On the road to the rent cap – the draft law of the “MietenWoG Bln”

The Berlin rent cap intends to „freeze” the rents for housing spaces in Berlin initially for five years, to lower current rents and to determine upper limits of rent. This article gives an overview on the content and reception of the draft bill of the law on the limitation of rents in the Berlin housing sector (“MietenWoG Bln”).

I. Overview

On 26 November 2019, the Berlin Senate – for the second time already - passed a draft bill of the "Law on the Limitation of Rents in the Berlin Housing Sector (MietenWoG Bln)" at the request of the Senator for Urban Development and Housing, Katrin Lompscher. In order to become legally binding, the draft bill must now be passed by the Berlin House of Representatives (Abgeordnetenhaus), to which it was submitted for resolution.

The MietenWoG Bln is intended to come into force in March 2020. However, the effective date for "freezing" the rents is intended to be 18 June 2019. Approximately 1.6 million Berlin apartments would be affected by the MietenWoG Bln. However, the draft bill does not cover new apartment buildings completed after 1 January 2014 and price-bound housing.

The draft law is currently the subject of intensive discussions in housing associations, the housing industry and rental associations. There has been a lot of criticism. In part, already the legislative competence of the State of Berlin for the MietenWoG Bln is denied but predominantly the material constitutionality of the draft law is called into question.


II. Background

Like other major German cities, Berlin has seen a considerable increase in residential rents in recent years. While the offered rent - i.e. the rent demanded in the case of the conclusion of a new lease agreement - in the capital averaged EUR 5.51 per square metre in 2009, apartments in Berlin were offered at an average price of EUR 9.87 per square metre in 2018. The Berlin median rent, however, is still EUR 6.72 per square metre, hence at a comparatively moderate level, according to the Berlin rent index (Mietspiegel) of 2019.

The main reasons for the rent increase are the growth of the Berlin population and the increasing demand for housing space as well as the rising building land prices. Between 2011 and 2017, the Berlin population increased by almost 300,000 people. This is almost twice the amount of people living in the district of Berlin-Kreuzberg.

In order to curb the increase rate of housing rents in major German cities, the German Parliament (Bundestag) passed the Law Amending Tenancy Law (Mietrechtsnovellierungsgesetz) on 21 April 2015 and thereby introduced the so-called "rent brake" (Mietpreisbremse) (cf. BGBl. I 2015, 160). The rent brake introduced regulations into the German Civil Code (Bürgerliches Gesetzbuch) that limit the amount of rent in case of the conclusion of new residential lease agreements to an amount that may only exceed the local comparative rent by a maximum of ten percent.

The rent brake applies to housing rental agreements in areas in which the supply of rented housing to the population at reasonable conditions is particularly at risk. These areas are determined by the governments of the German Federal States (Bundesländer) by means of legal ordinances (Rechtsverordnungen) for a period of five years. With the Ordinance of 28 April 2015 (cf. GVBl. 2015, 101) on Rent Limitation, the Berlin government exercised this competence. The rent brake was declared applicable in Berlin for the period from 1 June 2015 to 31 May 2020.

In addition, the government's draft bill to extend (for a further five years) and tighten the "rent brake" is on the parliamentary track, flanked by the government's draft bill to extend the period under review for the local comparative rent (from four to six years).

On 26 November 2019, the Berlin Senate decided to go one step further and to "freeze" the rents in Berlin for a period of five years and to determine upper limits of rents (Mietobergrenzen) through a so-called "rent cap" (Mietendeckel) or - according to the Senator for Urban Development and Housing, Katrin Lompscher - a "rent brake plus" (Mietpreisbremse plus). The draft law applies to all housing lease agreements with the exception of lease agreements for publicly subsidized housing, residential facilities, housing for the needs of social institutions (such as communal accommodation) and new apartment buildings that were ready for occupancy for the first time on 1 January 2014.


III. The provisions of the draft law

1. Rent freeze

As in no other German Federal State before, the basic rents in Berlin are to be "frozen" for a period of five years at the level of 18 June 2019 (effective date) in accordance with section 3 of the draft law. Within this five-year-period, landlords shall not be entitled to increase the rents in accordance with the contractual agreements (e.g. graduated or index rents) as well as the rent increase regulations of the German Civil Code. For housing space not rented on the effective date, the rent at the end of the last rent before the effective date shall be decisive.

