified by cost increases or additional

services provided by the landlord; (iii) in the case of newer build

ings, they are within the range of the cost-covering gross yield;

or (iv)they merely compensate for inflation on the risk-bearing

capital. The purchase price is excessive if it is 10% or more

above the income value of the property. The capitalized income

value is determined by capitalizing rents of comparable proper

ties (i.e., not the actual rents of the building) that are customary

in the locality and neighborhood. If the landlord wants to justify

the rent increase with reference to the higher rent customary in

the locality or neighborhood, he/she must present at least five

properties of the same size, location, equipment, condition

and age with a higher rent. The properties must not belong to

the landlord who wishes to increase the rent.

In case of a fixed rental period or a minimum rental

period, the rent can only be increased before the expiry of the

fixed rental period or the minimum rental period if this has been

contractually agreed. The law provides for the indexation or

staggered rent for increases during the fixed rental period or

a minimum rental period. In the case of indexation, the lease

agreement must be binding on the landlord for a period of at

least five years and an adjustment is only permitted in accord

ance with the development of the national consumer price index.

An early termination by the tenant is possible. A staggered

rent is only permitted if (i) the lease is concluded for at least three

years, (ii) the rent is increased no more than once a year and

(iii)the amount of the increase is fixed in francs. A combination

of indexation and staggered rent is not permitted.

In addition, the parties usually contractually agree that

increases in the event of new charges incurred or additional

services provided by the landlord during the fixed rental period

or the minimum rental period are also possible without taking

into account the termination dates, which is permissible

according to case law and doctrine.

2.2 Recent Case Law

Pursuant to previous case law, a rent was abusive if it resulted

in a net return on investment of more than 0.5% above the

reference interest rate (see Section 3.1). The net return on

investment is the ratio of the net income to the equity capital

invested. The net income is equal to the net rental income (ex

cluding compensation for ancillary costs) minus expenses. The

expenses, in turn, include all actual mortgage interest, manage

ment costs, and maintenance and operating costs not covered

by the tenants. In decision 4A_554/2019 of 26 October 2020,

the Federal Supreme Court changed its previous practice: Now, a

surcharge of 2% to the reference interest rate is permissible

as long as the reference interest rate is equal to or below 2%.

A rent is abusive

if it generates

an excessive income.

3 Rent Reductions

3.1 Legal Framework

The tenant may challenge the initial rent as abusive with

the conciliation authority within 30 days of taking possession

of the property and request a reduction if (i) the tenant felt

compelled to enter into the agreement because of personal or

family hardship, or because of the conditions in the local mar-

ket for residential and commercial premises; or (ii) the landlord

substantially increased the initial rent from the previous rent for

the same property.

A tenant may request a rent reduction at any time during

the term of the lease with effect from the next possible

termination date if he has reason to believe that the landlord

is earning an excessive return on investment from the rented

property. In other words, if the rent has become abusive due

to a significant change in the basis for calculation, in particular

due to a reduction in costs. In particular, a reduction in the

mortgage interest rate is deemed to be a reduction in costs.

For rent adjustments due to changes in the mortgage interest

rate, the mortgage reference interest rate as determined by

the Federal Government applies. A reduction in the reference

interest rate of 0.25% generally entitles to a reduction of 2%

if the mortgage interest rate is more than 6%, of 2.5% if the

mortgage interest rate is between 5% and 6%, and of 3%

if the mortgage interest rate is less than 5%. However, the

landlord may offset the cost savings resulting from the reduc

tion of the reference interest rate against cost increases that

Monthly Newsletter / October 2021

have occurred (since the conclusion of the lease or the last

adjustment). In this case, the rent reduction claim is reduced

accordingly. If a rent reduction is granted in full, the landlord

must expressly reserve the right to claim any other cost in

creases at a later date.

If the suitability of the property for the intended use is

impaired or lowered during the rental period due to defects,

the tenant may demand a rent reduction from the moment the

landlord became aware of the defect until the defect is reme-

died, and this regardless of the fault of the landlord.

Finally, a tenant may demand a rent reduction if this has

been contractually agreed, so in particular if the parties have

agreed on indexation and the index falls. Lease agreements

usually provide that the landlord may, but is not obliged to, ad-

just the rent in the event of a change in the index. This means

that in the event of index reduction, the landlord is not obliged

to grant a reduction.

Based on general contract law, the lease agreement and

thus the obligation to pay rent ends if the performance of the

service becomes permanently impossible. A final adjustment

is possible if the circumstances have unexpectedly changed

to such an extent that the originally agreed exchange ratio is no

longer appropriate (clausula rebus sic stantibus).

