Socialisation of Housing Companies according to the prevailing opinion unconstitutional

See also the authors' detailed legal treatise:
Petersen/Maier, Vergesellschaftung als Rekommunalisierung, ZfIR 2019, S. 737 ff.

An initiative of the Berlin Association for Referendum on Rentals (Berliner Mietenvolksentscheid e.V.) currently demands the socialisation of large private housing companies in Berlin. [Note by the author: The German Federal Constitution, i.e. the Grundgesetz or Basic Law for the Federal Republic of Germany, uses the German term Vergesellschaftung, which can be translated as socialisation or nationalisation - in the current article, we have used the term socialisation, as it comes closer to the original German term which is different from the German term Verstaatlichung]. In the middle of last year, “Expropriate Deutsche Wohnen & Co." ("Deutsche Wohnen & Co. enteignen") handed 77,001 signatures to the Berlin Senate for a petition regarding a referendum on the enactment of the "Law on the Socialisation of Land and Property" ("Remunicipalisation Law"). In the housing policy and legal constitutional debate, not only in Berlin, this initiative revives the almost forgotten legal basis of Art. 15 of the German Federal Constitution (Grundgesetz or Basic Law for the Federal Republic of Germany) for the socialisation of economic assets and land.

Socialisation as the Most Intensive Instrument of State Intervention in the Market

Socialisation is the state’s most intensive instrument in the context of a social market economy. Usually, the state pursues certain social or economic goals through regulatory frameworks, which in the rental and housing market include e.g. the entire federal rental legislation and, especially in Berlin, the so-called “Rent Cap” (“Mietendeckel”, see this article for details). This legislative framework is supplemented by measures in which the state acts as a regular market participant. An example of such measures is the repurchase of almost 6,000 residential and commercial properties in the Berlin districts of Spandau and Reinickendorf by the State of Berlin.

In contrast, socialisation qualifies as an act of state sovereignty, which necessarily replaces free economic choice. The affected companies are no longer free to carry out their economic activities within the regulatory framework or to respond voluntarily to a repurchase offer made to them by the state in a "level playing field" environment. Instead, their ownership is transferred - against their will - to the state immediately by law or, alternatively, by an administrative act based on law.

It may be surprising that the Grundgesetz, the German Federal Constitution, provides any legal basis for such a far-reaching and intensive measure. However, the possibility of socialisation under Art. 15 Grundgesetz is an expression of the economic neutrality of the Grundgesetz. It illustrates that the organization form of the (social) market economy is by no means mandatory under the Grundgesetz. At the same time, however, the concept of socialisation (or nationalization, see above) is at least contradictory to the economic policy orientation, which since the Adenauer era may be regarded as the predominant consensus in German society. Therefore, Art. 15 Grundgesetz has never been applied so far.
 

“Expropriate Deutsche Wohnen & Co.”’s Request is Unconstitutional

As thus far, there had not been any case of a socialisation, which was based on Art. 15 Grundgesetz, a detailed jurisprudential debate on this provision of the Constitution is being conducted for the first time with regard to “Expropriate Deutsche Wohnen & Co.”. In this context, first, it must be noted that the initiative itself speaks of "expropriation". However, its legal request and background is based on the concept of a socialisation under Art. 15 Grundgesetz. This legal positioning can be seen as an attempt to circumvent the (supposedly stricter) constitutional requirements for a real expropriation, as expressly regulated in Art. 14 par. 3 Grundgesetz.

However, in the context of socialisation, the prevailing legal opinion has meanwhile established that a Socialisation Act on the basis of the initiative’s draft bill for a "Remunicipalisation Act" would be unconstitutional. This legal view, which is also held by the authors of this article, is essentially based on the following considerations:

Principle of Proportionality and Prohibition of Excessiveness

In accordance with the rule of law, due to its inherent relevance to fundamental rights, state activity must always comply with the principle of proportionality. In this respect, the state is obliged to refrain from excessive interventions in the sphere of fundamental rights of citizens and legal persons. Contrary to the view taken by the initiative, the principle of proportionality also applies in the context of socialisation.

The principle of proportionality requires that state activity must be suitable, necessary as the least severe measure and proportionate. While socialisation may be considered as (still) suitable to achieve certain social objectives such as rent stability and the provision of guaranteed housing, in particular for lower income groups, it already lacks necessity as the mildest means or the least severe measure. As already mentioned, (an array of) other housing policy measures are conceivable which would be less impactful for the fundamental rights of private housing companies than a socialisation. In this regard, one can consider an adjustment of the rental law or even repurchases of apartments by the state. A concrete example for less impactful and milder means in the field of tenancies are the constantly discussed and regularly implemented rental law reforms at federal level, which brought along several amendments to the German Civil Code (BGB), such as the German Rental Law Adaptation Act, which came into force on January 1, 2019). The fact that a transfer of ownership from private housing companies to the state also entails an unreasonably severe intervention in the right of ownership under Art. 14 par. 1 Grundgesetz is beyond question in the legal literature.

