With the new year, the performance of contracts is often increased by inflation. While a year ago no one paid much attention to inflation clauses in contracts, the huge rise in inflation has shown their importance. Lease contracts are a typical example. As attorney Pavel Strnad of Polverini Strnad points out, inflation clauses are often invalid because they are not properly worded.
“If the wording of an inflation clause is vague, the clause is invalid. With the current rate of inflation, the landlord can lose considerable sums and the relationship between the tenant and the landlord is disturbed. The vagueness can be caused only by wording inaccuracies or errors,” says attorney Pavel Strnad of the Polverini Strnad Law Firm. “Not only landlords should be careful, but also tenants – they should check the use of the correct inflation index in any valid inflation clause.”
A proper inflation clause must include at least the following three points:
1. the date of the increase – for example, 1 January or the anniversary of the agreement,
2. the process by which the increase occurs – for example, at the landlord’s request or automatically,
3. the specific inflation indicator by which the benefit is to be increased, as an increase arrangement for ‘inflation only’ is vague.
“One of the most commonly used consumer price indices published by the Czech Statistical Office or Eurostat may be used as a specific inflation indicator. However, care should be taken as there are several regularly published indices and they can easily be confused. A clear and comprehensible choice of these indexes is the most important thing for the validity of the entire inflation clause,” says attorney Pavel Strnad of the Polverini Strnad law firm.
What does a vague and therefore invalid inflation clause look like?
The rent amount remains fixed for the first year of the Agreement. After each subsequent year, the landlord reserves the right to increase the rent in the following year or for the next rental period by an amount corresponding to the full amount of inflation officially announced by the Czech Statistical Office or the Czech National Bank.
In this clause, it is not clear what specific inflation rate is to be used – for what period, compared to what period, the Czech Statistical Office publishes several differently determined indices. “Such a clause is therefore indeterminate and thus invalid. The rent could not be automatically increased by inflation in such a case,” concludes attorney Pavel Strnad of the Polverini Strnad Law Firm.
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