On 2 September 2019, the Berlin Senate Administration for Urban Development and Housing published the draft bill for a Berlin rent price law for residential space, the so-called Berlin rent price cap (Berliner Mietendeckel). The draft bill is based on the outline concept for the introduction of a Berlin rent price cap which the Berlin Senate adopted on 18 June 2019 (see our news alert from July 2019). It also reflects the compromise reached by the governing coalition parties in Berlin at the end of last week. As a next step in the legislative process, a hearing with industry associations has been scheduled for next week. After further coordination with other branches of the Senate administration, the Senate's (i.e. the cabinet’s) vote on the draft bill is due to take place in mid-October. Subsequently, the bill shall be introduced to the Berlin state parliament for the required readings and final adoption. The law is scheduled to come into force in January 2020.

Content of the Draft Bill

The draft bill largely reflects the concepts proposed in the Senate's resolution of 18 June 2019. However, it also includes further specifications and additions. According to the draft, the Berlin rent price cap shall be structured as follows:

• The rent price cap shall be applicable throughout Berlin for five years. It shall apply to all residential leases including furnished apartments, short-term leases and comprehensively modernized apartments. It shall however not apply to

- newly constructed residential spaces that were ready for occupancy on or after 1 January 2014 (the exemption applies to the first letting and all consecutive lettings);
- publicly subsidized apartments;
- dormitories.

• With the entry into force of the rent price cap law, a rent freeze shall apply to all existing leases at the level of the rent on 18 June 2019. The rent freeze shall also apply to stepped rents and indexed rents.

• In addition, generally applicable upper rent limits shall be introduced which differ depending on the year of construction and the fitout (with/without collective heating system, with/without bathroom) of the apartment. The draft bill defines a total of 12 upper rent levels ranging between EUR 3.92 and EUR 9.80 per sqm.

- No further criteria are foreseen with a view to location and other fitout features of the apartment.
- The defined upper rent levels include all additional charges for furniture (if any).
- The upper rent level may be increased by a maximum of 10 percent if the apartment is located in a building with no more than two apartments.
- If the apartment was modernized in the 15 years prior to entry into force of the Berlin rent price cap, the landlord can continue to add the charged modernization levy to the rent – but only up to a maximum of EUR 1.40 per sqm; for modernizations after the entry into force of the rent price cap law to a maximum of EUR 1 per sqm.
- The applicable upper rent level must not be exceeded if the apartment is re-let or let for the first time (e.g. for apartments that were used for non-residential purposes before).

• If, under an existing lease, the rent exceeds the upper rent level the tenant shall be entitled to claim that the rent be reduced down to the permitted upper rent level, provided however that the current rent represents more than 30 percent of the tenant's household income. When calculating the respective rent load of the tenant only that part of the rent shall be taken into account which corresponds to the "appropriate" amount of rental space as defined under social law provisions, i.e.

- 50 sqm for a one-person-household
- 65 sqm for a two-person-household
- 80 sqm for a three-person-household
- 90 sqm for a four-person-household
- 12 sqm for every additional person in the household.

• If and to the extent, under an existing lease, the upper rent level has not yet been reached, an annual rent increase of 1.3 percent shall be permitted ("breathing rent price cap").

• Prior to the conclusion of any new lease, the landlord shall be under the obligation to inform the tenant of the rent level that was in effect for the respective apartment on 18 June 2019 as well as of the year of construction and the fitout features of the apartment that are relevant for calculating the applicable permitted upper rent level. Such obligation shall also apply to existing leases during the first two months after the entry into force of the Berlin rent price cap.

• Modernization levies that lead to an increase in the rent of no more than EUR 1.00 per sqm must be notified to the district authority. However, any modernization measures that result in a higher rent increase require a permit. Such permit shall only be issued if (i) the costs incurred due to the modernization measure can be considered appropriate and unavoidable and (ii) if the modernization

- is required by law,
- is beneficial to achieving climate protection goals,
- helps to reduce or abolish barriers in the apartment, or
- is necessary to improve substantial equipment deficits of the apartment.

• In cases of economic hardship, rent increases as well as agreements on higher rents may be approved by the district authority upon application by the landlord. In order to demonstrate an economic hardship, the landlord must establish that the rent level permitted under the new rent cap law would lead to permanent losses or put the substance of the apartment at risk.

• Demanding a rent that exceeds rent levels permitted by the Berlin rent price cap law qualifies as an administrative offence and may be subject to penalty fines of up to EUR 500,000. The same shall apply if a landlord violates the information obligations under the rent price cap law.

Legal Assessment
 
Even though the draft bill appears in some respects less far-reaching than the proposals discussed in the past couple of months, we consider the proposed Berlin rent price cap to be in violation of the German Constitution – as far as it applies to private, non-subsidized housing stock.

In particular, the State of Berlin lacks the necessary legislative authority to adopt the rent price cap law. In its comments on the draft bill, the Senate Administration does not elaborate on this aspect. It only makes the general argument that the Berlin rent price cap can be based on the legislative authority in the area of "housing" which is left to the federal states. However, we see the proposed stipulations of the Berlin rent price cap as a direct intervention into the legal relationship between tenants and landlords. Effectively the Berlin rent price cap, as it is proposed now, overrules the rent price law provisions of the German Civil Code (Bürgerliches Gesetzbuch). By way of an example, the draft bill provides that rent increases that were implemented after 18 June 2019 in compliance with the provisions of the Civil Code shall be void as soon as the Berlin rent price cap enters into effect. This violates the separation of legislative powers between the federal legislator and the state legislators under the German Constitution, based on which the federal government has comprehensively excercised its legislative power for the field of rent price law.

In addition, the draft bill also includes a number of arbitrary differentiations – in particular with regard to the defined upper rent levels. We see strong arguments that in several cases these differentiations violate the constitutional principle of equality. Further, we believe that the proposed forced rent reductions – combined with penalty fines –  violate the constitutional property guarantee.

Outlook
 
Based on the current legislative proposal, we expect that the Berlin rent price cap will be legally challenged before the Federal as well as the Berlin State Constitutional Court. However, such legal challenges will only be possible once the law has been enacted.

Given the content of the draft bill, we also see room for injunctive relief (einstweiliger Rechtsschutz) potentially suspending the Berlin rent price cap law until the constitutional courts have ruled on its constitutionality.

Already several months ago, our experts for constitutional and rent price law have rendered the first critical comments and expert opinions on the proposed Berlin rent price cap. This expertise is at your disposal to further analyse the implications 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