Constitutional Court invalidates Berlin law on rent cap

I. Introduction

The long-awaited court decision from all sides is finally here. There was so much speculation and conjecture in the run-up to the decision. But now it is a certainty. The Second Senate of the German Federal Constitutional Court has declared the MietenWoG Bln incompatible with the German Constitution and therefore null and void (BVerfG, decision of March 25, 2021 - 2 BvF 1/20, 2 BvL 4/20, 2 BvL 5/20).

The MietenWoG Bln came into force - with the exception of Section 5 of the MietenWoG Bln - on February 23, 2020. For the apartments covered by its scope, the "Berlin rent cap" essentially consisted of three sets of regulations: a rent freeze prohibiting rents exceeding those effectively agreed on June 18, 2019 (effective date), a location-independent rent cap for reletting, with building- and equipment-related surcharges and certain modernization allocations permitted, and a statutory ban on excessive rents. By contrast, the provisions of the MietenWoG Bln did not apply to new buildings that were ready for occupancy for the first time from January 1, 2014.

II. Essential legal reasoning of the Federal Constitutional Court

According to the German Federal Constitutional Court, regulations on rent levels for freely financed housing offered on the open housing market (unbound housing) fall within the concurrent legislative competence. The Federal States are only authorized to legislate on the matter as long as and to the extent that the Federation has not made final use of its legislative competence (Articles 70, 72 (1) GG). Since the Federation has conclusively regulated rent law in Sections 556 to 561 BGB, there is no room for any legislative power of the Federal States due to the blocking effect of federal law. As the core of the MietenWoG Bln also regulates the rent level for unbound housing, the law is incompatible with Articles 74 (1) No. 1, 72 (1) GG and is void as a whole.

The detailed legal grounds for the decision of the Federal Constitutional Court are as follows (source: Federal Constitutional Court press release of April 15, 2021, No. 28/2021):

1. Conclusive distribution of legislative powers
As a rule, the German Constitution assumes a conclusive distribution of legislative powers between the Federation and the Federal States, with duplication of powers being alien to the Constitution. Accordingly, the Federation has the right to legislate insofar as the Constitution expressly assigns this right to it. The scope of legislative powers of the Federal States is therefore fundamentally determined by the scope of legislative powers of the Federation, not vice versa. The Constitution does not provide for a presumption of competence in favor of the Federal States. While opening clauses in federal laws are permissible, they do not grant the Federal States any leeway beyond the respective opening.

2. Concurrent legislation and blocking effect
Concurrent legislation is essentially regulated in the German Constitution in Articles 72, 74 and 105 GG. If the Federation makes use of concurrent legislation powers, the Federal States lose the right to legislate on the same matter pursuant to Article 72 (1) GG at the time ("as long as") and insofar as ("to the extent") the Federation permissibly makes use of the legislative competence (so-called blocking effect). Within the scope of the blocking effect the legislative competence of the Federal States ceases to exist. The blocking effect presupposes that federal and state legislation relate to the same subject matter. It extends as far as federal legislation has made or intended to make an exhaustive, i.e. complete and conclusive, provision.

3. Regulations on rent amount are in the scope of concurrent legislation
As part of social tenancy law, regulations on the amount of rent for unbound housing fall within the concurrent legislation for civil law in the meaning of Article 74 (1) No. 1 GG. Since the entry into force of the German Civil Code on January 1, 1900, the law on tenancies has been governed by Sections 535 et seq. BGB and - despite numerous amendments - is an essential component of civil law. This also applies to tenancies of apartments (Section 549 BGB).

4. Rent amount is conclusively regulated in the German Civil Code
With Sections 556 to 561 BGB, the federal legislator has conclusively made use of its concurrent competence for tenancy law as part of civil law. The regulatory intensity and regulatory density of the federal provisions alone suggest that Sections 556 et seq. BGB are comprehensive and conclusive. Sections 556 et seq. BGB do not contain any regulatory reservations, opening clauses or enabling provisions that would allow the Federal States to enact their own or deviating rent amount regulations. On the contrary, the differentiated regulatory system and the connection with the law on protection from termination make it clear that the federal legislator intended to make conclusive provisions.

Since the Tenancy Law Reform Act of June 9, 2001, the federal legislator has based regulations on the amount of rent solely on Article 74 (1) No. 1 GG - without any objection from the German Federal Constitutional Court. In addition, the Tenancy Law Amendment Act of April 21, 2015, introduced for the first time the so-called “rent brake” regulated in Sections 556d et seq. BGB into the German Civil Code. The explanatory memorandum to the draft of the aforementioned law, which was subsequently adjusted several times, contains a comprehensive consideration of all relevant aspects and thus the objective of a final reconciliation of interests between the parties to a lease agreement: The Tenancy Law Adjustment Act of December 18, 2018, was intended to prevent tenants from having to leave their apartments due to modernization. The Act on the Extension of the Consideration Period for the Local Comparative Rent of December 21, 2019 intended a moderate modification of the "local comparative rent" regulated in Section 558 (2) Sentence 1 BGB, namely the extension of the consideration period from four to six years. Finally, on March 19, 2020, the Federal Parliament passed the Act to Extend and Improve the Regulations on the Permissible Rental Amount at the Start of the Rental Period, which gave the Federal States the option of continuing to apply the rent brake for a clearly defined period.

At the latest with the Tenancy Law Amendment Act, the federal legislator has conclusively regulated the assessment of the maximum permissible rent for unbound housing. In the past six years, it has reacted to the worsening housing situation in metropolitan areas with the four aforementioned laws, some of which are extensive. It has attempted to ensure a balance between the interests of landlords and tenants, which are protected by fundamental constitutional rights, by means of detailed regulations. This way the federal legislator intended to curb the development of rents in tight housing markets. Since the federal legislator has conclusively made use of its concurrent legislative competence, at least with regard to setting the maximum permissible rent for unbound housing, the Federal States are precluded from regulating the amount of rent in this area (cf. Article 72 (1) GG).

