Commercial lease agreements in Greece are governed by the presidential decree no. 34/1995 on commercial lease agreements, as amended and in force (PD) and, by the Greek Civil Code (GCC) for all issues not governed by the PD or the parties’ agreement.
The PD includes provisions as to minimum duration of the lease (i.e., legal term as opposed to the contractual term), readjustment of rent (in the absence of relevant contractual agreement or in case such agreement has expired or is invalid), transfer of the lease agreement, termination rights.
The PD was amended on 28 February 2014 and separated the applicable provisions to leases entered into before 28.02.2014 and leases entered into after 28.02.2014. The most important amendments relate to minimum duration (12 years for leases entered into before 28.02.2014 as opposed to 3 years for leases entered into thereafter) and termination rights by the lessor and the lessee[1].
Article 7 of the PD on the calculation and procedure for readjustment of the rent applies to leases entered into both before and after 28.02.2014.
As per article 4 of the PD, there are cases of leases with commercial use that fall outside the scope of the PD. This is the case, for example, for seasonal leases, i.e., with a term of less than 1 year, leases of premises within border stations or port or airport areas, leases of properties that have been classified as listed – διατηρητέα in Greek, etc. In such cases only the provisions of the GCC and the parties’ agreement apply. The GCC does not include provisions as to minimum duration of the lease and readjustment of rent.
Contractual agreement as a rule and common practice
As a general rule, the contracting parties can agree on the amount, calculation and adjustment of the rent, in any way they wish. Thus, any adjustment agreement (yearly, biennially, triennially, semiannually, etc.) is legal. Apart from a fixed amount, the rent can also be agreed as a percentage of the profits of the lessee’s business. This agreement may provide for the payment, in any case, of a minimum guaranteed rent of a certain amount (minimum guaranteed rent).
Annual increase rates that are customarily agreed by the parties are (a) the annual inflation rate, i.e. adjustment according to the Consumer Price Index (CPI) of the past 12 months preceding the adjustment, that is calculated by the Hellenic Statistical Authority around the 10th day of every month or CPI plus a fixed percentage higher than that (for example CPI + 1% or 2%), (b) a fixed percentage per se or a cap in case CPI exceeds a certain percentage or (c) a fixed amount, the first two being market practice.
Especially as regards lease agreements falling within the scope of the PD, the PD provides that the rent is freely determined by the contracting parties and is adjusted as per the provisions of the lease agreement (time and amount). Any contractual clause regarding the gradual adjustment of the rent by percentage remains valid for the term (either contractual term or legal extension) for which no gradual adjustment has been foreseen, as long as the parties have not excluded its validity for such term (either contractual term or legal extension)[2].
Gradual adjustment of the rent is the agreement of the parties, that the rent will fluctuate at regular intervals and by a certain amount or percentage. Same rule applies when the increase or decrease of the rent is agreed by indicating a certain monetary amount per stage.
The contracting parties may abolish the clause of the contractual adjustment of the rent by a subsequent agreement.
Generally applicable provisions in the absence of contractual agreement or in case such agreement has expired or is invalid
For lease agreements falling within the scope of the PD, legislative adjustment is provided in case (a) there is no contractual adjustment provided for; or such adjustment agreement has expired and (b) if the adjustment was dependent on an invalid clause.
Article 7 of the PD provides for two rent adjustment procedures and namely (a) the first adjustment after 2 years from the commencement of the lease agreement[3] and (b) the subsequent annual adjustments[4].
The first adjustment, i.e., after 2 years from the commencement of the lease agreement[5], is determined as follows:
- for the areas where the system of objective value[6] applies, no less than 6% of the objective value of the leasehold and 4% for its uncovered areas
- for the areas where the system of objective value does not apply, no less than 6% of the market value of the leasehold and 4% for its uncovered areas,
unless there are exceptional reasons which impose a different regulation, and which must be mentioned in the contract.
