Old wine in new bottles – SPD’s proposal for rent and profit distribution caps constitutionally untenable

The Social Democratic Party (SPD) group in Berlin’s state parliament is tightening its housing policy agenda and making a fresh attempt to introduce a rent cap in Berlin. The core of the partial resolution on “rents”, passed in Rostock at the end of January, is a multi-stage plan that provides, among other things, for state-level regulation of the housing market through a planned Berlin law “on the application of Article 15 of the German Basic Law (Grundgesetz ‒ GG)”.

This revives an issue that has been occupying Berlin politically and legally since 2019. It began with a key issues paper from the Berlin Senate Administration which envisaged a five-year freeze on rents in existing tenancies, intervention in rent increases following modernisation and extensive restrictions on rents for new leases. We reported on this in the Noerr Insight on 14 June 2019. The next step was the draft Rent Control in the Housing Sector in Berlin Act (Gesetz zur Mietenbegrenzung im Wohnungswesen in Berlin ‒MietenWoG Bln), which was examined in the Noerr Insight of 23 September 2019, in particular from a constitutional law perspective. The Berlin Senate subsequently passed the draft bill (Noerr Insight dated 4 November 2019). The Rent Control Act, which ultimately came into force, was declared null and void by the Federal Constitutional Court (Bundesverfassungsgericht ‒BVerfG) in its decision of 25 March 2021 on the grounds that the State of Berlin lacked legislative competence. We analysed the decision and its implications in the Noerr Insight of 16 April 2021.

The SPD now proposes to rely on Article 15 of the Basic Law and to present the intervention as a “public‑interest regime” for the housing market, i.e. a public-law management regime under which returns from renting are limited and only a restricted portion of those returns may be distributed, rather than as classic rent control under tenancy law. Whether this approach will succeed appears highly questionable from a constitutional point of view and will probably have to be clarified again by the Federal Constitutional Court.

Below, we set out the main content of the SPD’s partial resolution on “Rents”, focusing on the key points announced for a Berlin state law on the application of Article 15 of the Basic Law (see A. below), give an initial constitutional assessment of the proposed instruments (see B. below) and provide an outlook on the further legislative process (see C. below).

A. Key elements of the SPD proposal

I. The new rent cap: law on the application of Article 15 of the German Basic Law

The core of the SPD proposal is a planned Berlin draft law on the application of Article 15 of the Basic Law, aimed at establishing a lasting socially just framework for the housing market.

The main elements of the proposal can be summarised as follows:

• Reference date rule for rents
  Rents are to be capped from a reference date yet to be determined. After that date, in principle, only increases to reflect inflation will be permitted. The reference date rule is to apply to existing dwellings, i.e. to flats that already exist. However, it will not apply to new buildings or landlords who let no more than two residential dwellings.
   
• Cap on distributions with a reinvestment requirement
  Distributions from rental income will only be permitted once necessary investments have been carried out and adequate reserves have been built up and will then be capped at a maximum of four per cent of annual rental income without utility charges. Any amounts above the permissible distribution must remain in the system and be used for maintenance, energy‑efficient modernisation and new construction. A hardship provision is envisaged, on application, where there would otherwise be a risk of lasting damage to the physical substance of the dwelling, taking into account any loan obligations.
   
• Additional requirements for large-scale landlords
  For landlords with 500 or more residential dwellings, investment‑related minimum requirements are to apply, calculated on the basis of annual rental income without utility charges.
   
• Penalties and enforcement framework
  The model is to be underpinned by administrative offences and “meaningful” fines, calibrated to the size of the company and the economic benefit obtained.
   
• Transparency, reporting duties and evaluation
  In addition, it is also planned that parliamentary scrutiny, transparency and an evaluation will be built into the regulatory model through reporting duties and review clauses.
   
• Further matters for review within a “public-interest regime”
  In the further course of proceedings, additional instruments are to be examined. Those expressly mentioned include a ban on lease terminations by the landlord because they need the dwelling for their own personal use, rules on graduated and index-linked rents, the removal of fixed terms from fixed-term leases and restrictions on furnished lettings and modernisation surcharges.

B. Legal assessment

I. Legislative competence: Article 15 of the Basic Law as an attempt to circumvent the competence issue

The SPD group seeks to rely on Article 15 of the Basic Law in order to present the project, in doctrinal terms, as a public-interest oriented framework for managing housing. In this way, it aims to tackle the key competence issue that arose under the previous Berlin rent cap in relation to federal rent‑price law, without providing for a blanket transfer of dwellings into state ownership.

The decisive anchor of competence is not Article 15 itself, but Article 74(1)(15) of the Basic Law. As this head of competence forms part of the system of concurrent legislation, the following applies: if the federal government has not legislated on something, the states may legislate on it. The federal legislature has so far either not used this power to socialise dwellings at all, or at least not in a way that would block the federal states from passing their own laws.

1. Rent cap and profit distribution restrictions as a “transfer into the public economy”?

From a doctrinal point of view, this approach is not convincing: Article 15 of the Basic Law is designed as an instrument for transferring assets into public ownership, not as one for blanket control of rent levels.

Article 15 empowers the legislature to transfer certain assets into public ownership or other forms of the public economy for the common good. The aim is to ensure that the assets in question no longer serve primarily to generate individual profits through private sector use, but rather directly meet a societal need or pursue an objective in the public interest. Measures can therefore only be based on Article 15 to the extent that they are genuinely directed towards achieving this purpose.

The term “public economy” is generally understood to mean the satisfaction of needs without a profit motive and/or with a specific commitment to the common good. An approach that essentially leaves private ownership in place and under which management continues to be carried out by private actors, while “only” restricting rent levels and limiting profit distributions, does not transfer anything into the public economy. Not every intensive form of regulation can simply be reinterpreted as a transfer into the public‑economy sphere.

