Having your rental price assessed according to the rent price revision procedure
If you are curious whether the rental price of your commercial space is still reasonable or if you feel that your rental price deviates, it can be determined through a few steps to see if it is reasonable.
The basis can be found in the Civil Code 7, under article 303 paragraph 2, which specifies the factors to consider when assessing the rental price. However, this text is limited and can be interpreted quite broadly. In the following, we will further elaborate on the relevant criteria for calculating your rental price. Examples will be provided to offer a better understanding.
If you prefer to leave the calculation of the rental price to a specialist, Vastgoed InterVisie has years of expertise in this field, from calculating your rental price to conducting a legal procedure. Feel free to contact us – without any obligation – to discuss the possibilities for your commercial space.
Legal criteria for calculating the rental price
According to the law, Article 303, paragraph 2 of the Civil Code 7 is applicable for calculating the rental price. It states the following:
In determining the rental price, the court takes into account the average rental prices of comparable commercial premises in the vicinity, which have occurred during a period of five years preceding the day on which the claim is filed. Each rental price included in the comparison shall be adjusted according to the general price level development from the day on which that rental price was applicable until the day of filing the claim.
Based on the aforementioned legal text, the following questions arise:
- Which commercial premises are comparable to the leased premises;
- What does “in the vicinity” refer to;
- What are the rental prices of comparable commercial premises in the past five years;
- What does the “average” rental price mean;
- How is the rental price adjusted.
Calculating the rental price based on comparable properties
It is important that the comparable properties are similar to the leased property in terms of potential use and functionality. The following characteristics/criteria play a role in the comparison.
Location of the property;
(example: a retail store in an A1 location has more footfall than a store in a B location)
Accessibility of the property;
(example: a store with a ground floor entrance is more easily accessible than a store with an entrance in the basement)
Parking facilities at the property;(example: a store located near a parking lot has better parking facilities than a store without parking options)
Surface area of the property;
(example: a store with an area of 100 m² is not directly comparable to a store with an area of 800 m²)
Layout/Divisibility of the property;
(example: a store with a rectangular layout is generally easier to divide than a store with an L-shaped layout)
Frontage-to-depth ratio of the property;
(example: a store with a frontage-to-depth ratio of 1/3 is more accessible than a store with a frontage-to-depth ratio of 1/8)
Quality of the property;
(example: a store of good quality provides a better rental experience than a store of poor quality)
Does the zoning play a role?
This question cannot be answered with a simple yes or no. The principle is that the physical form of the building is decisive. The nature of the business operated in the leased premises (and thus the zoning of the leased premises) and the nature of the businesses operated in the comparison properties should not play a role in determining the rental price. It is primarily about the physical comparability of the property.
However, this does not mean that the zoning of a property never plays a role. If the zoning is reflected in the physical form of the property, then the zoning does indeed play a role. In essence, the zoning of a rental property does not play a role in the choice of comparison properties. However, under certain circumstances, it may be relevant if the zoning is reflected in the physical form of the property and cannot be easily altered at low costs.
Calculating rent with fewer comparable properties
Calculating rent with fewer comparable properties The ideal scenario is to have comparable properties that meet the same criteria as the property you are leasing. However, in practice, this is not always possible. The desired properties may not be available, they may be owner-occupied, or the rental data may be unavailable. This does not mean that less comparable properties are automatically excluded. In such cases, these less comparable properties can be made comparable by applying correction factors. Of course, this should be done reasonably and in good faith.
When a comparable property is larger than yours, the rental price of the comparable property is increased by a percentage. This is because a larger property generally has a lower price per square meter than a smaller property.
Similarly, if the comparable property is located in an A2 location while your property is in an A1 location, the rental price of the comparable property is increased by a percentage. It can be said that the rental price of a property in an A1 location is higher than that of a property in an A2 location.
Calculating rent based on “locally situated” properties
It is important that the comparable properties are located “locally.” Specifically, this means that, in principle, the comparable properties are situated in the same shopping area as your property. However, there may be exceptions to this rule. For example, if there are no comparable properties available within the same shopping area and/or the comparable properties are located in a shopping center owned by a single entity where no market competition exists. In such cases, it may be necessary to consider another comparable shopping area/shopping center elsewhere.
Number of Comparable Properties for Calculation
There is no specific legal guideline regarding the minimum or maximum number of comparable properties when calculating the rental price. The determination of the number of comparable properties is generally at the discretion of the tenant, landlord, expert, or judge, depending on the level of comparability of the properties involved. In practice, a common range of approximately 4-6 properties is often considered.
