Update: "Berlin Rent Price Cap" (Mietendeckel) – Draft Bill of the Berlin Senate of 22 October 2019

On 22 October 2019, the Berlin Senate passed the draft bill for a Berlin rent price law for residential space, the so-called Berlin rent price cap (Berliner Mietendeckel). The Senate’s draft implements the coalition resolution of 18 October 2019 and is essentially based on the draft bill of the Senate Department for Urban Development and Housing of 2 September 2019 [see our Newsalert from September 2019] and the key points on the rent price cap adopted by the Senate on 18 June 2019 [see our Newsalert from July 2019].
 
In the meantime, the Senate has submitted the bill to the Council of Berlin's District Mayors for comments. Subsequently, the bill will be submitted to the Berlin House of Representatives for the required readings and final adoption. Slightly deviating from the previous timetable (adoption in December 2019, entry into force in January 2020), it is expected that the Berlin rent price cap will not be adopted before February 2020, but shall then enter into force immediately.

The Provisions of the Senate’s Draft – Even Tighter than the September Draft

The Senate’s draft has further tightened the draft bill submitted by the Senate Department for Urban Development in September. It also contains some clarifications and additions. Accordingly, the Berlin rent price cap shall apply as follows:

Scope of Application 

The rent price cap shall apply to all residential space in Berlin (including single-family/semi-detached homes, fundamentally refurbished and furnished apartments as well as short-term letting models).
Exemptions: The rent price cap law shall not apply to newly constructed buildings that were ready for occupancy on or after 1 January 2014, publicly subsidized apartments as well as dormitories and apartments operated by recognised welfare organisations. 

Regulatory Concept

Compliant with previous drafts and concepts, the rent price cap shall provide for two major instruments: a rent freeze and upper rent limits (rent caps)

Rent freeze: With the entry into force of the new law, a rent freeze shall apply to all existing leases at the level of the rent on 18 June 2019 (or, if vacant on that date, the last agreed rent prior to that date). The rent freeze shall also apply to any indexed rents and stepped rents as well as rent increases to the local comparative rent. From 2022 on, an annual inflation adjustment of at max. 1.3% p.a., however not exceeding the applicable rent cap, is envisaged. The exact percentage will be determined by the Senate Administration in a legal ordinance.
Rent caps: The provisions governing the rent caps have been modified. However, the concept of the rent caps continues to serve two functions – as an absolute upper rent limit, and as a reference point for rent reductions

o Rent caps of between EUR 3.92 and EUR 9.80 per square meter shall apply; those amounts are based on the 2013 rent index (Mietspiegel), adjusted to reflect real wage developments until 2019. The rent cap level applicable to an individual apartment depends on the construction year and fit-out standard (with/without collective heating; with/without bathroom), but not on the location of the apartment.
o For buildings with no more than two apartments (in particular detached and semi-detached houses), the respective rent cap will be increased by 10%.
o New: A flat-rate increase of the rent cap levels by EUR 1 per square meter for apartments with modern equipment. According to the Senate's draft, an apartment qualifies as “with modern equipment” if at least three of the following five criteria are fulfilled: (i) elevator, (ii) built-in kitchen, (iii) high quality sanitary fit-out, (iv) high quality flooring and (v) low energy performance (less than 120 kWh/m² a).

Running Leases 

Rent freeze: With respect to running leases, only the rent freeze shall apply from day one. This means that with the entry into force of the new law the rent does not have to be reduced, provided that the rent level of 18 June 2019 (or before, as applicable) has not been exceeded as a result of rent increases in the interim.
Rent reduction: If the applicable rent cap level is exceeded by more than 20%, the rent is considered excessive (also publicly referred to as "extortionate rents"). After 9 months from the entry into force of the new law, the tenant can apply to the Senate Administration for a rent reduction down to the 120%-level. For this purpose only, the relevant rent cap level shall be adjusted to reflect the location of the apartment as follows: 

o For good locations the relevant rent cap level shall increase by 74 cents per square meter, for medium and simple locations, however, the relevant rent level shall decrease by 9 cents or 28 cents per square meter, respectively.
o What qualifies as a good, medium or simple location shall be determined by a separate legal ordinance. It is to be expected that such ordinance shall be based on the system of location criteria under the existing rent index.

First-time Letting and Re-letting

In  case of first-time lettings (after 18 June 2019) or re-lettings (after the entry into force of the new law), the landlord is obliged to reduce any rent above the relevant rent cap level down to the applicable rent cap level.  However, if the rent agreed as of 18 June 2019 (or before, as applicable) was below the applicable rent cap level, only this lower rent may be charged. [Note: For the purposes of this concept, “first-time lettings” refer to changes of use implemented after 18 June 2019, however, not to any first-time lettings in newly constructed buildings since 2014 – as the new law does not apply to those buildings at all].
With respect to apartments with an agreed rent level below EUR 5 per square meter as of 18 June 2019, for re-lettings the rent may be increased by a maximum of EUR 1 up to EUR 5.02 per square meter.

