How to deal with "unfair rent" laws

Real Estate
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I was thinking about building/owning property to rent to tenants. But “unfair rent” laws have me spooked. Resources as to how to charge market rent lawfully (or at least as much as permitted) are sparse.

I will try to put forth my understanding of the foundations and potential solutions. I hope that others will correct me on them, and add their knowledge to the discussion.

Introduction

Rents in Switzerland rise and rise because quickly rising demand meets not so quickly rising supply. In my view mainly driven by immigration, sprawling regulations, and NIMBYs against rezoning. Recently there have been claims that landlords in Switzerland have too high (and unlawful) yields. The crazies from the Swiss tenants association even want to launch an initiative to remove any market elements from rent prices fixing them to costs only.

Anyway, the concept of unfair rent does already exist in our laws. In general this area is complex and driven by court rulings instead of laws. Many interest groups claim many things, and lawyers earn good money on the state of affairs. I base myself upon the following sources:

Unfair rent and challenge

Tenants have the right to challenge the rent as unfair. They can do so initially and after every rent increase. The deadlines for this is 30 days. They can also challenge if costs decreased significantly. The challenger has to prove that the rent is unfair.

If I understand correctly there no conditions for challenging when the rent increases or cost decreased. There are certain conditions for challenging the initial rent in the first 30 days:

  • personal or family emergency is cause for entering rental contract; or
  • local vacancy rate below 1.5%; or
  • rent increase over 10% on previous rent without having renovated anything; or
  • the rent is unfair

Especially number 2 is satisfied in many, many municipalities (map).

I’m not fully sure if rent increases or cost decreases can be used to challenge and adjust the rent on absolute or only relative grounds (e.g., the rent has always been unfair and is reduced to a fair rate vs. cost decreases reduce rent and rent increases are capped to a reasonable relative increase). Sources seem to point to relative only, and the initial rent is fixed after 30 days.

How unfair rent is defined is based on the property:

  • If the property is older / didn’t change hands in 30 years: Higher than custom in the neighborhood/local area. Difficult to prove, as it is often difficult to find comparable objects.
  • If the building is newer than 10 years: Gross yield exceeds mortgage reference rate plus some percentage (1.5 - 2% according to federal supreme court rulings).
  • If the property did change hands in the last 30 years: Net yield exceeds mortgage reference rate plus some percentage (0.5% originally, and 2% on reference rates >2% after the last federal supreme court ruling).

Maximize permitted rent

Apart from relying on your tenant being too content, uninformed or lazy to challenge, maybe actually optimizing for fair rent could be another strategy.

If you make it to 30 years, you probably win, and charge whatever people are ready to pay. You being a company could help that. You could maybe even buy one that already holds for 30 years. Or you maybe you could buy an older property (though, I’m not sure if renovating it can make it lose old building status).

So what remains is optimizing gross or net yield. According to the tenants association:

gross\ yield = \frac{rent}{investment\ cost}
net\ yield = \frac{rent - expenses}{investment\ cost - mortgage}

where

  • rent is exclusive of service charges
  • expenses are mortgage interest and maintenance, operating, administrative cost
  • investment cost is buying land and building buildings

Those yields should be as low as possible on paper. How could this be optimized? Here are some things I thought about:

  • Use the highest investment cost possible. The building and land might be worth more now than when you bought it. Though, I don’t know what is good enough proof. Independent, insurance, or government estimations?
  • Raise costs. If you do everything yourself then it never appears as costs.
    • I’m not sure if you can just account the work you do in the internal books (e.g., directly income (from painting walls) → expenses (for having walls painted). Would you need to bill from another company?
    • Costs should be realistic. Where to find good estimates? Maybe ofri.ch?
    • Pay higher markup for the mortgage, but get something else for something unrelated from the bank (e.g, free trading, TER free funds).

I’m not sure how much difference this can make. Will it push it to an attractive investment? Or should “someone else” (i.e., nobody) deal with all these problems? Global stock ETFs are much less complicated.

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I think it is great that tenants also have an organization that looks out for their interest. Being able to live in a reasonably priced home is a good thing IMO. But yes, it prevents some juicy gains from the investor perspective.

I have never understood the reason why older buildings have less restrictions than newer buildings. It’s older, lower standard etc. so why should rent be higher here?

Please no, that seems just unreasonable if not even morally questionable. But factor in the work you do yourself at a usual price standard is probably standard I would assume?

Sorry for not being too helpful with my answers to your open questions; haven’t been on the landlord side yet (as you can probably guess from the sentiment in my answers :wink: )

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Again, this is not crazy because people representing their interests. This is crazy, because it does the opposite. It doesn’t solve the underlying demand-supply problem, but additionally discourages supply while leaving demand unconstrained (or even fueling it with artificially low prices).

The result is lower rents, yes. But you can’t have them, because nobody is offering. On the demand side, current tenants occupy theirs forever because they can’t switch. This is already happening with old couples unwilling to downsize from family homes because their rent would rise. Instead of higher rents, you now have nepotism and ever increasing wait times (the older couple will eventually die in about 30 years). This is the natural consequence of such policies wherever they have been implemented.

To add an actually useful alternative:

  • If local vacancy rates are too low, force municipalities to meet demand by rezoning. It makes no sense that Zurich is not a skyscraper skyline. This would also reduce the need to bulldoze arable and natural land.

