Legal Indicators of Rent Adjustment under Article 288 CC

Legal Insight

November 2022

Danae Stamarga, LL.M

Summary: The ever-changing conditions of economic and social reality often require the corresponding adjustment of contractual relations in order to remedy any injustice created for one of the contracting parties. This article attempts to give an indicative list of those factual circumstances which have been considered by the courts to be capable of leading to a compulsory adjustment of the rent either upwards or downwards in order to remove the imbalance created between the benefits of the two parties as a result of a change in circumstances.

Introduction

In recent years, and especially from 2018 until today, there has been a significant increase in property values in all regions of our country, with the most significant increase occurring in large urban centres, since, indicatively, in Athens and Thessaloniki, the rise in house prices over the last four years has reached 35% and 27% respectively. Such a development cannot, of course, leave rental prices unaffected, which are correspondingly affected, because otherwise the lessor of a property who entered into a lease contract when property values were significantly lower will be obliged to suffer a loss which, even if he could have foreseen it at the time of entering into the lease, this does not mean that he accepted it. And of course when the lessee also agrees to the rent adjustment then there is no question whatsoever. The problem actually arises when one of the parties refuses to agree to the adjustment of the rent when it needs to be adjusted because of a change in circumstances subsequent to the conclusion of the contract.

1. Possibility to adjust the rent by court decision 

For this reason, the legislator provides the possibility for the parties to the contract, even if one of them does not agree to the rent adjustment, to obtain it by applying to the court. In particular, this possibility is provided under Article 288 of the Civil Code, which states that 'the debtor is obliged to perform the provision as required in good faith, taking into account the customary practice'. This essentially means that the performances of both parties to the transaction, i.e. both the lessee and the lessor, must be adapted to the prevailing perceptions at the time of the transaction, even if this means deviating from what was agreed due to a change in circumstances in the meantime. Thus, on the basis of this article, the parties can intervene in the contract by correcting it and determining the performance to be made by deviating from what was agreed and on the basis of objective criteria which they perceive to be the prevailing practice in the trade. This right exists even in the event of a foreseeable change in the circumstances on which the parties had based their agreement. In other words, the application of that provision is not conditional on an unforeseen change in circumstances.

Thus, on the basis of the above, a lessor or lessee may request the court to adjust the rent due, initially or after an adjustment, contractual or legal, if, due to foreseeable or unforeseeable circumstances, there has undoubtedly been such a substantial increase or decrease in the rental value of the lease that, based on the specific circumstances, his persistence in paying the same rent is contrary to the fairness and honesty required in commercial transactions and that, in accordance with good faith and fair dealing, the rent must be adjusted to the level which removes the disproportion between the benefits of the two parties and restores the good faith which has been disturbed (cf. see in this respect the judgment of the Supreme Court No 9/1997).

The existence of these special circumstances must be of a permanent nature and the resulting consequences must not fall within the limits of the normal business risk assumed by the lessee who carries out a certain business activity in the leased premises. On the other hand, in the case of an action brought under Article 288 CC, the decisive time for the existence of the abovementioned special circumstances is the time of the first hearing of the action.

2. The method of rent adjustment

In this case, the court, in order to decide on the adjustment, compares two amounts, namely the rent paid and the "free" rent, which represents the value of the use of the leased premises and which, on the basis of the comparative evidence provided by the parties, must be determined by the judgment. If there is a difference between them, the court shall determine whether the principles of good faith give rise to a need for an adjustment. A need for adjustment, according to the principles of good faith, exists when, due to a substantial increase or decrease in the rental value of the leased property, the lessor or the lessee, respectively, suffers a loss, which loss exceeds the risk that he (the lessee or the lessor) assumed in concluding the lease at the given rent, and can be further limited by an increase or decrease in the rent, respectively. Once the need for adjustment is established, therefore, the court will adjust the rent, not necessarily by the difference that would arise by comparing the two amounts mentioned above, but to the level that removes the disproportion of the benefits on both sides and restores the good faith that has been disturbed. The adjustment of the rent in that way does not apply retroactively but for the period after service of the action.

3. Legal indicators of the necessity to adjust the rent

On the basis of all of the above, the courts have from time to time held that such circumstances capable of leading the parties to a mandatory adjustment of the rent so that it reflects the prevailing circumstances are:

Α) An increase in the rental value of the leasehold property, which was caused by:

(a) The increase in the value of the rented property as a result of: a) the opening of a pedestrian street, the commissioning of a metro station and an increase in commercial traffic.

Such a case was regulated by the Commission's Decision No. 423/2008 of the Supreme Court, according to which "...after nine years from the conclusion of the lease, the rental value of the leased property has increased dramatically, so that the rent paid is not in line with the economic conditions on the street, with the consequence that there is a disproportion between supply and consideration, which justifies the adjustment of the rent to the amount that removes the disproportion". According to the same decision, the above increase in the rental value of the property was due to the pedestrianisation of the street on which the property was located, which resulted in an increase in commercial traffic and, subsequently, in the rental value of the properties on that street, while the opening of the metro station in Syntagma Square, to which the street is adjacent, also contributed to the increase in traffic.

