LETTER TO THE ATTORNEY

Dear Attorney,

Good evening. I hope this message finds you well. I am reaching out to inquire about a proposed increase in the rent for my commercial space. Specifically, I am considering imposing a 20% increase on the current rental rate. The last time I implemented any rental increase was in 2016, at which time the rate was raised by 10%.

My primary concern is whether the suggested 20% increase would be viewed as reasonable and in accordance with pertinent laws and regulations in the Philippines governing commercial leases. Naturally, I would also like to avoid any potential disputes, should the tenant consider the adjustment excessive.

Given your expertise in Philippine real estate laws, your guidance on this matter would be greatly appreciated. I am seeking advice on whether such an increase is standard practice, whether there are established legal ceilings for rental increments, and if there are any relevant procedures or documentation that I need to prepare in order to implement this increase properly.

Thank you for your time, and I look forward to your counsel.

Sincerely,

A Conscientious Lessor

LEGAL ARTICLE: A COMPREHENSIVE OVERVIEW ON THE REASONABLENESS OF RENTAL INCREASES FOR COMMERCIAL SPACES IN THE PHILIPPINES

Introduction

Rental increases for commercial spaces in the Philippines are governed primarily by the stipulations of the contract entered into between the lessor (the property owner) and the lessee (the tenant), as well as by the general principles of obligations and contracts outlined in the Civil Code of the Philippines. While there is no specific statute exclusively regulating rent increases for commercial property in the same way that Republic Act No. 9653 (the Rent Control Act of 2009) covers residential leases under certain conditions, a proposed increase must still adhere to the principles of fairness, the underlying agreement between the parties, the market conditions, and any relevant judicial precedents that might govern disputes arising from perceived unreasonableness.

This legal article will discuss the various considerations to help you determine whether a 20% increase for a commercial lease is justifiable and what steps you, as a lessor, should follow to ensure proper compliance with Philippine law. It will also cover the relevant jurisprudence, the scope of contractual freedom in Philippine transactions, standard practices within the real estate sector, and best practices for mitigating disputes.

Applicability of the Civil Code of the Philippines

The Civil Code of the Philippines sets out the fundamental provisions that control lease arrangements. Specifically, Articles 1642 to 1688 of the Civil Code deal with lease of work and service, as well as lease of property. When it comes to commercial leases, the parties typically enjoy greater contractual freedom compared to residential leases, unless otherwise restricted by specific laws or ordinances.

The most vital principle here is that the lease contract must clearly stipulate the rate of rent, the frequency of increases, and the permissible margin of such increases. In the absence of explicit contractual stipulations or special laws that regulate the amount by which commercial rent can be increased, the lessor retains broad authority to determine rent hikes, subject to the standards of reasonableness and the general covenant of good faith found in contractual relations under the Civil Code.
Concept of Reasonableness in Commercial Rent Increases

While Philippine law does not impose a statutory cap on rent increases for commercial spaces, reasonableness is generally understood through:
- Market Conditions: Landlords often justify rent increases by citing inflation rates, local property values, demand for the property in question, and improvements to the property that enhance its value.
- Contractual Provisions: If the lease agreement contains a clause that indicates a timeline or formula for possible rent increases—such as a fixed percentage every few years—this provision will take precedence, provided it does not contravene established legal principles.
- Comparative Rates: Landlords sometimes look at similarly situated commercial properties in the locality to help justify an increase. Courts, too, may examine prevailing rental rates in the area when evaluating allegations of excessive increases.
Importantly, if a court finds that a landlord’s proposal is disproportionately higher than prevailing market rates, it may be deemed unconscionable. Although most contractual matters do not automatically end up in court, establishing a clear basis for the rental adjustment is the best practice to mitigate potential legal disputes.
Freedom to Stipulate in Commercial Leases

As there is no specific regulatory law that pegs a maximum rate for increases on commercial properties, the guiding principle becomes “autonomy of contracts.” Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms, and conditions as they may deem convenient, so long as they are not contrary to law, morals, good customs, public order, or public policy.

