Rent Adjustment: How much is allowed by law?

Rent adjustments are a topic that frequently raises questions for both landlords and tenants. In a volatile economic scenario such as the one we live in, understanding the legal limits for this type of adjustment is essential to avoid conflicts and guarantee a healthy relationship between the parties involved. 

Understanding rent adjustments

Understanding rent adjustments goes beyond simply knowing the legal mechanisms and the monetary adjustment indices used. It also involves understanding the economic and real estate context that directly influences this process. Let's delve deeper into this topic for a more complete understanding.

Economic and Real Estate Context

Rent adjustments are a response to changes in the country's economic scenario. Inflation, for example, is one of the main factors directly influencing rent adjustments. When inflation rises, the purchasing power of money decreases, which makes it necessary to adjust the rent to ensure that the landlord continues to receive a fair return on his property.

In addition to inflation, other economic factors, such as real estate appreciation in certain regions, increased demand for real estate or a shortage of supply, can also influence rent adjustments. In areas where there is a high demand for real estate, it is common for rents to rise more quickly, while in regions with an oversupply, rents tend to remain stable or even fall.

Negotiation between Landlord and Tenant

Although there are monetary adjustment indices provided for in the law, negotiation between landlord and tenant plays a fundamental role in the rent adjustment process. It is common for the parties to negotiate the index to be used, taking into account not only the variation in inflation, but also other relevant factors, such as the state of repair of the property, any improvements made by the tenant, among others.

Negotiations can also involve the possibility of an adjustment below the monetary correction index, especially in cases where the tenant has financial difficulties. In these cases, it is important that both parties show flexibility and try to reach an agreement that is fair and balanced for both parties.

Legal and contractual aspects

Although the parties are free to negotiate rent adjustments, it is essential that the process is conducted in accordance with the rules established by Brazilian law and the rental agreement. Failure to comply with these rules can lead to conflicts and even result in legal action.

That's why it's important for landlords and tenants to be aware of the clauses in the lease that govern rent adjustments, as well as the deadlines and procedures established by law. Failure to comply with these clauses can result in penalties and losses for both parties.

Legislation on rent adjustments

In Brazil, the Tenancy Law (Law No. 8.245/91) establishes the main rules relating to the rental of real estate, including the readjustment of the rent. According to the law, rent adjustments must be made annually and by mutual agreement between the landlord and tenant.

Article 18 of the Tenancy Law establishes that, in the absence of an agreement between the parties, the rent adjustment will be calculated based on an index previously stipulated in the rental agreement or, in the absence of such a provision, according to one of the monetary correction indices provided for in the legislation.

Most commonly used monetary correction indices

There are various monetary correction indices that can be used to adjust rents in Brazil. Some of the most common are:

IGP-M (General Market Price Index)

The General Market Price Index (IGP-M) is one of the main indices used in Brazil to adjust rents and commercial contracts. It is calculated by the Getúlio Vargas Foundation (FGV) and aims to measure the price variation of a basket of products and services over time. The IGP-M is considered an important indicator for monitoring inflation and changes in the cost of living in the country.

Composition of the IGP-M

The IGP-M is made up of three sub-indices, which reflect different aspects of the economy:

• IPA (Wholesale Price Index): The IPA is responsible for measuring the change in prices of products sold wholesale. It is divided into three processing stages: agricultural products, industrial products and public administration products. The IPA represents around 60% of the total weight of the IGP-M.
• CPI (Consumer Price Index): The CPI measures the change in prices of products and services consumed by families with a monthly income of between 1 and 33 minimum wages. It is calculated based on a basket of products and services that includes food, transportation, health, education, among others. The CPI represents around 30% of the total weight of the IGP-M.
• INCC (National Construction Cost Index): The INCC measures the variation in prices of building materials, labor and services related to construction. It is mainly used to adjust contracts for construction work and services. The INCC represents around 10% of the IGP-M's total weight.

IPC-A (Broad Consumer Price Index)

The Broad Consumer Price Index (IPCA) is one of the most important indicators for measuring inflation in Brazil. Calculated by the Brazilian Institute of Geography and Statistics (IBGE), the IPCA aims to measure the price variation of a basket of products and services consumed by Brazilian families with a monthly income between 1 and 40 minimum wages.

Composition of the IPCA

The IPCA is calculated based on the prices of a wide range of products and services, divided into nine main groups:

• Food and Beverages: Includes fresh food, industrialized food products, beverages, among others.
• Housing: Includes housing expenses such as rent, condominium, electricity, cooking gas, among others.
• Household items: Includes expenses for furniture, appliances, household utensils, among others.
• Clothing: Includes expenses for clothing, footwear, accessories, etc.
• Transport: Includes expenditure on public transport, fuel, vehicle maintenance, among others.
• Health and Personal Care: Includes expenses for health insurance, medicines, personal hygiene products, among others.
• Education: Includes formal education expenses, such as school fees, school supplies, among others.
• Communication: Includes expenditure on communication services, such as fixed and mobile telephony, internet, among others.
• Personal Expenses: Includes miscellaneous expenses such as beauty services, recreation, culture, among others.

