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  • Writer's pictureZiggurat Realestatecorp

What are fair escalation clauses in lease contracts?

Fair escalation clauses in Philippine lease contracts should strike a balance between protecting the interests of both landlords and tenants. They should be transparent, reasonable, and comply with relevant laws and regulations, including the Rent Control Act, which places restrictions on rent increases in certain situations. Here are some characteristics of fair escalation clauses in Philippine lease contracts:

  1. Transparency: The clause should clearly define how the rent increase is calculated and when it will occur. Tenants and landlords should be able to understand the terms without ambiguity.

  2. Frequency: The frequency of rent increases should be specified in the clause. Typically, rent is adjusted annually or every two years. Frequent increases may be seen as unfair, so it's important to specify reasonable intervals.

  3. Calculation Method: The clause should explain the method for calculating the rent increase. This could be based on a fixed percentage (e.g., 5% annually) or linked to a relevant economic indicator, such as inflation rates.

  4. Maximum and Minimum Limits: To prevent excessive increases, it's advisable to include maximum and minimum limits on how much the rent can go up. These limits should be reasonable and in compliance with local regulations.

  5. Market Conditions: A fair escalation clause should consider the local rental market conditions. Rent increases should be in line with prevailing market rates to avoid unfairly burdening tenants.

  6. Compliance with Laws: Ensure that the escalation clause complies with Philippine laws, especially the Rent Control Act, which sets limitations on rent increases for certain residential properties.

  7. Negotiability: Fair escalation clauses should be open to negotiation between landlords and tenants, allowing both parties to discuss and agree on terms that are reasonable and mutually acceptable.

  8. Notification Period: The clause should specify the advance notice period required for rent increases. Typically, this is at least one month before the increase takes effect.

  9. Renewal Terms: If the lease is subject to renewal, the clause should also outline how escalation will be handled during lease renewals.

  10. Protection of Tenants: Fair escalation clauses should take into consideration the financial capacity of tenants and not result in an unreasonable financial burden. Landlords should consider tenants' ability to absorb rent increases.

Ultimately, the key to a fair escalation clause is achieving a balance that allows landlords to maintain the value of their rental income while protecting the interests of tenants. Both parties should have a clear understanding of the terms, and the clause should comply with relevant laws. Before signing a lease agreement with an escalation clause, it's advisable for tenants to seek legal advice or assistance to ensure they are not agreeing to unfair or unreasonable terms.

Example of Escalation Clause

Here's an example of an escalation clause in a lease contract linked to yearly inflation:

Escalation Clause: "The monthly rent for the leased premises will be subject to an annual adjustment based on the prevailing annual inflation rate in the Philippines. The adjustment will be calculated as follows:

  • At the end of each 12-month period, the lessor will determine the most recent annual inflation rate published by the Philippine Statistics Authority (PSA).

  • The new monthly rent will be calculated by adding the annual inflation rate to the current monthly rent. The formula for calculating the new rent is as follows: New Monthly Rent = Current Monthly Rent × (1 + Annual Inflation Rate)

  • The adjusted rent will be effective 30 days after written notice is provided to the lessee. The notice will include the current monthly rent, the calculated adjustment, and the effective date of the adjustment."

Additional Notes:

  • In this example, the lease contract allows for an annual rent increase based on the official inflation rate published by the Philippine Statistics Authority. The use of the official inflation rate provides an objective and transparent method for adjusting the rent.

  • The formula used to calculate the new monthly rent is simple and directly linked to the annual inflation rate. It multiplies the current monthly rent by the sum of 1 and the annual inflation rate.

  • The notice period of 30 days is specified to give the lessee adequate time to prepare for the rent adjustment.

  • This type of escalation clause is tied to economic conditions, making it clear and based on a widely accepted measure of price increases in the country.

Before including such a clause in a lease agreement, it's important to ensure that it complies with local laws and regulations, as well as any specific requirements or restrictions. Additionally, both parties should be aware of how the adjustment will be calculated and when it will take effect.

Source: Ziggurat Real Estate Corp.

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