Klara Geywitz, Federal Minister for Housing, Urban Development and Building
Federal Construction Minister Klara Geywitz (SPD) wants to reintroduce the right of first refusal (Vorkaufsrecht) for municipalities in tight housing markets, or so-called “milieu protection” areas.
Following a ruling by the Federal Administrative Court in November 2021, a new law needs to be passed and the traffic light coalition is now working on the draft bill. Essentially, the municipalities' right of first refusal is about access to property sales in the milieu protection areas. If the municipality fears that the new owner wants to get rid of established tenants in a milieu protection area, it can pull its right of first refusal, meaning that the original owner would then have to sell to the municipality. In Berlin, this happened more frequently before the Federal Administrative Court's decision and Berlin is estimated to to have spent around €500 million on this.
‘The many municipalities, which now know that it is necessary to provide the population with affordable housing, must also be able to get hold of the land more easily and protect existing rental structures,’ Geywitz said in an interview with the Rhein-Neckar-Zeitung.
Markus Lewe, President, German Association of Cities
In order to ease the burden on tenants, Geywitz also advocated lowering the cap and extending the rent brake. Justice Minister Marco Buschmann (FDP) had told her that this was being worked on with high pressure. ‘It is actually a very transparent legislative procedure, so I hope that the high pressure will soon have an effect after more than a year,’ he said.
In addition, Geywitz wants to speed up construction in the current tight situation: ‘Everything that speeds up construction leads to prices being dampened, because a longer approval process automatically increases construction costs.’
The German Association of Cities and Towns have been vocal when it comes to strengthening the municipalities' right of pre-emption, which would mean that land could be taken out of the speculative housing market, said President Markus Lewe (CDU) in May at the main meeting of the association in Cologne.
Federal Council calls for Building Code to be amended as ‘quickly as possible’
In 2021, the Federal Administrative Court largely overturned the practice of many cities of buying rental buildings in this manner. Since then, municipalities have only been able to exercise the right of first refusal if a property is largely vacant or in a state of disrepair.
The Federal Ministry of Transport, Building and Urban Affairs presented a first draft of the reform in April 2022 and passed it on for approval. In April last year, the Federal Council called on the Federal Government to amend the Building Code as ‘quickly as possible’.
An intervention by the municipality can only be prevented if the buyer in question signs an averting agreement with strict conditions. These conditions include, for example, that rent increases are capped even more than the level set by the Mietpreisbremse. Refurbishments are also only possible to a limited extent. According to the draft bill, these conditions are to apply for 20 years, thereby making investment in rental buildings financially challenging. The problem is also exacerbated by the fact that many private landlords are now of retirement age, thereby lacking the capital to meet the government requirements for energy-efficient refurbishment and heating replacement - investments which would likely not be paid off during their lifetime. In addition, lenders are less likely to provide loans to this age group. In most cases, they can no longer get a loan from the bank because of their age.
The first refusal in milieu protection areas has been implemented in Berlin since 2016. Either the right of first refusal was exercised - in Berlin usually in favour of third parties, mostly municipal housing associations or cooperatives - or the purchasers were required to sign rejection agreements. In these agreements, the buyers committed themselves to obligations that usually went far beyond the legal obligations in the milieu protection area. These conditions stipulated, for example, that energy-efficient renovations should only be carried out if the owner was legally obligated to do so, or that the owner should refrain entirely from dividing the property into owner-occupied apartments. Five years on, the Federal Administrative Court has declared this practice of preventive advance purchase rights to be unlawful: it is simply not provided for in the law. The fate of the rejection agreements has yet to be decided.
It has been almost two years since the Federal Administrative Court prohibited the Berlin district of Friedrichshain-Kreuzberg from exercising its right of first refusal for an apartment building located in a milieu protection area. Above all, the court took exception to the reasoning with which the district justified the right of first refusal: it wanted to prevent the danger that the apartments would be modernized and the residents displaced by higher rents or conversion into condominiums. This is not possible, the highest administrative judges clarified, pointing out that the right of first refusal may not be exercised without a concrete reason. The mere presumption that a property deal will promote gentrification is not sufficient.
Contrary legal verdicts put Berlin in the hot seat
Berlin is back in the hot seat, not least because the various rulings have been contradictory. In September last year, the Federal Administrative Court came to the conclusion in a new case that the buyer was entitled to terminate the avoidance agreement because the basis of the transaction had ceased to exist. This was because the property was used in accordance with the conservation ordinance when the agreement was concluded. Therefore, it was ruled that the district of Neukölln did not have the right of first refusal at all.
However, to complicate matters, another chamber, the 13th, of the same Berlin court recently came to a contrary conclusion: namely that the eight plaintiffs in total, owners of various properties in Friedrichshain-Kreuzberg and Pankow, must, in fact, abide by the averting agreements they concluded with the districts. At the time when they wanted to buy the properties, as well as when they concluded the agreements, they knew that the legal issues surrounding the district right of first refusal and its avoidance had not yet been clarified by the supreme court, according to the chamber. They had concluded the agreements in order to achieve legal certainty through a comprehensive settlement.
Lukas Siebenkotten, president, German Tenants' Association
One thing is certain, this is a battle that will continue to rage on. Increasingly, the cities and tenants' representatives have been pushing for a new legal regulation of the right of first refusal. The mayors of Berlin, Hamburg and Munich in particular - the three largest cities in Germany - see an urgent need for action. After all, until the BGH ruling, local politicians were banking on the so-called right of first refusal to secure affordable rents in central residential areas. Berlin alone used the right of first refusal 84 times, while Munich bought 21 properties in 2020 - more than ever before.
Nevertheless, the regulation remains controversial: ‘What is affordable must remain affordable,’ stressed Lukas Siebenkotten, president of the German Tenants' Association. After all, the right of first refusal is designed to protect tenants from having their apartment buildings sold off to money-driven investors. But the battle is far from over.
