The Danish Rental Acts Section 19.2 and Its Effect on Real Estate Transactions

Abstract

This thesis analyses what impact Section 19.2 of the Danish Rental Act has on the valuation of an older residential rental property and how the prevailing uncertainty regarding the legal rental level can be mitigated by partially applying principles of strategic contracting.

Due to the increase of aggressive international investors entering the Danish market for older resi- dential properties, a new version of the Danish Rental Act was passed in 2020 with the purpose of protecting tenants by limiting sudden increases of rental fees.

This thesis assesses, first, which legal requirements that must be fulfilled to set rental levels after the lucrative rules in section 19.2 and, secondly, how the legislation passed in 2020 has limited investor's ability to impose excessive rental fees.

Additionally, this work analyses what aspects must be considered when setting the rental fee levels, and how this determination differs depending on which legal instance rules out the setting of the rental fees.

Additionally, based on a fictional case, a model is being presented to ascertain what impact the Rent Tribunal’s reduction of the agreed rental level has on the valuation of a property. The uncertainty regarding the setting of the rental fees could potentially lead to a significant drop in the value of the property in question. In this specific case, it demonstrates that if the Rent Tribunal grants rental fee reductions to four tenants annually, an actual reduction of 30% in property valuation may occur.

Finally, this thesis proposes ways in which both buyers and sellers can mutually benefit in real estate transactions by applying principles from strategic contracting. Especially, it exposes how the appli- cation of proactive contract clauses can mitigate risks associated with potential reductions in the rental level dictated by the Rent Tribunal after post-closing of a real estate transaction. This work concludes that incorporating either a designed to purpose hardship clause or a reciprocal gain clause, would be appropriate measures to mitigate the risks associated with the uncertainty of the rental fees in real estate leases that are regulated subsequent to the Danish Rental Act’s section 19.2.