Berlin rent cap – state law to limit rents

A concept for limiting rent levels has already been the subject of political discussion since the beginning of 2019 against the backdrop of Berlin’s tight housing market. On January 30, 2020, the Berlin House of Representatives has now passed the Act on the Revision of Statutory Provisions on Rent Restrictions (Rent Act), which is expected to come into force before the end of February, following publication in the Berlin Law and Ordinance Gazette. The Rent Act, also known as the rent cap in the public debate, has met with considerable political resistance and predominantly criticism in the real estate industry.

Key points of the rent law
According to a rough estimate, the rent cap affects 1.5 million apartments in Berlin. It is not to apply to new buildings that were ready for occupancy for the first time on or after January 1, 2014, and to housing that is otherwise permanently uninhabitable in an individual case, as well as to uninhabited former housing that is restored for residential purposes at a cost equivalent to new construction, as well as publicly subsidized housing, housing provided by sponsors, and housing in residential homes. The main content of the Rent Act is a “freeze” on rents for five years, i.e. an exclusion of rent increases (rent freeze). Rents that are more than 20’% above established rent ceilings are prohibited as so-called excessive rents. Under the Rent Act, landlords are also obliged to provide tenants, without being asked to do so, with information on the relevant circumstances for determining the rent cap within two months of the Act coming into force and in each case before a new contract is concluded.

Rent freeze
Under the Rent Act, for a period of five years, it is prohibited to charge a rent that exceeds the rent effectively agreed on June 18, 2019 (the effective date). This rent freeze is to apply to all existing leases. For new leases between the effective date and the effective date of the Rent Act, the agreed rent shall apply. Graduated and index-linked rents are frozen, so to speak, at the level applicable on the reference date. For the first time as of January 1, 2022, it is to be permitted to increase the rent annually in line with inflation as determined by the Federal Statistical Office on December 31 of the previous year, but by a maximum of 1.3%, and only up to the permissible rent cap.

Rent caps and reduction of excessive rents
The rent ceilings for determining the monthly allowable rent are derived from a rent table contained in the Rent Act. The figures are based on the 2013 Berlin rent index and have been adjusted by 13.5% to reflect price trends. The rent ceiling is essentially determined by the age of the building and ranges from EUR 3.92 to EUR 9.80 per square meter. The rent cap is increased by EUR 1.00 per square meter for residential space with “modern furnishings”, which, according to the Rent Act, can only be assumed if three of five conclusively regulated criteria (threshold-free accessible passenger elevator, built-in kitchen, high-quality sanitary equipment, high-quality flooring, energy consumption characteristic value of less than 120kWh/(m² a)) are met. In the event of modernizations, including multiple modernizations within the period of validity of the rent cap, the permissible rent may not increase by more than EUR 1.00 per square meter in total. In order to avoid undue hardship, exceptions to this rule may only be approved by Investitionsbank Berlin under strict conditions upon application by the lessor.
The location of the apartment is of comparatively little importance in determining the rent ceiling: For apartments in a simple location, a deduction of EUR 0.28 per square meter applies to the rent ceiling, and for apartments in a medium location, EUR 0.09 per square meter is deducted. For apartments in good locations, EUR 0.74 cents per square meter is added. At the time the Rent Act was passed, a residential classification was not available; it is yet to be published.

According to the Rent Act, a rent is considered excessive if it is more than 20% above the respective rent ceiling, and as such is prohibited. Tenants may demand a reduction of an excessive rent for the first time nine months after the Rent Act comes into force.

Administrative offences
Violations of the duties to cooperate and provide information, as well as charging excessive rent, are classified as administrative offenses and can be punished with fines of up to EUR 500,000.

Classification of the Rent Act
The adopted rent law is subject to constitutional concerns. The initiation of a standards control procedure has already been announced by various parties.
It is already legally disputed whether the state of Berlin actually has the legislative authority to introduce an area-wide rent cap for the state of Berlin on the basis of the 2006 constitutional reform. The Rent Act suspends, at least in part, the right to rent enshrined in the Civil Code. Above all, the rent cap cannot be reconciled with the federal government’s rent brake. The Mietpreisbremse (rent brake) is based on municipal rent indexes, while the Mietendeckel (rent cap) aims to abolish them for Berlin. According to the assessment not only of the Federal Ministry of the Interior, the State of Berlin was “prevented by competence law” from enacting a law to limit rents, since the federal legislature had comprehensively and conclusively exercised its concurrent legislative competence in this area. Berlin’s CDU and FDP parliamentary groups have already announced that they will jointly file a lawsuit before the state constitutional court, and the CDU/CSU parliamentary group in the Bundestag has announced that it will file a lawsuit before the Federal Constitutional Court.
In addition to concerns about the formal constitutionality of the Rent Act, there are also significant doubts about its substantive legality. By linking the effective date to June 18, 2019, the Rent Act has a retroactive effect on rent increases and the determination of allowable rent levels. A retroactive effect, as provided for in the Rent Act, is subject to constitutional limits arising from the principle of the protection of legitimate expectations and the principle of proportionality, which are not likely to be observed here.

