Berlin passes controversial rent cap law
The Berlin State Parliament has passed the highly controversial Berliner Mietendeckelgesetz, or Berlin rent price cap law, in a city plagued by rents which have doubled in the last 10 years.
The cap is expected to go into effect as of mid-February and freeze rent prices until 2025. The law will limit rental increases to 1.3% per year in line with inflation, which will affect around 1.5 million apartments, or almost 75% of the total, according to Berlin's Department for Urban Development and Housing. The cap does not include social housing or properties that were built after 1 January 2014.
‘The law went beyond what we expected as in some aspects it’s tighter,’ Christian Schede, managing shareholder of Berlin-based law firm Greenberg Traurig, told REFIRE. ‘There is an automatic obligation on the part of landlords to reduce rents if the currently agreed rent level turns out to be in excess of more than 20% of the new upper rent limits. If you don’t comply with the Mietendeckelgesetz, as a landlord, you are exposing yourself to a fine.’
However, in a saga that has had more twists and turns than your average thriller, CDU and FDP politicians opposing the law now intend to take the matter to Berlin’s constitutional court, deeming it unconstitutional. (Rival party, the SPD, for its part, has vowed to introduce rent controls in other German cities.)
While the law draws on the Senate’s bill from 22 October last year, it has also incorporated some amendments in line with proposals from the Committee for Urban Development and Housing made on 22 January this year.
Under the new law, a rent freeze will be applied to all existing leases based on the rent as of 18 June 2019. As such, the rent freeze will also apply to any indexed rents and stepped rents. For residential spaces that were re-let after 18 June 2019, the law has been relaxed in comparison to the Senate’s draft bill. Even after the rent price cap law comes into effect, the rent agreed under the Bürgerliches Gesetzbuch provisions, Germany’s civil code (BGB), between 18 June 2019 and publishing of the new law can still be charged by the landlord, provided the lease is still in place at the time the rent price cap law comes into effect. In contrast, the Senate’s draft bill stipulated that for re-let spaces, only the rent applicable on 18 June 2019 could be charged after the new law took effect, according to Greenberg Traurig.
Constitutional clash
However, the city is now facing a constitutional clash as applicable federal rent control law under the BGB and the new state law rules under the Mietendeckelgesetz are directly competing with each other, according to Schede. ‘This law will interfere with existing leasing strategies which have been developed based on current, applicable federal laws,’ he said.
For Dr. Konstantin Kortmann, head of residential investment at JLL, ‘federal legislation outweighs legislation made by a German state, which could be one of the main reasons for Berlin’s constitutional court to overturn the new law’, he said.
The Berlin Senate administration estimates that private landlords and state-owned housing companies will lose around €2.5bn in rent in Berlin over the next five years as a direct result of the new law. It has also been estimated that landlords in the city will spend €1.5bn less a year on modernizing and refurbishing their apartments. Also, the state-owned housing companies will each lose around €59m a year in profits, which means €296m from the public budget – not to mention the direct additional costs for the local administration and reduced tax income for the government, according to Schede.
‘One issue is the possibility of reducing agreed rents retrospectively with the law,’ Kortmann said. ‘This contradicts my sense of fairness and is seen as one of the main critical points of the law. My gut feeling is that we’re witnessing a turn of the tide. It’s one thing to curb future income but another to drive down existing revenue and hammer investors and people are realizing this. It could drive some investors to insolvency. Everyone is trying to muddle through. I know a case in Kudamm where the landlord is trying to take the middle road: a year ago, they could get rents of €25-€26 per sqm, now they’re charging €15, which is between the minimum price set out and the old price.’
In addition, the new law means that re-letting may often be subject to lower rents. ‘This can void landlords’ business plans for the next five to 10 years,’ said Schede.
“Historic mistake”
Many in the industry have been quick to slate the new law, including the Association of German Pfandbrief Banks (vdp): ‘Against better judgment and in spite of numerous warnings from political, industry and academic experts, the House of Representatives has passed a law that shakes the foundations and proper functioning of the Berlin rental housing market,’ said Jens Tolckmitt, chief executive of the vdp. ‘The rent cap is a historic mistake, which – paradoxically – prevents exactly what Berlin so urgently needs: new housing. The rent cap undermines our market economy.’
Signs of the adverse effects of the rent cap are already becoming clear to the Pfandbrief banks. Investors have been pulling out of Berlin since discussions on the rent cap began, according to the vdp. In addition, modernisation measures are being scaled back; while over the next few years, new residential property construction is also likely to decline: ‘Property investors’ confidence in Berlin as a location has been seriously undermined,’ said Tolckmitt.In addition, the rent cap seems an inappropriate approach in view of the objectives set by policymakers both at European level, with the Green Deal, and at national level, with the Climate Protection Act adopted in Germany, according to the vdp. ‘If there are virtually no financial incentives for landlords to undertake energy-saving renovation measures, they will not do so. Without the private sector making urgently needed investment in existing properties, the ambitious climate protection targets set by policymakers cannot be achieved,’ said Tolckmitt.
Landlords agree: ‘It’s a mistake for the market,’ Andre Schmöller, head of residential investment manager, Domicil Real Estate, told REFIRE. ‘We no longer own any apartments in Berlin but if landlords can’t increase rents, they’re not going to do costly renovations that aren’t absolutely necessary, particularly if they’re only cosmetic. There are so many problems with this law. Everyone in Berlin will have to re-value their apartments. It’s going to be particularly hard for listed resi companies, who have to make all these values public. It’s estimated that, in light of this law, apartments could lose as much as 15% to 20% of their value.’
A spokesperson for listed residential landlord Vonovia told REFIRE that the rent cap was a move ‘in the wrong direction’ but that just 10% of the group’s residential portfolio – or 40,000 apartments – is located in Berlin.
Law to be challenged in Berlin’s constitutional court
According to Greenberg Traurig, ‘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 BGB provisions regarding rent control, particularly with reference to the local comparative rent (ortsübliche Vergleichsmiete) and governing stepped and indexed rents as well as the rent price brake for re-lettings (Mietpreisbremse), are meant to be suspended by the Berlin rent price cap in Berlin and replaced by a stricter rent control regime, according to the law firm. As a result, the state legislator now expressly stipulates that the rent price cap law will serve as a so-called prohibition law - or Verbotsgesetz - which automatically voids rent price agreements concluded between the landlord and the tenant in compliance with applicable BGB requirements.
‘I was surprised that they tightened this law especially with a more prominent role of the Bezirksämter, or local authorities,’ Kortmann said. ‘I thought they’d go for something more viable. It’s as if the ruling parties wanted to be seen to be helping people but knew that that the law wouldn’t hold and that it would be challenged. CDU and FDP politicians can’t take this before Berlin’s constitutional court before the law comes into effect, which is expected to be next week (18 Feb). While some say the process could take three-to-six months I personally think it’s more likely to be six-to-nine months.’
The Berlin rent price cap violates other fundamental rights and principles of the German constitution, according to Greenberg Traurig, because it does not provide for an appropriate treatment of substantially refurbished apartments. Similarly, it does not appropriately consider the location of the leased space when it comes to determining permitted rent levels.
The CDU and FDP announced at the end of January that they will challenge the rent price cap law before the State of Berlin constitutional court. The case will be led by constitutional law expert Professor Shirvani from the University of Bonn.