Fieldfisher's Real Estate specialists outline the key regulations affecting residential rents across core European real estate markets.
Jurisdictions covered in this guide:
- France
- Germany
- Ireland
- Spain
- UK
Growing pressure on the availability and quality of residential property across Europe has spurred interventionist measures in the form of rent controls, new safety legislation and energy efficiency standards.
In some jurisdictions, such as France and Germany, some form of rent control is a relatively familiar, if not entirely well-accepted, feature of the property regulation landscape and investors in these markets have generally priced in limitations and have some tolerance for variation.
In other markets such as Ireland and the UK, restrictions on how much landlords can charge are at odds with prevailing investment models and regulatory change in these jurisdictions in response to economic and political pressures is proving particularly painful.
In this brief guide, we summarise the key legislative provisions affecting residential rents across five European markets and consider the likely impact of future changes.
For further information or advice on any of the information covered in this guide, please contact one of our experts.
Key contacts:
France: David Bensimon
Germany: Victor-Alexander Martins, Philipp Stricharz, Maureen Pitzen
Ireland: Paddy Smyth, Conor Dunne
Spain: Victor Casarrubios, Javier Galán, Francisco Moya
UK: Iain Thomas, Mariana Burns, Stan Papoutcharov
France
The ELAN law (Evolution du Logement, de l'Aménagement et du Numérique) enacted on 23 November 2018 introduced new rent controls on an experimental basis in so-called "tense" areas.
The ELAN law aims to limit rent increases when renting and renewing leases to preserve access to housing in these sectors where demand far exceeds available supply.
Initially scheduled to run for five years, until November 25, 2023, this experiment was extended for a further three years by the "3DS" law (Decentralization, Differentiation, Deconcentration and Simplification) of 21 February 2022.
Previous measures relating to rent controls, stemming from the ALUR (Accès au Logement et un Urbanisme Rénové) law of 24 March 2014, have been repealed and integrated into a rewriting of Articles 17 and 17-2 of the previous 1989 iteration of the law as part of new legislative provisions to update rent control regulation in France.
Scope of application.
- Categories of housing
France's rent control system applies to furnished and unfurnished accommodation, as well as "mobility leases" (short-team lease agreements for furnished properties), subject to the provisions of the law of 6 July 1989 (known as the Mermaz law, governing rental relationships between owners and tenants).
However, it does not apply to:
- Communal living facilities;
- Company housing;
- Leases granted to seasonal workers;
- Housing owned or managed by HLM (affordable housing for people on low incomes) organisations, or owned or managed by SEMs (semi-public companies that operate as social housing landlords) and covered by an APL (Aide Personnalisée au Logement, or personalised housing assistance) agreement; or
- Furnished residences with services, as defined by the French General Tax Code (French General tax Code, article 261 D 4°c).
Territories
According to the 6 July 1989 Mermaz law, rent controls can only be applied in:
"continuously urbanised areas with a population of over 50,000, where there is a marked imbalance between housing supply and demand, leading to serious difficulties in accessing housing throughout the existing residential stock, characterized in particular by high rents, high purchase prices for older housing, or a high number of housing applications compared with the number of annual moves into the social rental stock".
Four main conditions are required for a territory to be eligible for rent control – namely, there must be:
- A significant difference between the average rent in the private sector and the average rent in the social sector;
- A high median rent;
- A low ratio of housing starts to existing units over the past five years;
- Limited prospects for new housing provision over the next few years, as set out in the PLH (local housing programme).
Areas subject to rent controls in France include the municipalities of Paris (and many of its surrounding suburbs), Lyon, Lille, Montpellier and Bordeaux, as well as regions such as the Basque Country and Grenoble-Alpes Métropole (for the full list, see: decree no. 2023-1046 of 16.11.23: JO of 18.11.23).
Determining reference rents
For each zone defined by decree as being subject to rent control, the prefect (regional government representative) is responsible for establishing:
- Reference rent: This is the price per square metre of standard living space for a given housing category and geographical area. This rent is used as the basis for determining rents applicable to the majority of leases.
- Increased reference rent (+20%): This defines the maximum ceiling at which a rent can be set. It allows a degree of flexibility for properties offering exceptional features or benefits.
- Reduced reference rent (-30%): This threshold is designed for situations where special conditions justify a reduced rent, such as defects in the property or a less sought-after location.