Compatibility with the property guarantee under Article 14 of the Basic Law must also be questioned when examining the rent cap. In this respect, it is at issue whether the non-achievement of an already calculated return and the inflation compensation not even granted initially are capable of justifying an encroachment on the substance of the property. The Rent Act also restricts the contractual freedom of the parties to the rental agreement to a not only insignificant extent. The link to the 2013 rent index is also questionable, although more recent qualified rent indexes for Berlin have been adopted since then (currently 2019). Moreover, it does not seem appropriate to take into account the location of a dwelling merely by means of flat-rate discounts and surcharges on unit rents.
In terms of content, the envisaged capping and reduction of rents is likely to provide particular relief to those tenants who already have the financial means to rent very high-priced apartments in preferred locations, as these rents are the ones most likely to be affected by a reduction. As a result, tenants of art nouveau older apartments in absolutely prime locations will be far more likely to enjoy substantial rent reductions than, for example, tenants of apartments in large housing estates in suburban districts, where rents are far less likely to be above the new rent ceilings anyway. In general, the idea of a ban and a reduction of excessive rents is new political territory and one of the main points of criticism in the public debate. If this regulation is overturned by the courts, tenants may be faced with substantial additional payments.

Finally, the fact that the provisions of the Rent Act are limited to five years should not be ignored. It is not conceivable how the previously applicable qualified rent index is to be updated in a representative manner after the expiration of the Rent Act, since residential space is excluded from the determination of local comparative rents, where the rent level is subject to state regulation – in this case by the Rent Act.
Moreover, the impact on housing and real estate companies as well as on smaller and private residential property owners is likely to be significant. In many cases, it will no longer be possible to realize calculated tenant expectations at the assumed level. In order to still be able to meet certain return expectations, attempts are likely to be made to cut costs elsewhere, for example at the expense of investments in the building fabric. This, in turn, has negative effects on the living conditions of tenants as well as on the condition of apartment buildings and the cityscape as a whole. Negative economic effects are also expected for other industries, especially real estate-related service providers and the construction industry, which face a potential decline in orders. On the other hand, opportunities will arise for speculative investments and investors with an affinity for risk, who are banking on significant rent increases and the realization of appreciation once the Rent Act expires.

Outlook
It remains to be seen whether the Berlin Senate’s goals of providing relief for needy tenants and counteracting excessive rents can actually be achieved permanently and sustainably with the Rent Act. Even if the Rent Act stood up to constitutional scrutiny, many unanswered questions remain: What happens after the five-year rent freeze? How do rents develop afterwards without a rent index? What impact will the rent cap have on housing affordability in the long run? Does the rent cap provide incentives to develop new apartments in Berlin? Will investors reconsider their business decision for residential real estate in Berlin and Germany as a whole? Already now, to our knowledge, the Rent Act is being watched very closely, even abroad. We will continue to report and will be happy to answer any questions you may have on contract design.

Sources:
Berlin House of Representatives, Printed Matter 18/2347, Nov. 28, 2019, available at http://pardok.parlament-berlin.de/starweb/adis/citat/VT/18/DruckSachen/d18-2347.pdf and Printed Matter 18/2437, Jan. 23, 2020, available at https://www.parlament-berlin.de/ados/18/IIIPlen//vorgang/d18-2437.pdf
https://www.berlin.de/rbmskzl/aktuelles/pressemitteilungen/2019/pressemitteilung.856545.php
https://rsw.beck.de/aktuell/meldung/bundesinnenministerium-mietendeckel-verstoesst-gegen-grundgesetz
https://www.n-tv.de/politik/Berlins-Opposition-bekaempft-Mietendeckel-article21547987.html
https://www.stadtentwicklung.berlin.de/wohnen/mietspiegel/de/qualifiziert.shtml
https://www.immobilien-zeitung.de/153900/gewinne-dank-mietendeckel