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Challenge of controlled rents at the expiry of the cantonal administrative control: new hope for the Landlords?

The Federal Supreme Court of Switzerland rendered on 20 August 2016 an interesting decision (Case 4A_559/2015) concerning the possibility to challenge the rent of residential premises furthered and controlled by a public authority when the concerned property is going out of such administrative control.

In this particular case, the lease agreement had been signed in July 2005 for a five bedrooms apartment situated in Geneva built at the beginning of 1990 and classified as HLM (social housing), whose rent was controlled by the competent authority until the end of 2012. The agreement was renewed from year to year, failing a termination by either party.

During such period of control, any modification of the agreed rent roll was of the competence of the local administrative authority, which decided to act either officially, or at the request of the owner, or of a Tenant. Based on Federal law, the administrative authority may not authorize rents procuring to the Landlord an excessive yield of the own funds invested in the building or coming from a manifestly excessive purchase price.

In August 2012, following a gift (donation), the ownership of the property had been transferred to a new owner and during the period of rent control, the last increase of rent to CHF 1'508.00 per month was authorized as of 1st December 2012. Simultaneously, the Tenant requested a rent reduction for the 1st March 2013, in view of the end of the rent control, and this based on a yield calculation.

Indeed, under Swiss Law, there are two methods applicable to calculate whether a rent is admissible.

The first, the so-called "absolute method", aims at examining, on the basis of the market prices and of the costs borne by the Landlord, if the rent is abusive, because it is procuring an excessive yield.

In application of Article 269 Swiss Code of Obligations (SCO), the rent is abusive when it enables the Landlord to get an excessive yield of the rented premises. What is meant here is the net yield of the invested own funds. The yield corresponds to the connection between the net revenues obtained from the rented premises, after deduction of all expenses, and the own funds invested. The rent must on one hand offer a reasonable yield on the own funds invested and on the other hand cover the real estate expenses. The calculation of the net yield, according to the "absolute method", is a control of the rent on the basis of the financial situation of the building at a specific moment, regardless of any previous agreements.

The second method, the so-called "relative method" consists in controlling if a rent adaptation during the lease is admissible, according to the contractual relationship between the parties; to that purpose, the judge examines in particular the evolution of the rent fixing criteria between the date of the setting of the previous rent and the date of the fixing of the litigious rent.

The principle of trust implies that the party which does not dispute a rent adaptation, cannot afterwards avail itself that it was abusive or insufficient; a modification of rent is therefore only admissible if the circumstances have changed since the last adaptation. In accordance with the wording of Article 270a al.1 SCO, the Tenant may dispute the amount of the rent and ask for its reduction for the next termination term, if he has a reason to admit that the rented premises are procuring to the Landlord an excessive yield within the meaning of Articles 269 and 269a SCO, because of a considerable modification of the calculation basis, resulting in particular from a costs reduction.

According to a well-established case-law, a rent reduction request during a lease must be examined on the basis of the relative method, meaning that the Tenant can only invoke rent reduction factors which occurred since the last rent fixing. The Landlord may however allege the exception of the absolute method to counter a rent reduction request based on the relative method.

In addition, in certain specific cases, the case-law has exceptionally also admitted that the party which requests a rent modification may invoke the absolute method, specially where the previous rent resulted from an indexed or a staggered lease; indeed in such leases, the rent may only vary according to a single factor, either the rise in price based on the Swiss Consumer Price Index, or the specific amount agreed in advance between the parties.

In this new and recent decision, the Federal Supreme Court questioned whether the absolute method should be applicable when a building is going out of the rent control by an authority; the Court mentioned expressly that the relative method would be sufficiently appropriate, since it would enable the civil judge to take into account all the changes that have occurred since the last rent fixing by the administrative authority, including the possible loss of public subsidies by the Landlord.

This decision is a confirmation of the preamble of a previous decision rendered in 2001 by the same Court, pointing out that in principle only the Landlord may invoke the absolute method when a property is going out of the administrative control of the rents, since it is likely that a yield calculation would generally result in setting a rent superior to the one subject to the control of the administrative authority.

Residential premises, whose rents are controlled by an authority, may be interesting for foreigners willing to invest in Switzerland because they constitute an exception to the principle that real estate used for residential purposes may not be purchased by persons abroad solely as an investment. In seven cantons of Switzerland, including in Geneva, foreigners may be authorized to acquire real estate for the construction of subsidized housing, i.e. for the building of accommodation with a rent which is low and reasonable compared with similar premises in the same locality, or to acquire newly built social housing of the same type when there is a local housing shortage (Article 9 para.1, lit. a. Federal law of 16 December 1983 on the acquisition of real estate by persons abroad).