(b) Inclusion of the area of the leased property in the city plan.

(c) Entry into force of the system of objective determination of the market value of the real estate in the given area.

(d) Establishment and operation of many shops in the area of the leasehold property, resulting in an increase in the demand for properties for lease.

The above criteria are presented in the decision No 636/1997 of the Trikala Court of First Instance, in which it was held that: "the sum of 66,141 drachmas as the monthly rent of the rent in question is now in obvious disproportion to the rental value of the rent. This is because from the starting date of the lease (01.04.1986) until the day (21.04.1997) when the monthly rent of the defendant was adjusted to the amount of 66,141 drachmas, many events took place which contributed to a significant increase in the rental value of the defendant.In particular: 1) The area where the disputed lease is located was included in the city plan of Trikala, which contributed to the construction of many buildings in the area. 2) The system of objective determination of the market value of real estate is now in force in this area, which has led to a large increase in the objective rental value of the real estate. 3) Many shops (mainly restaurants and shops selling cars and car parts) have now been established and put into operation in the same area, which has increased the interest of entrepreneurs in establishing a shop in the same area. The high demand for properties in the area for lease contributed to the large increase in rents[...]Of course, the plaintiff could have secured a monthly rent in excess of 70,000 drachmas for the disputed lease, if he had the freedom to negotiate freely. Indeed, if he had leased the rent in question in order to use it as a restaurant, car repair shop or other similar shop, he could have secured a monthly rent of approximately 100,000 drachmas. [...] On the basis of the above-mentioned proven facts, the Court reaches the following conclusions: [...] 2) In any event, the monthly rent of 66,141 drachmas is in obvious disproportion to the rental value of the rent in question, so that the defendant's insistence on payment of this rent is contrary to the provision of Article 288 of the Code of Civil Procedure. 3) In view of the comparative facts, which have been set out above, the manner in which the disputed lease is used by the defendant, and the minor burden which the particular manner of use causes to the disputed lease, the monthly rent, which the defendant must pay to the plaintiff in order for the defendant's provision to be in accordance with good faith, fair dealing and, above all, the rental value of the disputed tenancy, amounts to 80. 000 drachmas'.

Similarly, with regard to (d) above, the Athens Court of Appeal decision No 8008/2003 held that: "...The area, as is well known, presents a remarkable commercial traffic, since there are many shops selling the most branded goods, with the consequence that, in recent years, there has been a significant increase in the demand for real estate for lease (shortage of commercial premises), with the consequent substantial increase in the rental value of the shops [.... ]For the leasehold property in question, a monthly rent was paid during the year in question from 1. 027,14, i.e. EUR 34,70 per square metre (1 027,14: 29,6 (26 + 18/5) = 34,70). That is, it is sufficiently less than that which can be obtained under a free rent regime, as stated above, that the defendant tenant's insistence on paying this amount to the plaintiff co-tenants is contrary to the fairness and honesty imposed on transactions and it (monthly rent) must be fixed, in the judgment of this Court, at the amount of EUR 52.70 per square metre. The Court of First Instance finds that, in its judgment, the amount of EUR 1 560 (52,70 x 29,6) per square metre and the total amount of EUR 1 560 (52,70 x 29,6), which removes the disparity in the benefits provided by both parties".

(e) Upgrading of the area of the leased property due to the construction of Attiki Street and the airport.

This reason appears in the decision of the Athens Court of Appeal No. 4643/2005, according to which the leased property "is located approximately 500 meters near Attiki Odos, the start of work on which began in 1996 and was inaugurated on 18.3.2001, which significantly shortened the access of the lessee's cars to the leased property. In 1996 the contract for the construction of the new international airport in Spata Eleftherios Venizelos was signed, which began operations on 29.3.2000. These events have significantly increased the marketability of the properties in the area of the lease as well as the rental value".

(f) Currency devaluation.

The devaluation of the currency and the general rise in the cost of living were considered, according to the decision of the Piraeus Court of First Instance No. 19/1994, to be sufficient circumstances for the court to order the adjustment of the rent on the basis of Article 288 AK. In particular, the above judgment states that "...the following are proven in the Court's judgment [... ] In particular, there was a change in the economic conditions existing at the time of the conclusion of the lease due to the significant increase in the market value of real estate and its rental value nationwide, and accordingly of the property at issue, but also due to the devaluation of the drachma and the general increase in the cost of living with a corresponding discount in the exchange value of the agreed rent [...] Having proved the above, the increase in the rental value of the lease and the devaluation of the drachma and the rise in the cost of living by at least 40% caused, in the Court's judgment, the plaintiff lessor to suffer a loss (loss of profit) exceeding the risk assumed by him with the initial drafting of the lease agreement and this loss must be limited, in application of the provision of Article 288 CC, to the limits imposed in good faith, taking into account the customary commercial practice, by adjusting the rent paid to the upper amount of 100. 000 per month, which is the fair rent, in view of the prevailing rental conditions in the area where the lease is located at the time in question".

