The Berlin rent cap: A pill for the housing market with risks and side effects

Published 16 December 2019 by DSC LEGAL Rechtsanwaltsgesellschaft mbH

Rents on the Berlin housing market have risen rapidly in recent years. As a consequence, low-income sections of the population are particularly threatened with displacement from their social environment. The federal rent regulations that have been tightened in favour of tenants (keyword: rent brake) have a dampening effect on rent prices. However, in the opinion of the responsible state politicians, they do not relieve tenants sufficiently. Against this background, the Berlin Senate decided on October 22, 2019, to initiate the legislative process for the Law updating the legislation on rent limitation ("Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung“). This is intended to cap the rents for around 1.5 million apartments - initially for a limited period of five years.

Capture

Overview of the provisions regarding the rent cap
According to the Berlin Senate's press release of 22 October 2019, the new law shall apply to all housing, with the exception of new-build housing from 2014 and publicly subsidised housing, and will essentially contain the following provisions:

Rent freeze
A rent freeze is introduced for five years. The existing net cold rents (including any surcharges for equipment and furniture) will be frozen for this period at the level of the rents owed on 18 June 2019. This also applies to stepped and indexed rents. Only from 2022 the rent may be increased annually by an inflation compensation of 1.3% provided that it remains below the permissible upper rent limit.
The permissible upper rent limits were determined on the basis of the rents in the list of representative rents of Berlin (“Berliner Mietspiegel”) for 2013, updated with the real wage development until 2019. They differentiate according to age and certain furnishing features of an apartment. The location of the apartment is not taken into account in this respect.
The upper rent limits range from EUR 3.92/m² living space per month (residential space with first-time readiness for occupancy until 1918 without central heating and without bathroom) to EUR 9.80/m² living space (residential space with first-time readiness for occupancy from 2003 to 2013 with central heating and with bathroom). With modern equipment, the respective upper rent limit increases by EUR 1.00. If the residential space is located in buildings with no more than two apartments, the respective rent price cap is increased by a surcharge of 10%.
 
Re-letting
For the re-letting of apartments, the rent from the previous tenancy that was effectively agreed on 18 June 2019 may be demanded, limited to the upper rent limit.
If the monthly rent for a modern apartment is particularly low (less than EUR 5.02/m²), it may be increased by a maximum of EUR 1.00/m² to a maximum of EUR 5.02/m².
 
Entitlement to a rent cap
In existing tenancies, tenants shall be able to cap their rent if it is more than 20% above the permissible upper rent limit. This includes surcharges and deductions for apartments located in simple residential areas (-28 ct/m²), medium  residential areas (-9 ct/m²) and good residential areas (+74 ct/m²). The  provisions will only be applied 9 months after the law has come into force.
 
Modernisation measures
Modernisation measures may only be allocated in the amount of EUR 1.00/m². A duty of notification applies. Promotion programmes will be put in place by the Berlin Senate to cover additional modernisation costs of up to EUR 1.00/m² living space. An allocation of  such additional costs to the tenants is not permitted.
 
Hardship provision
In cases of economic hardship on the part of landlords, Investitionsbank Berlin shall approve rent increases at the request of the landlords if this is absolutely necessary in order to avoid threats to the substance of the rental object and losses of the landlord. The approved rent increases above the upper rent limits are to be cushioned by a rent subsidy for households entitled to obtain an official document certifying the tenant's financial hardship (so-called Wohnberechtigungsschein – WBS). The rent subsidy may not exceed the amount exceeding the upper rent limit.
 
Fine
Violations of the requirements of the Berlin Rent Act (Berliner Mietengesetz) will be punished as an administrative offence with a fine of up to EUR 500,000.
 
Controversial constitutional assessment of the rent cap
At first glance, the new Berlin tenancy law seems to be appropriate to curbing the rise in prices in the housing market. However, this presupposes that the law comes effectively into force and is not declared ineffective due to a violation of higher-ranking law.
In the run-up to the legislative process, renowned constitutional lawyers also doubted whether the rent cap was constitutional. In particular, it is argued that social tenancy law is conclusively regulated at federal level, which is why no competing public tenancy law can be enacted at  federal state level. Due to the lack of legislative power of the Federal States, the Federal State of Berlin could therefore not effectively enact a law on rent caps.
In addition, the legal literature argues with considerable reasons that the rent cap violates the principle of equality (Article 3 of the German Basic Law (Grundgesetz - GG)) and constitutes a disproportionate and therefore unjustified encroachment upon basic rights (in particular the right of property, Article 14 GG). Naturally, the Berlin Senate takes a different view.
These questions can  finally be decided only by the German Federal Constitutional Court. Such a decision may take a long time, during which there is considerable legal uncertainty.
Since it is currently not possible to conclusively assess whether the rent cap will come into force at all, for which period it will apply and whether the German Federal Constitutional Court will not declare the law invalid in whole or in part, precautions should be taken for the event that the rent cap does not or does no longer apply. On the one hand, for example, are landlords recommended to make alternative arrangements with regard to the rent owed under or without the validity of the rent cap. On the other hand, tenants are recommended to save the difference between the contractually agreed rent and the rent owed according to the rent cap and, if necessary, to immediately pay the rent that has been underpaid in order to avoid termination.
 
Financing risks for landlords
Landlords may also be exposed to financing risks as a result of banks having to take the capitalized earnings value of rented and owner-occupied residential property into account when calculating the mortgage lending value. In turn, the capitalised earnings value of a property depends on the amount of rent that can be permissibly earned. In cases where the mortgage lending value decreases as a result of the rent cap, the financing banks may therefore be forced to demand additional collateral from borrowers. If borrowers  were unable to provide such additional collateral, it may constitute a breach of contractual disbursement requirements with the consequence of the bank being entitled to terminate the loan for compelling reasons.
 
Effects on the order situation of craft businesses
In Berlin, there has already been a significant decline in orders for refurbishment and modernisation because a large number of landlords wants to wait and see how the situation further develops. The Berlin Chamber of Crafts expects an average decline in turnover of 30%. In this respect, the rent cap can lead to considerable economic problems for craft businesses.