5. Berlin rent cap and federal rent brake regulate the same subject matter
The "Berlin rent cap" and the federal rent brake essentially regulate the same subject matter, namely the protection of tenants from excessive rents for unbound housing. However, the MietenWoG Bln narrows the leeway left to the parties to a lease agreement by the federal regulations and introduces a parallel tenancy law at the state level with static and market-independent stipulations; it establishes statutory prohibitions within the meaning of Section 134 BGB that limit private autonomy in concluding lease agreements for housing beyond the level permitted under Sections 556 et seq. BGB. The MietenWoG Bln thus modifies the legal consequences ordered by federal law and shifts the balance of the interests involved undertaken by federal law.

Thus, Section 3 (1) Sentence 1 and Section 3 (2) Sentence 2 MietenWoG Bln prohibit the rent increase permissible under Section 557 (1) BGB in the current tenancy or for new leases. Section 3 (1) Sentence 2 MietenWoG Bln freezes the graduated or index-linked rents permitted under Sections 557a, 557b BGB on the level of the rent owed on the effective date. Section 7 MietenWoG Bln reduces the modernization measures relevant for rent increases to a catalog that is narrower than the measures pursuant to Section 555b No. 1, No. 3 to 6 BGB, and limits the permissible rent increase after modernization measures more than Section 559 (1) BGB. The scope of rent regulation is extended by the MietenWoG Bln; rent increases permitted under federal law are prohibited, as are agreements on the amount of rent permitted under federal law at the start of the lease. Hence, the maximum permissible rents of Section 6 (1) to Section 6 (3) MietenWoG Bln exclude the agreement of a rent amounting to 110% of the local comparative rent - even in the cases of Section 4 MietenWoG Bln - contrary to Section 556d (1) BGB.

These restrictions of the MietenWoG Bln are in addition to the regulatory regime of the rent brake according to Sections 556d et seq. BGB. Since Sections 556 et seq. BGB conclusively regulate the amount of rent for unbound housing, however, the state of Berlin lacks legislative competence in this respect. Other titles of legislative competence, namely Article 74 (1) No. 11 GG ("Law of the Economy") or Article 70 (1) GG, cannot be used as a basis for the enactment of the MietenWoG Bln. In particular, the regulation of the maximum permissible rent for unbound housing was not (or was no longer) covered by the legislative competence title "housing" within the meaning of Article 74 (1) No. 18 GG (old version) and could therefore not be transferred to the legislative competence of the Federal States under the Federalism Reform I in 2006.

III. Practical Consequences

The failure of the rent cap is now becoming a problem for a large part of Berlin tenants who were able to reduce their monthly rent as a result of the MietenWoG Bln. According to a survey conducted by Berliner Sparkasse, not even half of Berliners who were able to reduce their rent because of the rent cap have set aside money in case the law fails before the Federal Constitutional Court. However, reclaims from landlords can now be asserted with immediate effect. In case of doubt, however, tenants should not wait for the landlords' request to pay the difference in order to avoid legal disputes, but should transfer the outstanding amounts without delay - subject to a civil law review, if necessary. There is now also a risk of termination of a lease agreement without notice due to late payment.

The reactions of the larger housing groups have been mixed so far. Some have already announced that they do not want to make any repayment demands, as tenants should not suffer any financial disadvantages as a result of political decisions. Others, on the other hand, do not want to forego repayments, but may offer tenants options such as installment payments or deferrals. It can be assumed that the many small landlords in Berlin in particular will predominantly insist on repayment, as they are largely dependent on the contractually agreed rent to pay their bank loans.

The Berlin coalition has already announced that it will work to ensure that the state of Berlin supports particularly needy tenants with an emergency fund for repayments. Who can apply for help there and whether the state will take over the accrued sum in full or merely grant a loan was still open at the time this article was written.

Landlords should note that any orders issued by housing authorities in the meantime must now be rescinded by the authorities or may no longer be enforced. In case of doubt, landlords and property managers should file an appeal against any orders that are still pending.

IV. Final Considerations

With the rent cap, a legal experiment has failed. In principle, it was undisputed that the federal government is responsible for regulating tenancy law and that this has already been done via the German Civil Code. In legal terms, the Civil Code is private law and regulates the legal relationships between private individuals. The federal government also has the necessary legislative competence for this. However, the Berlin coalition was of the opinion that another approach could be taken, namely public law, which regulates the legal relationship between private individuals and the state. According to the Berlin coalition, there is a private "tenancy contract law" for which the federal government is responsible, but there is also a "rent cap law" that allows the state to place an upper limit on this individual freedom of private individuals.

In the end, this project remained just an experiment. It entered uncharted territory and was now, to a certain extent, put in its place. According to the German Federal Constitutional Court, there can be no playing with legislative competence titles, i.e. the competences of the Federation and the Federal States, in a state governed by the German Constitution. The federal legislator had made extensive use of its competence to regulate tenancy law. Nevertheless, initial reactions from the public and politicians show that the problem of high rents in metropolitan areas is heating up minds more than ever. In the wake of this, demands are emerging that it is now the task of the federal legislator either to create an effective tenancy law or to transfer the competence to do so to the Federal States. New legal regulations are therefore very likely to be introduced in this area. It would certainly be desirable for the legislator to take action on the supply side as well, in order to contribute to the creation of additional living space - and thus to a lasting easing of market tension. Numerous proposals for this are on the table.

_{Published: June 2021}