After the lapse of 1 year from the first adjustment, further adjustment is provided for and in particular every year amounting to 75% of the change in the CPI of the month of the adjustment in relation to the corresponding month of the previous year (simple twelve-month change), as calculated by the Hellenic Statistical Authority.
Legal readjustment due to the lapse of 1 year also applies in case there was a readjustment clause, but the duration of such clause has expired[7].
In both procedures (first adjustment after 2 years from the commencement of the lease agreement and subsequent annual adjustments), the rent is adjusted automatically, but becomes due only after the tenant receives a written notice form the lessor, which is serviced by court bailiff[8]. In case the adjusted rent exceeds double the amount paid, then the exceeding percentage is due as follows: 50% after 6 months from the written notice and 50% after 1 year[9].
The lessor is not obliged to claim an adjustment amounting to 6% of the value or 75% of the CPI, i.e., it may (although not usual practice) claim less than the above thresholds.
Legal theory upholds that if the rent is agreed as a percentage of the profits of the lessee’s business, then adjustment is not possible based on article 7 of the PD, but only based on articles 288 & 388 of the GCC, as detailed below.
Special provision for 3% threshold to the adjustment rate for the year 2022
Pursuant to article 121 of law 4926/2022 (GG Bulletin A’ 82/20.04.2022), as amended by article 92 of law 4941/2022 (GG Bulletin A’ 113/16.6.2022), for the lease agreements falling within the scope of the PD, a 3% threshold is imposed on the rent increase rates, from 1st January 2022 to 31st December 2022.
As per the explanatory statement of such law, this provision seeks to protect the smooth financial functioning of medium, small and micro-enterprises from the economic conditions that have been created in the real estate market especially in the current year, due to the high inflationary pressures that have been caused by the unprecedented increase in the prices of international trade of goods following the geopolitical crisis caused by the military invasion of the Russian Federation troops in Ukraine.
The 3% threshold does not apply in case the lessor is:
- a real estate investment company of law 2778/1999,
- a company, the majority of the registered shares, units or voting rights of which belongs directly or indirectly to Alternative Investment Funds (AIF) that are managed by Managers of Alternative Investment Funds (AIFM) of Law 4209/2013 and Directive 2011/61/EU, and whose registered office is not located in a non-cooperative state, as defined in article 65 of law 4172/2013 (Income Tax Code), or in a high risk third country for money laundering or financing of terrorism, as designated by the European Commission,
- a shopping centre/mall operator with a minimum total surface of 15,000 sq. m. in one or more levels,
- companies wholly owned by the Greek State, as well as their subsidiaries.
In addition, given that the law explicitly provides that this provision only applies to the lease agreements falling within the scope of the PD, it follows that it does not apply to leases with commercial use, but falling out of the scope of the PD as per article 4 of the PD (such as seasonal leases, i.e., with a term of less than 1 year, leases of premises within border stations or port or airport areas, leases of properties that have been classified as listed – διατηρητέα in Greek, etc.).
Up to this date, no extension or revision of such provision has been enacted or announced.
Constitutionality of the exceptions to the special provision
Pursuant to its explanatory statement and the discussions in the Parliament, such provision seeks to protect medium, small and micro-enterprises. However, the exclusions from its application can raise questions about its consistence with the principles of equal treatment and proportionality, protected by the constitution.
In that respect one could argue that it treats preferentially the specific categories of lessors and at the same time disadvantageously those lessees who have entered into lease agreements with such lessors. In particular, it can be supported that the criterion of the law (nature and/or corporate form of the lessor), is not convincing in relation to its compatibility with the above principles, as it implies, without justification, that the specific categories of lessors either do not contract with lessees who are medium, small and micro-enterprises, or that the lessees of such specific categories of lessors do not face the same problems as the rest.
