Luxembourg’s Residential Lease Reform: What Does It Mean for Real Estate Investments?

The Bill of Law No. 7642 (referred to here as the Residential Lease Law) entered into force on 1 August 2024. The Residential Lease Law modifies the residential-leasing regulations in Luxembourg. While Luxembourg has some of the highest homeowner rates in Europe, it also has a significant shortage of housing for both long- and short-term rental. The reform has several purposes: first, it seeks to increase tenant protection in relation to landlords; second, it encourages investors to return to the property market. Investor presence is essential to meet the growing demand for housing and fight the housing shortage.

What Are the Main Changes Introduced by the Residential Lease Law?

Obligation for Written Leases
All residential lease agreements must now be in writing. Previously, lease agreements could be made verbally, per the Luxembourg Civil Code. The Residential Lease Law has now amended the provision to exclude verbal contracts for residential leases (new article 1714 of the Civil Code). As a result, any verbal contract concluded after the Residential Lease Law took force (1 August 2024) must be adapted to have a written form, under the penalty of nullity.

Creation of a Co-Living Regime
In consideration of the reality of the residential lease market in Luxembourg, a co-living regime was formally introduced. This provides for a legal framework that will regulate apartment sharing — which is prevalent in Luxembourg — and provides legal security for all landlords and tenants. New elements in this regard include:

• A definition of co-tenancy: the rental by several co-tenants of the same property, which must include at least a living room or sanitary facility shared by all co-tenants.
• A shared tenancy agreement that must be signed between tenants and landlords.
• A written co-tenancy pact, which must be signed by all tenants, that aims to specify aspects of life in community among co-tenants, how the rent is split between co-tenants if not already done in the lease agreement, and how charges are split between co-tenants.
• Joint liability of co-tenants to the landlord for the obligations arising from the lease agreement.
• A procedure for handling anticipated lease terminations.

Rent Ceiling
It is reminded that the rule stipulating that “the maximum rent cannot exceed 5% of capital invested in the property” is still in force and remains applicable.

Landlords offering furnished accommodation can now charge a monthly rent supplement by including the value of the furniture under certain conditions: 1.5% of the value of furniture no older than 10 years, based on furniture invoices. The monthly rent supplement must be listed separately from the base rent in the lease. This increases the value and attractiveness of rented properties and the assets managers can better keep track of the underlying assets of fund managers engaging in such residential construction projects.

Rent Adjustment
Additionally, the rent can be revised to match changes in market value. The rent can be adjusted every two years, but the increase cannot be greater than 10%.

Shared Agency Fees
The Residential Lease Law also creates the obligation to split real estate agency fees and costs evenly between landlords and tenants. Previously, the agency fees was only framed with contractual freedom of lessees and lessors, ultimately resulting in tenants having to bear these costs. With this change, real estate agencies are expected to become more creative and offer enhanced value-added services to maintain their appeal to landlords.

Rental Guaranty
The rental guaranty regime has also been modified. The maximum amount for the guaranty is reduced from three months’ rent to two months’ rent. The Residential Lease Law also mandates the partial return of the rental guaranty, ensuring that tenants will receive 50% of the guaranty back within a month from departure, except in cases of damage or rent arrears. The remaining 50% will be held by the landlord until all outstanding charges are finalized and settled. Failure to comply with the time frame will result in a penalty for the landlord to pay 10% of one month’s rent to the former tenant.

Additionally, a significant improvement has been made regarding property sales and purchases, with the automatic transfer of the guaranty to the new landlord when a property is sold.

Reappeal of the Luxury Accommodation Regime
The luxury accommodation regime, which was intended to allow tenants to renounce some of the protections afforded by the previous Residential Lease Law, is fully repealed. As a result, it is no longer possible to extend beyond the 5% of invested-capital limitation in rent calculations or prohibit the automatic extension of the lease in favor of tenants.

Global Move to Attract Investors: Links to the 2024 Tax Measures
The Luxembourg government has enacted a sweeping set of measures in a law voted on by Luxembourg’s parliament on May 22, 2024. In an effort to mobilize properties, the law temporarily reduces the tax rate for nonspeculative capital gains — after two years from the acquisition — realized on the sale of real estate forming part of individuals’ private assets in 2024 to a quarter of the global tax rate (approximately 11%). This temporary measure is expected to encourage the sale and purchase of properties, thus adding momentum to the real estate market. (please see our recent publication on this 2024 tax law here).

Conclusion
The Residential Lease Law creates a more stable and secure legal framework for residential leases in Luxembourg. The introduction of a mandatory written agreement for residential housing, along with the establishment of a co-tenancy legal regime, provides greater legal certainty for both investors and tenants. The Residential Lease Law improves predictability and protection for lease agreements, and it stimulates valuation and expectations of return, particularly with the formalization of a co-tenancy regime. Overall, this is beneficial to Luxembourg’s real estate industry.

Practical Steps of Implementation
To ensure compliance with the legal requirements of the new Residential Lease Law and maximize the benefits of the reform, consider the following enhanced implementation steps:

• Update lease agreements: Ensure all lease contracts are in writing, including mandatory provisions and rent supplements for furnished properties, if any, and remove any provision regarding luxury accommodation.
• Enforce co-living requirements: Ensure that both a co-tenancy agreement and a co-tenancy pact are signed and that the property conforms with legal requirements.
• Comply with ceilings and adjustments: Verify that rent does not exceed the 5% invested-capital rule. Plan for biennial rent adjustments, capped at 10%, to align with market value.
• Manage rental guarantees: Adjust the guaranty amount to a maximum of two months’ rent and implement internal policies to return 50% within one month of lease termination.
• Review real estate agency contracts: Ensure that fees are split 50/50 between landlords and tenants.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.