On 30 January 2020, the Berlin State Parliament passed the state law introducing the so-called Berlin rent price cap (Berliner Mietendeckel). The new law draws on the Senate’s bill of 22 October 2019 [see our Newsalert from October 2019], but compared to the Senate’s draft has incorporated some essential points from an amendment proposal adopted by the Committee for Urban Development and Housing on 22 January 2020. For quite some months, landlords preparing to meet the new law’s requirements have been working on somewhat different assumptions. In particular, the final version of the rent price cap law has been substantially tightened regarding an automatic rent reduction starting nine months after the law goes into effect. In the previous Senate’s bill, such rent reduction could only be ordered by the Senate Administration upon the tenant’s request.
The rent price cap law will come into effect on the day after its publication in the Berlin State Law Gazette (Gesetz- und Verordnungsblatt). The valid publication requires the law to be signed by the President of the Berlin State Parliament and the Governing Mayor. Taking into account the usual parliamentary procedures, the law is expected to enter into effect in mid-February (reportedly around 18 February 2020).
The Adopted Final Text of the Law – tightened further
The now adopted final version of the rent price cap law includes some further tightened provisions compared to the draft bill submitted by the Senate in October. According to the adopted final text, the Berlin rent price cap provides as follows:
Scope of Application
• The rent price cap applies to all residential space in Berlin (including single-family/semi-detached homes, furnished apartments, as well as short-term letting models).
• Exemptions: The rent price cap law does not apply to (i) newly constructed buildings that were ready for occupancy on or after 1 January 2014, (ii) publicly subsidized apartments, (iii) apartments that were modernized or refurbished with funds from public sources, (iv) dormitories, and (v) apartments operated by recognised welfare organisations.
• In contrast to the Senate’s draft bill, a new exemption has been included for comprehensively refurbished residential spaces that were uninhabitable and unoccupied before the refurbishment, provided the modernisation costs are comparable to cost levels for newly constructed buildings. According to the recitals of the new law, uninhabitability must be proven by means of a new “uninhabitability certificate” issued by the relevant District authority. Other cases of comprehensive refurbishments are still not exempt from the Berlin rent price cap – therefore, this exemption under the Mietendeckel still differs from the exemption provision for comprehensive refurbishments under the German Civil Code (BGB).
Regulatory Concept
The rent price cap provides for two major instruments: a rent freeze and upper rent limits (rent caps).
• Rent freeze: With the entering into effect of the new law, a rent freeze applies to all existing leases at the level of the rent on 18 June 2019. Thus, the rent freeze shall also apply to any indexed rents and stepped rents, as well as rent increases to the local comparative rent. 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, for such spaces, the rent validly agreed under the BGB-provisions 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.
• Rent caps: The provisions governing the rent caps remain unchanged when compared to the Senate’s draft bill. The rent caps therefore continue to function as an absolute upper rent limit and a reference point for rent reductions.
- Rent caps of between EUR 3.92 and EUR 9.80 per square meter apply; those amounts are based on the 2013 rent index (Mietspiegel) as adjusted to reflect real wage increases. The applicable rent cap level depends on the construction year and fit-out standard, but not on the location of the apartment.
- An increase by 10% of the rent cap levels applies for buildings with no more than two apartments (namely detached and semi-detached houses).
- A flat-rate increase of the rent cap levels by EUR 1 per square meter for apartments with modern equipment applies. An apartment qualifies as “with modern equipment” if at least three of the following five criteria are fulfilled: (i) elevator, (ii) built-in kitchen, (iii) high quality sanitary fit-out, (iv) high quality flooring, and (v) low energy performance (less than 120 kWh/m² a).
- The Senate Administration is now obliged to adjust the rent cap levels to the real wage development two years after the new law takes effect. In return, it is stipulated that the inflation adjustment, which will take effect from 2022 onwards, will only be granted up to the level of the applicable rent cap as well as by a maximum of 1.3% annually, with the exact percentage being determined by the Senate Administration by means of separate ordinance.
• The rent under the rent price cap law now includes the net cold rent including all surcharges. In the Senate’s draft bill, it was merely provided that surcharges for furniture and equipment would also be covered by the rent price cap. By extending this to include all surcharges, the legislator wants to prevent circumvention strategies (including partly-commercial letting strategies).