For furnished rentals, the reference rents, both increased and reduced, are adjusted upwards.
Setting the rent.
Initial rent setting
The base rent is agreed freely between the parties, without exceeding the increased reference rent.
As of 24 August 2022, for energy class F or G (i.e. low-performing energy efficiency) dwellings, the new rent may not exceed the last rent applied to the previous tenant.
Reference in the lease
The lease must explicitly mention the reference rent and the increased reference rent.
In the absence of this information, the tenant can demand that it be included in the lease by means of a formal notice, and then, if necessary, apply to the court to have the rent adjusted.
Rent supplement
A rent supplement may be justified by the particular characteristics of the property's location or comfort (including furnishings), in comparison with similar properties in the same sector.
Since 18 August 2022, no rent supplement has been authorised for housing with certain unfavourable features (such as signs of dampness or poor energy performance, etc.).
The rent supplement must be clearly indicated in the lease, along with the corresponding justifications.
In the event of a dispute over the additional rent, the tenant may refer the matter to the Commission départementale de conciliation within three months of signing the lease. The landlord must then prove that the characteristics of the property justify the additional rent.
Rent adjustment on renewal
When renewing a lease, the parties have the option of adjusting the rent, subject to certain conditions.
If the rent set in the existing contract (excluding the rent supplement) exceeds the increased reference rent, the tenant has the right to initiate action to reduce the rent to or below this ceiling.
If the rent is lower than the reduced reference rent, the landlord may propose a rent increase up to the limit of the reduced reference rent.
An important change introduced on 24 August 2022 is that lessors of dwellings rated F or G in terms of energy performance may not initiate a rent reassessment.
Sanctions in the event of non-compliance by the landlord
If a lease is identified as not complying with the increased reference rent, the prefect may send a formal notice to the lessor. This formal notice will include:
- A reminder of the failure to comply;
- An injunction to bring the lease into compliance, and to reimburse the tenant for overpayments within two months;
- Information on the maximum fine; and
- An invitation to submit observations within one month.
Within this timeframe, the lessor must provide a copy of the corrected rental contract and proof of the reimbursement made to the lessee.
If the owner fails to respond to the formal notice, the prefect may impose a fine of up to €5,000 for an individual and €15,000 for a corporate body.
Germany
In Germany's residential tenancy sector, landlords may conclude a tenancy agreement with any party, and the contracting parties can agree the amount of rent individually at the start of the tenancy.
However, rent overcharging is prohibited by Section 5 of the Economic Offences Act 1954 (Wirtschaftsstrafgesetz (WiStrG)).
The following controls apply to residential rents in Germany
- Ban on '"usury"
According to Section 5 WiStrG, landlords are forbidden from committing "usury" – i.e., taking advantage of a low supply of comparable properties and charging a rent that exceeds the standard local rent by 20% or more.
- Rent freezes ("Mietpreisbremse")
Since June 2015, landlords are restricted from re-letting properties in areas with a tight housing market at more than 10% above the local comparable rent.
Each federal state in Germany independently determines what qualifies as a "tight housing market", by looking at supply and demand trends over a maximum five-year period.
Rent freezes do not apply to properties that:
- Are being let for the first time since 1 October 2014; or
- Have been extensively modernised in the three years prior to the start of the tenancy.
If landlords violate the regulations of the rent freeze, tenants can generally demand a refund of the rent paid in excess over the last 30 months.
- Rent increases
In Germany, rents can be increased either by agreement, or by law.
By agreement
Rent can be increased during the current tenancy by an individual agreement between the parties to the tenancy agreement (Section 557 of the German Civil Code)
By law
Rent may be increased:
- Up to the standard local comparative rent (Sections 558 to 558b of German Civil Code);
- Following modernisation (Sections 559 German Civil Code); and/or
- Due to changes in operating costs (Section 560 German Civil Code).
There are different mechanisms for increasing rents:
Graduated rent (Section 557a of the German Civil Code)
Parties can agree to increase rent incrementally as part of the tenancy agreement.
The rent must remain unchanged for at least one year from the start of the agreement and following each increase.
During the term of the agreement, rent increases up to the standard local comparable rent or due to modernisation (Sections 558 to 559b of the German Civil Code) are excluded, and are subject to any overriding rent freeze regulations and relevant comparable rents (Section 557a (4) of the German Civil Code).