Consequently, if the existing lease contract is silent on how or when the rent may be increased, the lessor generally retains the right to propose new terms at the time of renewal. In practice, many commercial lease contracts span multiple years with provisions for escalation, but in the absence of these clauses, any increase should be negotiated in good faith between the parties.
Rent Control Laws and Their Inapplicability to Commercial Leases

Republic Act No. 9653 (the “Rent Control Act of 2009”) was designed specifically to protect residential tenants in certain areas, especially those with monthly rentals not exceeding a specified threshold, as periodically revised by the Housing and Urban Development Coordinating Council (HUDCC). Commercial leases are generally excluded from the coverage of these laws. Consequently, the restrictions that cap rent increases at specific percentages within prescribed periods do not typically apply to commercial property. That said, certain local ordinances or special laws might occasionally influence the matter. Hence, a prudent landlord should always verify whether the local government unit imposes any particular regulation on commercial lease rates within its jurisdiction. In most cases, however, commercial landlords are free to negotiate with tenants regarding lease terms.
Jurisprudence and Court Interpretations

Philippine courts historically recognize the principle of contractual freedom in commercial transactions. Jurisprudence focuses on verifying whether both parties clearly consented to the terms and whether they committed to abide by said terms. In situations where a dispute arises concerning the validity or fairness of an increase, the court investigates the following:
- Existence of an Implied Agreement: Even in the absence of a written clause, a landlord might justify repeated increases by custom or usage if the tenant has historically paid incremental increases without complaint.
- Damage to Lessee: If the tenant can demonstrate that the proposed rental hike is excessively burdensome or was arbitrarily determined, courts may evaluate whether the disparity is gross enough to invalidate the newly suggested terms.
- Evidence of Good Faith Negotiation: A lessor who gives ample notice to the tenant about the proposed increase and supports it with a demonstrable basis (e.g., property improvements, higher inflation, or changed market conditions) is more likely to be viewed favorably by the courts.
Procedural Considerations and Best Practices

Even in the broad realm of commercial leases, procedural regularity and courtesy can go a long way toward preventing or settling disputes. To that end, here are some best practices:
1. Notice Period: Provide the tenant ample notice before implementing any rent increase. A lead time of 30 to 90 days is advisable, though the contract itself may require a more specific period of notice.
2. Written Communication: While verbal agreements can be binding under certain conditions, it is prudent to document any proposed increase in writing and keep proof of the tenant’s receipt of such notice.
3. Negotiation and Good Faith: If the tenant contests the amount or timing of the increase, consider an open line of communication to negotiate an agreeable figure. This can help preserve the landlord-tenant relationship, reduce the likelihood of legal disputes, and foster mutual trust.
4. Documentation of Rationale: Maintained records of increased costs, comparative property rates, and other objective justifications. Should a dispute ultimately require mediation or litigation, this evidence can show that the proposed figure was arrived at through careful consideration of market realities.
Factors Affecting the Reasonableness of a 20% Increase

In evaluating the reasonableness of a 20% increase, specific situational factors come into play, such as:
- Time Since Last Increase: As you noted, the most recent rent increase of 10% was implemented in 2016. If the lease has been operating at the same rate since then, one might argue that, over several years, inflation and other economic shifts may justify a bigger jump. An increase after a prolonged period might be easier to rationalize compared to incremental annual hikes.
- Condition of the Premises: If significant improvements or renovations have been made, or if the landlord has upgraded facilities (e.g., installing better security systems, modernizing the building, or improving communal areas), these enhancements can be cited to justify the increase.
- Market Forces and Comparative Analysis: Evaluating average commercial rental rates in the area is wise. If similar commercial units in your vicinity are priced significantly higher, a 20% increase may be objectively justified.
- Existing Lease Provisions: Always check whether the existing contract provides guidelines on maximum allowable increases or requires a specific formula for rent escalation. Adhering to these contractual stipulations is of paramount importance.
Potential Legal Remedies and Tenant’s Recourse

