Rent indexation

What it means

Rent indexation means regularly raising rent in line with an agreed indicator, most often inflation measured by a consumer price index such as the HICP. It protects the landlord against the erosion of rent when prices rise.

In commercial leases of offices, shops or warehouses, indexation is a standard part of the lease agreement. Rent is usually adjusted once a year on a set date by the percentage change in the index over the previous year.

The lease should specify the index, the period over which the change is measured, the adjustment date, the notice procedure and whether rent also falls when prices fall. Without a clear clause, an increase is hard to enforce, and in a dispute the court's interpretation decides.

How it works in practice

Example: rent of 2,000 euros a month and annual inflation of 4 percent mean 2,080 euros after indexation. The landlord usually notifies the tenant in writing of the new calculation with reference to the published index, and the tenant should check it.

Leases often include a floor and a cap, for example an increase of at least one and at most five percent a year. The cap protects the tenant from steep rises during high inflation, and the floor protects the landlord from stagnation.

For VAT payers, indexed rent is taxed in the same way as the original rent if the landlord has opted to tax the lease. Under IFRS 16, a change in rent triggers remeasurement of the tenant's lease liability.

What to watch out for

In residential leases, tenants enjoy stronger protection and unilateral rent increases are restricted. An indexation clause must be agreed clearly in the lease from the outset, or the landlord cannot raise the rent simply by pointing to inflation.

If a landlord does not apply indexation for several years, a dispute may arise over whether it can be applied retrospectively. It is better to adjust rent regularly as the lease provides and keep a written record of each adjustment to avoid misunderstandings.