I don’t think this is normally accounted for. At least people I know don’t do it. Tracking this only adds overhead. If you have employees you can use the cost of salaries. But a one-man show would probably prefer to not pay additional taxes for their own salary. Especially social contributions make this a very bad deal even in low tax locations.

In any case, you would potentially have to prove this to a judge, so a detailed report of hours worked might be a sensible backup.

I know, any of this will need a lawyer for higher certainty, but I’d prefer having a good idea of what to ask, instead of having them explain the basics at 500 CHF per hour.

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I am in this situation currently (challenging the rent based on excessive yield after a rent increase) and I was wondering the same. I believe most of the time, the rent increase will be cancelled and it doesn’t go further; but the code of obligations doesn’t mention this limit as far as I could tell.

I think it arose out of practicality: documents are often missing which makes the other formulas difficult to use.
There’s an initiative from the tenant’s association in progress to remove that clause (if I understood the initiative correctly).

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You need to build affordable apartments, Zürich has a lot of construction going on, I can see cranes in most directions (obviously not enough and the only affordable ones are those built by Genossenschafts).

I don’t think the issue in Zürich is due to lack of new build from private investors (if anything in many places people tear down affordable/older housing to build luxury apartments). Those investors will always try to juice the returns first and foremost, without taking into account social goods.

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New market-rate construction from private investors will eventually lead to people moving there and vacating cheaper (lower-standard) apartments, which leads to people moving there and vacating cheaper (lower-standard) apartments, ad infinitum

See "The Effect of New Market-Rate Housing Construction on the Low-Income H" by Evan Mast

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Is that the same thing that happens in Zug with building new overly expensive flats? :new_moon_with_face:

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In Zurich it’s different, it’s often cheap apartments that are destroyed and replaced by expensive ones (often with same number of units or less since they’re have less rooms but larger areas). The paper assumes cheaper housing supply stays constants (only net new market rate is added).

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Whenever they do destroy existing stock they make a point to build more new flats… :wink:

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Just out of curiosity . Do you know how many times rent is actually challenged under the pretext of “unfair rent ” ?

I know so many people who had a rent increase. No one used such a clause. People normally use calculations with respect to reference rates and inflation and if increase fits, then they just accept.

But based on your post, it seems like you are saying people also challenge the rent within 30 days of renting it for first time?

This is very weird. Why accept the rent , sign a contract and then challenge the rent and call it “unfair”

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Because it’s legal and protected? (I know people who did that)

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Because in places like Zurich where you have 100 people that would even pay more rent than advertised, just to get the flat out of desperation, challenging the rent before wouldnt work.

If you challenge anything beforehand or make the slightest impression as if you could be annoying, you’re out of the game.

Hence it is very important to allow challenging it also after signing, to prevent exploitation. I know, others might criticize it as ‘intervention in the free market’ though.

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But can’t this lead to exploitation of the rule?
To avoid legal costs, perhaps landlords would end up accepting such reductions

To me this seems a bit arbitrary. On what basis does a new tenant say that the rent is unfair? If it’s based on increase vs last rent then I can understand.

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The costs are minimal (and would be covered by a legal insurance that I think most landlords would have, most tenants would do it without any representation beyond potentially a bit of coaching from MV).

Usually the complaint is done through the Schlichtungsbehörde which apply some known guideline around what is considered abusive (those that OP complains about in the first post).

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Rental market in Switzerland is definitely not a free market (people can complain about that, but that’s not what it currently is). Let’s not use this thread to debate this :slight_smile:

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So what we are saying is following

  • landlord advertises the flat at “fair rent” as per their understanding
  • tenant agrees to the rent
  • tenant files an appeal that rent is “unfair”
  • Now landlord either pay legal fees to dispute this claim or end up reducing rent

How fair is that ?
I am all in for protecting the tenant. I myself am tenant but such rules can lead to exploitation.

I am not very surprised why landlords are so picky in renting out their flat. It seems they can get badly hurt. I also heard that landlord cannot ask tenant to leave unless legitimate grounds are proven. Like there is a medical need / age / or family situation changed.

Let’s say if I buy a house and I rent it out and in few years I need to live in it, why do I need legitimate ground for this? I own a house and I want to live in it. Isn’t this legitimate enough?

I might be reading this all wrong but I think when a law is super protective for one side, it might end up hurting them in long run because the other side isn’t interested anymore

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Okay.
So what we are saying is that if landlord is not abusive the law is not biased to let tenants abuse them. If that’s the case then it sounds fair

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No, landlord advertises an unfair rent, they probably know it but want to get away with it. Sometimes they do, sometimes they’re unlucky because people know their rights.

It’s similar to how a contract can have illegal clauses, you can sign it but it’s still not enforcable.

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All you do is go in front of the Schlichtungsbehörde where a neutral party tries to negotiate between you and them. Don’t see big risk of exploitation here. Of course one could continue then and start sueing, but you could do that with any kind of contract.

Or even without having a contract. But if the rent is fair (and that means ‘not excessive’ and not ‘good deal for tenant’), there is nothing to fear.

I thought that is kind of covered by declaring an ‘Eigennutzung’?

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There’s nothing illegal, and most landlords do it. No judgement here. (Everyone will try to get the best deal they can get away with :slight_smile: )

edit: and big companies or real estate funds are definitely at an advantage here, they can use the fact that only a fraction of the renters will challenge the rent, while an individual landlord will be potentially more impacted (a lot more variance if their sole renter challenges the rent).

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