To our knowledge, the Greek courts have not yet been asked to adjudicate on the issue. According to the officially published data of the Hellenic Statistical Authority, in our country the 12-month change in inflation (September 2021-September 2022) amounts to 12%, and same percentage applies for the readjustment of rents for which the yearly readjustment was to take place in October 2022, whereas the corresponding percentage last year was 2.2%. If the excluded lessees cannot come to an agreement with the respective lessors for contractual readjustment, or if the provision is extended for 2023, there might be case law in the future.
Articles 288 & 388 of the GCC
Even in case there is a contractual agreement for the gradual adjustment of the rent, or the legal provisions of article 7 of the PD referred to above apply, if the rent does not correspond to market conditions, adjustment may be sought based on articles 288 and 388[10] of the GCC. Recourse to such provisions applies both for leases falling within the scope of the PD and for leases governed by the GCC.
According to article 288 GCC, “the debtor has the obligation to perform the contract according to good faith (καλή πίστη in Greek), taking into account business usage (συναλλακτικά ήθη in Greek)”.
Article 288 GCC is mandatory law. Thus, the observance of good faith in the performance of obligations cannot be limited or excluded in advance by a waiver or an agreement[11].
According to article 388 GCC, “If the circumstances on which the parties mainly based the conclusion of a reciprocal contract (αμφοτεροβαρής σύμβαση in Greek), taking into account good faith and business usage (καλή πίστη και συναλλακτικά ήθη in Greek), were subsequently changed, for reasons that where exceptional and could not have been foreseen, and due to such change, the performance of the debtor’s obligation, taking into account the performance of the counterparty’s obligation, has become unduly burdensome, the court may at its discretion and following a petition of the debtor adjust it to the appropriate measure and decide to dissolve the contract either in its entirety or in part to the extent it has not been performed.
If it is decided to dissolve the contract, the performance obligations arising from it are ceased and the contracting parties have a mutual obligation to return the benefits they received under the provisions on unjust enrichment”.
Adjustment can be requested both for the originally agreed and for the adjusted rent, either by the lessor (increase) or by the lessee (decrease). This right can only be exercised by filling a lawsuit or counterclaim (αγωγή ή ανταγωγή in Greek).
If the court decides to readjust the rent, the readjustment is not retroactive but produces effect from the service of the relevant lawsuit and henceforth. The Supreme Court (plenary session) has also upheld that in such case the contractual term regarding gradual adjustment of the rent ceases to produce effect for the future, and that after the period for which the rent decided by the court applies, readjustment is based on article 7 § 3 of the PD (75% of CPI)[12].
After the filing of the lawsuit for readjustment according to articles 288 & 388 GCC, the claimant is entitled to request interim measures and namely to request that the lessor shall not terminate the contract or evict the lessee for not paying the rent provided by the contract, until the issuance of the decision on the lawsuit[13].
Apart from fact that in case of article 388, the court is entitled not only to adjust but also to dissolve the contract, the main difference of the practical application of these two provisions is that article 388 presupposes a change in the circumstances on which the parties mainly based the conclusion of the contract due to unforeseen reasons, with the result being undue burdensome of the one contracting party (or excessive benefit of the other party, as opposed to the benefit that such party would gain if the contract was to be developed smoothly and as foreseen).
If the change in the circumstances is not due to unforeseen reasons but due to other special reasons, article 288 may apply, so as to restore the obligations of the parties to the level that meets the requirements of good faith and business usage. To apply article 288, the courts seek for (a) permanent change in the circumstances, (b) material deviation between the rent paid and the one imposed by good faith and business usage and (c) causal link between the change in the circumstances and the material deviation of the rent, so that the readjustment is excluded, if the deviation would occur even without a change in the circumstances.
In any case, the relevant decision depends on the specific circumstances of the case at hand, including the expected profit from the contract, the financial situation of the parties, the need that the parties intend to serve by entering into the contract and the obligations to third parties that depend on the contract.
