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Berlin rent cap: What has changed for landlords and owners (updated)

Berlin Senate approves rent price cap

UPDATE – 25 October 2019: The red-red-green coalition has reached a compromise after tough negotiations. The bill on the rent price cap was passed on 22 October 2019 and is due to come into force in January 2020.

We have summarised the key points of the bill “Act on the Revision of Legal Regulations on Rent Limitation”. We will also keep you up to date on the progress of this initiative, which is unique in Germany.

Berlin - BERLIN RENT CAP: WHAT HAS CHANGED FOR LANDLORDS AND OWNERS

1) Which measures were decided with the rent cap bill?

Rent frozen for five years: For five years, the rents for flats which are not part of social housing programmes will be frozen. An inflation compensation of 1.3 percent per year is planned from 2022.

Retroactive validity: The bill is retroactively valid as of 18 June 2019, the date on which the Senate passed the key points.

Initial letting in new buildings not affected: Initial lettings in newly erected buildings that were ready for occupancy on or after 1 January 2014 are exempt from the Berlin Rent Act.

Rent ceilings:
In order to determine the upper rent limits, the ceilings listed in the Berlin Rent Index from 2013 were updated taking real wage development until 2019 into account. The rent ceilings result from the table in the draft law and are scaled according to the construction year categories and amenities.

Rent ceilings and permissible surcharges

The upper rent limit for flats with modern fixtures and amenities has been increased by 1 euro. According to the bill’s rent table, “modern fixtures and amenities” mean the living space demonstrates at least three of the following five features:

  1. Fitted kitchen
  2. High-quality sanitary equipment
  3. High-quality floor covering
  4. Passenger elevator
  5. Energy consumption value of less than 120 kWh/(m²a)

The rent ceilings increase by a surcharge of 10% if the residential space is located in buildings with no more than two flats.

Thus the calculation of the permissible rent is based on the rent ceiling in accordance with the rent table + surcharges listed above.

Berlin - Berlin Rent Cap

(Source of rent table for rent price brake: Press release on the Senate session of 22 October 2019.)

Re-letting: In the case of re-letting, the price of the previous contractual rent and the rent ceiling must not be exceeded. If the previous rent was higher than the rent ceiling, the maximum rent may not exceed the rent ceiling. If the rent for a flat with modern fixtures and amenities is particularly low (less than 5.02 euro/sq. m), it may be raised by a maximum of 1 euro/sq. m to a maximum of 5.02 euro/sq. m if the flat is re-let.

Existing rents: Only the rent that was effectively agreed on 18 June 2019 may be claimed. Subsequent graduated rent or indexed rent increases are ineffective. If the flat was not rented on the cut-off date, only the previous rent may be stipulated.

Initial letting: If the residential space is leased for the first time after the cut-off date or if it is leased again after the law has come into force, only a maximum rent corresponding to the upper rent limit may be stipulated. An initial letting exists if the space had previously been leased as commercial premises, or if the rental object has changed, e.g. if the size of the flat has been significantly altered.

Modernisation: Modernisation measures (energy-efficient renovations, barrier-free access) are notifiable; modernisation allocations of up to 1 euro per square metre are permissible. Funding programmes are to be used to cover additional modernisation costs. In this case, it is not permissible to allocate the costs to the tenants.

Rent reductions: For existing tenancies, tenants should be able to reduce their rent upon application if it is more than 20% above the permissible upper rent limit. This includes increases and reductions for simple locations (-28 cents/sq. m), average locations (-9 cents/sq. m) and good locations (+74 cents/sq. m). The regulations will only be applied nine months after the law comes into force.

Hardship provision for landlords: In cases of economic hardship, rent increases can be approved if absolutely necessary in order not to endanger the basic structure of a building. Approved rent increases above the rent ceilings are to be cushioned by a rent subsidy for households holding a certificate of eligibility for public housing (WBS). The rent subsidy may not exceed the amount surpassing the upper rent limit.

Fines: Any violations of the stipulations of the Berlin Rent Act are considered an administrative offence with a fine of up to 500,000 euros.

2) Rent price brake in Berlin: What type of rent increase is still permissible?

Berlin - Rent price brake in Berlin: What type of rent increase is still permissible?

3) Whether the rent price cap is constitutionally compliant is a controversial subject – the final assessment will lie with the Federal Constitutional Court. What is the current legal evaluation, also in relation to the existing “rent price brake” (“Mietpreisbremse”)?

The rent price brake under the German Civil Code would not be affected by a rent price cap as a state law. In principle, tenancy law is a matter to be clarified at the federal level.

