Paragraf 5 stk 2 (Section 5(2)) (now continued in Section 19(2) of the Danish Rent Act (lejeloven)) allows landlords to set rent according to the value of the rented premises (det lejedes værdi) when a tenancy has been thoroughly modernised. This requires significant investment that markedly raises the standard of the home and is a central tool for investors to optimise older housing stock in Danish cities under current legislation.
Understanding the framework for Section 5(2)
When discussing investment in older residential rental properties in Denmark, the term paragraf 5 stk 2 (Section 5(2)) is unavoidable. Although the legal designation technically changed during the consolidation of the rent acts, the industry and investors still frequently refer to this provision. The essence of the rule is to create an incentive for private landlords to maintain and modernise the existing housing stock, which is otherwise subject to cost-based rent (omkostningsbestemt leje).
In cities like Copenhagen, Aarhus, Odense, and Aalborg, where demand for modern, high-standard housing is high, this section has historically been the driving force behind many renovation projects. Without the ability to raise the rent to the value of the rented premises, it would often be economically unfeasible to carry out the necessary upgrades to kitchens, bathrooms, and installations in properties built before 1991.
However, it is crucial to understand that Section 5(2) is not a free pass for arbitrary rent increases. The legislation is complex and contains a series of precise requirements regarding the size of the investment, the condition of the home before and after, and which types of properties are covered at all. Since the political agreement in 2020 (popularly called the 'Blackstone intervention'), the rules have been further tightened to protect tenants and ensure a slower phasing-in of value increases.
What defines a thorough modernisation?
For a tenancy to be let under the rules of the value of the rented premises under Section 5(2), it must involve a "thorough modernisation" (gennemgribende modernisering). This is not merely a superficial refurbishment with paint and floor sanding. Legislation and case law require that works have been carried out that significantly increase the utility value of the premises for the tenant.
Typically, this involves a total renovation of primary rooms such as the kitchen and bathroom. It often includes replacing appliances with modern energy classes, installing underfloor heating, new plumbing (VVS-installationer), and electrical work. Additionally, the property's general energy condition is scrutinised. Under newer rules, a requirement has been introduced that the property must achieve a certain energy rating (typically C or better, or an improvement of two energy classes) before the provision can be used.
The investment threshold is adjusted annually. In September 2026, it is important to consult the latest rates from the Social and Housing Authority (Social- og Boligstyrelsen) or relevant professional advisors to know the exact amount per square metre that must be invested before the modernisation is considered thorough. If the investment falls below this threshold, one risks the rent being reduced to cost-based rent in a case before the rent assessment committee (huslejenævnet), which could ruin the investment's business case.
Energy requirements and the moratorium period
One of the most significant changes in recent years is the introduction of the so-called moratorium period (karensperiode). The rule was introduced to dampen speculation in quick acquisitions and subsequent rent increases. As a starting point, it means that a new owner of a property cannot notice rent increases under Section 5(2) for the first five years of ownership, unless the property already meets certain energy requirements or other specific exceptions.
This five-year moratorium period has changed the strategy for many investors. Where one previously saw rapid value creation through modernisation immediately after acquisition, investment today requires a longer time horizon. As an investor, one must have the capital and patience to operate the property on existing terms before initiating the large modernisation projects that activate the value of the rented premises.
| Requirement Type | Details and Conditions |
|---|---|
| Investment amount | A fixed minimum amount per m² or a total amount (adjusted annually). |
| Energy label | Requirement to achieve energy class C or an improvement of two levels. |
| Moratorium period | 5 years from acquisition (certain exceptions exist, e.g., for high energy labels). |
| Inspection | The rent assessment committee may require an inspection to approve the modernisation. |
| Documentation | Requirement for full documentation of expenses incurred and the nature of the improvement. |
Geographical differences in the application of Section 5(2)
Although the Rent Act is national, its effect and relevance vary greatly depending on geography. In the so-called regulated municipalities (regulerede kommuner), which include the vast majority of larger cities like Frederiksberg, Gentofte, Aarhus, and Randers, Section 5(2) is one of the few tools to lift rent above the cost-based level.
In Copenhagen and the surrounding areas, we often see that the value of the rented premises for a fully modernised apartment is significantly above what the cost-based rent would be. Here, demand for quality is so high that investors are willing to undertake the extensive renovation costs and the long moratorium period. In smaller towns in the Region Zealand or North Jutland, the picture may be different. Here, the gap between cost-based rent and the value of the rented premises is often smaller, meaning the incentive to make very large investments is reduced.
It is therefore essential to conduct a thorough market analysis of the local rent level before purchasing a property for modernisation. One must not only know the law but also know what tenants in that specific area are willing to pay for a new bathroom or a modern open-plan kitchen-diner (samtalekøkken). In cities like Roskilde or Helsingør, we often see a good balance where modernisations can still be economically justified due to the cities' popularity and proximity to the capital.
Challenges and risks in modernisation projects
Working with Section 5(2) involves a series of risks that one must be aware of. The greatest risk is undoubtedly the assessment by the rent assessment committee (huslejenævnet). Even if the necessary amounts have been spent on renovation, it is ultimately the committee that decides whether the modernisation is "thorough" and whether the set rent corresponds to the value of the rented premises.
If the rent assessment committee judges that the rent is set too high, they can demand it be reduced retroactively. This can have major consequences for the property's valuation and the investors' return (Yield). Therefore, we see a tendency for professional actors to seek advance approvals (forhåndsgodkendelser) or utilise extensive documentation and expert assessments to minimise this risk.
