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Variation in commercial lease rents frozen at 3.5% year-on-year

Published on July 18, 2023 by Pierre Belhache - 3 mins reading time
SMALL BUSINESSES Companies Inflation Real estate

The law of July 7, 2023 extended the cap on increases in the rent reference index (IRL) for tenants in the private and social housing sectors until March 31, 2024. It also extended the 3.5% cap on the increase in the commercial leases rent index (ILC) for SMEs.

Differentiating between IRL and ILC

The index de référence des loyers (rent reference index) is used to revise housing rents, setting ceilings for annual increases when the lease contains a specific clause. This index is redefined each quarter by Insee, based on the average change in consumer prices excluding tobacco and rents over the last 12 months.

The commercial rent index is used for the annual revision of the rent for a commercial lease. It is calculated on the basis of inflation (75%) and changes in construction costs (25%). Since 2019, this index has risen by more than 10%.

Commercial rent caps extended

The August 16, 2022 law on emergency measures to protect purchasing power introduced a temporary cap on the annual variation in rental indices, the IRL and the IRC. It stipulated that rental leases containing an annual rent review clause could not impose an increase of more than 3.5% in mainland France, 2.5% in the French overseas territories and 2% in Corsica, a measure which applied to both empty and furnished rental properties and was aimed at private individuals, retailers and SMEs. Although this "rent shield" was due to expire on June 30, 2023, the law extended it until March 31, 2024.

 

In practice, lessors are allowed to increase commercial lease rents, but these are capped at 3.5%, even if the variation in the Indice des Loyers Commerciaux (ILC) exceeds this threshold. This measure will remain in force for a further year, until publication of the index for the 1st quarter of 2024.

One of the reasons for extending the scheme is that inflation is still high. The Minister of Housing believes that this should provide support for tenants until consumer prices stabilize. Without this measure, the annual variation in the IRL would have reached +6.26% in Q1 2023, and that of the ILC +6.29% in Q4 2022.

Tenants who were already having difficulty finding housing could be penalized the most as a result of this capping, but also of the timetable for the gradual ban on rentals for thermal flats. The status of "passoires thermiques" has changed since January 1, 2023, as specified in the Climate and Resilience Act, which aims in particular to accelerate the renovation of housing to achieve carbon neutrality by 2050. Renting out apartments or houses that consume too much energy is now prohibited, a measure that follows on from the rent freeze that had already applied since summer 2022.