Cost-Based Rent: Rules, Calculation, and Significance

Omkostningsbestemt leje (cost-based rent) is a method for setting rent in older residential rental properties, where the rent is determined based on the property's actual operating expenses plus a statutory return. The method applies in regulated municipalities for properties built before 1991, unless the rent is set according to the rules for det lejedes værdi (value of the rented premises) or thorough modernisations.

Understanding cost-based rent in the Danish market

When navigating the Danish property market, especially in major cities like Copenhagen, Aarhus, Odense, and Aalborg, you will inevitably encounter the concept of omkostningsbestemt leje (cost-based rent). This principle is a cornerstone of Danish rental legislation and aims to ensure a balance between the landlord's need to cover costs and the tenant's need for a reasonable rent that is not solely driven by supply and demand in the free market.

The rules for cost-based rent are primarily found in boligreguleringsloven (the Housing Regulation Act), which is part of the overall rental legislation. In practice, this means that the rent in a property must not exceed the total expenses for operation, maintenance, and administration, plus a return on the property's value. This creates transparency, but also a complexity that requires detailed insight into both legal and financial aspects of the property.

For an investor, it is crucial to understand that cost-based rent is not a static figure. It changes as taxes, fees, insurance, and maintenance needs change. Therefore, ongoing budgeting and notification of rent changes are central parts of property management in Denmark.

Which properties are covered by the rules?

Not all properties in Denmark are subject to the rules on cost-based rent. Application depends on two main factors: the age of the property and the municipality in which the property is located.

The geographical division

Denmark is divided into regulated and unregulated municipalities. In regulated municipalities, which include the vast majority of large urban areas and growth centres, the chapter of the Housing Regulation Act on cost-based rent applies. In unregulated municipalities (often smaller rural municipalities), the rent is typically set according to the rules of det lejedes værdi (value of the rented premises). It is therefore important to always investigate the specific municipality's status with the local huslejenævn (rent assessment committee) or the municipality's technical department.

Year of construction

As a rule of thumb, cost-based rent applies to properties built before 1 January 1991. For newer properties built after this date, there is typically freedom of contract regarding rent (fri markedsleje (free market rent)), provided this is explicitly mentioned in the tenancy agreement. However, there are exceptions, including properties converted from commercial to residential use, where special rules may apply.

For investors in growth areas like the Triangle Region (Vejle, Kolding, Fredericia) or university cities like Esbjerg and Roskilde, it is essential to distinguish between the different rental forms, as it has a direct impact on the property's valuation and potential cash flow.

The basis for calculating cost-based rent

When calculating cost-based rent, the starting point is an operating budget for the property. This budget must include all necessary expenses to keep the property running in good and proper condition.

Operating expenses

The items that may be included in the budget include, among others:

• Taxes and duties: Ejendomsskatter (property taxes), dækningsafgift (land tax on commercial property, where relevant), and sewage disposal charges.
• Insurance: Statutory and necessary insurance for the property (fire, storm, pipe damage, etc.).
• Refuse and cleaning: Expenses for waste collection, chimney sweeping, and any caretaker functions.
• Administration: Expenses for professional management of the property as well as auditing.
• Electricity and heating: Common electricity for hallways, basements, and outdoor areas.

Maintenance and provisions

A significant part of the budget is allocated to maintenance. Here, a distinction is often made between ongoing maintenance expenses and statutory provisions for external maintenance (according to sections 119 and 120 of the Rent Act). These provisions are earmarked for future work on the property's building envelope, roof, windows, and technical installations. The size of these amounts is regulated annually by the state.

The owner's return

In addition to covering expenses, the landlord is entitled to a return. This return is typically calculated as a percentage of the property's value (often based on the public property assessment as of 1 April 1973 with certain additions, or a calculated value for newer properties). It is important to note that this return rarely corresponds to the market return seen in free trades, which is why many older properties are traded at prices reflecting an optimisation potential through improvements.

Table: Overview of budget items in cost-based rent

Modernisation and lease optimisation (BRL § 19, para. 2)

Many investors work with strategies where leases are thoroughly modernised to lift the rent from the cost-based level to the "value of the rented premises". This was previously known as Section 5(2) improvements (now Section 19, para. 2 in the new Rent Act).