Index-linked rent (Section 557b of the German Civil Code)
The rent increase can be agreed in accordance with the price index for the "standard of living" for all private households in Germany, as determined by the Federal Statistical Office.
The rent must remain unchanged for at least one year during the agreement.
Where rent freeze regulations apply, this restriction only applies to the initial rent of the index-linked rental agreement (Section 557b (4) of the German Civil Code).
Social housing ("Sozialwohnungen")
Social housing is price-controlled because the rental property is subsidised with public funds.
The rent may only be high enough to cover the running costs, which are approved and recorded by the local authority.
Temporary/fixed-term rental agreement (Section 575 of the German Civil Code)
Letting for a fixed term is only permitted for residential leases if there is a reason for a fixed term within the meaning of Section 575 (1) of the German Civil Code.
The landlord must inform the tenant in writing of the reason for the fixed term when the contract is concluded. Otherwise, the tenancy agreement is deemed to have been concluded for an indefinite period (Section 575 (1) sentence 2 of German Civil Code).
Generally, permissible reasons are:
- Own use: landlord requires the rental unit for themselves or family members;
- Demolition or substantial renovation; or
- The landlord wishes to rent the property to someone providing a service to them/as work accommodation.
Ireland
On 24 December 2016, the Irish government introduced so-called "rent pressure zones" in an effort to combat rising costs of renting in Ireland.
A Rent Pressure Zone is a designated area where rent increases are capped.
Rent pressure zones are to remain in place until 31 December 2024 and may be extended, pending the outcome of government discussions.
Initially, rent could not be increased by a landlord by more than 4% in any given year on properties situated in rent pressure zones.
Since 11 December 2021, rent increases were capped in line with inflation, or 2% a year, whichever is lower.
Notwithstanding these restrictions, landlords remain obligated to carry out necessary repairs to their rental properties to ensure they meet the minimum standards set out in the Housing (Standard for Rented Houses) Regulations, 2019.
Treatment of rental income
Rental income is treated in the same was as employment income in Ireland, i.e., it is charged at 20% of the first €42,000 earned with 40% charged on any income earned above that threshold.
Pay related social insurance (PRSI) and universal social charge (USC) are also charged on rental income at 4% and 8% respectively, meaning that up to 52% of rental income may be paid in tax.
The effect of Ireland's tax treatment of rental income, combined with high interest rates pushing up the cost of mortgages, has resulted in a large exodus of landlords from the private rental market.
Spain
On 24 May 2023, the Spanish government passed Law 12/2023 of 24 May on the right to housing (Ley 12/2023, de 24 de mayo por el derecho a la Vivienda, or the "Housing Law").
The Housing Law introduced certain changes which affected players in the Spanish real estate market, including major property holders, investment funds and developers.
These changes include:
- Rent control measures;
- Measures related to public housing (vivienda protegida);
- Real estate tax surcharges on vacant residential properties; and
- Measures relating to judicial process for the repossession of residential properties.
The rent control measures set forth in the Housing Law refer to residential leases as defined in article 2 of Law 29/1994, of 24 November (the “Spanish Lease Act”).
However, a working group is expected to propose measures for non-residential leases in the coming months, with a focus on seasonal leases, to prevent avoidance of rent control measures by landlords disguising residential leases as seasonal leases.
Although the Housing Law introduced some new measures for the real estate market, the implementation of most of these measures relies on subsequent elaboration and specification through regional and local regulations.
Rent control measures already in force
The following rent control measures came into force with the passing of Spain's Housing Law without requiring further regulations:
- A cap of 3% in any rent reviews of residential leases during 2024;
- Lessees facing social and economic vulnerability, with proper accreditation, have the right to seek an annual extraordinary extension of their lease under the same conditions, following the minimum or extended terms stipulated in the Spanish Lease Act.
Lessors that qualify as “Large Holders” (i.e. those individuals or legal entities that own more than 10 residential properties – a threshold that can be reduced by the regional authority to five, not taking parking lots or storage rooms into account – or a built-up area of more than 1,500 square metres, are forced to accept this extension;
- Lessors will bear real estate management and lease formalisation expenses; and
- The National Statistics Institute is encouraged to establish a new reference index in place of the Consumer Price Index (CPI) to determine annual rent revision caps by the end of 2024.
Other rent control measures under regional and municipal development
Regional decisions play a big role in how rent controls will operate, especially in places labeled as “stressed residential markets” (the “Stressed Areas”).
