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The current state of affairs

Two weeks ago, on 18 June, the Berlin Senate decided on "Key points for a Berlin rent law (rent price cap)". The text of the resolution was made public only last week. It is almost identical with the key-points paper on the introduction of a "Berlin rent cap" which surfaced in early June (for more information, please see our newsalert from June 2019).

The clarification of central regulations, important points of which remain controversial in the Berlin state government parties, was postponed until the legislative process now underway. The bill is to be presented at the end of August, and the hearing of associations and experts will take place by mid-September. The Senate’s vote is scheduled to take place in mid-October and the bill shall then be discussed and adopted by the Berlin state parliament. The law is scheduled to come into force in January 2020, with retroactive effect as of 18 June 2019.

The Senate's decision largely reflects concepts publicly discussed in recent weeks. Compared to the key issues paper that previously surfaced, the Senate decision contains few specifications.

In more detail:

• The rent price cap shall be applicable throughout Berlin.

• A "moratorium on rents" shall apply for five years, during which time the rents for all existing flats will be frozen. Compensation for inflation shall explicitly not be provided.

• The rent price cap shall apply to both existing leases and renewed leases. The only exceptions are new buildings and socially subsidized apartments. A new feature is that buildings constructed after 2014 may be exempted from the regulation. Moreover, in cases of economic hardship, where an "economic shortfall" is proven, rent increases and higher rent agreements may be approved by the Senate administration.

• In addition, a generally applicable upper rent limit shall be introduced, above which amount tenants are entitled to demand a reduction. This shall also apply in the case of re-letting. It is still unclear whether a flat-rate upper limit or, for example, an upper limit differentiated according to the year of construction, location and equipment should be set. It was merely pointed out that the upper limit should be determined by reference to a point in time when the Berlin real estate market "had not yet run into a severe imbalance".

• Modernization levies that lead to an increase in the gross warm rent (i.e. all-inclusive, after taking into account savings in operational costs) of more than EUR 0.50 per square metre shall be subject to approval by the Investitionsbank Berlin. Approvals are to be granted if, for example, energy-saving measures are required by law or are beneficial to achieving climate protection goals, if barriers in apartments are reduced or if government subsidies are used to modernize housing. In the legislative process, it is intended that further ecologically and socially innovative refurbishment models should be taken into account and that subsidy practices should be readjusted and further developed.

• Violations of the new Berlin rent law shall be classified as an administrative offence and punishable with fines of up to 500,000 Euros.

Background to the political discussion

After the Senate's decision, the main contents and mechanisms of the regulations still remain unclear. More voices critical of the decision being raised in the political debate. They warn against unintended effects that counteract the creation and maintenance of adequate housing in Berlin and are also anti-social. It remains to be seen how the draft law will be structured and whether changes will be implemented via the legislative process.

The political discussion has only just begun. The industry associations, in particular the umbrella association ZIA as the central interest group of the real estate industry and the BFW as the leading association of the private housing industry, have reinforced their political activities. Last week, at the ZIA's annual Real Estate Industry Day, top politicians from the CDU/CSU and FDP emphasized their rejection of rent price caps and the nationalization of housing companies. They called for concentration on measures to accelerate and financially facilitate new constructions. Early this week, also the GdW, the federal association of public and private sector housing companies, has rejected the Berlin rent price cap and called for subsidized programmes for new affordable housing.

Immediately prior to the Senate's decision, housing politicians of the co-governing Berlin SPD warned that a rent freeze would also deprive the state of Berlin of an annual surplus of around 150 million euros for its public housing companies – amounts that are urgently required year-by-year for the construction of new affordable public housing. The housing cooperatives are also rejecting the rent price cap. In their opinion, it removes the possibility of raising the planned funds for pending socially sound modernization and repairs by means of moderate rent increases. Even the district councillor of Friedrichshain-Kreuzberg, Florian Schmidt (BÜNDNIS 90/DIE GRÜNEN), has raised this issue.

Some other federal states are also currently discussing the introduction of a state law rent price cap. However, it seems fair to assume that other federal state will first wait and see how the “pilot case” in Berlin will eventually develop.

Legal evaluation

Prior to the Senate's decision, we had already set out our constitutional objections to the planned law in legal articles and an expert opinion for the Berlin/Brandenburg division of the BFW. In our opinion, for private, non-publicly subsidized housing stock the Berlin rent price cap violates the German Constitution in a number of key aspects. In particular, the State of Berlin lacks the necessary legislative authority.

In Germany, the rent price law is regulated by the Civil Code (BGB). As such, the federal government has conclusively exercised its competing legislative authority for civil law. The fact that the federal government intends to continue to regulate this area itself is shown not least by the draft law presented by the Federal Ministry of Justice in May to tighten the rent price brake (Mietpreisbremse) stipulated in the Civil Code.

The legal research service of the federal parliament (Bundestag) comes to the same conclusion: "For rental apartments offered freely on the housing market, the federal rent law should constitute a final legal regulation". This was the conclusion of a study titled "Legal rent regulation by the individual states on the basis of legislative competence for the housing sector", published in February. In its most recent expert opinion published only two days ago, the Bundestag’s legal research service states in more detail: “Overwhelming arguments support the view that the conclusive effect of the §§ 557 et seqq. of the German Civil Code applies to the entire set of regulations that govern the rent price law to be applied to the privately financed housing market” (accentuation by author). Accordingly, “the conclusive effect of the federal law should prevail irrespective of whether rental price regulations qualify as private law or public law.” Therefore, the line of argument brought forward by the Senate administration – that the Berlin rent cap could be based on the legislative authority in the area of "housing" left to the federal states since the federalism reform in 2006 – is not sufficient to convince.

The federal government has exhaustively regulated the relevant facts of life – i.e. the legal relationship between tenants and landlords – by means of the federal rent price law. The regulatory powers of the federal states are thus blocked for the privately financed housing stock. The opposite view is primarily based on an expert opinion prepared for the Berlin SPD group in the Berlin state parliament in March. However, this view misjudges the conclusive effect of the federal rent price law. Furthermore, this position would result in the State of Berlin being entitled to issue laws contradicting the federal rent price law and, thus, lead the federal constitution’s concept of competing legislation ad absurdum. The fact that the Berlin rent price cap is intended to be implemented in the form of a public administrative law act would not change this finding, since also based on the Senate’s decision the Berlin rent price cap shall directly affect the private-law governed contractual relationship between landlords and tenants.

Furthermore, in our opinion, the Berlin rent price cap also violates the constitutional property guarantee. Since not even inflation compensation is to be granted, the rent price cap is very likely to violate the prohibition on causing losses, which is protected by the property guarantee. In its most recent expert opinion, the Research Service of the Bundestag highlights this aspect. In addition, the rent freeze also constitutes a disproportionate encroachment upon the constitutionally protected rights of owners. The state legislature has a variety of alternative instruments at its disposal which would interfere less with the property rights of the owners. These instruments could accelerate the construction of affordable new dwellings and support low-income tenant groups with targeted subsidies.

A detailed analysis as well as a final evaluation of the potential legal challenges and options for action of the owners will only be possible when the draft bill is made public at the end of August. We will keep you informed about further developments in the legislative process. Already prior to that we are at your disposal in order to analyze the implications for your specific situation or if you would like more information on this topic.

Christian Schede
Managing Partner
+49 30 700171 120

Johann-Frederik Schuldt
+49 30 700171 289