The rent adjustment cannot be distorted in this way by landlords

The change in prices in Brazil is measured using some specific indices, with its own methodologies. For example, there is the IPCA-IBGE, declared the official inflation index and which operates only in retail trade. In August 2023 this index accumulated an increase of 4.61% and now in 2024 it has reached 4.50%.

On the other hand, there are the IGPs, published by the Fundação Getúlio Vargas, indices that determine the variation in the purchasing power of money in wholesale, retail and civil construction, in proportions of 60%, 30 respectively % and 10%. Given their configuration, PGIs are notoriously more volatile, as well as being severely impacted by exchange rates and commodity prices.

The PGI-M stands out here, recording a change of -7.20% in August/2023 and +4.26% in August/2024. The IGP-M and the IGP-DI are, traditionally, the most used indices for the purposes of adjusting the rents established in rental contracts.

Considering that there is no legislation regulating the matter, nor jurisprudence on the matter, disagreements between owners and tenants are frequent regarding the application of the adjustment when the index varies negatively, a phenomenon called “deflation”.

In fact, it is common practice for rental contracts, through specific clauses, to establish that only positive changes in inflation should be applied. Regardless of the validity or otherwise of these clauses, which are questionable in light of the following arguments, assuming, hypothetically, that the rental contract must be kept unchanged in situations of negative inflation, it is necessary to clarify that, under penalty of distortion of the rental contract rental value, in the following adjustment base month, if inflation is determined during the interregnum, the rent will have to be readjusted taking into account the 02 periods, i.e. the 12 months of deflation and the 12 subsequent months in which inflation is verified (i.e. if the change in inflation is higher than the change in deflation observed in the previous interval).

In other words, if a contract celebrates an anniversary every August and contains the aforementioned clause prohibiting the reduction of the rent, now in 2024 the right thing to do is to keep the rental contract unchanged, given that in the 24 months there is still deflation equivalent to 2.94%. In this example, therefore, the rent will only be increased in August 2025 and if inflation is above 2.94%.

The problem is that some owners of street properties and spaces located in shopping centers simply ignore the 12 months in which deflation occurred and now, in 2024, want to consider only the positive change in prices of the last period. In the August 2024 example, they currently intend to increase rent by 4.26%, not counting deflation in 2023.

Furthermore, in the same way, the lessor cannot, when calculating the cumulative value over the 12 months, cancel the months of deflation and apply only the months in which the change was positive. In this case the distortion is even greater.

The variation highlighted above in the PGI-M may seem insignificant for a residential or non-residential joint tenancy, however, for industrial or retail-related tenancies (chain stores, shopping centres, etc.), the incidence or not of deflation in rental contracts generate an impact in representative absolute values.

Starting from the idea that the annual adjustment of the fee has the function of correcting the purchasing power of the currency, through an index chosen between the parties, any total or partial inattention to the negative variations will result in distortions, in the sense that, in ultimately, the value of the lease will not represent the actual appreciation or devaluation of the currency over the term, which will ultimately result in illicit enrichment in favor of the lessor.

In this sense, if there is a contractual provision relating to the adjustment of the rent, as there is no legal obligation to do so, there is no doubt that its value must be reduced when the inflation rate is negative.

It is worth remembering that, according to studies also conducted by the Fundação Getúlio Vargas, CPIs are the most suitable indexers for readjusting rents deriving from rental contracts for properties intended for retail sale, since their variations follow the prices of the products and of the services for which they are intended for the final consumer, unlike what happens with PGIs and others.

Given the volatility of our economy and the difference between the inflationary indices published in the country, a possible contractual solution to be adopted between tenants and owners is to establish a rent adjustment based on the average between IGP-M/FV and IPCA – The IBGE , for example.

Finally, from the perspective of tenants, it is essential that they negotiate their leases according to the terms discussed here, as well as being careful to require their leases to be readjusted properly.

Daniel Cerveira is a partner at Cerveira, Bloch, Goettems, Hansen & Longo Advogados Associados; Author of the books “Shopping Centers – Limits to contractual freedom” and “Franchising”.

Source: Terra

Rose

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