Why do you reserve the right to raise the rental rate anytime within the lease term?

One of the stipulations in our standard lease contract is the following:

RENTAL PRICE ADJUSTMENT. The LESSOR has the right to change, modify or adjust the rental price as deemed appropriate or necessary. Such modification will take effect 30 days after LESSEE has been notified. Rental price adjustments shall not be greater than what is allowed by law.

In the above excerpt, we’ve highlighted the clause “appropriate or necessary”. This is a very important condition that guarantees the lessee that we cannot just raise the rent without justifiable reason. Simply put, if the raise is not “appropriate” nor “necessary”, then they may contest it and refuse to be bound by it.

This is based on the principle of the law known as the “mutuality of contracts” where the law requires that a contract must bind both parties and that its validity or compliance cannot be left to the will of only one party. What has been agreed upon, should be complied with by both parties – in our case here, the rental price we have already agreed upon and have actually written down in the contract, should be honored by both us (the lessor) and the lessee.

This is expressly provided by the Civil Code of the Philippines, under Article 1308. [New Civil Code of PH]

An example case already decided by the Supreme Court applying (among others) this principle of mutuality of contracts, is the case of Equitable PCI Bank vs. Ng Sheung Ngor, GR. No. 171545. To quote, the court said:

Escalation clauses are not void per se. However, one “which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement” is void. Clauses of that nature violate the principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

On the other hand, the law also allows modifications of the terms of contracts and other kinds of obligations, for justifiable reasons. The above cited stipulation in our lease contract is only a re-iteration of this allowance provided by law.

The following provisions of the Civil Code are examples of these allowances provided by law:

• Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.

  In cases of hyperinflation, the value of our currency will become tremendously lower. To compensate for the loss in value, we can only increase the rental price. And we may have to do it even in the middle of our subsisting lease if we need to, which is why we really cannot guarantee that we will not adjust the rental price for the entire lease term.

  But our clause also goes on to say that the “Rental price adjustments shall not be greater than what is allowed by law.“

  One of the things allowed by law is that in Article 1250 of the Civil Code that we’ve cited above. This means, in cases of hyperinflation, we can only increase the rent to compensate for the loss in value of our currency. If we exceed that, we will be violating the principle of mutuality of contracts which we’ve first discussed above.

• Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

  Our lease contract essentially places on us, the lessor, the obligation to provide the service of letting the lessor enjoy the use of the leased property. If, for some reason, this becomes so difficult for us because the rent amount paid by the lessee becomes hugely insufficient, then we actually have the right under the law to be released from our obligation to continue letting the property to the lessee.

  But instead of availing of this guarantee of the law, we choose to first allow the continuance of the lease, only with the appropriate or necessary adjustments to the rental price so as not to make it “so difficult” for us to continue to do so.

The stipulations of our lease contracts, or any of our other contracts with our clients, are oriented towards the benefit and protection of both parties. We always consider the interests of both sides and implement only what’s fair and just.