Modernizations

The provisions of the September draft were again significantly tightened

The costs of modernization measures may only be allocated to the tenant if the rent does not increase by more than EUR 1 per square meter and the rent cap is not exceeded by more than EUR 1 per square meter. Additional modernization costs that would lead to an increase in rent of more than EUR 1 may not be allocated to the tenant. Such additional costs may only be refinanced under new subsidy programmes still to be specified and launched by the State of Berlin.
Further, such modernization costs can only be allocated to the tenant if they relate to measures (i) which the landlords are legally obliged to implement, (ii) for thermal insulation of the shell of the building, the ceiling of the basement areas, the top floor ceiling or the roof, (iii) for the use of renewable energies, (iv) for energy savings by way of window replacement, (v) for the replacement of heating systems, (vi) for the construction of elevators or (vii) for the removal of barriers.
Any such rent increase needs to be notified to the state-owned Investitionsbank Berlin.

Economic Hardship 

In cases of economic hardship for which the landlord is not responsible, Investitionsbank Berlin may approve a higher rent at the landlord’s request. Once granted, such approval shall apply to the running as well as any subsequent leases.
In order to demonstrate economic hardship, the landlord has to establish that the rent level permitted under the new law would lead to permanent losses or would put the substance of the leased space at risk. The recitals of the draft bill refer, by way of example, to expenses incurred by the landlord in fulfilment of a legal obligation which cannot be refinanced through the regular rental income. It should be noted that this is likely to be relevant in particular in context with modernization measures which the landlord is legally obliged to carry out.
The practical aspects as to how this economic hardship provision will be implemented remain unclear. The Senate intends to specify this in a separate legal ordinance.

Information Duties

Landlords shall be under the obligation to provide future tenants with (unsolicited) information on the rent applicable to the respective apartment as of 18 June 2019 (or before, as applicable) prior to the conclusion of a new lease agreement. Furthermore, they shall provide tenants with information on the criteria relevant for calculating the relevant rent cap level. Also, for running leases these information duties shall apply during the first two months after the entry into force of the new law.

Penalty Fines 

The provisions regarding penalty fines remain unchanged. Such fines can be imposed if the landlord demands a rent exceeding the permitted rent level or violates information duties.
The penalty fine for individual cases may amount up to EUR 500k.

Legal Assessment

Contrary to public announcements, under the new draft bill the concept for the Berlin rent price cap was not softened, but tightened: 

Based on the generalizing 120%-threshold to determine excessive rent levels, nine months after the entry into force of the new law there will be countless requests for rent reduction (according to the Senate’s own estimate: at least 150,000).
Neither the determination of the applicable rent cap level nor the concept for rent reductions is based on the income of the tenant. As a result, particularly higher earning tenants will benefit from the Berlin rent price cap.
Also based on the new draft bill, the Berlin rent price cap remains unconstitutional due to the lack of legislative competence of the State of Berlin. The existing provisions of the social rent price law under the German Civil Code (BGB), in particular the BGB-provisions regarding rent control with reference to the local comparative rent and governing stepped and indexed rents as well as modernization levies, shall be suspended by the Berlin rent price cap in Berlin and replaced by a stricter rent control regime. In fact, the Berlin rent price cap can be construed as a "special BGB" just for Berlin that is in breach of the Federal Constitution as it contravenes the socially balanced rent control law under applicable federal law. However, as pointed out by the Federal Supreme Court conceptual decisions of the federal legislator must not be compromised by any of the state legislators.
Finally, we see strong arguments that the Berlin rent price cap also violates other fundamental rights and principles of the German constitution. In particular, the concept of mandatory rent reductions sanctioned with penalty fines is likely to be in breach of the constitutional property guarantee and the freedom of contract. Further, the draft bill lacks required differentiations. For example, whilst newly constructed buildings (from 2014 onwards) are exempted, the bill does not address fundamentally refurbished apartments. Similarly, it does not appropriately take into account the location of the leased space when it comes to determining permitted rent levels.

Outlook

Not least due to the recent tightening of the draft bill, it is to be expected that immediately after its entry into force the Berlin rent price cap will be challenged before the constitutional courts at the federal and state level. Besides abstract constitutional review proceedings to be initiated by at least 25% of the MPs at the federal or state level, also individual constitutional challenges and constitutional review proceedings in context with individual civil or administrative court disputes are available.

Subject to the final draft bill, including its recitals, we still see room for injunctive relief (einstweiliger Rechtsschutz) potentially suspending the new law until the constitutional courts have ruled on its constitutionality.

Since spring this year, our experts in constitutional and rent price law have rendered numerous critical comments and expert opinions on the constitutionality of the Berlin rent price cap plans and have advised on pertaining constitutional and compliance issues. This expertise is at your disposal to further analyse the application for your specific situation.

Christian Schede
Managing Partner
christian.schede@gtlaw.com
+49 30 700171 120

Johann-Frederik Schuldt
Associate
johann.schuldt@gtlaw.com
+49 30 700171 289