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13.10.2022 | KPMG Law Insights

Adjustment of advance operating cost payments in times of exploding costs

In recent months, operating costs have virtually exploded, especially for heating and hot water. There is currently no end in sight to the price increases. Landlords of both residential and commercial space find themselves in a “sandwich position” between tenant and utility. On the one hand, they have to make the often considerably increased advance payments to the utilities themselves and, on the other hand, they can only pass on operating and ancillary costs to the tenants with a considerable delay, if at all. This leads to landlords having to pay substantial amounts up front.

Examination of the increased operating costs

Landlords are advised to carefully examine the bills sent by their utilities, as well as other operating and utility costs incurred, to determine whether amounts billed are justified and in accordance with the contracts entered into. This is also necessary in view of the fact that it can be expected that, in view of the sharp rise in costs, tenants will in future examine even more closely whether and to what extent the allocation of operating and ancillary cost items is actually formally and materially justified.

If the bills issued to them are correct, landlords are advised to scrutinize existing utility contracts as a whole and explore whether more favorable alternatives may be available. On the one hand, they are obligated to do so on the basis of the economic efficiency requirement applicable to cost allocation as a secondary obligation under the lease agreement. On the other hand, they can also reduce the advance payments they have to make themselves in this way and prevent the consequences of payment defaults on the part of the tenants. The efforts made by the landlord in this regard should be documented in order to be able to prove compliance with the requirement of economic efficiency in case of doubt.

Increase in advance payments for operating and ancillary costs or a flat rate

In addition to the adjustment of existing contracts with the suppliers or a change of suppliers, an adjustment of the monthly apportionment of operating and ancillary costs agreed with the tenant should be considered. The first prerequisite for this is that such an allocation has been effectively agreed in the first place, whether in the form of a lump sum or in the form of monthly advance payments with annual billing.

An increase in the apportionment by appropriate agreement is possible at any time for both residential and commercial leases. However, in the case of commercial leases – at least in the case of long-term leases – compliance with the statutory requirement for written form must be ensured in order not to run the risk of the fixed-term lease becoming an open-ended lease.

The unilateral adjustment of the agreed apportionment in the case of a residential lease is regulated by law. Accordingly, the adjustment of an agreed flat rate is possible in the event of an increase in operating costs by declaration in text form and with appropriate justification, insofar as this is agreed in the rental agreement. If advance payments for the operating costs have been agreed, each contracting party may, after a formally and materially effective settlement, adjust the advance payments to be made in the future to an appropriate amount by declaration in text form. The declaration of an adjustment of the advance payment amount can either be linked to the statement of operating costs or be made at a later date. It is important to note here that the parties are only entitled to a single right of adjustment per settlement period. If an adjustment has already been made as part of the annual settlement, residential tenants may object to a new adjustment in the current fiscal year even if it may seem reasonable in order to avoid foreseeable high additional payment amounts. The justification of the adjustment of the advance payments is not provided for by law, but should be strongly recommended to the respective party from the outset.

There is no statutory regulation on the adjustment of apportionment provisions for commercial leases. In this case, a unilateral adjustment of the advance payments or lump sum for operating and ancillary costs can therefore only be considered if this has been contractually agreed accordingly or is subsequently agreed.

Outlook

If it is not possible to adjust the operating and ancillary cost allocation during a current fiscal year and the landlord does not have sufficient reserves to bridge a bottleneck, he should seek possible interim financing in good time. Regardless of this, he should seek discussion with his tenants and inform them of the increased costs at an early stage. This gives tenants transparency over their costs and enables them, for example, to adjust their heating behavior and other consumption.

Residential tenants are also advised to find an amicable solution with their landlord if they want to counter the foreseeable cost burden at an early stage, because an adjustment of the prepayment amount protects tenants from a massive financial burden due to an expected one-time additional payment.

Contact persons at KPMG Law Rechtsanwaltsgesellschaft mbH: Inke Reuter (Senior Manager) and Dr. Rainer Algermissen (Partner)

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