On Thursday 6 October 2022, on the proposal of Luxembourg's Minister for Housing, Henri Kox, the Council of Government (Luxembourg's cabinet) adopted a series of amendments (bill no. 7642) on the draft law on the reform of the residential rental lease, amending the amended law of 21 September 2006 on leases for residential use.
One of the key elements of the amendments aimed at protecting tenants against usurious rents was the complete revision of the "maximum annual rent ceiling" mechanism. Before the reform, the maximum annual rent ceiling was limited to 5.0% of the capital invested in the housing (revalued and discounted), which will now be reduced to a rate of 3.5% of total investment (3.0% for dwellings with energy performance certificate of categories F to I).
Xavier Bettel, Luxembourg's Prime Minister and Minister of State, in his State of the Nation address on 11 October 2022 in the Chamber of Deputies (Luxembourg Parliament), affirmed: "We are lowering the rent ceiling from the current 5% of the invested capital to 3.5% and even 3% for [non] energy-efficient housing".
Here we calculate, without prejudice, the maximum legal rent under different simplified scenarios for both pre-reform and post-reform (not yet in force) of the amendments bill no. 7642 of 6 October 2022 using the documentation provided by the Ministry of Housing on the web portal www.logement.lu. Please note that "revaluation" of a residential property will vary from case to case and has not been considered in the calculations below. However, the "discount", which reflects the yearly depreciation of a dwelling and is aimed to encourage homeowners to do repairs and renovations as needed from time to time, is included in the calcuations.
There are three key findings, of which the first is presented here.
1. New rent agreements are "lower" post-reform for only five preceding years
Assuming a total investment of €400,000 in 2020 in a dwelling with an energy certificate category between A and E, the maximum legal rent in 2022 would have been €20,004, or €1,667 per month (5% of total investment after discount) which decreases to €15,684, or €1,307 per month post-reform (3.5% of total investment after discount). However, if the same amount of investment was done in the year 2000, and assuming no additional expenses were acquired (restoration, renovation, etc.), the maximum legal rent in 2022 would have been €26,316 (€2,193 per month), which jumps to €46,296 (€3,858 per month) post-reform, nearly 75% higher than the pre-reform level.
The reason for this is that the scale or "coefficient" for each year has been updated and is now linked to the national consumer price index (indice des prix à la consommation national - IPCN) as well as the property price index. It should be noted that the pre-reform "coefficients" were only available until 2020 and not updated alongside the proposed new post-reform "coefficients".
Overall, the new "coefficient" overrides the net decrease in legal maximum rent offered by the 3.5% investment ceiling (post-reform) compared to the 5.0% investment ceiling (pre-reform) in just the five preceding years. In other words, tenants would benefit from a reduced maximum legal rent ceiling for dwellings which are five or less years old.
In principle, the new reform would mean that the maximum rent ceiling will be higher for dwellings which were acquired in 2016 or before. Also, it is expected that the newly built dwellings will be declared as primary residences by the homeowners and less available for the rental market, whilst investors will be interested in old rental properties in lieu of higher rental value, which in turn is likely to further push up the selling prices of old houses and apartments.
The new legal rent ceiling will apply to all new rental leases and also if the lessor decides to increase the rent of a previous rent agreement after the entry into force of the law. Moreover, the owner will have the legal obligation to determine the capital invested, revalued and discounted, from own expense before the dwelling is rented, and indicate the total amount of the capital invested, revalued and discounted, in the lease contract.
Importantly, apart from the new maximum rent ceiling, two changes proposed under the reform will also reduce the financial burden for all new tenants. First, the maximum amount of the rental guarantee will be reduced from three to two months' rent and second, any agency commission will be borne equally by the lessor and the tenant. Together, this would reduce the maximum five months equivalent of rent needed in the beginning of a lease to three and half months equivalent for all tenants.