Running Leases
• Rent freeze: With respect to running leases, only the rent freeze applies from day one. This means that with the entering into effect of the new law, the rent does not have to be reduced, provided that the rent level on 18 June 2019 has not been exceeded as a result of rent increases in the interim (due to stepped or indexed rents or rent increases to the local comparative rent). For residential spaces re-let after 18 June 2019 but before the rent price cap law comes into effect, the landlord can still charge the rent effectively agreed under the BGB-provisions, provided the lease is still in place at the time the rent price cap law is implemented.
• Automatic rent reduction: If the applicable rent cap level (taking into account the location of the apartment, see below) is exceeded by more than 20%, the landlord must lower the rent after nine months from the new law coming into effect to the 120%-level of the rent cap. In contrast to the Senate’s draft bill, the rent reduction no longer requires an application by the tenant, but must be applied automatically by the landlord. In practical terms, this means that landlords should check their entire portfolio on their own initiative as to whether the rent demanded is above the 120%-level. If landlords do not make the required reduction, they may be subject to a penalty fine. Only when calculating the relevant rent cap level for this reduction obligation, the location of the apartment is considered as follows:
- For good locations, the relevant rent cap level increases by 74 cents per square meter. However, for medium and simple locations, the relevant rent cap level decreases by 9 cents or 28 cents per square meter, respectively.
- What qualifies as a good, medium, or simple location shall be determined by a separate legal ordinance adopted by the Senate Administration. It is expected that such ordinance will be based on the system of location criteria under the existing rent index (May 2019 Mietspiegel).
First-time Letting and Re-letting
• In case of first-time lettings or re-lettings after the rent price cap law has come into effect, the new rent must not exceed the applicable rent cap or, if lower, the rent charged on 18 June 2019. This may result in landlords having to reduce the rent on new rental contracts to a level below the rent paid by the previous tenant. First-time lettings in this context mainly concern conversions from commercial to residential space carried out after 18 June 2019, but not the first letting of new buildings (completed as of 2014) – as the new law does not apply to those buildings at all.
• With respect to apartments with an agreed rent level below EUR 5.02 per square meter as of 18 June 2019, for re-lettings the rent may be increased by a maximum of EUR 1 up to EUR 5.02 per square meter provided that the apartment has a modern equipment.
Modernizations
• The costs of modernization measures may only be allocated to the tenant up to (maximum) EUR 1 per square meter. The costs of modernization measures that would lead to a higher rent increase cannot be allocated to the tenant; it is expected (and also implied in the recitals of the new law) that the State of Berlin will provide subsidy programs for such modernization measures.
• In any case, modernization costs can only be allocated to the tenant if they relate to measures (i) which the landlords are legally obliged to implement; (ii) for thermal insulation of the shell of the building, the ceiling of the basement areas, the top floor ceiling, or the roof; (iii) for the use of renewable energies; (iv) for energy savings by way of window replacement; (v) for the replacement of heating systems including an optimization of the heating system; (vi) for the construction of elevators; or (vii) for the removal of barriers.
• Any such rent increase needs to be notified to the state-owned Investitionsbank Berlin.
• If modernization measures were carried out between 18 June 2019 and the rent price cap law entering into effect, landlords are entitled to continue charging the modernization levy already allocated to the tenant, but only up to (maximum) EUR 1 per square meter.
Economic Hardship
In comparison with the Senate’s draft bill, the economic hardship provision reflects some clarifications, but has been tightened further as a result:
• In cases of economic hardship for which the landlord is not responsible, IBB (Investitionsbank Berlin) may approve a higher rent at the landlord’s request. Once granted, such approval shall apply to running and any subsequent leases.
• In order to demonstrate economic hardship, the landlord has to establish that the rent level permitted under the new law would lead to permanent losses or would put the substance of the leased space at risk. According to the new law, “permanent losses” require that the current expenditures for the relevant economic unit exceed the revenue generated with that unit. Further, it is defined that the “substance of the leased space is at risk” if the revenues from the relevant economic unit is insufficient to cover substance-preserving maintenance measures.
• The reference point when assessing the existence of “permanent losses” or the substance of the leased space being “at risk” is the economic unit (Wirtschaftseinheit). In the definition of the new law, an administrative unit is an individual apartment whenever such apartment is subject to condominium ownership. However, the whole building or even several buildings will constitute an administrative unit if they are managed together and are directly linked location-wise (in unmittelbarem räumlichen Zusammenhang).
