Luxembourg’s reform of residential tenancy law: What does it mean for real estate investments? | Goodwin

Bill No. 7642 (hereinafter referred to as the Residential Tenancy Law) entered into force on 1 August 2024. The Residential Tenancy Law amends residential tenancy regulations in Luxembourg. While Luxembourg has some of the highest homeownership rates in Europe, it also faces a significant shortage of housing for both long-term and short-term rentals. The reform has several objectives: first, it aims to increase tenant protection against landlords; second, it aims to encourage investors to return to the real estate market. The presence of investors is essential to meet the growing demand for housing and combat the housing shortage.

What significant changes does the Residential Tenancy Act bring about?

Obligation to have a written rental agreement
All residential leases must now be concluded in writing. Previously, leases could be concluded orally under the Luxembourg Civil Code. The Residential Lease Act has now amended the provision to exclude oral contracts for residential leases (new Article 1714 of the Civil Code). As a result, any oral contract concluded after the entry into force of the Residential Lease Act (1 August 2024) must be adapted to the written form, otherwise it will be void.

Creation of a co-living regime
Given the reality of the apartment rental market in Luxembourg, a co-living regime has been officially introduced. This provides a legal framework that regulates apartment sharing, which is widespread in Luxembourg, and offers legal certainty to all landlords and tenants. The new elements in this regard include:

• A definition of joint tenancy: The rental of the same property by several co-tenants, which must include at least one living space or sanitary area shared by all co-tenants.
• A joint tenancy agreement that must be signed between tenants and landlords.
• A written tenancy agreement, which must be signed by all tenants and which regulates aspects of the cohabitation of the co-tenants, the division of rent between the co-tenants (if this is not already regulated in the tenancy agreement) and the division of costs between the co-tenants.
• Joint liability of the co-tenants towards the landlord for obligations arising from the rental agreement.
• A procedure for dealing with early terminations of leases.

Rent cap
It is recalled that the rule that “the maximum rent may not exceed 5% of the capital invested in the property” remains valid and applicable.

Landlords of furnished accommodation can now, under certain conditions, charge a monthly rent supplement that takes into account the value of the furniture: 1.5% of the value of furniture that is not older than 10 years, based on furniture invoices. The monthly rent supplement must be listed separately from the basic rent in the rental agreement. This increases the value and attractiveness of rental properties and asset managers can keep a better eye on the underlying assets of fund managers who participate in such housing projects.

Rent adjustment
In addition, the rent can be adjusted to reflect changes in market value. The rent can be adjusted every two years, but the increase cannot exceed 10%.

Joint agency fees
The Residential Tenancy Law also requires that estate agent fees and costs be split equally between landlords and tenants. Previously, estate agent fees were only conditioned by the freedom of contract between tenants and landlords, which ultimately meant that tenants had to bear these costs. With this change, estate agents are expected to become more creative and offer improved value-added services in order to remain attractive to landlords.

Rental deposit
The rental deposit policy has also been changed. The maximum amount of the deposit has been reduced from three to two months’ rent. The Residential Tenancy Act also requires partial refund of the rental deposit. This ensures that tenants receive 50% of the deposit back within one month of moving out, except in the case of damage or rent arrears. The remaining 50% remains with the landlord until all outstanding fees are paid. If the time frame is not met, the landlord must pay a penalty of 10% of one month’s rent to the former tenant.

In addition, a significant improvement has been achieved in the area of ​​property purchases and sales through the automatic transfer of the guarantee to the new landlord when a property is sold.

Reintroduction of the luxury accommodation scheme
The luxury accommodation scheme, which was intended to allow tenants to waive some of the protections of the previous residential tenancy law, is completely abolished. As a result, it is no longer possible to exceed the 5% limit of the invested capital when calculating the rent or to prohibit the automatic renewal of the lease in favour of tenants.

Global Initiative to Attract Investors: Links to the 2024 Tax Measures
The Luxembourg government has adopted a comprehensive package of measures in a law passed by the Luxembourg Parliament on May 22, 2024. To mobilize real estate, the law temporarily reduces the tax rate on non-speculative capital gains realized on the sale of real estate belonging to a person’s private assets – after two years from the acquisition – to a quarter of the global tax rate (approximately 11%). This temporary measure is intended to encourage the sale and purchase of real estate and thus give momentum to the real estate market. (Our recent publication on this 2024 tax law can be found here).

Diploma
The Residential Tenancy Act creates a more stable and secure legal framework for residential tenancy agreements in Luxembourg. The introduction of a mandatory written contract for residential property as well as the creation of a legal regime for co-tenancy agreements provide more legal certainty for both investors and tenants. The Residential Tenancy Act improves the predictability and protection of tenancy agreements and stimulates valuation and return expectations, in particular by formalizing a legal regime for co-tenancy agreements. Overall, this is beneficial for the Luxembourg real estate industry.

Practical steps for implementation
To ensure compliance with the legal requirements of the new residential tenancy law and to derive the greatest possible benefit from the reform, you should consider the following extended implementation steps:

• Update rental agreements: Ensure all rental agreements are in writing, including mandatory provisions and any rental supplements for furnished properties, and remove any provisions regarding luxury accommodation.
• Enforce co-living requirements: Make sure that both a co-tenancy agreement and a co-ownership agreement are signed and that the property meets legal requirements.
• Comply with ceilings and adjustments: Make sure that the rent does not exceed the 5% rule of the invested capital. Plan for a rent adjustment of a maximum of 10% every two years to adjust it to the market value.
• Manage rental deposits: Adjust the guarantee amount to a maximum of two months’ rent and implement internal policies to repay 50% within one month of termination of the lease.
• Check brokerage contracts: Make sure the fees are split 50/50 between landlords and tenants.

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