Joe Miletzki
The Hereditary Grand Duke’s Palace in Karlsruhe, the main building of the Federal Court of Justice
Germany’s Federal Court of Justice has drawn a firmer line under what tenants may do when they sublet their apartments. In a ruling handed down on 28th January, the court made clear that subletting is intended to help tenants manage changes in their personal circumstances — not to serve as a profit-making sideline.
The practical effect is significant. Tenants who charge subtenants more than it costs them to keep the apartment are no longer operating within the protective purpose of tenancy law. Where subletting turns into a commercial exercise, landlords now have stronger grounds to intervene, terminate the tenancy and, if necessary, pursue eviction.
For institutional landlords in rent-controlled markets, the ruling is less about legal doctrine than about control. It clarifies where legitimate cost recovery ends and impermissible surplus begins, and it strengthens the hand of asset and property managers dealing with subletting practices that create regulatory risk or distort portfolio income.
The backdrop is a housing market under pressure. Figures cited by the Federal Ministry of Construction suggest that at least 1.19 million households in Germany are involved in subletting arrangements. At the same time, rent controls have expanded sharply. More than 600 municipalities are now covered, up markedly from two years ago. The gap between capped rents and what subtenants are willing to pay has widened — and some tenants have stepped into that gap.
Where the court drew the line
The case originated in Berlin. A tenant paying €460 a month in basic rent sublet a 65 sqm apartment for €962. He did so without the landlord’s permission and justified the difference by pointing to furnishings and equipment left in the flat. After discovering the arrangement, the landlord issued a warning, terminated the tenancy and sought eviction.
Lower courts initially disagreed, but the Berlin Regional Court ultimately ruled in the landlord’s favour. The Federal Court of Justice has now confirmed that outcome. Crucially, the judges did not dispute that a temporary stay abroad can justify subletting in principle. What they rejected was the idea that such a justification survives once the arrangement is clearly structured to generate a surplus.
Put plainly, the court’s message was simple: subletting may reduce a tenant’s financial burden, but it may not generate income. Charging enough to cover one’s own rent, running costs and demonstrable expenses may be permissible. Charging materially more crosses a line.
The judges were careful to limit their ruling. They did not decide whether a breach of Berlin’s rent cap would, on its own, have justified termination. Nor did they address whether a landlord could claim a share of excess subletting income. Those questions remain open.
The immediate consequence is a shift in leverage. Rent regulation has long constrained landlords’ pricing flexibility, while leaving room for tenants to extract higher rents from subtenants. That asymmetry created arbitrage opportunities, particularly in large cities, where some tenants effectively treated regulated tenancies as tradable assets.
Advisers to landlords see the ruling as a corrective. Andreas Griebel of Rödl & Partner described it as a step towards ending the “commercial subletting market” that had taken hold in major urban centres. Where profit-oriented subletting can be demonstrated, landlords now have a clearer path to terminate even long-standing contracts and, in some cases, re-let units under more current conditions.
What changes for landlords and investors
For professional property managers, the implications are practical rather than abstract. Requests to sublet can be assessed more critically, with closer scrutiny of whether proposed rents bear a reasonable relationship to the tenant’s own costs. Where they do not, permission can be refused with reference to the court’s reasoning. Where tenants sublet without consent and the numbers point to profit, warnings and termination become easier to defend.
The ruling also affects adjacent parts of the market. Short-term tourist lettings, which often generate daily rates far above normal monthly rents, will in many cases be difficult to reconcile with the court’s cost-coverage logic. For landlords, this matters because misuse of residential space can expose owners to substantial municipal penalties in some cities. The judgment strengthens civil-law options to act before authorities intervene.
Furnished apartments present a similar issue. In cities such as Berlin, minimal furnishing has often been used to justify sharply higher rents, exploiting regulatory gaps. Policymakers have pointed to evidence that rents in furnished, short-term and shared-apartment segments sit well above regulated levels. Planned reforms by the Federal Justice Ministry, including caps on furniture surcharges and clearer disclosure rules, are intended to narrow those gaps. The court’s ruling moves in the same direction, even if it does not resolve the issue on its own.
Reaction to the decision has been unusually broad. Both tenant and landlord associations welcomed it. Property owners see it as restoring a measure of fairness and control, while tenant representatives emphasised that it also protects subtenants from excessive mark-ups in an already strained market.
At heart, the court has reaffirmed a simple principle: access to a regulated tenancy is not a tradable asset. The right to sublet exists to cushion life changes, not to monetise scarcity. For institutional landlords operating under rent caps, the ruling restores practical leverage and reinforces control over how residential assets are used.
Beyond Germany, the case will resonate with investors active in other tightly regulated housing markets. As rent controls spread across Europe, distortions are increasingly emerging not at the headline rent level but in side markets such as subletting, furnished accommodation and short-term use. Germany’s highest court has now tightened one of those seams. The broader lesson is that governance and enforcement matter as much as pricing power when regulation limits flexibility.