Envisaged changes to German regulations related to standard rent tables (rent indexes, “Mietspiegel”)
Draft Bill related to changes in tenancy law of April 11, 2016
After the introduction of new rules related to caps on residential rent, the so-called Mietpreisbremse (literally “rent brake”) which took place last year, the German legislator is now contemplating adjusting the criteria for the calculation and establishment of the comparative local customary rent (“ortsübliches Vergleichsmiete”).
At the same time, the criteria for the preparation of so-called qualified standard rent tables in the sense and meaning of section 558 d of the German Civil Code shall be set. Pursuant to the legislator, the aim of the respective amendments to the existing legal framework consists in “having the standard rent tables more accurately reflect the true amount of the comparative local customary rent”. On April 11, 2016, the Federal Ministry of Justice and Consumer Protection has published a respective draft bill related to changes in tenancy law.
According to the Federal Ministry of Justice, both reforms shall help increase the effects of the newly-introduced rent control rules, thereby also helping to achieve the goals of the latter instrument, consisting in ensuring availability of affordable housing (cf. article “Rent Cap 2.0?”).
1. Comparative local customary rent
According to section 556 d of the German Civil Code, in regions with a tightened/overheated residential real estate market (Gebiete mit angespanntem Wohnungsmarkt), the so-called comparative local customary rent (ortsübliches Vergleichsmiete) shall be decisive in determining the allowable maximum amount of rent. Also the provisions related to increases in rent as contained in sec. 558 of the German Civil Code refer to the comparative local customary rent.
The comparative local customary rent is defined in section 558 of the German Civil Code. Pursuant to this provision, the comparative local customary rent is established on the basis of the customary rent payable in the same municipality or in comparable municipalities for leasehold residential real estate of comparable nature, size, standard, condition and location, including energetic condition and status agreed upon or amended in the four years preceding the conclusion of the respective residential lease agreement.
Based on the draft bill of April 11, 2016 prepared by the Ministry in charge, the Federal Ministry of Justice, the applicable reference period shall now be extended from four years to eight years, meaning that older lease agreements will have to be factored in and historical rents will become significantly more important. This will most likely lead to a situation in which the comparative local customary rent in certain German regions, mainly attractive metropolitan areas such as for example but not limited to Berlin and Hamburg will have to be set at a significantly lower level then this would be the case if the reference period remained to be four years only (cf. Report issued by the Center for Real Estate Studies (CRES) of Steinbeis University Berlin commissioned by the IVD).
Due to the fact that pursuant to sections 556 d para. 1, 556 e para. 1 of the German Civil Code, in case of the conclusion of new residential lease agreements, the rent may not be set at more than 110% of the comparative local customary rent (or the amount of rent that had been lawfully agreed upon with the previous tenant, if this was higher) a lower comparative local customary rent will most likely lead to a stagnation in the amounts of rent in regions with a tightened residential real estate market. Also, for the term during which rent control rules apply, it would hardly be possible to increase rents for housing in the respective regions.
2. Qualified standard rent table
Thus far, and pursuant to section 558 d of the German Civil Code, a qualified standard rent table shall be given where a standard rent table has been prepared on the basis of established scientific criteria and has been accepted by the municipality or by organizations representing the interests of the owners and the tenants. In particular the legal term “established scientific criteria” has, however, proven to be hard to clearly define.
Therefore, in its draft bill, the Federal Ministry of Justice not only redrafted the definition of qualified standard rent tables, but also amended a legal presumption in section 558 d para. 1 of the German Civil Code, according to which – in simplified terms – the standard rent table will by law be regarded as qualified if it is approved of by a certain group of people named in the draft bill.
Furthermore, the new section 558 e of the draft bill provides for an authorization to the Federal Government to issue statutory ordinances establishing binding rules for the preparation of standard rent tables.
While the establishment of clear-cut rules for the preparation of qualified rent tables should help in increasing legal certainty for interested parties and, therefore, represent a welcome development, the long-term economic consequences of changes to the rules related to comparative local customary rents can hardly be overlooked at this stage. The same holds true for consequences of such changes on investments, and, in particular, investments in new buildings. There seems to be a rather obvious risk that the latter amendments will have a counterproductive effect on the goals pursued by the legislator, namely to overcome housing shortages by the creation of additional residential real estate for rent.
Irrespective of the fact that it is currently unclear whether the Federal Ministry of Justice will be able to implement its current plans despite the heavy criticism by federations, also in this regard, further developments and potential consequences of upcoming changes, also on the valuation of real estate assets should be closely monitored and taken into consideration in upcoming decision-making.