Conclusion
Readjustment of the rent is customarily part of the contractual agreement of the parties. In the absence of relevant contractual agreement or in case such agreement has expired or is invalid, the provisions of the PD apply, for the lease agreements falling within the scope of the PD. This is not the case for the lease agreements falling outside the scope of the PD, irrespective of the commercial use of the leasehold (such as listed properties), in which cases the contractual agreement of the parties applies. The parties can judicially pursue readjustment based on articles 288 and 388 of the GCC.
The special provision imposing the 3% threshold on the rent increase rates for the year 2022, for the lease agreements falling within the scope of the PD, has not up to this date, been extended. Taking this into account, as well as the thoughts relating to the constitutionality of the provision, the parties are encouraged to discuss in good faith the revision of the terms of the contracts between them, to avoid judicial pursue.
Whether or not the current high inflationary pressures could be interpreted as unforeseen or special circumstances, within the meaning of articles 288 & 388 GCC, subject to the remainder prerequisites set forth in this regard, depends on the specific circumstances of the case at hand.
[1] In brief, a lease in force or extended before 28.02.2014:
- shall have an initial fixed duration of 12 years (commencing from the date of the original lease, unless earlier terminated by mutual consent of the parties or in certain other specified cases),
- may be terminated prematurely or may have its duration shortened by a subsequent written agreement of the parties (a termination agreement bearing “certain date,” for example, a date verified by the Police Authority or other public authority or served to the contracting parties),
- after the lapse of the first year of the lease, the lessee may terminate it by a 3 months’ prior notice to the lessor and by paying 1 additional month’s rent as compensation (article 43 of the PD). Under Greek law such right cannot be waived by the lessee, unless by a subsequent agreement,
- can be terminated by the lessor due to private use or reconstruction, unless the lessor has waived such rights.
Whereas a lease agreement executed after 28.2.2014:
- shall have an initial minimum fixed duration of 3 years, even if the parties agreed on a shorter duration or on indefinite duration of the lease,
- may be terminated by a subsequent written agreement of the parties with certain date. After the agreed (definite) term of the lease (if such term is more than 3 years), unilateral termination of the lease is done in writing and its legal consequences occur after 3 months from notification of the termination to the other party. Note, however, decision no 2117/2019 of the Athens Court of Appeal (ΕλλΔνη 2/2019, p. 508-514), according to which the lessee may terminate at any time of the lease with 3 months’ notice, which has been heavily criticized by theory. To our knowledge, no decision by the Supreme Court has been issued on this issue,
- the right of the lessee to terminate under article 43 of the PD can no longer be exercised,
- cannot be terminated by the lessor due to private use or reconstruction.
[2] Article 7 § 1 of the PD.
[3] Article 7 § 2 of the PD.
[4] Article 7 § 3 of the PD
[5] If there is a contractual agreement regarding the adjustment that is valid for a certain period of time, then the 2-year period is calculated from the end of the agreed adjustment period.
[6] I.e., the minimum tax value of a real estate property that is calculated by the tax authorities based on a number of pre-determined criteria (as is location, floor level, year of construction, type of property).
[7] Thus, if the rent was €500 and increased to €1,000 following a newer agreement of the parties, but without defining the duration of such clause, then the lessor can request adjustment (75% of the CPI), after 1 year.
[8] Article 7 § 5 of the PD.
[9] Art. 7 § 1 of law 2041/1992. So, for example if the paid rent was €500 and the new rent is €2,000, then: a) with the written notice the amount of €1,000 is due, b) after 6 months the amount of €1,500 is due and c) after 1 year the amount of €2,000 is due.
[10] As also provided for in article 7 § 4 of the PD.
[11] Such waiver or agreement is null and void, according to article 174 GCC.
[12] ΟλΑΠ 3/2014 (ΕλΔ 2014/722)
[13] In practice, after the filing of the lawsuit, the tenant begins to pay the rent in the amount requested with the lawsuit.