As a further aspect, it should also be noted that a socialisation only affects parts of the Berlin housing issue. It could be argued that there is a more stable rent level for apartments, which are managed and rented out by the public sector. At the same time, however, it must be taken into account that a socialisation would not create a single new apartment. This argument is also relevant in the legal context with regard to the constitutional proportionality test. The socialisation initiative aims merely at perpetuating the current rent level in Berlin, for which, on the other hand, a serious encroachment on fundamental rights would have to be accepted, as the other side of the coin,

Principle of Equal Treatment

Not only against the background of the principle of proportionality, but also in view of the principle of equal treatment under Art. 3 par.1 of the Grundgesetz, the initiative's request appears unconstitutional. The initiative defines ownership of 3,000 or more apartments as the "threshold of maturity for socialisation ". Private housing companies that reach this threshold are to be socialised, the initiative claims.

The initiative cannot provide any legally valid arguments for precisely this threshold. In relative terms, however, it must also be taken into account that an initiative aimed at a petition for a referendum is not forced to present a final, viable draft resolution. Rather, it would be up to the legislator to find a constitutional arrangement.

Calculation of the Socialisation Compensation

In the light of the financial situation of the State of Berlin and the statutory debt ceiling, which is fully effective from 2020, the initiative “Expropriate Deutsche Wohnen & Co.” can only hope for realisation if the compensation for socialisation remains "significantly below the market value". From a constitutional perspective, however, this cannot imply that the socialisation compensation is to remain significantly below the market value. The case law of the Federal Constitutional Court (Bundesverfassungsgericht) on expropriation compensation amounts clarifies that the starting point must necessarily be the market value. If the legislator wishes to remain below the market value, this can only be justified by circumstances specifically connected to the object of expropriation or socialisation. However, such circumstances are not apparent with regard to the private Berlin housing companies. The residential units are and will be used in future only for rental purpose.

Socialisation no adequate Measure of Remunicipalisation

So far, the political and jurisprudential debate has largely ignored the context in which the initiative itself puts its request for a socialisation of private housing companies: The remunicipalisation.

The background to this initiative's categorisation is that in 2004 the State of Berlin sold over 65,000 residential units to, among others, the investment companies Whitehall and Cerberus. In retrospect, the governing mayor of Berlin, Michael Müller, described this sale as a mistake. A socialisation would reverse this process, i.e. remunicipalise the housing properties.

However, the required socialisation on the legal basis of Art. 15 Grundgesetz cannot be seen as an adequate measure of remunicipalisation. Remunicipalisation efforts must adhere to the constitutional limits for state action, too. Central legal aspects in this respect are the relationship between state and citizens, the economic neutrality of the Grundgesetz, the fundamental rights of freedom and general questions of economic efficiency. These aspect results in further restrictions, which also speak against the constitutionality of the socialization law demanded by “Expropriate Deutsche Wohnen & Co.”.
 

No Matter of Course for a State of Berlin’s Competence

Remunicipalisation is always in the area of conflict between the fulfilment of tasks by the state or by the private sector and the tension associated therewith. In principle, the state has the right to, in its own responsibility, perform public tasks, which are in the public interest and thus have a general interest dimension. However, with the sale of more than 65,000 residential properties in 2004, the State of Berlin decided to no longer carry out the task of renting these apartments on its own responsibility, but to place the residential units in the hands of private housing companies. A socialization would reverse this decision.

Due to the considerable intervention in the private housing companies' occupational freedom, this step requires a special justification also in terms of competence. It is not a self-evident fact and competence that Berlin may, at its discretion or at will, transfer back the residential units currently in private ownership to itself and rent them out itself. A valid reasoning that would justify the associated intervention in the freedom of occupation of private housing companies is also not apparent.
 

“Socialisation of the Increase in Value”

Furthermore, remunicipalisation efforts must always be seen as economic decisions by the state. For budgetary reasons, the state always has to keep an eye on the development of the value of the economic goods and assets that shall be remunicipalised.

Against this background, the intended socialisation could be seen boldly as a "Socialisation of Increases in Value". It can be assumed that the values of the housing stocks affected by a socialisation will continue to increase if the economy develops normally. Due to the economic neutrality of the Grundgesetz, a "Socialisation of Increases in Value" is not objectionable from a constitutional perspective. Similar considerations, according to which increases in the value of real estate in metropolitan areas solely driven by a shortage of space and housing should benefit the state and not the owners, were – across party lines – already being made in the 1970s. However, such housing policy deliberations have not been realised so far.

It is also clear, however, that the opposite path of a "Privatisation of Possible Losses in Value" cannot be achieved by an act of state sovereignty. The resale of state-owned housing stocks would have to be based on the then prevailing market conditions. The Grundgesetz does not provide for a "de-socialisation".
 

Conclusion

A socialisation of private housing companies under Art. 15 Grundgesetz in line with the ideas of the initiative “Expropriate Deutsche Wohnen & Co.” would be unconstitutional. Furthermore, such a socialisation could neither be seen as an adequate measure of remunicipalisation. Not at least because of constitutional reasons, the State of Berlin should therefore strongly oppose the initiative “Expropriate Deutsche Wohnen & Co.”. Considerable legal objections also exist against other housing policy measures such as the Berlin “Rent Cap” (see this article for details).

Berlin's rental and housing policy should therefore pay more attention to the limits of what is constitutionally permissible. In the end, an all-embracing concept is needed to solve the problems in the Berlin housing market. In that context, constitutional rights must be observed, and so must the rule of law.