To apply this rule, a number of conditions must be met:

1. Thorough improvement: A significant amount must be invested in the lease (a fixed minimum rate per square metre or a total amount).
2. Energy requirements: The property must meet certain energy requirements (typically energy label C or better, or have implemented energy improvements for a certain amount).
3. Inspection: Upon re-letting after such a modernisation, the lease must often appear in a significantly improved condition that justifies the higher rent compared to similar unmodernised leases in the area.

This transition from cost-based rent to the value of the rented premises is one of the primary value drivers for property investors in cities like Frederiksberg, Randers, and Helsingør, but it requires precise management of the construction process and documentation of expenses to avoid later claims for rent reduction in the Huslejenævn (Rent Assessment Committee).

Notification of rent increases

When expenses in a property increase – for example, if property tax is raised or insurance premiums go up – the landlord has the opportunity to pass these costs on to the tenants through a notification of a rent increase.

For cost-based rent, such notification must be given with three months' notice. The notice must be in writing and include a specification of which items in the budget have changed, as well as inform the tenant of the opportunity to object. If the landlord forgets to notify increases in actual expenses, they cannot be collected retroactively. Therefore, administrative discipline regarding budget follow-up is critical.

In municipalities like Aarhus and Copenhagen, tenants are often very aware of their rights, and errors in a notification letter can lead to the increase being declared invalid by the Huslejenævn. It is always recommended to use standardised forms or professional assistance for these processes.

Pitfalls when acquiring properties with cost-based rent

As an investor, there are several risk factors to be aware of when assessing a property where the rent is set on a cost-based basis:

1. Maintenance backlog: If a previous owner has not set aside sufficient provisions or has not carried out necessary maintenance, future operating expenses may exceed what can be covered via the rent before a new budget adjustment takes effect.
2. Rent Assessment Committee cases: Historical cases regarding the level of rent can have an impact on the property's value. You should always review the property's history in the Huslejenævn.
3. Lack of documentation: If improvements have been carried out but documentation (invoices, construction accounts) is missing, it may be impossible to maintain an increased rent in the event of a sale or dispute.
4. Tax matters: Depreciation rules and the tax treatment of maintenance versus improvement can vary. We always recommend consulting a tax advisor or accountant in connection with transactions.

Future prospects for regulated rent in Denmark

The Danish rental market is subject to ongoing political debate. Questions about rent caps, energy requirements, and tenant protection are often on the agenda in the Folketing (Danish Parliament). In 2026, we see a continued trend towards increased requirements for energy efficiency in the older housing stock. This affects the cost-based budget, as green investments can often be included as improvements giving the right to a rent increase, but they also require significant up-front capital.

For investors, this means that property strategy must increasingly focus on ESG (Environmental, Social, and Governance). A property with low energy consumption and high tenant satisfaction will typically be more robust against legislative changes and market fluctuations in cities like Odense and Roskilde.

Frequently asked questions

What is the difference between cost-based rent and the value of the rented premises?

Cost-based rent is calculated from the property's actual operating expenses and a return. The value of the rented premises is determined by comparing with the rent in similar leases in the same neighbourhood regarding location, type, size, quality, and equipment.

Can you always change the rent if expenses increase?

Yes, in properties with cost-based rent, the landlord can notify a rent increase when the budgeted operating expenses rise. This must be done with three months' notice and documented for the tenants.

Where can I find the rates for maintenance provisions?

The rates for provisions for external maintenance (§ 119) and internal maintenance (§ 120) are adjusted every year on 1 January. Current figures can be found on the website of the Social- og Boligstyrelsen (Social Affairs and Housing Authority) or from professional organisations.

Does cost-based rent also apply to commercial properties?

No, the rules on cost-based rent generally only apply to residential leases. Commercial leases are regulated by erhvervslejeloven (the Business Rent Act), where there is much greater freedom of contract, and rent is typically set at the market rent.

How PropertyInvestments can help

At PropertyInvestments, we have helped both Danish and international investors navigate the complex Danish property market since 1985. We offer advice on sourcing investment objects, where we analyse the potential in properties with cost-based rent. We assist in preparing properties for sale, optimising operating budgets, and ensuring that all legal requirements are met in connection with rent setting.

If you are facing an investment in a regulated property, or if you wish to sell a portfolio in Denmark, you are welcome to contact us for a professional dialogue about your options. We ensure a structured process from the initial analysis to the final sale.

Contact us: PropertyInvestments Email: info@propertyinvestments.dk Phone: +45 31 16 31 00