The changing face of leases and rental space: what's new in 2023

The social and political developments of the last two years are increasingly affecting tenancies. In particular, ESG, inflation and the reorganisation of office space are important topics with implications for tenancy law in 2023.

Increasing demand for "green leases"

Climate change, rising energy prices and the threat of gas shortages are increasingly resulting in "green leases". This is based less on legal requirements than on the "win-win situation" for the contracting parties: tenants are encouraged to use the property as sustainably as possible and landlords are encouraged to manage it as sustainably as possible.

"Basic green leases" contain at least one provision on the sustainable use and management of the property, the ecologically sound implementation of maintenance, modernisation and other construction measures, and the reduction of waste, emissions and consumption. "Extended green leases" contain more far-reaching provisions, e.g. on monitoring energy and participating in the fulfilment of certification requirements. When drafting legally effective clauses, questions arise, among other things, on exchanging or transferring (consumption) data, easing the requirement to manage property economically (Wirtschaftlichkeitsgebot) or potential contractual penalties.

Some clauses are contractual obligations, and some are only declarations of intent. Since breaches of declarations of intent are unlikely to be actionable, it is to be expected that commitment clauses (Verpflichtungsklauseln) will become more widely used in the future.

Legal obligations with regard to sustainability at a glance

The legislator has also responded to climate change with a series of laws/regulations that must be taken into account in future lease negotiations. For example, landlords are required to install meters for energy consumption which can be read remotely. In addition to obligations regarding conversion and retrofitting, the new German Heating Costs Ordinance (HeizkostenV) also provides for new notification and information obligations. From 2022, landlords in whose properties remotely readable meters are installed must provide tenants with billing or consumption information on a monthly basis (see section 5 German Heating Costs Ordinance HeizkostenV).

The legally obligatory sharing of CO2 costs between the tenant and the landlord will also necessitate corresponding lease clauses. The Carbon Dioxide Cost Allocation Act (CO2KostAufG) was passed by the Federal Parliament and the Federal Council in November 2022 entered into force on 1 January 2023. For residential buildings, it provides for the costs to be allocated based on a graduated model depending on the energy quality of the building. For non-residential buildings, it is planned that the carbon dioxide costs will be shared 50-50 initially, and that a graduated model will be developed by 2025.

In many federal states, such as Baden-Württemberg (PVPF-VO), there is already a legal obligation to install solar installations on building roofs, and from 2023 this will also be the case in Berlin (Berlin Solar Act) and Hamburg (Hamburg Climate Protection Act). At the federal level, the Coalition Agreement 2021-2025 provides for the introduction of a so called solar obligation. There is a compelling need for landlords and tenants to regulate additional aspects, for example with regard to costs and revenue, installing and maintaining the mandatory solar installations and marketing the electricity generated.

Rising inflation: graduated and index-linked rent and rent adjustment clauses

The topic of indexation is also currently of utmost relevance for every lease that is entered into. It can lead to annual rent adjustments of (currently) up to 10% for the contracting parties. There are various clauses to regulate corresponding changes in the monetary value and to protect the landlord from loss of purchasing power; some of these clauses provide for rigid rent adjustments, others for flexible rent adjustments.

With indexation clauses, the rent is adjusted according to the consumer price index. To be effective, the clauses must allow for upward and downward rent adjustments. They are only permitted for contracts with a minimum term of ten years on the part of the tenant (as an exception to the general prohibition of price clauses) (section 1, 3 German Price Clause Act (PrKG)). Due to the rapid increase in the index caused by inflation, indexation clauses are currently proving to be extremely advantageous for landlords.

Tenants who cannot pass on price increases to their customers may be under considerable pressure as rents rise. When entering into new leases, it is therefore advisable to agree on caps for rent increases, e.g. that the rent may not change by more than 10 % in three years.

Rigid graduated rents that are not subject to changes in monetary value provide more security and predictability for both parties. The rent increases by a fixed percentage, for example, 2 % per year. Currently, landlords do not fare well with such graduated rents, as they do not reflect current inflation.

New requirements for office space

In addition, the office sector is under pressure due to, among other things, a changed situation regarding presence in the office at companies. Working remotely is experiencing a new boom, but offices often remain empty. Employers are responding by refraining from renting large-scale office capacities, and opting for flexible space concepts instead. Not only does this save on expenses for rent and working materials, it also aims to promote networking among staff. Desk sharing can be the central means to this end. With desk sharing, the existing office workstations are used by employees on a rotating basis.

Works councils view this critically and expect to be involved when such policies are drawn up and introduced. Whether or not they have such rights has not yet been decided by the highest courts. In addition to the right to information and the right to be consulted under section 90 Works Council Constitution Act (BetrVG), there is a right of co-determination under section 87 (1) no. 6 Works Council Constitution Act (BetrVG) if employees use IT tools to "reserve space". Whether introducing flexible space concepts can trigger operational changes subject to co-determination within the meaning of section 111 Works Council Constitution Act (BetrVG) is also being discussed.

The development is currently spurred by supply bottlenecks, increasing prices for raw materials and inflation. Many investors are already losing interest in the office sector. It will therefore be important to design and redesign office space in a sustainable and innovative manner.