Before concluding a new lease agreement, the landlords shall inform the tenants about the agreed rent on the effective date or at the end of the last rent. This notification obligation also exists in the case of current contractual relationships anytime at the request of the tenants or the responsible District Authority (Bezirksamt).

According to the draft law, an adjustment of the basic rent to the inflation rate by an annual increase of a maximum of 1.3 percent (so-called "breathing rent cap") should be possible as of 1 January 2022. The exact adjustment amount shall be determined by the senate administration responsible for the housing sector by way of ordinance.

2. Upper limits of rents

In addition to the "freezing" of the basic rents for housing spaces, the draft law provides in its section 5 for upper limits of rents, which amount to between EUR 3.92 and EUR 9.80 per square metre depending on the year of construction and equipment of the housing space. These upper limits of rents, which were highly controversial in the legislative process, are based on the Berlin rent index of 2013, which was at least as controversial.

These upper limits of rents may not be exceeded in case of the first letting after the effective date, in case of re-letting after the MietenWoG Bln came into force and in case of inflation compensation (cf. section 3 paras. 2, 3, 4 MietenWoG Bln). If, in the event of re-letting, the rent on the effective date (18 June 2019) is below the relevant upper limit of rent, the rent of the effective date is decisive for the re-letting. This does not apply if the rent of the effective date is below EUR 5.02 per square metre and the apartment has modern equipment in accordance with section 5 para. 3 MietenWoG Bln. In this particular case, the rent of the effective date may be increased by EUR 1.00 per square metre in the case of re-letting, provided that the rent does not result in exceeding the amount of EUR 5.02 per square metre.

Pursuant to section 5 para. 4 MietenWoG Bln, a landlord is obliged to provide a tenant with information on the circumstances relevant for calculating the respective upper limit of rent within two months after the MietenWoG Bln enters into force and before the conclusion of a new rental agreement.

3. Rent reduction claim

Beyond that, the probably most drastic regulation of the planned law, section 4 of the draft law, plans a rent reduction claim of the tenants in case of so-called "excessive rents". This rent reduction claim is to be asserted nine months after the entry into force of the MietenWoG Bln. A rent is considered “excessive” if it exceeds the respective upper limit of rent by more than 20 percent (taking into account the housing location) and if the excess is not permitted, according to the exceptions provided in the draft law (such exceptions may exist for modernisations and cases of hardship according to section 6 and section 7 MietenWoG Bln).

For the consideration of the housing location EUR 0.28 per square metre is deducted from the relevant upper limit for “simple locations” and EUR 0.09 per square metre is deducted from the relevant upper limit for “medium locations”. In cases of “good locations”, EUR 0.74 per square metre is added to the relevant upper limit of rent. In the draft law, the senate administration responsible for the housing sector is authorised to determine the allocation of housing locations through ordinance.

If the tenant has a rent reduction claim, the capping of the respective rent is supposed to take place on request of the tenant by the senate administration responsible for the housing sector with effect from the calendar month following the request.

In a first draft bill of the MietenWoG Bln, the Senator for Urban Development and Housing, Katrin Lompscher, initially linked the rent reduction claim to social criteria. According to the social situation of the tenant, a rent reduction claim should only be considered if the rent amounts to more than 30 percent of the creditable total income of the tenant's household. This was dropped in the final draft bill. The rent reduction claim has now even been made income-independently.

4. Modernisations

According to section 6 of the draft law, rent increases due to modernisations should only continue to be possible if a modernisation fulfils the conditions listed in section 6 para. 1 MietenWoG Bln (e.g. modernisation serves climate protection and accessibility of apartments), the rent increases due to a modernisation amount to a maximum of EUR 1.00 per square metre and the respective upper limit of rent is not exceeded by more than EUR 1.00 per square metre. In this case, modernisations should not require approval and should only be subject to notification to the Berlin Investment Bank (Investitionsbank Berlin). This shall also be the case for multiple modernisations during the validity of the MietenWoG Bln, provided that the rents are not increased by more than EUR 1.00 per square meter as a result of the modernization levies.

If the modernisations do not meet the aforementioned requirements, they shall not be financed through rent increases. According to section 6 para. 2 MietenWoG Bln, the Berlin Senate shall offer subsidy programmes for additional modernisation costs "up to a maximum of one additional euro per square metre of living space".