Nevertheless, several expert opinions consider the rent price cap to be admissible, including an expert opinion prepared by Dr. Franz C. Mayer, LL.M. (Yale) and Dr. Markus Artz (University of Bielefeld) for the SPD parliamentary group in the Berlin parliament. However, many others consider such a law to be unconstitutional, including Dr. Thomas Dünchheim (Hogan Lovells International LLP) on behalf of the German Property Federation (ZIA).

The red-red-green Berlin government argues that the rent price cap is a matter of public law, which falls under the responsibility of the federal state.

New reports on constitutionality: Rent freeze yes, rent reduction no – and high risks for tenants

In the latest policy paper from gif Gesellschaft für Immobilienwirtschaftliche Forschung e. V. dated 16 October 2019, Dr. Karola Knauthe (HWR Berlin) concludes that tenants may also be exposed to considerable risks. If the Federal Constitutional Court were to classify the rent price cap as unconstitutional, tenants could be threatened with back rent repayments or even the loss of the flat.

In a further report dated 15 October 2019, commissioned by the Berlin Senate Chancellery, constitutional law expert Ulrich Battis offers a nuanced assessment of the proposed law. While a rent freeze is permissible, the lowering of rents and the stipulation of rent ceilings is not. It would be unrealistic to expect a legally compliant solution before the end of 2020.

We have summarised the relevant expert opinions and analyses for you below.

Gif report warns of high financial risks for tenants

Prof. Dr. Karola Knauthe, Professor of Real Estate Law at the Berlin School of Economics and Law (HWR), analysed the constitutionality of the draft law and the possible consequences for gif Gesellschaft für Immobilienwirtschaftliche Forschung e. V. if the Berlin Rent Act were to be struck down by the Federal Constitutional Court.

The analysis published on 16 October 2019 considers the bill constitutionally questionable with reference to the principle of proportionality in accordance with Article 14 GG and the legislative competence of the federal state.

It is also important to note that tenants would be exposed to considerable risks if the Federal Constitutional Court were to classify the rent cap as unconstitutional. The tenant would be responsible for any resulting back rent payments. Such additional financial burdens could lead to the loss of the flat in the event of non-fulfilment.

Report commissioned by the Senate Chancellery considers planned rent reductions and rent ceilings unconstitutional

According to media reports, Dr. Ulrich Battis (GSK Stockmann) presented another expert opinion commissioned by the Berlin Senate Chancellery on 15 October. The rent freeze planned as part of the rent price brake is permissible and constitutional as a state law “as part of a housing policy concept for the re-establishment of a balanced housing market” (quoted by the Berlin Tagesspiegel).

In contrast, rent reduction and the setting of rent ceilings are not in keeping with the federal constitution. The bill would have to be adapted accordingly to make it legally watertight. The expert does not consider this to be tenable by the planned entry into force in January 2020 and therefore expects the date to be pushed back to the end of 2020. In addition, the report urges administrative improvements and better activation of urban voids.

An expert opinion of the Research Service of the German Bundestag determined that the law would be predominantly unconstitutional

Having already been published on 18 June parallel to the resolution of the rent price cap, details of the appraisal drawn up by the Research Service of the German Bundestag became public at the end of June. The report confirms that tenancy law is conclusively regulated in the German Civil Code (BGB) and that federal law would thus have a blocking effect. Moreover, property rights may be restricted, but their inherent substance may not be violated. Rent increases must remain possible.

However, the Research Service of the German Bundestag does not commit itself to stating that the new rent price cap is completely unconstitutional. Media reports quote the expert opinion as follows: “The responsibility of the federal states for banning rent increases could result from their legislative power in connection with housing. Since the federalism reforms of 2006, this competing power has been the sole responsibility of the federal states.”

4) The road to the current bill: Compromise on the first draft bill

It has been a long road to the rent price cap bill. On the evening of 29 August 2019, the red-red-green coalition in Berlin agreed on a first compromise on the rent price cap draft.

After several weeks of controversial public discussions, Left Party Senator Katrin Lompscher’s radical internal draft was thus off the table, which foresaw the calculation of base rents exclusively on the age of the property and the amenities, regardless of the location, providing for rent ceilings of between 3.42 euros and 7.97 euros per square metre.

Rent price cap in Berlin – strategic consulting

We would be happy to provide you with further details at any time in person, by telephone or by e-mail. Our 50+ real estate experts for the Berlin residential and commercial property market are looking forward to hearing from you.

Disclaimer:

This article is intended solely as general, non-binding information and should not replace detailed research or specialist advice. Although this article has been prepared with the greatest possible care, there is no claim to factual accuracy, completeness and/or topicality. The particular circumstances of the individual case must always be taken into consideration. The use of information contained in this article is the sole responsibility of the respective reader. Any liability on the part of Engel & Völkers Gewerbe Berlin GmbH & Co. KG and/or another Engel & Völkers licensee is excluded.

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