Mietpreisbremse battle taken to Germany’s Federal Constitutional Court

Berlin’s Landgericht, or District Court, has taken Germany’s Mietpreisbremse to the Bundesverfassungsgericht (the Federal Constitutional Court) this month, marking the latest step in a protracted battle to have Germany’s much-maligned rental brake law declared unconstitutional.

Next up, the Federal Constitutional Court (FCC) has to decide whether the Mietpreisbremse case is even admissible or not, Martin Hamer, a partner at law firm Greenberg Traurig in Berlin, which has been advising its clients on the possible ramifications of the Mietpreisbremse being abolished, told REFIRE. ‘We think the FCC will accept the case, though. However, it’s hard to predict the timeline as some cases take three-to-four years to be resolved. We think that this case could be quicker and that a decision will be made in 2018,’ he added.

In particular, the compatibility of the rent control regulation with the constitutionally protected guarantee of property and the freedom of contract are expected to be reviewed.

‘Until this decision has been made, the legal situation regarding both the practice of renting and the drafting of rental contracts remains unclear,’ Hamer said. ‘For the time being, landlords remain bound by the stipulations of the Mietpreisbremse. Nevertheless, the FCC’s decision could have far-reaching consequences for the housing industry.’

Berlin’s District Court is arguing that the Mietpreisbremse violates the principle of equality. If the FCC agrees, it could require the German parliament to rewrite parts of the law, according to Hamer’s associate Johann-Frederik Schuldt: ‘However, if the FCC decides that the law violates the guarantee of property as set out in Article 14 of the Constitution, whereby any legal type of property is protected, including intellectual property, the law could be voided,’ he explains.

If the FCC were to find the Mietpreisbremse to be in violation of the German Constitution, the rent control regulation would be void with retroactive effect, according to Schuldt.

‘If it does decide that the law is unconstitutional, it would raise all sorts of questions, such as can price stipulations be adjusted in existing contracts? There will certainly be cases where landlords will be entitled to put rents up for existing tenants,’ he said.

In September, Berlin’s District Court ruled that the rent control law violates the German Constitution, citing paragraphs 556d and 556e of the German Civil Code. The judges complained that landlords are not treated equally across the country because the local benchmarks used to calculate rent increases vary massively in different areas. In addition, the rental brake law, which caps permitted rents in more than 250 municipalities in Germany, does not apply to rentals that were more than 10% above the local benchmarks when the new law was introduced in June 2015, which has enabled those landlords to continue charging higher rents. According to Berlin’s District Court, the fact that these landlords are still allowed to charge these ‘old’ rents also violates the principle of equality. The general consensus is that the law has largely failed put the brakes on rents spiralling out of control in popular cities or to protect tenants in danger of being priced out of their neighbourhoods.

German advisory firms would also like to see the back of the rental brake law. ‘I think the Mietpreisbremse is very strange and ill-crafted, because it does not tackle the underlying problem and has shown that it makes the market less fair and transparent,’ said Dr. Konstantin Kortmann, head of residential investment Germany at JLL.’ If it is deemed unconstitutional, it could be painful for tenants if landlords ask them to pay back-rent from the time the contract was signed, although I don’t expect the big landlords to do that. I don’t think it makes sense to re-write the Mietpreisbremse law, either, because my gut feeling in similar cases, when a law is voided, is that it is often replaced with an alternative that is not much better.’

Many investors would also like to see the Mietpreisbremse abolished. ‘I would prefer for it to be declared unconstitutional,’ Marcus Mack, fund manager at TH Real Estate, told REFIRE. ‘I feel that rental controls are something that the market should decide. If you find a nice flat and the landlord is charging too much rent, you’re not going to sue him if you want to live there.’

German landlords have, unsurprisingly, been quick to criticize the law. As Friedemann Weck, head of acquisitions at ADO Properties, recently told REFIRE: 'I'm not a fan of the Mietpreisbremse because it doesn't help the people who really need help,’ he said. ‘A landlord will always take a wealthier tenant over a lower-paid one, such as a nurse or a taxi driver and there is nothing in place to change that. The rent cap is not working, it’s achieving the opposite. Politicians need to understand that they can’t temper with or interfere with market forces.’

Organisations such as consultancy BulwienGesa and property associations ZIA and Haus & Grund have also criticized the Mitepreisbremse. The IVD is also a long-term advocate of abolishing it. Many in the industry, including ZIA’s president, Andreas Mattner, have complained that it does nothing to promote the construction of new housing which is so badly needed in major cities.

For now, the law – and its future – remain shrouded in uncertainty: ‘We’ve spoken to many lawyers who have argued that the rent control regulation violates the constitution but it’s hard to say which legal argument will be accepted by the FCC – it’s a very political process,’ Hamer said. ‘The influence of the individual judge responsible for drafting the decision is also quite high.’