Rent determination based on the rental rules – comparison with other leases

Date 7 sep. 2011

 

The case in brief
On 24 June 2008, the landlord, Kirkbi Invest A/S, gave notice to the tenant, Dansk Supermarked A/S, that their rent would increase with DKK 829,058.64 annually. In accordance with the Danish Business Rent Act, Section 13, the increased amount was to be allocated over four years, thus implying that the tenant was supposed to pay an extra DKK 207,264.66 on 1 October 2008, 1 October 2009, 1 October 2010 and 1 October 2011.


Previously, on 4 March 1992, the landlord and tenant had made a rent agreement. The parties agreed on an annual rent of DKK 950,000. According to the rent agreement, the rent was to be adjusted every other year. Because of the adjustment, the yearly rent was DKK 1,198,441.36 on 1 October 2008.


The lease was 339 square meters, plus 163 square meters of basement. The increased amount in rent was calculated and divided into the number of square meters. Hereinafter, the tenant was to pay DKK 5,500 per square meter and DKK 1,000 per square meter of basement.


The defendant claimed acquittal or, alternatively, a lower rent fixed by the court.


The legal background

The Business Rent Act, Section 13, states that the landlord has the right to claim the rent adjusted to the market-based rent if the current rent is significantly higher or lower than the market-based rent.


Market-based rent is the rent a rational landlord/tenant with knowledge about the market conditions would agree on. Determination of the market-based rent has to be objective and is decided by considering the quality, location, use, equipment etc.


In accordance with the Business Rent Act, any increase in rent may take place at three months’ notice, however, it cannot be effective until at the earliest four years from the latest significant change in the rent agreement. Moreover, the amount of the rent increase must be distributed by the straight-line method by a fourth p.a. over four years.


The court’s decision

The reason why the landlord decided to notify about the increase in the rent was that prior to the notice, the landlord had gathered information about other nearby tenants’ rent rate.


On the basis of this knowledge, the landlord gave notice about the rent to the tenant, among others, in this specific case. The notice stated an increase implying an annual rent of DKK 5,500 per square meter and DKK 1.000 per square meter of basement.


Prior to the case, the tenant had hired a valuation expert from the estate agent agency EDC to undertake the determination of the market-based rent rate for the lease. The valuation expert based his decision on other grocery stores in nearby locations. In his report, he assessed the annual market-based rent at DKK 1,382,100 to be divided into DKK 3,500 per square meter and DKK 1,200 per square meter of basement. The report thereby stated a significantly lower rent than the rent notified by the landlord.


The tenant declared that essentially, the rent should be adjusted based on other leases in the same branch and not based on other leases in other branches.


The landlord, however, declared that the market rent cannot be determined by solely comparing to other leases in the same branch, but that other leases of same quality, location, use, equipment, etc. have to be taken into account.


The district court ruled in favour of the landlord and decided that the tenant was to pay the increased rent and interests from the date of the notice. The rent was calculated at DKK 5,000 per square meter and DKK 1,000 per square meter of basement. In this way, the court did not side completely with the landlord’s claim of a rent increase of DKK 829,058.64 and only upheld a rent increase of DKK 659,558.64.


The High Court of Eastern Denmark upheld the district court’s ruling on the same grounds as the district court. The High Court of Eastern Denmark ordered that the specific furnishing of the lease did not mean that the lease agreement was decided on such conditions or furnished in such a specific way that it was not an option to compare the rent with other leases used for other purposes.


Therefore, the market rent should not only be determined based on a comparison with other leases from the same branch.


Conclusion

With the ruling from the Eastern High Court, it is clear that the market rent regulated in the Business Rental Act, Section 13, shall be determined based on a comparison of a variety of leases with almost the same quality, location, use, equipment, etc. Consequently, it is not enough to ascribe a determining importance to the use of the lease even if the location may be comparable. 

 

 

If you have any questions or require additional information on business rental, please contact Partner Thomas Weitemeyer (twe@mwblaw.dk) or junior associate Anders Kjær Dybdahl (akd@mwblaw.dk).


The above does not constitute legal counseling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.