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Berlin_Rent_Cap_Commentary_SOCIAL

Berlin Rent Cap Act Finally Adopted but Uncertainties Remain

In Short

The Situation: Over the past decade, Berlin has experienced a significant rent increase for residential space though rents still remain significantly lower than rents in other European capitals. On January 30, 2020, the Parliament of the Federal State of Berlin adopted a law to freeze rents ("Rent Cap Act") in Berlin which came into force on February 23, 2020.

The Result: Rents for residential space completed before January 1, 2014, are frozen on the level of June 18, 2019 ("Effective Date"). Maximum rent amounts are introduced for residential space, taking into consideration the year of construction, standard of comfort, and the residential area.

Looking Ahead: The Berlin government expects that the Rent Cap Act will help to cool down what commentators argue is an overheated market for rented residential space. Critics say that this regulation will not create more residential space but will discourage investors and developers and make the situation even worse. Owners of Berlin residential investments could experience a significant negative impact on their returns.

Mixed views have been expressed as to whether the legislation is in line with constitutional laws. The Christian Democratic Union (conservative party) has filed an urgent motion to the Federal Constitutional Court, so the Rent Cap Act will be reviewed by the constitutional court. Until a final decision, this will create uncertainties for landlords as well as for tenants.

Berlin is not the only area for which rent caps are being discussed. Recently, a citizen covet in Bavaria collected sufficient votes to start an initiative for a rent cap there. However, this initiative is still in its early stages.

Term, Residential Space Subject to Limitations

The initial term is five years starting with the Effective Date (retroactively), i.e., a rent increase which occurred after this date is only valid if it complies with the regulations of the Rent Cap Act. If the housing situation in Berlin does not improve, it cannot be excluded that the term will be extended or renewed.

The Rent Cap Act will apply to all residential space completed by December 31, 2013, except for publicly subsidized residential space, residential space which was modernized and the modernization was publicly subsidized, hostels, or specific social buildings let to individuals with an urgent need for housing.

The rent for residential space completed as of January 1, 2014, or residential space that was or is uninhabitable and was not used for residential purposes but has been restored after January 1, 2014, will not be subject to the limitations of the Rent Cap Act.

Maximum Rent, Rent Cap

The monthly maximum rent is fixed between EUR 3.92 and EUR 9.80 per square meter per month ("Maximum Rent"), depending on the year of completion, the standard of the residential space, and—for older buildings in particular—depending on the availability of a bathroom and central heating. Detailed amounts are included in a rent table. The Maximum Rent is lowered by EUR 0.28 in low standard residential areas and by EUR 0.09 in average residential areas, and is increased by EUR 0.74 in high standard residential areas. The table applies if residential space is let for the first time, and for all cases of re-letting. If the residential space is in a building with only two flats, the rent may be up to 10% higher than the Maximum Rent.

The rent is "frozen" on the level that was agreed between the landlord and the tenant on the Effective Date, and it must not exceed the Maximum Rent. If the contractual rent is less than the Maximum Rent, moderate annual increases are permitted as long as the Maximum Rent is not exceeded. This applies as well if the residential space has specific high-quality features such as high-quality sanitary equipment or floor covering, and low energy consumption.

Tenant's Rights

The key purpose of the Rent Cap Act is that the tenants do not have to pay what the law defines as excessive rents. Within two months following the Rent Cap Act coming into force, and before any new lease agreement is concluded, landlords have to provide tenants with information about the facts relevant for the calculation of the Maximum Rent. The current concept is that the rent is reduced to the permitted level by operation of law and the tenant may reduce rental payments directly. A rent exceeding the Maximum Rent is prohibited. The rent is too high if the rent exceeds the Maximum Rent (see ‎above) by more than 20% and has not been approved by the authorities for specific reasons. The landlords have to provide information regarding the permitted rent as specified in the law.

If the law will be declared null and void by the constitutional court (see below), tenants could be in payment default as they have not paid the higher rent applicable without the rent cap, and landlords could request the subsequent payment of the amounts by which the rent was reduced from the tenants.

Rent Increase Following Modernization, Economic Hardships

The Rent Cap Act also allows for a rent increase in connection with a modernization due to a statutory obligation, a thermal insulation or other energy saving measures, the installation of a lift, or the removal of barriers. The increased rent must not increase by more than EUR 1.00 per square meter and must not exceed the Maximum Rent by more than EUR 1.00 per square meter.

The rent may also be higher in case of economic hardships for the landlord, in particular if the permitted rent would cause losses or threaten the substance of the residential space.

Fines

In case of a breach of these regulations, the authorities may impose a fine up to EUR 500,000.

Other Limitations

Also, the German Civil Code sets forth limitations for rent increases: Generally the rent must not be increased by more than 20%, in municipalities where residential space is insufficient the limit is 15%, and the rent must not be more than 10% higher than the comparative rent, i.e., the rent that is paid for residential space of comparable standard in the vicinity. Pursuant to the German Commercial Criminal Law Code the rent must not exceed the comparative rent by more than 20%. These limitations apply in addition to the Rent Cap Act.

Legal/Constitutional Aspects

It can be expected that the Rent Cap Act will be challenged before constitutional courts. There are important arguments supporting the view that the city of Berlin lacks the legislative power to enact the Rent Cap Act and/or that the Rent Cap Act violates constitutional rights. If a court holds that the Rent Cap Act is not constitutional, it would have no effect.

Three Key Takeaways

  1. It is likely that the Rent Cap Act will be contested before courts. Until the final decision, there will be a high degree of uncertainty for investors as well as for tenants.
  2. Investors should consider the limitations set forth by the Rent Cap Act in assessment of investments in residential space made in Berlin. If the Rent Cap Act remains in force, it may have a negative impact on the returns of investors. While new projects completed from January 1, 2014, are not concerned by the law, a risk that the law is renewed or extended cannot be excluded and will also apply to more recent developments.
  3. The calculation of the Maximum Rent is complicated and will create additional efforts and uncertainties for both parties to a lease and an administrative burden for landlords. Noncompliance with the regulations may result in fines.

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