On 29 November, the Supreme Court put an end to the uncertainty hanging over landlords' heads after previous rulings ruling that an agreed rent modification clause in residential property was contrary to European law. A rent modfication clause providing for an annual rent increase of up to 3% on top of the inflation adjustment is in principle not considered unfair (ECLI:NL:HR:2024:1780).

Previous history
Two previous cases raised the question whether a rent modification clause used in the liberalised sector with a surcharge of up to 3% in addition to an indexation clause based on the consumer price index is unfair within the meaning of Directive 93/13. If the entire clause (both the inflation component and the mark-up component) were considered unfair, this would have far-reaching consequences for landlords, as all increases paid in the past would have to be repaid. These cases prompted the Amsterdam subdistrict court to refer questions to the Supreme Court for a preliminary ruling on the scope and consequences of the nullity of an unfair rent increase clause, including the possibility of splitting between the unfair and fair part in the clause, the possibility of setting off the rent increases paid against a claimed rent arrears, prescription or other a possibility of limiting recovery.

Preliminary questions
The Supreme Court has now put an end to this uncertainty and answered the following questions:

1. Should a rent modification clause containing both an indexation and increase component be regarded as one clause, or as two separately reviewable clauses?
2. Is an increase clause of up to 3% an unfair clause?
3. What are the consequences if an unfair clause is disapplied?
4. What should and may the court do ex officio if an unfair term is involved?
   .

Question 1: Should a rent modification clause containing both an indexation and increase component be regarded as one clause, or as two separately reviewable clauses?
According to the Supreme Court, taking into account all the circumstances of the contract in question and the relevant rules of national law, the court should assess, according to objective standards, whether the unfair component of a clause consists in a contractual obligation that is separate from the other clauses and whose unfairness can be tested separately. The issue here is whether two terms or two parts of a term can be separated on substantive grounds, such as the purpose or function of the terms or parts thereof. The decisive factor is not whether there is a single term or several terms from a purely textual point of view. The protection afforded by Directive 93/13 could otherwise easily be affected by the way the contractual terms are worded or drafted.

An indexation clause and an increase clause have different purposes. An indexation clause aims to compensate for monetary depreciation. As a rule, the purpose of an increase clause is to compensate for cost increases to the detriment of the landlord that exceed inflation and to keep the rent in line with changes in the value of the property.

The Supreme Court therefore ruled that the increase clause and the indexation clause are distinguishable on substantive grounds. An increase clause in the lease is separate from an indexation clause as contained in the same provision for the purpose of assessing its unfairness. The unfairness of the increase clause can and must therefore be tested separately. This does not affect the fact that the (cumulative) effect of the other clause should be taken into account in that assessment.

Therefore, if the increase clause is deemed unfair, this does not, in principle, affect the validity of the indexation clause.

Question 2: Is an increase clause of up to 3% an unfair clause?
The next issue was whether an increase clause that obliges the tenant to pay an annual surcharge on the rent of up to 3% on top of the indexation according to the consumer price index is unfair within the meaning of Directive 93/13.
According to the Supreme Court, this question should in principle be answered in the negative. The reasons are as follows:

• A residential tenancy agreement is a long-term contract that is usually concluded for a longer period. The landlord can only terminate that lease on limited grounds. In view of this, the landlord has a legitimate interest in being able to adjust the initial rent annually, inter alia in connection with monetary depreciation. The tenant has a legitimate interest in keeping the rent affordable.

• The financial consequences of an increase clause with an annual maximum rate of 3% are foreseeable for the tenant because the frequency of the rent change, the calculation of the rent increase and the maximum rent increase are fixed. Although it is not foreseeable for the tenant to what extent and on what grounds the landlord will apply the increase clause, and an application of the clause by the landlord is difficult for the tenant to verify in practice, it is particularly important for the tenant, when assessing the possible consequences of the clause, to be able to foresee the maximum percentage by which the rent may be increased and how often.
• Tenants, in the case of an open-ended lease, have the option to terminate the lease if the landlord increases the rent under the rent modification clause. Even though the tenant will not (be able to) use that option quickly, especially in times of tightness on the housing market.

• Dutch legislation for the liberalised rental sector is based on the premise that the landlord has a legitimate interest in changing the rent annually. The Maximum Rent Increases (Liberalised Rental Agreements) Act, which came into force on 1 May 2021, and the Affordable Rent Act, which came into force on 1 July 2024, assume the existence and admissibility of a rent modification clause. The Maximum Rent Increases Act and the Affordable Rents Act compulsorily regulate the maximum rent increase allowed annually, with a maximum percentage prescribed for surcharges on top of rent indexation. Section 7:248(3) of the Civil Code stipulates for leases of residential accommodation in the liberalised sector that to the extent that application of a rent review clause leads to a rent increase beyond that permitted by law, the clause is null and void to that extent and the rent is then deemed to be increased by the maximum permitted increase.
  .

The Supreme Court therefore concluded that an increase clause as such does not qualify as unfair. Nor is a stipulation providing for a surcharge of up to 3% unfair, because this percentage may be reasonably necessary to enable the landlord to achieve the aforementioned objectives of the surcharge clause, while the financial consequences were foreseeable for the tenant at the time the lease was concluded and the annual rent increase with a maximum of this percentage usually remains within acceptable limits. However, this may be different in individual cases due to additional circumstances that occurred at the time of concluding the lease.

Question 3: consequences of disapplying an unfair term
According to the Supreme Court, unless the tenant objects, an increase clause found to be unfair must be disapplied and the situation in which the tenant would have been legally and factually without that clause must be restored. Thus, a rent increase based on an increase clause found to be unfair is not possible, either for the past or for the future. Furthermore, any rent increase paid by the tenant on the basis of an unfair increase clause is undue payment within the meaning of Section 6:203 of the Civil Code, so that, in principle, the tenant has a claim to repay it.

Question 4 : what must and may the court do ex officio?
When assessing the admissibility of a claim for payment of rent arrears, the court should ex officio disregard a rent increase based on an unfair term. Thus, in the case of unfairness of an increase clause, if the court grants the claim for payment of rent arrears, it must, ex officio, apply to the amount of rent arrears to be awarded a deduction in the amount of the rent increases implemented under the increase clause. This does not mean that the court can only award the rent stipulated at the outset. Thus, indexations applied in the past on the basis of an indexation clause not found to be unfair will remain intact.

The court may not set off a tenant's debt for rent arrears against its claim against the landlord for undue payment for past rent increases paid on the basis of the unfair increase clause. This follows from Section 6:127 of the Dutch Civil Code, which provides that when a debtor with the power of set-off declares to his creditor that he will set off his debt against a claim, both obligations are extinguished to their joint amount. Set-off must therefore be invoked.

If the amount of the rent is partly based on the application of an unfair term, the court, when assessing a claim by the landlord to dissolve the lease contract and to vacate the leased property on account of a failure to comply with the obligation to pay the rent, should examine ex officio whether the failure justifies dissolution in the light of the circumstances of the case (based on the ‘unless provision’ of Section 6:265(1) of the DCC). Relevant here may be whether the tenant has paid too much rent in the past on the basis of application of a clause found to be unfair, also in relation to the extent of the rent arrears.

Conclusion
The Supreme Court ruling provides clarity on the validity of rent modification clauses. A surcharge of up to 3% on top of a CPI indexation is, in principle, not considered unfair. However, the Supreme Court leaves room for individual circumstances to be taken into account. It also emphasises the need for tenants to explicitly invoke set-off.

Would you like to know more or do you have questions or need advice about your lease? If so, please feel free to contact one of our lawyers without any obligation. We will be happy to assist you and keep you informed of further developments!