Germany: The "Rent Cap" According To The Intended "Act For Rent Limitation In The Housing Sector In Berlin"

Last Updated: 6 September 2019
Article by Klaus Jankowski, Olaf Kreißl, Jan Prielipp and Astrid Pütz

As a law firm, it is not really our job to take a stand on political issues. We do, however, notice an increase in the number of client inquiries about the effectiveness of the "rent cap" planned by the Berlin Senate, i.e., the legal limitation of rent for residential properties in the State of Berlin. In this context, numerous questions are already arising prior to publication of a generally accessible draft law and long before the law's final version, in particular because it is supposed to enter into effect retroactively.

It is apparent that a substantial amount of damage has already been incurred, simply because the fervent discussion about this intended instrument alone leads to substantial uncertainty and partial paralysis by landlords and investors. Housing projects are being canceled or at least put on hold; housing investments are scaled back or diverted – developments to the detriment of both landlords and tenants.

It also bears pointing out that the residential rental market in Berlin has in fact been in a state of considerable flux for several years now and that affordable housing is becoming increasingly scarce. Observed in other major cities for years, the housing shortage has arrived in Berlin as well. While other major cities have formed housing alliances with the private and public housing sectors, Berlin has abandoned public housing subsidies. The existing instruments for limiting rents, in particular the "rent brake," turn out to be largely ineffective. In our view, rising rents in recent years have mainly been caused by the lack of new residential construction. Instruments of a sustainable new residential construction policy need to be created. The rent cap is not a suitable solution. Rather, it would paralyze new residential construction in Berlin for years to come. The oft-repeated argument that a "breather" forced by the rent cap would do the Berlin housing market good is therefore also misguided. The opposite is the case: as a consequence, even fewer urgently needed residential construction projects will be undertaken for years to come, thus cementing the housing shortage in the long term. This is neither in the interest of the real estate sector nor in the interest of tenants and housing seekers.

Recent statements on the rent cap, in particular on the August 30, 2019 draft bill, indicate that the Berlin Senate intends to introduce a state law ("Act for Rent Limitation in the Housing Sector in Berlin") in the House of Representatives, according to which

  • rents for apartments not subject to fixed prices will be frozen for five years,
  • a rent cap, staggered by building age classes, will be introduced on the basis of the 2013 rent index,
  • in cases of re-leasing, the amount of the previous contractual rent and the rent cap may not be exceeded,
  • depending on the family income, tenants may demand official and judicial assistance to reduce rents that are too high based on the standards laid down,
  • modernization levies in excess of EUR 1.00/square meter must be approved by authorities,
  • infringements are punishable by fines of up to 500,000 euros, and
  • the Act is to apply retroactively to the date of the Senate resolution (June 18, 2019).

The vast majority of experts consider this draft law to be unconstitutional – a view that we unanimously support. For one, the State of Berlin has no legislative competence relating to the subject matter of tenancy law, which is conclusively regulated by the Federal Government, and, secondly, the recently submitted draft bill also lacks viable differentiations despite an "economic hardship clause." It is a constitutional novelty for the amount of the financial consideration for the service of renting out housing to depend on tenants' household income. Such massive encroachments on landlords' freedom of ownership and trade will not be justifiable in this manner. The constitutional expert opinions obtained by the State of Berlin do not really support the proposed law, either. The Senate Administration admits on its website: "The system referred to as rent cap is legally unchartered territory."

Subject to sound legal advice in individual cases, we generally recommend not to rely on the rent cap coming into effect in the form that is currently under discussion. This applies both to tenants and landlords. No one knows whether the law with the contents as currently discussed will enter into effect and withstand review by the constitutional court. We have valid statutory provisions on tenancy law that are in force now. It is impossible to reliably assesses whether and, if so, in what form a Berlin "rent cap" can and will exert an effective influence on these statutory provisions.

Although the law is intended to have a retroactive effect to take the wind out of the sails of landlords who are aiming for "quick fixes" in new leases or rent increases, this feature is not even demanded by the state's own experts. Furthermore, it is not to be expected that rent that is allegedly too high according to the "rent cap" will lead to subsequent fines if the increase took effect prior promulgation of the law. Retroactive punishability is undoubtedly unconstitutional.

Some clients may argue that we, as lawyers, should be happy about an increased workload as a result of such a controversial topic. No, we are not, because in the end all parties will lose, whether tenant, apartment seeker, landlord, investor, or service provider.

Leaving aside whether to support or oppose the "rent cap," it is clear that hardly any legislative project in Berlin has divided the city as much as this one before the first concrete text has even been submitted. Anyone who thinks that this particular government measure will lead to more affordable housing for Berlin's annually growing urban population is deluding themselves. Major damage has already been incurred by the housing rental market, and the confidence in stable parameters for investors, tenants, and landlords has been eroded. Even if rents were capped, those who are unsuccessfully applying, with thirty other applicants, for an empty apartment today will not see their chances improve when they are facing forty or more applicants.

Berlin needs building, not "capping"!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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