The Berlin rent cap is unconstitutional – What does that mean for landlords and tenants?

The rent cap in force in Berlin since February 23, 2020 was declared unconstitutional by the Federal Constitutional Court (decision of March 25, 2021, 2 BvF 1/20, 2 BvL 4/20, 2 BVL 5/20). The State of Berlin has exceeded its legislative competence, so that the Act on the Reorganization of Statutory Provisions on Rent Restrictions (Rent Act, GVBl. 2020, p. 50) is incompatible with the Basic Law and is null and void. Now, many renters are threatened with additional payments – and more than ever, suitable means are needed to promote housing construction in Berlin on a sustainable basis.

Decision of the BVerfG

As we discussed shortly after the law came into force in our client information published in February 2020,[1] the Rent Act is in conflict with Art. 74 para. 1 No. 1 in connection with Art. 72 para. 1 of the Basic Law is incompatible and null and void. In response to an application for a review of standards, the BVerfG ruled that the State of Berlin lacked the legislative competence for this law and that the Federal Government had made conclusive use of its exclusive competence for civil law with the provisions on rent levels in Sections 549 et seq. BGB (German Civil Code), the federal government has made conclusive use of its exclusive competence for civil law. At the latest with the Rent Law Amendment Act of April 21, 2015, which regulated the limitation of reletting rents (the so-called Mietpreisbremse), the federal government has conclusively regulated the assessment of the maximum permissible rent for price-independent housing under federal law, as the court clarified. The Rent Act essentially regulates the same subject matter as the federal rent brake, so that according to the decision of the BVerfG there is no room for a more far-reaching or deviating state law regulation, as represented by the Rent Act.

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As a result of the nullity of the entire Rent Act, the regulations limiting rent increases pursuant to Sections 3 et seq. of the Rent Act, which affected approximately 1.5 million of all rental apartments in Berlin, did not apply from the beginning. In particular, this means that the rent freeze regulated in the Rent Act, which provided for an exclusion of rent increases for five years, no longer applies. Likewise, the ban on demanding rents that are more than 20% above set rent ceilings has been lifted. For more details on the formerly applicable content of the Rent Act, we gladly refer to our article published in February 2020.

The Berlin Senate’s concept of using a state law to limit rent levels for privately financed, non-price-controlled housing has not worked. The goals of the Berlin Senate to relieve needy tenants, to counteract excessive rents and at the same time to sustainably calm the tight housing market could not be achieved in this way – and would probably not be achieved if a rent cap based on the Berlin model were to be cast into a federal law in the future on the basis of a parliamentary initiative, because there are further considerable fundamental rights concerns.

The BVerfG’s decision has now conclusively clarified the unconstitutionality of Berlin’s rent cap, but the consequences of the decision will not reach many landlords and tenants until the coming weeks. Thus, in many cases, tenants in Berlin are likely to face demands for back payments if and to the extent that the contractually agreed rent exceeded the rent permitted under the Rent Act and actually paid. Shortly after the decision was announced, a very differentiated picture is already emerging of how landlords will react: Although one of the largest housing companies on the Berlin market has already announced that it will forego back rent payments, not all landlords will be able to handle this in the same way, especially if the rent increases previously permitted by law were included in building financing. Some housing companies have already announced that they will not waive their right to demand back payments.

Outlook

The lack of sufficient affordable housing in Berlin, but also in many other German cities and metropolitan areas, remains a challenge for society and politics. The BVerfG’s ruling clarifies that regulations on the rent level for tenancies in privately financed housing construction, as part of social tenancy law, are conclusively reserved for the federal legislature, at least with regard to setting the maximum permissible rent. Consequently, further tightening or changes to the rent level could only be regulated at the federal level. In this respect, it is foreseeable that the issue of affordable rents will find its way into the many election campaigns in this particular year.

However, federal regulations on rent levels can only be one element of a more sustainable housing and construction policy, as is being called for everywhere. More than just ever-advancing regulation of market rents is needed to ease housing market tension. Limiting or capping freely agreed rents alone will not create new housing. New housing can be created primarily through new construction and modernization. According to our impression, investors for this are available in Germany as well as from abroad. Thus, at the state level, it seems sensible to take advantage of opportunities to focus on those instruments that are actually available to state legislatures – these may be familiar scenarios such as social housing, publicly subsidized housing, or price-conscious new construction by municipal housing corporations and cooperatives. Integrated concepts for building land development and holistic urban development could also be further advanced. However, it is also important that building administrations in cities and municipalities are not further thinned out in terms of personnel, so that building plans and building permits can be processed much faster than before. If urban building land is only allocated according to the highest bid and building requirements are only set according to the technical optimum and not with a sense of proportion, this will not reduce building costs and consequently rents either. The focus should be on a joint effort by policymakers, administrators, interest groups, housing companies, investors and tenant representatives to develop and advance holistic approaches to sustainably easing the housing markets. We will continue to closely monitor and report for you on the direction in which the development of the urban housing markets is moving and the paths that are being taken here.

[1] https://kpmg-law.de/mandanten-information/berliner-mietendeckel-landesgesetz-zur-mietenbegrenzung/