Inflation and rising interest rates: what are the answers for tenants?

HOUSING IN QUESTION

Inflation and rising interest rates are reducing the purchasing power of ^households1, while rising rents and health insurance premiums are crushing the population. Tenants will be doubly impacted, since the cost of living and interest rate criteria have a major influence on the rent-setting system.

In particular, landlords are entitled to index the equity invested in housing to the consumer price index and to obtain a return on this of 2% in addition to the reference interest rate (TF ruling 4A_554/2019 of 26.10.2020).

The aim is to measure these risks and propose solutions.

The impact of rising interest rates will not be felt immediately. Since 2008, this rate has been calculated on the basis of a weighted average of mortgages, many of which are for fixed terms. With regard to inflation, lessors will be able to pass on 40% of the increase in the index to rents (excluding charges) and, for certain leases with a minimum term of five years and an indexation clause, 100% of this increase.

To oppose a rent increase, the tenant may, in principle, claim that the increased rent is abusive. This is the case when the rent provides the lessor with too high a return on the equity invested. According to a study published by Asloca, between 2006 and 2021, landlords will have pocketed 78 billion francs abusively by not passing on interest rate cuts and continuing to raise rents. However, the tenant's leeway to invoke the yield is limited: it is not possible to do so if the building was built or acquired more than thirty years ago; the tenant also has no possibility of opposing rent indexation in a lease with a clause providing for it, or even of requesting a correction of his rent - which, by hypothesis, has become abusive over the course of indexations - on the occasion of the expiry of his contract (TF 4A_86/2020 of 05.01.2021).

To ensure the effectiveness of tenants' rights, tenants should be able to object to a rent increase on the grounds that the rent offers an unfair return, even if the property is old and not recently purchased. In the case of index-linked leases, which pension funds and other institutional landlords are fond of, the case law of the Swiss Federal Supreme Court should also be reconsidered in the light of the current context. Tenants who do not contest their initial rent from the outset should not be prejudiced by this fact for the entire duration of the lease (sometimes for several decades), as their rent is subject to a snowball effect of constant increases. He cannot have anticipated and accepted that economic trends would automatically lead to rent increases of tens of percent! In Switzerland, inflation has already reached 2.5% year-on-year. If the situation were to follow that of the Eurozone, it could reach 5% to 10% a year.
With regard to energy prices (heating and hot water costs), Asloca has lobbied the Federal Council to grant tenants on modest incomes an allowance of between CHF 200 and CHF 400 per person, via health insurance subsidies. At the same time, Asloca called for accompanying measures to facilitate the energy transition and prevent it from leading to sharp rent rises.

Spain and Portugal have obtained authorization from Brussels to set a limit on electricity prices, in order to reduce these costs by 30%. The Swiss Constitution allows urgent measures to be taken. The Federal Council did so in the 1970s to limit rent increases. The economic situation and the real estate crisis call for a moratorium on rent increases, along the lines of the rent ceilings in place in the cantons of Geneva, Vaud and Basel-Stadt. The system could provide for landlords who fail to achieve the yield to which they are entitled by law to obtain an appropriate de-capping. In this way, the burden of proving that the rent is permissible would fall on the lessor, not the lessee.

Measures must be taken without delay to prevent rents jumping for cyclical reasons, especially as the statistical study requested by Asloca shows that once rents have been increased, they do not return to their pre-crisis level (“ratchet effect”).

NOTES[+]

Chrsitian Dandrès is a national councillor and legal expert at Asloca.

The author of this column speaks in a personal capacity.

About Cerise Immobilier gérance et courtage, real estate agency in Villars-sur-Ollon

Cerise Immobilier gérance et courtage is a real estate agency located in Villars-sur-Ollon in the canton of Vaud, Switzerland. We offer services in sales, purchases, rentals, PPE management, property valuations and tax and legal advice. We cover the Chablais region of Vaud, including the communes of Ollon, Gryon, Bex, Aigle, Les Diablerêts, Chessel, Leysin, Lavey, Noville, Roche, Yvorne and Villeuneuve.

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