Although the IPCA is widely used as an inflation indicator, it is not the most common index for rent adjustments. The General Market Price Index (IGP-M), calculated by the Getúlio Vargas Foundation (FGV), is generally the preferred index for this purpose, especially in commercial and long-term contracts.

INPC (National Consumer Price Index)

Like the IPCA, the INPC is widely used by the government, the financial market and the general population to monitor inflation and make economic decisions. For the government, the INPC is important for calculating salary adjustments, pensions and social benefits, such as the minimum wage and INSS benefits.

In addition, the INPC is also used as a reference for correcting contracts and investments, just like the IPCA. However, due to its focus on lower-income families, the INPC can be considered a more sensitive indicator to variations in the prices of basic products and services, more accurately reflecting the impact of inflation on the low-income population.

Use of the INPC in rent adjustments

Like the IPCA, the INPC can also be used as the basis for rent adjustments, especially in residential contracts and in specific situations where there is no contractual provision for the adjustment index. However, the General Market Price Index (IGP-M) remains the most common index for this purpose, especially in commercial and long-term contracts.

The INPC can be an interesting option for rent adjustments in cases where there is a need for greater sensitivity to the prices of basic products and services, which tend to have a more direct impact on lower-income families. However, it is important that landlords and tenants are aware of the characteristics and variations of the INPC in order to make informed decisions regarding rent adjustments.

Legal limits for rent adjustments

Despite the freedom of the parties to negotiate rent adjustments, the Tenancy Law sets some limits to avoid abusive increases. According to article 19 of the law, rent adjustments cannot be made retroactively and must respect the minimum period of 12 months between one adjustment and the next.

In addition, the law establishes that, in the absence of an agreement between the parties, the readjustment of the rent cannot exceed the accumulated variation of one of the monetary correction indices provided for in the legislation. This means that even if the lease agreement provides for a specific index for the readjustment, it cannot be applied if the accumulated variation of this index is higher than the limit established by law.

Best practices for rent adjustments

The recommended practices for rent adjustments are fundamental to guaranteeing a healthy and transparent relationship between landlord and tenant. These practices aim to promote a fair and balanced negotiation process, taking into account the interests and needs of both parties. Below, we will detail some of these practices:

1. Advance notice

It is important for landlords and tenants to start negotiating rent adjustments early, preferably a few months before the end of the lease. This allows both parties enough time to assess market conditions, discuss expectations and reach an agreement that is fair and reasonable for both parties.

2. Transparency and Information

During negotiations, it is essential that both parties are transparent and provide all the relevant information to calculate the rent adjustment. This includes the presentation of the monetary correction indices used, the accumulated variation of these indices, as well as any other factors that may influence the value of the rent, such as the appreciation of the property or improvements made.

3. Balanced Negotiation

Rent adjustments must be fair and balanced for both parties. This means that both the landlord and the tenant must consider various aspects during negotiations, such as the variation in monetary correction indices, the economic conditions of the market, the appreciation of the property, among others. It is important that both parties are open to dialog and show flexibility in order to reach a mutually beneficial agreement.

4. Consideration of Additional Benefits and Costs

During negotiations, it is important for the landlord to take into account not only the variation in monetary correction indices, but also other benefits and additional costs that may be related to the property. This includes maintenance, security and concierge services, among others. Likewise, the tenant should be aware of these additional costs and take them into account when assessing the rent.

5. Formalizing the agreement

After agreeing on the rent adjustment, it is essential that the parties formalize this agreement in writing, by means of a contractual amendment. This ensures that the negotiated conditions are recorded clearly and objectively, avoiding misunderstandings in the future and guaranteeing the legal security of the rental contract.

6. Monitoring and Periodic Review

Once the rent has been adjusted, it is important for both parties to regularly monitor market developments and periodically review the terms of the lease. This can include carrying out new adjustment negotiations, if necessary, to ensure that the rent remains fair and balanced over time.

Pay attention to the rules and limitations

Rent readjustment is a common practice in the real estate market which aims to update the value of the rent in line with the variation in economic indices. In Brazil, rent adjustments are subject to rules and limitations established by the Tenancy Law, which aim to protect the rights of both the landlord and the tenant.

It is essential that landlords and tenants know these rules to avoid conflicts and ensure a balanced contractual relationship. When negotiating rent adjustments, it is important that the parties are transparent, seek a fair agreement and formalize this agreement in writing. In this way, it will be possible to maintain a healthy and transparent relationship between the parties involved.

March 31, 2024