The question was

whether a closure

due to Covid

constituted a defect

of the leased premises.

3.2 Recent Case Law

3.2.1 Reduction of Initial Rent

Based on the previous practice of the Federal Supreme Court,

there was a presumption of abusiveness in the event of a sub-

stantial increase of the rent. In such case, the tenant could

demand a rent reduction. It was up to the landlord to prove

that the rent increase was not abusive. If the increase was not

substantial, the tenant had to prove the abusiveness. However,

it was unclear which increase qualified as substantial. In its de-

cision 4A_183/2020 of 6 May 2021, the Federal Supreme Court

indicated that abusiveness is now only presumed in case of an

increase of "significantly more than 10%". Further, the standard

of reasonable doubts to refute the presumption was lowered.

Consequently, non-official statistics, three to four comparable

properties (instead of four to five comparable properties), or a

long rental period of the previous tenant may be sufficient.

3.2.2 Reduction Due to Covid Measures

In the context of Covid with the mandatory closures of shops

and restaurants, the question arose whether such closures

constitute a defect of the rental property which renders the

rental property completely unusable, and therefore justifies a

rent reduction of 100%. It was further discussed that the Covid

restrictions do not constitute a defect but are a fundamen-

tal change in the circumstances which could not have been

foreseen by the parties at the time they entered into the lease

agreement (clausula rebus sic stantibus). Finally, it was con-

sidered whether this was a case of impossibility because the

landlord was not able to fulfil its obligation to provide usable

premises, and therefore no rent was owed.

In a decision of 30 March 2020, an arbitration court in

Lucerne found that closures due to Covid qualify as a defect of

the property, that there was a disproportion between the rent

and the right to use the property, and that a rent reduction of

60% was appropriate. In a first-instance ruling of the Zurich

District Court of 23 April 2021, the court did not exclude a

rent reduction based on the clausula rebus sic stantibus.

However, in decision MJ210008-L of 2 August 2021,

the Zurich District Court of First Instance ruled that in a lease

agreement "as a general rule, the agreed quality of the leased

property only relates to property-related conditions and not

also business-related conditions." Furthermore, the Zurich

District Court held that the landlord only undertook to "provide,

for a consideration, premises in which the tenant can carry on

his business - this business, however, unless otherwise agreed,

is not part of the lease, but exists independently of it and is part

of the legal sphere of the tenant." Pursuant to the Zurich Dis-

trict Court, the impact of the governmental measures to fight

the pandemic on the tenant's business does not constitute

adefect in the leased property.

The court also held that, in the absence of continuity,

there was no case of impossibility. Finally, the court consid

ered whether there was a case of clausula rebus sic stantibus.

The court did not rule this out. In particular, it left open the

question whether the official closures were sufficiently unex

pected. However, this argumentation was also rejected by

the court in the case concerned, as the tenant did not suffi

ciently prove the extent to which the relatively short-term clo-

sure of the business had affected him (for example, by disclos-

ing the business books). Overall, at least in the case concerned,

the Zurich District Court rejected a reduction of the rent due to

the Covid measures. The decisions taken by the courts in other

cases will depend on the specific contractual clauses as well as

the effective - or at least possible - use of the premises during

the official closure in the cases in question.

4 Conclusion

The latest decisions of the Federal Supreme Court and the

District Court of Zurich regarding rent increases and rent

reductions are rather landlord-friendly. At least in the question

of rent reductions in the case of closures due to Covid, the

question arises as to how the higher instances will decide. Po-

litical efforts regarding rents tend to be tenant-friendly. These

include the (Carlo) Sommaruga and Badran parliamentary ini-

tiatives, which call for a periodic review of yields, and the Töngi

parliamentary initiative, which proposes that the proportion of

value-enhancing investments (which entitle to rent increases)

be reduced in the case of renovations. It remains to be seen

which trend will prevail.

Monthly Newsletter / October 2021

Amanda Burnand Sulmoni

Counsel Geneva

[email protected]

Josef Caleff

Partner Zurich

josef[email protected]

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The content of this Newsletter does not constitute legal or tax advice and may not be relied upon as such. Should you seek advice with regard to your specific

circumstances, please contact your Schellenberg Wittmer liaison or one of the persons mentioned above.

Yves Jeanrenaud

Partner Geneva

yves.jeanrenaud@swlegal.ch

Dr. Christine Beusch-Liggenstorfer

Of Counsel Zurich

[email protected]