(g) Increase of the price list.

In accordance with Order No. 72/1996 of the Mesolonghi Court of First Instance 'the instability of the currency, the increase in the rent, inflationary trends, the stabilizing economic programs and additional tax charges, in the judgment of the court and in accordance with the above, do not constitute exceptional and unforeseeable circumstances and therefore cannot support an adjustment of the rent under Article 388 of the Civil Code, because the conditions for its application are not met. However, on the alternative basis, which is based on Article 288 of the CC, the action is lawful [... In the Court's view, there is a need to adjust the rent of the lease in question on the basis of the principles of good faith and fair dealing, because, as a result of the substantial increase in the rental value of the lease since 1991, the applicant lessor suffers a loss through loss of profit, which (loss) exceeds the risk which he incurred in concluding the lease in question at the rent in question, i.e. 200,000 drachmas, in which case his loss must be limited by extending the provision, i.e. by increasing the rent from the sum of 200,000 drachmas to the sum of 300,000 drachmas".

B) The reduction in the rental value of the leasehold property, caused by:

(a) Oversupply of roofing for commercial use.

This criterion is presented in the 2192/2010 decision of the Athens Court of First Instance, according to which: "... many shops in the area remain unrented, so there is an oversupply of roofs for commercial use, which naturally leads to a reduction in the rental value of the properties of the commercial triangle. Even the other floors of the apartment building where the disputed building is located remain unoccupied as well as a cafeteria shop near the disputed building, on str. ...Based on these facts, the lawsuit should be partially accepted as well, as essentially valid, and the monthly rent should be reduced to 5,400 euros for the period after service of the lawsuit..."

(b) Changing economic conditions - Economic crisis.

One of the decisions that considered the economic crisis and its consequences as grounds for a reduction of the rent was the decision of the Supreme Court No.595/2020 according to which, "the imposition of harsh economic (fiscal and tax) measures with the 'memoranda', due to which the income of workers and, consequently, their purchasing power has been significantly reduced, the significant increase in income taxation and the imposition of financial burdens on real estate, etc., which also entail a reduction in the commercial activity of the shops, are dealt with under the provision of Article 288 of the CC and, consequently, these events justify the adjustment of the rent under that provision, even if they do not constitute grounds for the application of Article 388 of the same Code, considered as non-exceptional and unforeseeable events'"(see also Supreme Court 765/2020 ). A similar reasoning is presented in Supreme Court decision No 928/2020, which held that the deterioration of the economic situation of the country and the reduction of consumer traffic in businesses, including pharmacies, following the conclusion of the lease in question, constituted grounds for reducing the rent of the property that housed a pharmacy business.

Thus, in the decision of the Piraeus Court of Appeal, No. 50/2021, the following is stated "In order to assess the above determined by the decision of the Piraeus Court of Appeal No. 245/2018 decision, the Court of Appeal took into account the financial crisis that has been affecting the country since the beginning of 2010, with the direct consequence of the shrinkage of incomes and the reduction of citizens' purchasing power, which resulted, inter alia, in the closure of a significant number of businesses (including mass catering establishments), the oversupply of shops for rent, the low demand for them and, lastly, the reduction in their rental value, resulting in a change for the worse in the rental conditions in the specific area of the applicant, which were taken into account in determining the rental value of previous years. The rapid decline in rents from 2010 onwards was demonstrated by the comparative data submitted by the defendants, in particular [...] It was also demonstrated that from the beginning of 2010 the effects of the international economic crisis, which had already begun outside Europe in mid-2008, began to be reflected at a domestic level. This crisis was sealed by the inclusion of the country in the support mechanism of the European Union and its financing by the International Monetary Fund in March 2010. The above-mentioned economic impasse resulted, starting in the summer of 2010, but mainly from the middle of 2011 onwards, in a climate of wider economic instability, which inevitably affected business activity, while it also took on social dimensions, pushing the country's unemployment rate to unprecedented high levels. The closure of an increasing number of commercial outlets, even those located on the country's most commercial streets, is a phenomenon that is growing at a geometric rate, while the real estate sector in particular has been irreparably shaken. These events, in connection with the economic situation in which the country finds itself, have resulted in the consequent reduction in the rental value of real estate".

Instead of an epilogue

In conclusion, we note that there are many cases where the courts will intervene by modifying an already established tenancy, either by increasing or reducing the rent so that it reflects the circumstances that have arisen since the conclusion of the tenancy agreement. A change of circumstances, on the basis of the foregoing, within the meaning of Article 288 CC may be indicative: a significant increase or substantial reduction in the rental value of the lease, a significant increase or reduction in the rent, a devaluation of the currency, a fluctuation in the demand for property for various reasons, a change in economic conditions and other reasons, since the cases in which an adjustment of the rent is permitted under that provision cannot, of course, be provided for in detail in their entirety, since the relevant judgment depends on the specific circumstances prevailing in each case.