2. Blocking effect of federal law remains key test

In the case of the first rent cap, the Federal Constitutional Court based its decision on the blocking effect of federal law in rent price law. It found that the State of Berlin had no legislative competence in this area because rent levels in unregulated housing are part of civil law and thus fall within the area of concurrent legislation, which the federal government had already comprehensively regulated in sections 556 to 561 of the German Civil Code (Bürgerlichesgesetzbuch ‒ BGB).

The current idea of re-labelling rent caps and restrictions on profit distributions as part of public law cannot succeed. In terms of effect, the subject matter of the provisions would still be shaped by tenancy law because reference date rents, indexation to inflation and caps on profit distributions directly govern the performance of privately negotiated contracts. They would therefore relate to social tenancy law, for which legislative competence still lies with the federal government.

It therefore seems likely that the Federal Constitutional Court would once again classify the measures as social tenancy law provisions, regardless of any political references to a “public economy”.

3. Practical hurdle: lack of a compensation model

In the current debate, using Article 15 of the Basic Law is seen as an attempt to fix the competence error of the first Berlin rent cap law. At the same time, it appears to avoid the full consequences of a genuine transfer of property into social ownership, especially the issue of compensation, which inevitably arises when returns from rents and powers of disposal are restricted this severely. This compensation aspect is likely to create an additional area of difficulty, since an intervention of this breadth could trigger substantial follow‑on financial burdens.

II. Fundamental rights and proportionality issues

From a substantive law perspective, the second attempt at introducing a rent cap is also highly questionable. The instruments outlined in the SPD proposal would interfere severely with landlords’ freedom to manage housing, which raises important constitutional questions about how to strike the right balance. The key constitutional considerations in this regard are outlined in broad terms below.

1. Article 14(1) of the Basic Law

Article 14(1) of the Basic Law would be particularly affected by the proposal. A regime based on reference date rents, subsequent indexation to inflation and an additional cap on distributions would significantly curtail the freedom to generate returns and to manage housing. In the extreme case, where investments, reserves and financing costs are high, the permissible distribution could in practice fall to zero, even though rents continue to be paid.

It is precisely this economic severity that critics are already pointing to. The more the rules, in practice, cause the income‑earning function of ownership to dry up almost completely, or to be realisable only on a permanent basis under strict conditions, the more acute the question becomes whether this is still a determination of the content and limits of property rights, or whether, in economic terms, it comes close to de facto expropriation..

2. Article 12 of the German Basic Law: freedom to pursue an occupation as a professional landlord

For professional landlords and real estate companies, the approach may also need to be examined as an interference with the freedom to pursue an occupation (Article 12 of the German Basic Law) because it predetermines not only rent levels but also various aspects of housing management.

What is likely to be critical here is above all the intensity and cumulative effect of the regulatory instruments: the more business models are, in practice, only possible within a framework laid down in the public interest, the higher the requirements for a proportionate design of the rules, particularly where they operate in a sector that is in principle organised along market‑economy lines.

3. Proportionality: balancing interests in the light of the Federal Constitutional Court’s case law

The Federal Constitutional Court has not ruled out price controls in tenancy law across the board, but it does require a sound balancing of interests and a fair reconciliation of the interests of landlords and the objectives pursued in the public interest. In its decision on the rent‑control mechanism, the Court essentially accepted a targeted, area‑based cap focused on re‑lettings and emphasised the legislature’s margin of assessment and operating latitude. The SPD’s approach goes significantly further, however, as it is designed as a permanent regulatory model for unregulated residential dwellings.

It is precisely this shift from a targeted price cap to a permanent, public‑interest‑oriented regime for returns from renting and housing management that may render the scheme disproportionate. At the same time, such a model does not actually address the core problem in the housing market, namely the shortage of supply. This weighs all the more heavily given that the partial resolution itself stresses the need for new construction, while at the same time basing its argument on structural scarcity and limited land availability.

Another problem lies in the incentive effects. If ownership formally remains with private individuals, but the possibility of private exploitation is largely cut off by rent caps, indexation to inflation and distribution limits, there will be strong incentives to withdraw from the market or to hold back investment (unless there is an investment obligation). Capital is likely to shift into less regulated segments or regions. This would run counter to the goals of the SPD’s partial resolution because investment in maintenance, energy‑efficient modernisation and new construction would fall, and supply pressures in the regulated segment would increase further.

The constitutional balancing will therefore largely depend on whether the state legislature can plausibly demonstrate that the chosen combination of instruments, applied this broadly, is necessary and does not give rise to disproportionate side‑effects, for example, by burdening financing and investment in existing dwellings to such an extent that the objective of “permanently affordable rents” is, in the medium to long term, undermined.

C. The next steps in the legislative process

The politically decisive element of the partial resolution is the announced Berlin bill “on the application of Article 15 of the Basic Law”. The SPD parliamentary group is considering drafting its own bill based on a legal opinion and introducing it into the parliamentary process.

In the House of Representatives, the Christian Democratic Union (CDU) and the SPD together hold 88 of 159 seats. In order to pass legislation, the SPD would therefore typically need to reach an agreement with its coalition partner. An alternative majority, for example made up of the SPD, the Greens and the left-wing party DIE LINKE, would be arithmetically possible but would likely spell the end of the governing coalition. It is therefore very unlikely that the legislative process will be completed before the scheduled election date in September 2026.

We will be closely monitoring the further political steps, the drafting of any bill and any foreseeable judicial review, and will report at an early stage.