If a tenant disagrees with the rent hike and deems it excessive, they may seek an alternative lease arrangement, negotiate a reduced increase, or, in rare cases, file a legal action for injunction or breach of contract. Such an action is often predicated on the notion that the lessor is acting in bad faith by imposing an “unconscionable” rate that lacks basis. However, as noted, the burden is on the tenant to show that the increase is indeed arbitrary or oppressive. Without statutory controls, courts frequently revert to the principle of freedom of contract, absent any showing that the landlord acted in violation of law or public policy.
Implications of Non-Compliance and Dispute Resolution

Landlords stand to encounter potential liabilities if they unilaterally enforce large-scale increases without following proper notice and negotiation procedures, especially if the tenant claims constructive eviction or some form of harassment. Should matters escalate, the usual remedies include:
- Judicial Intervention: The tenant might seek a temporary restraining order or an injunction to prevent the new rate from taking effect. Subsequently, the parties would proceed with standard litigation.
- Alternative Dispute Resolution (ADR): Prior to or in lieu of filing court actions, many commercial lease disputes are resolved through mediation or arbitration, if the contract stipulates an ADR clause. Such methods tend to be speedier, less adversarial, and more cost-effective.
- Termination of Lease: If negotiations fail and the tenant will not accept the proposed increase, they may opt not to renew or decide to vacate after the lease term ends. In such a case, the landlord retains the right to advertise the space to a new tenant at the new rate, though there may be possible vacancy periods or costs associated with searching for a suitable replacement.
Practical Considerations and Strategic Advice

To smoothly implement a 20% rental increase, consider these strategies:
1. Market Study: Conduct a quick but thorough survey of nearby commercial rentals. Presenting comparative data can assure the tenant that the figure being proposed is within—or aligns closely with—prevailing market rates.
2. Incremental Increase or Phased Approach: Proposing the 20% increase in phases (e.g., 10% this year, 10% next year) may ease the tenant’s financial burden and reduce disputes. A phased approach can also preserve goodwill.
3. Highlight Property Improvements: If new amenities or renovations are in progress, consider presenting a breakdown of costs and the added value these improvements provide to the tenant’s business.
4. Establish Clear Communication Channels: Encourage open discussion. Notifying the tenant well in advance and explaining the reasons behind the increase often prevents claims of arbitrariness.
5. Review the Contract Thoroughly: Ensure that any deadlines, clauses, or specific processes for implementing rent increases outlined in the existing lease are followed rigorously to avoid allegations of breach of contract.

Conclusion

Commercial leases in the Philippines generally allow the landlord and tenant a significant amount of latitude to set their own terms, which includes deciding how frequently and how much to raise the rent. There is no specific statutory cap for commercial property akin to what exists for certain residential spaces, rendering the principle of “freedom of contract” central to determining the validity of a proposed rent hike. Nonetheless, that freedom is not absolute; it is tempered by the concepts of good faith, fairness, and reasonableness.

Given that the last increase was in 2016 and only amounted to 10%, a 20% increase could be justified under specific circumstances—such as substantial property improvements, inflation, and higher market rates in the area—especially if you can demonstrate that this figure remains competitive relative to the prevailing market conditions. Thorough communication with your tenant, along with timely notice and clear written documentation, will be vital in defending the decision should any dispute arise.

By adhering to prudent practices, keeping abreast of current laws and jurisprudence, and engaging in open, good-faith negotiations, you can protect your interests as a commercial landlord while maintaining a positive relationship with your tenant. If serious concerns or disagreements do emerge, it is always advisable to consult with a lawyer or engage in mediation or arbitration, rather than allowing minor disagreements to escalate unnecessarily into litigation.

In summary, the contemplated 20% increase—though seemingly substantial—could indeed be reasonable, provided it aligns with market realities, the conditions of the property, the terms of any existing agreement, and the broader legal framework set by the Civil Code. Documenting your rationale carefully and communicating transparently with your tenant will bolster your position, both in maintaining a harmonious business relationship and in preempting any potential legal conflict.