Berlin Senate approves ‘rent cap’ bill

On 22 October 2019, after intensive political negotiations the Berlin Senate approved the draft of an Act on New Statutory Regulations on Rent Control (BerlMietenWoG-E). The Senate aims for the Act to enter into force on 1 January 2020. Berlin’s legislative measures to cap rents are also being observed with interest by other state governments in Germany. In the opinion of many observers, the fate of the Act under constitutional law will be crucial as to whether other states follow Berlin’s example and set in motion similar laws.

Main contents of the bill

Just like the ministerial draft, the bill provides for an Act limited to five years. The scope of the Act remains unchanged from the ministerial draft: Section 1 of the Act states it will not apply to publicly subsidised housing, housing ready for occupancy for the first time from 1 January 2014, or to housing rented or let by legal entities under public law or reg-istered private charities for people with urgent housing requirements and with care or disability support requirements.
The key provisions of the bill can be summarised as follows:

• The core of the bill is the rent freeze in section 3 of the Act, prohibiting the charging of rent exceeding the rent validly agreed on 18 June 2019. The rent validly agreed on that date may also not be exceeded in the context of graduated and index-linked leases. This maximum rent standardised on the reference date will increase annual-ly only from 1 January 2022 by a percentage of the inflation rate since the reference date but not more than 1.3%.

• For housing let for the first time after 18 June 2019, the upper limits set in sections 5 and 6 of the Act will apply. Regarding these upper limits, a distinction is to be made in principle only based on the year of construction and whether there is cen-tral heating and/or a bathroom. What is new in comparison to the ministerial draft is that due to ‘modern’ furnishings, a surcharge of one euro per square metre on the maximum rent is permissible if an apartment exhibits three of five defined characteristics. ´

• Rents validly agreed on 18 June 2019 can be capped by the Senate Administration for Urban Development and Housing under section 4 of the Act upon application by the tenants if the rent exceeds the upper limit determined in consideration of the residential location by more than 20% and is not authorised under section 7 of the Act (for cases of hardship). The residential location is to be considered by this provi-sion in such a manner that in ‘basic’ residential locations, €0.28 is to be deducted from the upper limit, and for ‘medium’ residential locations, €0.09. In ‘good’ resi-dential locations, €0.74 is to be added to the upper limit. The provision is only to become effective nine months after the Act takes effect.

• Section 6 of the Act contains a provision for the apportionment of modernisation costs. Certain modernisation measures defined in more detail in section 6(1) of the Act must be reported if the rent thereby increases by no more than one euro per square metre and the upper rent limit is exceeded by no more than one euro. For modernisation costs going beyond that up to a maximum of one more euro per square metre, the Berlin Senate plans to make subsidies available. Other moderni-sation costs not listed in section 6(1) of the Act are not intended to be apportioned to the rent at all. The provision is stricter than in the ministerial draft. That still pro-vided that the rent could be increased by up to €1.40 per square metre when mod-ernisation had taken place in the last 15 years before the Act came into force. Addi-tionally, an increase in the upper limits by one more euro per square metre was to be possible in the case of future modernisation measures.    

• The bill finally contains criteria for an administrative offence in section 10. Breaches of certain provisions of the bill may be penalised with fines of up to €500,000. Section 10(1) no. 4 of the Act provides for this, especially for ‘demanding’ an inadmissibly high rent.

Legal assessment

First, the bill still suffers just like the ministerial draft bill from the inherent defect of the lack of legislative competence of the federal state of Berlin (LINK zum Newsbeitrag vom 14. Juni 2019). In addition, many objections already raised in relation to the ministerial draft might also be justified regarding the bill. The most important constitutional objec-tion is that the location and the furnishings of the rental properties are not considered in the upper rent limit, or only considered rudimentarily in the case of the furnishings, which results in an unjustifiable equal treatment of essentially unequal matters (LINK zum Newsbeitrag vom 23. September 2019). This objection gains even more importance through the bill because at least in the case of caps under section 4 of the Act, the Berlin Senate seems to find itself in the situation of having to differentiate between different residential locations. In light of this, it appears all the more surprising that the location and the furnishings are otherwise supposedly irrelevant, i.e. when setting the upper rent limits.

However, the bill is also questionable for other reasons. In particular, the provision on the reduction of rents which were validly agreed on 18 June 2019 in section 4 of the Act if the rent exceeds the upper rent limit determined in consideration of the residential location by more than 20% and is not authorised under section 7 of the Act (for cases of hardship) triggers constitutional concerns:

• First, the upper rent limits are in principle linked to the rental index from the year 2013 and have only been updated accordingly to reflect real wage development starting from this year. From a constitutional perspective one might ask how a link to such outdated figures can be justified at all. The question of constitutionality arises particularly in the case of existing leases signed in compliance with the laws in force at the time and which may now possibly be capped under section 4 of the Act, which likewise uses the upper limits in sections 5 and 6 of the Act as a guide. The interference in protected legitimate expectations is far-reaching in this case and does not appear justifiable. The interference is exacerbated by the fact that a modernisation apportionment which has already taken place will now no longer be taken into consideration and future modernisations will be considered only in certain cases.

• Regarding the division of the city into ‘basic’, ‘medium’ and ‘good’ residential loca-tions (2nd and 3rd sentences of section 4(2) of the Act), the question is whether in view of the strong diversification of urban construction in Berlin, substantially une-qual locations are being treated equally. The rental index is based on the same divi-sion, which in turn is crucial for the determination of the local comparative rents within the meaning of section 558(2) German Civil Code. The term of ‘local compar-ative rents’ has remained unopposed by the Federal Constitutional Court. Mean-while, when determining the rental index for a certain apartment and thus also when determining the local comparative rent, factors like ‘type, size, furnishings, quality and location’ (section 558(2) German Civil Code) of the apartment are con-sidered. A comparison with the determination of the local comparative rents ac-cordingly shows exactly what a rough, ultimately unequal standard is being applied in the bill.    

• Finally, doubts exist regarding the necessary determinedness of the penalty criteria in section 10 of the Act, insofar as it follows on from section 4 of the Act. Under sec-tion 10(2) in conjunction with (3) no. 4 of the Act, a fine of up to €500,000 can be imposed if a landlord wilfully or negligently ‘demands’ a rent higher than the per-missible rent under sections 3 to 6 of the Act. Insofar as the provision also refers to section 4 of the Act, it remains unclear whether inadmissible ‘demanding’ is present only if the tenant has made the necessary request under section 4(1) of the Act for capping and an excessive rent is nevertheless being ‘demanded’, or whether a pe-nalised ‘demanding’ already exists if in the past an excessive rent was agreed upon under section 4(2) of the Act. If the latter applied, landlords would indirectly be re-quired to work actively toward an adjustment of ‘excessive’ rents once the Act comes into force. This interpretation is supported by the wording of section 10(2) and (3) no. 4 of the Act which states that the Act itself shows when a demand for rent is permissible and when it is not. The contrary view is supported by section 4(1) of the Act, referenced by section 10(3) no. 4 of the Act, which clearly requires a capping request as an intermediate step. In any case this rule remains undeter-mined, despite the enormous practical importance: thousands of cases might be af-fected.