The start of a new year and the current situation on the property market, where prices of new flats keep rising and rental housing has long been in high demand, lead many owners of investment properties in Prague to wonder whether they are renting out their vacant flat for an appropriate amount. If they decide to increase the rent, the practical procedure will depend on whether they have concluded an open-ended or a fixed-term contract with the occupant of the property.
Open-ended lease agreement
If landlords want to avoid what are often unpleasant negotiations about rent increases, it is advisable to agree on the conditions for adjusting the amount directly in the lease agreement. Flat owners who have not done so and have an open-ended contract signed with their tenant can raise the rent while respecting the statutory conditions. These are set out in the Civil Code, which in the relevant sections allows property owners to propose a rent increase of no more than 20% over three years. Provided, that is, that the new amount corresponds to the usual rent in the given location. It is important to mention that this is a so-called mandatory provision designed to protect all tenants. Arrangements between the two parties that would curtail the tenant’s rights as laid down by law are invalid, they are disregarded and a court would very likely annul them. The owner must notify the tenant of the intention to adjust the rent in writing. A proven form is a registered letter, or the proposal can be handed over in person against a signature or sent to a data box. The tenant then has two months to respond. If they fail to do so, the landlord can take the matter to court. In practice this is a last resort, because in the long run it is usually better to find a compromise and a fair solution that both parties will accept.
A rent increase is not just a matter of legally prescribed steps; it is a sensitive topic that affects the overall quality of the relationship between landlord and tenant
If the tenant accepts the change, they will start paying the new amount from the third calendar month after the proposal was delivered. Recording the adjusted amount in the lease agreement is not mandatory, yet it is more transparent to conclude an amendment and, to be on the safe side, have everything confirmed in black and white.
Fixed-term lease agreement
With fixed-term contracts, the rent cannot be increased unilaterally, because changing the monthly payment for the use of the property requires the agreement of both contracting parties. The rent is therefore often adjusted when the contract is extended, with the owner and tenant agreeing on new conditions for the following period. Currently, more than half of all lease agreements are concluded for a fixed term, typically for one or two years. As part of building good relations, it is advisable to let the tenant know before the contract expires that in the proposed extension or in an entirely new contract the owner plans to increase the rent. The decision whether the current occupant accepts it or finds other housing is then up to them. As you can read on the FLAT SERVICE blog, the willingness to move in the Czech Republic is not particularly high and people usually prefer to extend their existing contract.
A specific case is a rent increase following an investment in improving the flat, where the owner carries out for example, construction works leading to a long-term reduction in energy costs
A tool called the inflation clause
One interesting tool that can help owners of investment flats adjust the rent without any hassle is the so-called inflation clause. It regularly indexes the monthly payment for rental housing, i.e. increases it in line with the year-on-year inflation rate. To avoid unnecessary disputes, we recommend wording the inflation clause clearly. Among other things, it should explicitly state when the price increase takes place (usually on 1 January) and which inflation indicator it follows (for example the consumer price index published by the Czech Statistical Office). If a date on which the rent will be increased has been agreed, it happens automatically. There is no longer any need for the flat owner to inform the tenant about it. The statutory limit on rent increases described above does not apply to inflation clauses. If, for example, the consumer price index were to rise very significantly, the rent increase could exceed 20% over the past three years. If both parties agree, the rent can also be adjusted by a fixed percentage each year or by a fixed amount. As with other aspects of a functioning legal relationship, the basis is a properly drafted lease agreement. We have summarised the most common mistakes and the problems they cause, which we often see in our practice, in a separate article.
It works the other way round too
Just as the property owner can increase the rent, the tenant can conversely ask for it to be reduced. That applies where the monthly rent being charged differs significantly from similar housing in the neighbourhood. If the owner does not agree to the request, the tenant can turn to the court, to which they must submit an expert appraisal or provide verifiable evidence of the rent paid in at least three comparable rentals. This is a complicated process of proof that is demanding both administratively and financially, which is why this option is in reality used only very exceptionally. At FLAT SERVICE we regularly monitor the usual level of rents and, thanks to our many years of experience, we can also estimate future developments. If you entrust the rental of your investment flat in Prague or the surrounding area to us, you need not worry about it being offered on the market below its value. Contact us at sales@flatservice.cz or on +420 277 000 330 and we will be happy to explain how professional property management works and introduce you to our services.
