Italy overhauls commercial lease rules

In the first major review of legislation governing commercial leases since the late 1970s, Italy is substantially deregulating lease agreements over €250,000 in a move which may reshape the country’s occupier sector and stimulate new investments in the market.

The changes, introduced with the ‘Unblock Italy’ decree - which also led to reforms of the country’s REIT legislation - allow for much more flexibility in the relation between tenants and landlords by effectively waiving rental caps on rent reviews and cancelling the minimum lease length for rents over €250,000 per year.

Under the new legislation, both parties are allowed to deviate from the otherwise rigid provisions of commercial lease law if the annual rent exceeds €250,000. Such deviations were up to now only possible if they benefited the tenant. Issues that landlords will now likely want to deviate from or at least discuss with tenants include duration of leases, rental reviews and adjustments, automatic renewals as well as indemnity payments to tenants.

Misalignment
Up to now, rent payable under commercial leases could be reviewed only within certain limits linked to changes in the consumer price index. In the case of long-term leases such as those for the hotel sector, these restrictions often resulted in a misalignment between the indexed rents and the market rental values. This situation meant that while landlords were on the one hand incentivised to sign up long-term leases in order to secure cash-flow, on the other they had to accept that this would result in a loss of money with time because rents would not keep up with market developments.

‘This is important primarily because it allows investors to take advantage of an upturn in the market by increasing rental prices and aligning them with the market situation,’ commented Marco Casasole, a lawyer at CMS in Rome and head of the Hotel & Leisure group of CMS.

Other legislative changes include the possibility for the parties involved to freely determine the duration of the lease as well as its expiry with landlords being given the chance to refuse the renewal or extension without being obliged – for instance for retail or hotel premises - to pay a compensation of between 18 and 21 months of rents as previously.

More power to landlords
In Casasole’s view, these changes will lead to a potential revolution in the occupier sector by giving more power to landlords. ‘There is now space to become much more creative in the making up of rental agreements which up to today were very restrictive,’ Casasole said. While it is difficult to anticipate the impact of the new legislation, it is likely to have a positive effect on investment, he added.

‘Thus far rental growth was restricted in the medium term because once you agreed on a certain level of rent, the possibility of increasing its value with time was limited. Now that commercial leases are deregulated, we might see landlords getting the upper hand particularly in the case of retail and high street assets, where the market is strong, while it is likely to have less of an impact on offices which are more of a tenants’ market,’ he explained.

'However,' Casasole warned, 'the change will not necessarily work exclusively in favour of landlords. By allowing greater flexibility, it will make it possible to seek a better alignment of interest between landlords and tenants, for instance by agreeing on phased or progressive rent increases that may facilitate the start of a new business or other arrangements – including rent increases linked to capital expenditures made by the landlord to improve the property, also to meet tenants' requirements - without the risk that a court may find those arrangements in breach of the law.'