Whether or not rent control measures kick in depends on how each region defines these areas, following the criteria laid out in the Housing Law.
Once these Stressed Areas are identified by the regions, the rent control measures come into play, which include:
- Both individual lessors and "Large Holders" face capped rents for new leases. The revised rent in these areas must not exceed the highest rent applied to the same dwelling in the past five years. However, a maximum 10% increase is allowed if certain refurbishments/improvement work occurred in the preceding two years, or if a fixed term of at least 10 years is established for the new lease. For "Large Holders" in Stressed Areas, the revised rent should not exceed the limit specified in the relevant index for housing rental prices. This limit is applicable to dwellings in Stressed Areas that have remained unrented for the past five years, regardless of whether the lessor is classified as a "Large Holder”.
The abovementioned index four housing rental prices is to be published in the official gazette on 13 March 2024;
- Giving lessees the option to extend their lease beyond the minimum period set for lessors, for up to an extra three years. The current minimum period mandatory for the lessor is five years (if lessor is an individual) or seven years (if lessor is a legal entity); and
- Offering tax perks for lessors if they adopt certain rent control measures.
Outlook for rent control in Spain
The effective implementation of Spain's Housing Law remains uncertain, due to political opposition and at least one constitutional challenge (by the country's People's Party) to aspects of its scope and application.
At the very least, consistent application of further rent controls envisaged by the Housing Law looks unlikely, especially in regions with right-leaning local governments (for example Galicia, Castilla y León, Cantabria, La Rioja, Aragón, Madrid, Extremadura, Andalucía, Murcia, Comunidad Valenciana, Baleares, Ceuta and Melilla).
However, it is important to note that the measures introduced on the passing of the Housing Law are enforceable in all regions.
Other areas such as Cataluña, which is currently under the governance of the pro-independence party Esquerra Republicana de Catalunya, are enthusiastically laying the ground work for rent controls in "Stressed Areas".
UK
England and Wales
In England and Wales, rent is regulated by a handful of key acts.
Among the most significant when it comes to rent control, to the extent that this concept exists in modern property legislation, is The Leasehold Reform (Ground Rent) Act 2022.
The Leasehold Reform (Ground Rent) Act 2022
This Act, which came into force for most new leases on 30 June 2022 and from 1 April 2023 for leases of retirement homes, put an end to ground rents for most new long residential leasehold properties in England and Wales.
The Act was the first step in the government's reform package intended to make home ownership fairer and more transparent for future leaseholders.
However, it has been criticised by the British Property Federation for potentially deterring would-be landlords from taking on the obligations of owning rented residential buildings.
Local authorities have the power to fine landlord's up to £30,000 for non-compliance of the Act with any payments taken in contravention of the Act to be refunded to leaseholders within 28 days.
The Leasehold and Freehold Reform Bill 2023-24
The Leasehold and Freehold Reform Bill 2023-24 is a proposed new piece of legislation intended to tackle the problem of escalating ground rents.
The bill presents five options, including capping existing leases at peppercorn rents.
However, investor groups have warned this could be viewed as asset expropriation, leaving the government at risk of legal challenge and compensation claims for loss of value to investments, in particular from the pension industry being one of the biggest investors in ground rents.
In its response to a public consultation on the new bill, the British Property Federation raised a number of concerns, including the risk that the bill could lead to freeholder insolvency, with negative impacts for beneficiaries such as the public, pensions, charities, and service organisations.
A final decision on the form of the Bill is expected in Spring 2024.
Scotland
As a separate jurisdiction, Scotland is more explicit about its statutory control of rents, including the provisions contained in the Cost of Living (Tenant Protection) (Scotland) Act 2022.
The Cost of Living (Tenant Protection) (Scotland) Act 2022
Since 6 September 2022, a temporary 3% rent increase cap for private tenancies has been in place in Scotland.
Landlords can seek up to 6% yearly increases to offset rising costs. The cap is set to last until 31 March 2024.
The scheme aims to aid renters in the cost-of-living crisis, prevent homelessness, and curb unlawful evictions.
Effects of rent control legislation in the UK
In England and Wales and Scotland, government attempts to intervene in the private rental market on behalf of tenants, combined with high interest rates pushing up mortgage costs, has resulted in a retreat from the market by many private landlords.
A more formalised system of rent controls has been mooted by members of the UK's opposition Labour Party.
This article was authored by Fieldfisher's Real Estate team