Constitutional concerns about the draft Framework Socialisation Act

In early August, the Berlin Social Democratic Party (SPD) parliamentary group presented a draft Framework Socialisation Act for Berlin (Vergesellschaftungsrahmengesetz Berlin). This draft is intended to implement the 2021 referendum initiated by the campaign “Expropriate Deutsche Wohnen & Co.” (Deutsche Wohnen und Co. enteignen), which was supported by over one million voters. In that referendum, the Berlin Senate (the city’s government) was instructed to take measures aimed at transferring real estate into public ownership.

Following the referendum, in March 2022 the then Senate made up of members of the SPD, The Left and the Greens set up an expert commission to consider whether the socialisation of housing companies with more than 3,000 flats by the State of Berlin would be legally possible and, if so, how such a measure could be designed.

The coalition agreement on government policy for 2023-2026, reached in April 2023 by the current Christian Democratic Union (CDU) and SPD government, envisages the adoption of a Framework Socialisation Act under Article 15 of the Basic Law (Grundgesetz ‒ GG), provided the commission concludes that such a measure can be carried out in line with the constitution.

The commission’s final report of 28 June 2023 now serves as the basis for the current draft. It affirms the possibility of socialisation in conformity with the constitution. A summary and analysis of that report can be found here.

A. Key content of the draft Framework Socialisation Act for Berlin

The draft seeks to establish a legal basis for the socialisation of land, natural resources and means of production, and their transfer into public ownership or other forms of community-based management. Its scope therefore explicitly extends beyond residential property to cover further areas of essential public services, such as energy, water, heating and waste disposal. Actual transfers of private property into communal ownership are to take place later under a separate implementing law.

The draft consists of four chapters: general provisions, the permissibility of socialisation, rules on compensation and procedural requirements. In the general provisions, particular attention should first be paid to section 2, which states that socialisation may be carried out “in particular for the purposes of providing essential public services”. This is followed by a list of such services, including creating and maintaining adequate housing.

Under section 8 of the draft, the socialisation of land, natural resources and means of production in individual cases through legislation is permissible only where a socialisation purpose under section 2 exists and the socialisation is proportionate. The standard for the proportionality test of the implementing law is in turn modified by section 9 of the draft. This alone is remarkable, as it rejects the position taken in the scholarly literature that socialisations under Article 15 of the Basic Law are not subject to a proportionality review.

In line with the final report of the expert commission, section 9 of the draft stipulates that the proportionality test must relate both to the purpose of the common good and to the independent purpose of socialisation. It must be examined whether the measure is suitable for each of these purposes in its own right – that is, both the pursued purpose of the common good and the socialisation itself. Recognising socialisation as an independent purpose modifies the proportionality test: the interest in ending private use and managing assets for the common good becomes a separate criterion in the balancing process. According to the draft, this interest has its own intrinsic value.

However, the necessity test is limited to the question whether there are clearly less burdensome but equally suitable means for achieving the other purposes of the common good. This is because including the purpose of socialisation itself in this assessment would make the test meaningless. When considering appropriateness, special regard must be given to the purpose of socialisation and the recognition it contains of a public interest in the community-based management of land, natural resources and means of production, especially regarding the transfer of the (private) rights that have been withdrawn.

Section 11 of the draft provides that compensation is to be paid for the socialisation, which is to be determined by fairly weighing up the interests of the general public and the affected owners. As the aim of socialisation is to replace private use with a form of community-based management, the amount of compensation is to be lower than the market value. According to the explanatory memorandum, Article 15 of the Basic Law is not intended to facilitate the ad hoc requisition of property for the purposes of providing essential public services. Rather, the provision is aimed at a structural change in the system of property in favour of community-based use. This transformation, it is argued, justifies not basing compensation on market value, but rather measuring it in the light of the change from private-benefit to public-benefit use. The amount could be based on, for example, what the property would earn if run for the community or a hypothetical value if the property were already subject to public-interest requirements. Ultimately, further details such as the calculation method, valuation process or any distinctions according to company form are to be left to the relevant implementing law.

B. Assessment and outlook

A possible review by the Federal Constitutional Court is likely to focus primarily on the statutory modification of the principle of proportionality and the provisions for compensating affected parties.

From the perspective of the hierarchy of legal norms, it is already doubtful whether the drafters’ attempt to modify the proportionality test for the implementing law by ordinary statute can succeed. The relevant standard for reviewing the implementing law is the Basic Law. Whether a Framework Socialisation Act could “steer” the Federal Constitutional Court in its assessment of proportionality is questionable. This would only be conceivable if the draft Framework Socialisation Act stays within the limits set by Article 15 of the Basic Law and can be seen as a legitimate interpretation of it. However, even if the Court confirmed the Act’s constitutionality upon review, it would still be possible for it to reach a different conclusion when subsequently reviewing the implementing law. This is because the Court is bound neither by (other) ordinary legislation nor its own previous case law when reviewing the compatibility of ordinary law with the Basic Law.

Furthermore, it is questionable whether the underlying assumption of the statutory amendment – that socialisation is an end in itself recognised by the Basic Law – is sustainable. A constitutional order based on freedom regards state action as always in need of justification. The assumption that socialisations could, in themselves, constitute a legitimate purpose therefore breaks with this principle. This assumption is also inconsistent with the design of the draft itself because under section 2 socialisations are not an end in themselves but serve the public provision of essential services and, ultimately, the enabling of individual freedom.

In addition, the draft law is likely to disproportionately restrict the guarantee of property under the Basic Law. Although the transformation towards community-based management is, in principle, a constitutionally legitimate means, Article 15 of the Basic Law does not permit any weakening of the protection of property rights. On the contrary, the Federal Constitutional Court emphasises the increasing impact on fundamental rights when there are large-scale state interventions in protected areas (see Decisions of the Federal Constitutional Court (BVerfGE) 125, 260, 318, concerning data retention), as would be the case with the Framework Socialisation Act.

The provision on compensation also raises constitutional concerns. The wording of the second sentence of Article 15 of the Basic Law suggests that the type and manner of compensation are not to be understood differently from the guarantee of property under Article 14 of the Basic Law. While the Federal Constitutional Court has indicated that in the case of Article 14 owners may, under certain circumstances, have to accept certain deductions (from the market value) because of the social obligations attached to ownership, the drafters of the bill envisage more far-reaching deductions, arguing that Article 15 is based on an independent doctrine of compensation. The justification given – that Article 15, unlike Article 14, enables a structural change in the system of property – does not upon closer examination amount to a substantive reason for higher deductions but is simply a circular argument.

It remains to be seen whether, in line with the current Senate’s coalition agreement on government policy, a vote on the draft will still take place during this legislative period. According to the SPD parliamentary group, the vote is planned for December. In any case, the Act is not due to come into force until two years after its promulgation in order to allow sufficient time for a review by the Federal Constitutional Court. The draft thus already anticipates a review in the form of an abstract judicial review. Only afterwards, and thus in a new legislative period, could a new Senate pass an implementing law.