real estate - cost calculation


Reduction of moderniza­tion sur­charge

Draft Bill related to changes in tenancy law of April 11, 2016

Despite the changes brought about by the First Act related to amendments in tenancy law which has been adopted mid-2015 (as regards the current status cf. article "Rent Cap 2.0?") the reforms relating to tenancy laws are not yet completed. Following the coalition agreement, the Federal Ministry of Justice is planning further amendments to German tenancy regulations. Recently, on April 11, 2016, the Federal Ministry of Justice and Consumer Protection published a corresponding draft bill.

One area of focus is the provision contained in section 559 of the German Civil Code dealing with increases in rent following modernization measures. If and where a landlord has effectuated modernization measures, he can increase the annual rent by 11% of the modernization expenses attributable to the housing in question. Also, under the current legislation, there is no maximum/ceiling amount for this so-called modernization surcharge (Modernisierungs­zuschlag).

Insofar, based on the draft bill of April 11, 2016 the legislator is aiming at bringing about the following changes to the existing rules: 

  • The percentage at which modernization expenses can be allocated to the tenant shall be reduced from currently 11% to 8%.
  • Moreover, a ceiling amount for modernization surcharges shall be introduced. Following such new rules, it shall only be allowable to within eight years increase the rent by a maximum of EUR 3,00 per square meter.
  • Furthermore, the term modernization expenses shall be newly defined and limited to necessary expenses. 
  • In addition, the legislator is contemplating to introduce a cost effectiveness principle (Wirtschaftlichkeitsgrundsatz), aiming at limiting the allocation of modernization expenses to such expenses which a sensible landlord had also incurred in case he would have had to bear the associated cost himself.
  • Besides, according to the draft bill the Federal Ministry of Justice is planning to introduce a simplified rent increase procedure in section 559 c of the German Civil Code. If these plans materialize, a landlord shall have the right to choose whether to follow the normal procedure or to follow a simplified procedure. The main advantage of the simplified procedure consists in the possibility to use the lump sum calculations for the modernization expenses and to disregard interest advantages; the main disadvantage for the tenant consists in the exclusion of allocations of modernization costs within the five years following the last modernization surcharge by means of the simplified rent increase procedure.
  • Finally, the extraordinary financial burden escape clause contained in section 559 para. 4 of the German Civil Code shall be amended so that in the future, an extraordinary financial burden which leads to an exclusion of an increase in rent shall regularly already be given where because of the increase in rent the rental expenses to be borne by the tenant exceed 40% of his and his household members’ net income.

In addition, it was and is currently being discussed whether the modernization surcharge shall be made subject to limitations in time. For example, rules could be introduced pursuant to which the modernization surcharge can only be demanded until the point in time when the investment made by the landlord has amortized. However, in the draft bill the Ministry did not incorporate a corresponding rule.

In summary, the federal Ministry of Justice is planning a tenant-friendly and more detailed regulation of the modernization surcharge. The ministry only partially responds to proposals made by the German Tenants’ Association (Deutscher Mieterbund) which had demanded to completely abolish the regulations related to modernization surcharges and to instead only take into account modernization expenses in the standard rent tables (Mietspiegel).

In order to come to a final assessment of the consequences of the planned amendments, one will yet have to wait for the final bill. Nevertheless, owners and investors should carefully monitor the further legislative developments and take the resulting changes and potential limitations into consideration, in particular when making investment decisions. 

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