"Rent cap" may be ruled unconstitutional

Berlin is further pursuing its goal of becoming the first German Federal State to regulate rents by way of a Federal State Act. The Berlin Senate Administration for Urban Development and Housing has published a draft bill on Rent Controls in the Housing Sector in Berlin (Gesetz zur Mietenbegrenzung im Wohnungswesen in Berlin - BerlMietenWoG-E). The draft bill by Senator Katrin Lompscher (member of left-wing party DIE LINKE) is in many parts based on the position paper that the Senate decided upon as a political model on 18 June 2019. A draft bill which can be presented to Parliament for consultation is to be available by 15 October 2019.

Main contents of the draft bill by the Berlin Senate Administration for Urban Development and Housing published

According to the draft bill, the Act would be limited to five years. The Act is to apply to all residential tenancies with the exception of publicly subsidised housing, housing ready for occupancy for the first time from 1 January 2014, residential hostels as well as renting as tenants or landlords of subsidised housing by legal entities under public law or registered private charities. 

Essentially, the draft bill contains the following provisions:

• Rent freeze: Rents exceeding the rents validly agreed on 18 June 2019 cannot be claimed. This maximum rent on the reference date will increase by 1.3% annually starting from the first year after the Act enters into force, as long as the upper rent limits (see below) are not exceeded (‘dynamic rent cap’). In case the dwelling was not let as of the reference date, the rent at the end of the last tenancy period is relevant. Fixed upper limits in section 5 of the draft bill will apply to housing rented out for the first time and to repeat renting after the draft bill comes into force. 
  
  
• Upper rent limits: The bill plans upper limits on the net rent excluding service charges, which may not be exceeded by the ‘dynamic rent cap’ (see above) or by renting to new tenants. Regarding the permissible upper limits, a distinction is made between the first readiness for occupancy of the dwelling and its fittings, although regarding the fittings the only relevant aspect is to be whether there is central heating and/or a bathroom. Other furnishings and fittings do not lead to an increase in the upper limit.
  
  The upper limits vary between €3.92 per square metre (for homes built up to 1918 without central heating and without a bathroom) to €9.80 per square metre (for homes built from 2003 to 2013, with central heating and a bathroom). The upper limit is €6.04 per square metre for homes first ready for occupancy before 1990; for homes built from 1991, the upper limit increases to €8.13 per square metre and starting from 2003, to €9.80 per square metre. For homes in buildings with no more than two flats, the upper rent limit increases by an extra 10% (section 5(2) of the draft bill).
  
  
• Lowering of excessive rents: Rents can be lowered by the district authority upon request if they amount to over 30% of the gross eligible income of the tenant household and exceed the upper limits set in section 5 of the draft bill. When calculating the rental burden, only the portion of the rent which is allotted to an appropriate amount of living space is to be considered (first sentence of section 5(4) of the draft bill).
  
  
• There are exceptions with permission of the district authority for modernisation and in cases of hardship (e.g. with a risk of permanent losses for landlords). Where modernisation has taken place in the last 15 years before the Act comes into force, the rent may not be increased by more than €1.40 per square metre, and by no more than €1.00 per square metre after the Act comes into force.
  
  

• The bill contains extensive duties on the part of the landlord (punishable with penalties of up to €500,000) to supply information to the district authority and the tenant on the circumstances relevant to calculating the upper rent limit.

Legal assessment

The draft bill contains some concessions for landlords, in comparison to the position paper that the Senate decided upon on 18 June 2019. In particular, intervention into existing rents as of the reference date of 18 June 2019 is to be allowed only in case the rental burden amounts to over 30% of the gross eligible income of the tenant household and exceeds the upper limits set in section 5 of the draft bill. These restrictions were not yet included in the position paper. The Senator responsible obviously intends to thereby consider more strongly the principle of protection of legitimate expectations (Grundsatz des Vertrauensschutzes) which is rooted in the rule of law principle. Likewise, the option of annually increasing the rent by 1.3% is intended to reduce the intensity of the burden on landlords.

However, there are substantial doubts about whether the draft bill is constitutional. It is still not clear why the State of Berlin should have the legislative competence, in deviation from the German Civil Code, to introduce a special ‘Berlin rental law’. In this context it will also have to be considered that the Federal Constitutional Court has, in the meantime, confirmed the constitutionality of (federal) laws on the so-called ‘rent brake’ (decision of 18 July 2019, case no. 1 BvL 1/18, 1 BvL 4/18, 1 BvR 1595/18 ).

In addition, the substantive objections still weigh heavily:

• The bill aims to permit intervention into existing tenancies by expressly circumventing agreed rent increases (e.g. graduated and index-linked rents). In addition, even a reduction of the current rent is to be permitted if the rental burden exceeds more than 30% of the gross income of the tenant household and the upper rent limit. Such significant intervention in the landlords’ protection-worthy trust in the lawfulness and continued existence of tenancy agreements is very difficult to justify. After all, the intended criterion of the ‘rental burden’ of a household was not known to the landlords when they entered into tenancy agreements; they were therefore not in the position to base their initial decisions on that criterion. In light of this, the criterion of the rental burden taken up in the draft bill does not appear suitable for justifying intervention into existing tenancy agreements.
  
  In principle, it must be questioned whether the ‘rental burden’ can justify any interference at all into existing tenancy agreements, because this criterion cannot and may not be equated with ‘neediness’. On the one hand, tenants’ fortunes remain completely outside of consideration. On the other hand, the percentage of income a tenant household spends on rent says nothing about the size of that income and thus about the (supposed) neediness of the household – tenants may, for whatever reason, be willing to spend a particularly high proportion of their (low, medium or high) income on rent. The criterion of ‘appropriate living space’ (first sentence of section 4(4) of the draft bill) only takes partial account (if at all) of these objections.
  
  
• Furthermore, the categorisation of the maximum rent provokes questions about compatibility with the requirement of equality. The differentiation only according to first readiness of a home for occupancy and the fittings appears all too rough. In particular, it completely ignores one of the most important criteria in the market for determining an appropriate rent: the location of the flat and/or the house. Besides, concerning the fittings, only central heating and a bathroom are considered; other types of fittings are completely ignored. One example illustrates the constitutional problem in view of the principle of equality: According to the draft bill, a flat (with bathroom and central heating) in a prestigious old building built between 1919 and 1949 in the popular and centrally located districts of Prenzlauer Berg and Charlottenburg would qualify for the same upper rent limit of approx. €6.27 per square metre as a flat (with bathroom and central heating) built between 1925 and 1933 in what is known as the Hufeisensiedlung (horseshoe estate) on the outskirts of Berlin (Neukölln-Britz).
  
  
• Finally, with a view to the equality requirement, it is extremely problematic that the bill is not intended to apply to publicly subsidised housing. This could lead to a situation where higher rents can be charged in publicly subsidised housing than in private-sector housing. This would be contradictory, since it is precisely social housing (in comparison to the private sector) that is meant to provide inexpensive homes. The arguments stated in the draft bill that social housing is already sufficiently regulated by other pricing rules and access limitations is not strong. On the one hand, because social housing laws curtail rent increases anyway, it is not clear why social housing should not also be included in the scope of application of the bill. Besides, if there should prove to be discrepancies in the permissible amount of rent between the private and social housing market, there does not seem to be any logical reason why lower maximum rents should apply in the private sector. This gives the impression that the legislator – possibly prompted by the Berlin housing associations’ publicly expressed concerns about the rent cap – wishes to leave potential for higher rents in the social housing sector.