The graduated rent model sets rent increases in advance in the contract. Find out how this model works in Switzerland and when it is worthwhile.
A graduated rent is a contractually agreed, step-by-step rent increase. The landlord and tenant agree not only on the initial rent, but also on all future increase dates and amounts. This model is only permitted in Switzerland for contracts with a term of at least three years; each stage must be at least twelve months apart and the increase must be specified in exact Swiss francs – percentages or index references are not sufficient. During the graduated rent period, all other adjustment mechanisms (reference interest rate, LIK index, value-enhancing investments) are blocked. These strict requirements under Art. 269c OR and Art. 19 VMWG create legal certainty because both sides know from the outset how the rent will develop.
In the commercial sector – for example, for new-build offices or retail space – graduated rent is often used to cushion high initial investments. At the beginning, the rent is below market level, gradually approaching the desired yield with each step. In residential properties, this model is mainly used for first-time rentals of new developments, when demand and costs first have to stabilise.
Let's assume that an agency rents 300 m² of office space in Zurich West. The initial rent is CHF 225 per m² / year. It is contractually agreed that the rent will increase by three percent on 1 April each year (as mentioned above, the amounts must be specified in Swiss francs):
Year 1: CHF 225 x 300 m² = CHF 67,500
Year 2: CHF 67,500 x 1.03 = CHF 69,525
Year 3: CHF 69,525 x 1.03 = CHF 71,610
After three years, the burden is CHF 4,110 per year higher than at the beginning. The amount is transparent for the entire term of the contract; neither the landlord can refer to the reference interest rate in the meantime, nor can the tenant demand a reduction if the market declines.
Whether a graduated rent is advantageous depends heavily on the market situation, the term of the contract and the liquidity profile of the parties. From the tenant's point of view, the model offers the advantage of predictability: the budget can be calculated precisely over several years and there is no risk of surprise surcharges due to jumps in the reference interest rate or ancillary costs. However, the lack of flexibility is a disadvantage: if the mortgage reference interest rate falls or the comparative rents in the region drop, the agreed level remains unchanged. Neither party can contest the agreement during its term.
For landlords, staggered rents mean a secure income stream and less administrative work, as there is no need to notify tenants separately of each increase. On the other hand, the rigid scale can prove risky if construction or financing costs rise more than forecast: additional adjustments are not permitted until the end of the scale period. The economic viability therefore depends on the stages being set at realistic levels.
In practice, certain ranges have become established:
Residential
For first-time rentals of new apartment buildings or city lofts, annual escalation rates often range between 1.5% and 3% or are fixed amounts of CHF 50 to 150 per month, depending on the initial rent.
Office and commercial space
Larger increases are common here because rental agreements are longer and construction and expansion costs are higher. Increases of 3% to 5% per year or fixed increases every two years (e.g. £10 per square metre) are common, especially in central locations in Zurich, Basel or Geneva.
Special cases
For project developments with a high vacancy risk, some owners start with initial rents up to 20% below market value and recoup the difference in five to seven-year increments.
It is important that each increment can be justified on the basis of market conditions and costs. Excessive increases can be challenged before the arbitration board at the start of the contract.
Planning security: Both parties know their cash flow – for tenants, this means a calculable fixed cost block, and for landlords, a reliable income curve.
Liquidity management: Thanks to low initial rents, young companies or start-ups can invest more capital in expansion or personnel before higher rents come into effect.
Simplified administration: Increases are automatic; cantonal form requirements and delivery deadlines only apply when the contract is concluded.
Negotiating leeway: Because future developments are fixed, concessions can be negotiated in the initial phase – such as rent-free months or contributions to interior fittings.
It is worth tenants doing the maths: how are the reference interest rate and LIK likely to develop? Is the property exposed to a decline in rents due to its location? Landlords, on the other hand, should check whether the scale is in line with their yield and debt service planning.
Graduated rent is not a solution for every situation, but it is an effective tool for distributing risks fairly between the contracting parties. Anyone who needs short-term liquidity as a company founder or wants to make a new building profitable over time as an owner benefits from the transparency of graduated rent. It is crucial that the stages are in line with the market, legally sound and financially viable.
On our platform, you will find numerous office and commercial properties where landlords offer graduated rent models. Take advantage of this planning security – and compare whether an index-linked or fixed rent is better suited to your strategy. This will ensure that your next rental property is not only the right fit for your company in terms of space, but also in terms of finances.
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