5. Cases of hardship

In cases of hardship, section 7 of the draft law stipulates that landlords may on request obtain a permit from the Berlin Investment Bank for an "appropriate increase" of the maximum rent permitted under the MietenWoG Bln. According to section 7 para. 2 MietenWoG Bln, a case of hardship arises in particular if the retention of the maximum permissible rent under the MietenWoG Bln may lead to losses for the landlord or threat the substance of a leased building in the long term. The senate administration responsible for the housing sector is authorized in the draft law to specify the criteria that are decisive in a case of hardship.

If a rent increase is permitted because of a case of hardship, tenants may be entitled to subsidies in accordance with section 8 MietenWoG Bln and section 2 of the Berlin Law on Housing Spaces. Tenants shall apply to the Berlin Investment Bank for these subsidies. The amount of the subsidies shall not exceed the spread between the relevant upper limit of rent and the increased rent permitted in the respective case due to a hardship.

6. Sanctions

Violations of the obligations arising from the MietenWoG Bln shall constitute administrative offences (Ordnungswidrigkeiten) which are to be punished with a fine of up to EUR 500,000.00 in accordance with section 10 para. 2 of the draft law.


IV. Reception of the rent cap

The planned Berlin rent cap has triggered a considerable controversy that goes beyond the borders of Berlin. Even the Berlin Senator for Urban Development and Housing, Katrin Lompscher, admitted that the rent cap was entering "new legal territory". In the discussion, not only legal doubts against the concept of the rent cap are brought forward (cf. IV.1.), but also the efficiency of the concept is questioned (cf. IV.2.).

1. Legal objections

a) Legislative competence

With regard to the assessment of the legal admissibility of the planned rent cap, the question of the legislative competence of the State of Berlin for the enactment of the MietenWoG Bln arises first.

According to article 70 of the German Constitution (Grundgesetz), the German Federal States are in principle responsible for legislation, unless the Constitution assigns legislative competence for a specific area to the Federation (Bund). Within the framework of competing legislative competence (konkurrierende Gesetzgebung, article 72 of the Constitution), the German Federal States are only responsible for legislation in certain areas listed in article 74 of the Constitution as long as and to the extent that the Federation has not made use of its legislative competence. Instead of many, the following statements may be briefly presented here:

In the opinion of the former president of the German Constitutional Court (Bundesverfassungsgericht), Hans-Jürgen Papier, the planned rent cap should fall under the competence title of article 74 para. 1 no. 1 of the Constitution and thus under the competing legislation because the social rent price right is a part of the civil right. The Federation has, however, already made regulations concerning the rent amount in housing rent relationships with the rent price brake. Although the Berlin legislator refers to article 28 para. 1 of the Constitution of Berlin (Verfassung von Berlin) and the right to adequate housing, this can only justify duties to act or powers to act for the Berlin legislator within the framework of the constitutional order of competences.

In contrast, Dr. Max Putzer, judge at the Berlin Administrative Court, considers the competence title of article 74 para. 1 no. 1 of the Constitution to be inapplicable. The legislative competence for the introduction of the planned rent cap results from the competence title for housing (cf. old version of article 74 para. 1 no. 18 of the Constitution); however, the legislative competence in this area was largely transferred to the federal states in 2006 through the Federalism Reform I (Föderalismusreform I), so that the Berlin legislator could permissibly enact the MietenWoG Bln.

The state and administrative law expert Prof. Dr. Dr. h.c. Ulrich Battis states in his expert opinion, which he wrote on behalf of the Senate Chancellery (Senatskanzlei), that the freezing of rents is covered ”as part of a housing-political concept for the re-establishment of a balanced housing market” by the legislative authority of the Federal State. However, he takes a different view on the planned rent reductions and the determination of upper limits of rents, for which he considers that the Berlin legislator should lack legislative competence.

b) Compatibility with fundamental rights

The compatibility of the planned rent cap with the freedom of occupation (Berufsfreiheit, article 12 of the Constitution) and the property guarantee (Eigentumsgarantie, article 14 of the Constitution) as well as the principle of autonomy of the individual (Privatautonomie) of the landlord (article 2 para. 1 of the Constitution) is also called into question. Hereto as well solely an excerpt from the current state of the discussions:

The legal expert Prof. Dr. Thomas Dünchheim submitted an expert opinion in February 2019 on behalf of the Central Real Estate Committee (Zentraler Immobilien Ausschuss). According to this opinion, a limitation of rents would constitute a disproportionate provision of the content and limits (Inhalts- und Schrankenbestimmung) of the fundamental right to property. The limitation of the rent amount violates the property guarantee of article 14 para. 1 of the Constitution, because the reduction of the return on the letting of housing space represents an interference affecting the substance of the property, which is incompatible with the property guarantee of article 14 of the Constitution. Beyond that, the commercial landlord would also be restricted in its freedom of occupation according to article 12 para. 1 of the Constitution. Finally, the expert opinion states that the private autonomy of the landlord (article 2 para. 1 of the Constitution) would be inadmissibly restricted by a state regulation of rents.

These questions are dealt with differently in an expert opinion prepared by Prof. Dr. Franz. C. Mayer and Prof. Dr. Markus Artz for the parliamentary group of the SPD in the Berlin House of Representatives: The authors state therein that a temporary restriction of the right to increase rents under the German Civil Code appears both sensible and appropriate insofar as it serves to safeguard the constitutional right to housing. In their opinion, a temporary rent cap, as provided for in the draft law, would also have positive effects on the Berlin housing market beyond its duration.

In another statement on the draft law, the German Bar Association (Deutscher Anwaltsverein) calls for a "careful examination of the necessity of a rent cap under the aspect of proportionality". The chairman of the Committee of Tenancy and Housing Law of the German Bar Association, Michael Drasdo, warns that the Berlin Senate must carefully examine whether the emergency on the Berlin housing market actually exists. The statement as to whether an emergency exists or not could not be made across the board for the entire city. The statement of the German Bar Association therefore proposes an examination of proportionality (Verhältnismäßigkeit) in relation to individual urban areas.

2. Efficiency of the rent cap

The economic effects of the rent cap on the Berlin housing market and thus its efficiency are meanwhile assessed very differently. In particular, it is criticised that no differentiation is made between individual landlords, that investors will be deterred and that the construction of new apartment buildings will be curbed.

These complaints do not only come from high-turnover players of the real estate industry, but also from building and housing cooperatives and state-owned real estate companies. The president of the Association of German Housing and Real Estate Companies (Bundesverband deutscher Wohnungs- und Immobilienunternehmen), Axel Gedaschko, notes that one possible effect of the rent cap will be uncertainty of the market, which further increases capital and lending costs. This is to be regarded as problematic to the extent that rising financing costs would also indirectly raise the costs of the construction of new buildings, making it less attractive.

In particular, the non-profit building and housing cooperatives, whose user fees are below the market average, see themselves affected by the rent cap. Only through moderate rent increases they can achieve surpluses on which they depend for the maintenance and modernisation as well as the new construction of apartments. For them, too, the rent cap could indirectly cause financing problems, especially for new construction projects. This concern is also shared by state-owned real estate companies, who fear that the rent cap will make it harder or almost impossible for them to afford modernisations of their apartments.

In the public discussion, however, there is agreement that the regionally deplored rapid rent increases in Berlin can be remedied in particular by the construction of affordable new housing. The aim of the Berlin Senate is therefore, according to its own statements, to gain time for such new construction of apartments with the rent cap limited to five years. However, if, as feared, the rent cap should predominantly cause the increase of capital and lending costs, this could also curb the construction of new apartments.


V. Conclusion

The Berlin rent cap will be a hitherto unique concept nationwide, which is based on the assumption that the tense Berlin housing market can and will be relieved by capping and reducing rents. At the same time, the Berlin rent cap must also be seen in the broader context of other housing policy efforts in the State of Berlin, such as the "communalisation" of private housing companies through expropriation under application of Article 15 of the German Constitution, the Grundgesetz (for the legal assessment and classification of such endeavours, cf. Petersen/Maier, Vergesellschaftung als Rekommunalisierung, ZfIR 2019, p. 737 ff.).

However, there are considerable concerns about the appropriateness and legality of the Berlin rent cap. It therefore remains to be seen whether the MietenWoG Bln will at all withstand the numerous constitutional doubts and the already announced judicial review.

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