Another significant factor is construction costs. In recent years, we have seen significant increases in materials and labour. As the requirements for the investment amount under Section 5(2) are fixed minimum limits, one may find that the actual costs of achieving a sufficient standard exceed the amount that can be recovered via the rent increase. Here, project management and sourcing of materials play a decisive role in the project's success.
The distinction between maintenance and improvement
A classic pitfall in working with Section 5(2) is the distinction between maintenance (vedligeholdelse) and improvement (forbedring). The Rent Act distinguishes sharply between these two categories. Maintenance involves works necessary to maintain the property's current condition, while improvements are works that add new value to the property.
In a thorough modernisation, there will typically be elements of both. If you replace an old, worn-out kitchen with a new one, part of the expense will be considered maintenance (what it would cost to repair the old kitchen), while the rest is an improvement. To meet the requirements of Section 5(2), the portion of costs attributable to improvements must exceed the statutory amount limits.
Investors should therefore keep very detailed accounts of all contractor expenses and ensure that invoices are specified. This allows auditors and legal advisors to split costs correctly, ensuring the evidence is in order if the rent assessment committee or a tenant organisation (lejerorganisation) should raise doubts about the rent level.
Examples of typical improvement works:
- Establishing a new bathroom in a room where there was no bathroom before.
- Installing balconies (altaner).
- Establishing a lift in the stairwell.
- Moving walls to create a more modern layout.
- Installing entirely new technical systems (e.g., ventilation systems with heat recovery).
Future outlook for modernisation of older properties
Although the rules have been tightened, there is still great potential in modernising the older housing stock in Denmark. The need for energy-efficient and contemporary housing will not disappear, and Section 5(2) remains one of the primary ways to finance these necessary lifts.
We see a tendency for investors to increasingly focus on properties that already have a good energy label to bypass the moratorium period, or properties with great potential for area optimisation. Furthermore, there is increased attention to sustainability in material choices, not just to meet legal requirements, but also to future-proof the property against future requirements from the EU and Danish authorities.
It is also worth noting that the political landscape can change. Rent legislation is often the subject of debate, and as an investor, it is crucial to stay informed via organisations like EjendomDanmark or through professional advisors. One should never base an investment solely on current rules without factoring in a certain safety margin for legislative changes.
Strategic approach to portfolio optimisation
For the serious investor, Section 5(2) is not just about the individual apartment, but about an overall strategy for portfolio optimisation. By modernising continuously when tenancies become vacant, one can gradually lift the property's total rental income and thus its market value. This requires close dialogue with the property manager (ejendomsadministrator) and a clear plan for when it pays off to initiate individual projects.
In cities like Esbjerg, Kolding, and Vejle, where the business community is growing, we also see increasing interest in modernisation properties. Although these cities do not have the same price pressure as Copenhagen, the lower entry price often provides a reasonable return on the invested capital in connection with renovation. It is about finding the right balance between acquisition price, renovation costs, and the achievable rent level.
Summary of rules and process
The process for carrying out a modernisation under Section 5(2) can be summarised in the following phases:
- Screening: Analysis of the property's current status, energy label, and rent level.
- Budgeting: Estimation of modernisation costs against the legal amount limits.
- Planning: Architectural drawings, obtaining building permits, and dialogue with contractors.
- Execution: Completion of the renovation with a focus on documenting all improvements.
- Letting: Setting the rent according to the value of the rented premises and drafting the lease with correct references.
- Validation: Potential submission to the rent assessment committee to secure the rent level.
It is important to emphasise that this article does not constitute legal or tax advice. Any property investment and modernisation case should be assessed by qualified professionals, including lawyers specialising in tenancy law and accountants with knowledge of property taxation. Rules at the Danish Tax Agency (SKAT) and the Ministry of Justice (Justitsministeriet) can change, and case law in the courts evolves continuously.
Frequently asked questions
What is the difference between Section 5(1) and Section 5(2)?
Section 5(1) refers to the cost-based rent system, where rent is determined based on the property's operating expenses plus a return. Section 5(2) allows for a departure from this system to use the value of the rented premises instead, provided the tenancy is thoroughly modernised.
Can you always use Section 5(2) in Copenhagen?
No, it depends on several factors. The property must be built before 1991, it must be located in a regulated municipality, and the requirements for investment size and energy label must be met. Furthermore, the five-year moratorium period must be observed unless specific exceptions apply.
What happens if the rent assessment committee rejects the modernisation?
If the rent assessment committee judges that the requirements for a thorough modernisation are not met, the rent will typically be reduced to the cost-based rent. The landlord may be required to repay overcharged rent to the tenant.
Is there a cap on how much the rent can increase?
The rent must not exceed the "value of the rented premises". This value is found by comparing it with the rent in similar tenancies in the same neighbourhood or district that have been modernised to the same level. There is thus no fixed DKK amount, but a market-based ceiling.
How PropertyInvestments can help
At PropertyInvestments, we have worked with the Danish property market since 1985. We help investors navigate the complex rules surrounding property optimisation and Section 5(2). Our expertise includes sourcing suitable investment properties, advising on modernisation potential, and managing the process towards a sale or stable operation.
If you are seeking assistance in identifying properties with modernisation potential in the major Danish cities, or if you want an assessment of your current portfolio's possibilities under current rules, please feel free to contact us. We offer a professional and concrete approach to property investment.
Contact us at info@propertyinvestments.dk or phone +45 31 16 31 00 for a non-binding dialogue about your investment goals.