How does the reference period work
Once the comparable properties have been selected, it is important to determine their rental prices. This involves considering the actual paid rental prices over the past 5 years preceding the revision date, which is also known as the reference period. The revision date is the date on which:
- Parties mutually agree on the start date of the newly determined rental price;
- A claim (through a petition) for determining the rental price is submitted to the court.
For a particular comparable property, the rental price was increased 3 years before the revision moment. When calculating the average rental price, the “old” (lower) rental price for years 1 and 2 of the reference period must be taken into account. The “new” (higher) rental price should be considered for years 3 to 5 of the reference period. If there is no rental price available for years 1 and 2, the years 3 to 5 can be proportionately used. In that case, the average rental price of the respective comparable property will contribute to the comparison by a factor of 3/5.
Adjustment of rental prices
When calculating the rental price, the rental prices of the comparable properties that are taken into account need to be adjusted. This means that the rental prices from the reference period should be converted to the price level at the time of revision in order to neutralize inflation. In practice, this means that the rental prices falling within the reference period are adjusted based on the Consumer Price Index (CPI, all households series) to the level of the revision moment.
Determining the surface area of your commercial space
When calculating the average rental price of your commercial space per square meter, the surface area plays an important role. It is crucial to determine the correct surface area. The law does not provide guidelines on how this should be determined, and in practice, there are different opinions on the calculation of the surface area.
Actual surface area
There are different methods to calculate the surface area of your commercial space. Often, the Gross Floor Area (GFA) or the Rentable Floor Area (RFA) is considered. When calculating the GFA, the outer walls of the space are included in the assessment, along with features such as a staircase, elevator shaft, and utility shaft on each floor level. When calculating the RFA, only the area between the outer walls is included in the assessment, excluding features such as a staircase, elevator shaft, and utility shaft. An official measurement report is prepared in accordance with the definitions of NEN 2580.
Corrected (adjusted) surface area
Once the actual surface area has been determined, the question arises as to whether each square meter justifies the same price. Less functional areas should be assigned a lower price. There are various methods to determine the corrected surface area of your commercial property. One method that has been commonly used in the past is the “ITZA method” (In Terms of Zone A). Another method that is currently widely used is the “functional correction method”.
In this method, all square meters are expressed as a percentage of the Zone A.
The term ITZA stands for “In Terms of Zone A,” which refers to the zoning principle. The basis of this method for determining rental prices is the understanding that the front area of a store has the most attention value, and shoppers tend to move more easily in areas where they have visual contact with the front. It has been found that the sales potential per square meter decreases as the square meter is located further back in a store.
The part on the ground floor that is most effectively used for retail by consumers, or the most functional part, is designated as the Zone A. Each square meter in this Zone A is set at 100%. Subsequently, lower percentages are assigned to all remaining square meters outside this Zone A, as well as on upper floors and in basements.
Functional Correction Method
In this method, all square meters are expressed as a percentage per zone, space, and/or floor level. This is also referred to as the corrected/adjusted surface area. The ground floor retail space is typically valued at 100%, and the remaining spaces/floor levels are valued as a percentage derived from the ground floor retail space. The valuation takes into account structural limitations such as architectural narrowing, elevations, reductions, expansions, and partition walls that can be considered as constraints. Additionally, the method considers the front-depth ratio of the property, accessibility, sightlines, and functionality when assessing the surface area.
Calculating the average rental price
Once the rental prices over the reference period are known and the corrected/adjusted surface area is determined, the average rental price per square meter can be calculated over the reference period or a portion of it. All rental prices within the reference period are added together, divided by the number of reference years, and then divided by the corrected/adjusted surface area.
The starting situation as a basis
In many situations, improvements are made to the property by the tenant and/or the landlord over the years. It is important to note that in a rent revision, no consideration should be given to improvements made by the tenant that enhance the value of the property. The underlying idea is that it would be unreasonable for the tenant to pay a higher rent for improvements made at their own expense. However, improvements made by the landlord may be considered value-enhancing in some cases, which could result in a higher rent for the tenant. In summary, improvements made by the tenant that enhance the value should not be taken into account in a rent revision. Not all investments are relevant. For example, investments in interior furnishings do not affect the value of the property. It pertains to improvements that are permanently attached to the property.
Here are some examples of rent-enhancing improvements that do not impact the rent revision:
- The tenant has removed a structural partition wall, allowing the rear space to be used as retail space;
- The tenant has made the first floor accessible to the public by installing an escalator;
- The tenant has leveled differences in the shop floor, improving accessibility for customers..