• In contrast to the Senate’s draft bill, IBB is no longer obliged to decide on applications to grant an economic hardship within three months. By removing this deadline, the state legislator intends to accommodate IBB’s concerns as to insufficient resources to administer the economic hardship applications in due course.
• The reasons to deny an economic hardship - situations for which landlords are considered “responsible” - are now defined in the text of the new law. They comprise the expectation of value increases, expectations to generate a return on investment, financing costs above market standard, revenue expectations that are (independent from the new rent price cap law) based on excessive rents, and losses that result from the division of the relevant administrative unit.
• Also with these clarifications, the aspects as to how this economic hardship provision will be applied remains fairly unclear.
Information Duties
• Landlords are obliged to provide future tenants with (unsolicited) information on the rent applicable to the respective apartment as of 18 June 2019 prior to the conclusion of a new lease agreement. Furthermore, they have to provide tenants with information on the criteria relevant for calculating the applicable rent cap level.
• For running leases, landlords are obliged to provide tenants with information on the criteria relevant for calculating the applicable rent level during the first two months after the new law takes effect. However, they do not have to inform the tenants about the rent charged for the apartment as of 18 June 2019. In case the Senate Administration demands this, landlords also have to provide the Senate Administration with this information.
Penalty Fines
• The provisions regarding penalty fines have been tightened further. Such fines can now not only be imposed if the landlord demands a rent exceeding the permitted rent level (i.e. above the level permissible according to the rent freeze, rent cap, or rent reduction provisions), but also if rents above this permitted level are accepted (entgegengenommen) by the landlord. In addition, also the violation of information duties and the failure to notify modernization measures to IBB may lead to a penalty fine.
• The penalty fine for individual cases may amount up to EUR 500k.
Our Assessment
The final version of the new law – despite a few provisions that were relaxed – reflects tightened provisions compared to previous drafts. Hence, it is still to be expected that the rent price cap law will stall investment and modernization measures, whilst not creating any new residential space. In particular, tenants with higher incomes living in larger apartments in substantially refurbished historic buildings will be benefitting disproportionately:
• The requirement of automatic rent reductions for rents beyond the 120% threshold nine months after the new law takes effect will become mandatory citywide, even for tenants that would not have filed an application for a rent reduction themselves since they did not consider the rent excessive. Accordingly, for these scenarios, the new law makes it a mandatory legal standard, which will benefit higher income tenants disproportionately.
• Based on the final version of the law, 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 adapted recitals, the state legislator now expressly stipulates that the rent price cap law shall serve as a so-called prohibition law (Verbotsgesetz) which automatically voids rent price agreements concluded between the landlord and the tenant in compliance with applicable BGB-requirements.
• Also with a view to the final adaptions of the new law, we see strong arguments that the Berlin rent price cap violates other fundamental rights and principles of the German constitution. In particular, the concept of citywide, automatic, and mandatory rent reductions sanctioned with penalty fines is likely to be in breach of the constitutional property guarantee and the freedom of contract. Also, the new law still does not provide for certain required differentiations. Most importantly, 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.
Outlook
The CDU and FDP parliamentary groups in the Berlin State Parliament have announced on 31 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. Also on the federal level abstract constitutional review proceedings – in that case before the Federal Supreme Court – have been announced by members of the CDU/CSU and the FDP-parliamentary group in the Bundestag. Already on 23 November 2019, at their national party convention, the CDU passed a resolution to initiate such proceedings. In addition, landlords may also resort to individual constitutional challenges and constitutional review proceedings in context with individual civil or administrative court disputes are available.
Not least due to the further tightened provisions in the law, landlords, depending on the individual case, may want to consider reviewing the room for injunctive relief (einstweilige Anordnung) in the context of individual constitutional court proceedings, potentially suspending the new law until the constitutional courts have ruled on its constitutionality.
Since the plans for a Berlin rent price cap surfaced in Spring 2019, our team that focuses on constitutional and rent price law have rendered numerous critical comments and expert opinions on the constitutionality of the Berlin rent price cap plans and have advised on pertaining constitutional and compliance issues. These insights are at your disposal for further analysis of your specific situation.
Christian Schede
Managing Partner
christian.schede@gtlaw.com
+49 30 700171 120
Johann-Frederik Schuldt
Associate
johann.schuldt@gtlaw.com
+49 30 700171 289