What is the rent cover based on?
As the Senate Department for Urban Development and Housing (SenSW) admits, the rent cap is legally new territory. Accordingly, the positions on the planned rent law differ from one another. An SPD-internal (Social Democrats) dossier sees substantial legal risks in the proposed law and attests to the current approach, in some areas serious deficiencies. We discuss this paper in a blog post. At the same time, the Social Democratic Party (SPD) parliamentary group in the Berlin House of Representatives has commissioned an expert opinion confirming the admissibility of such a law at state level. It concerns the legal opinion of the lawyers Mayer and Artz, in which the professors from Yale and Bielefeld come to the conclusion that a rent cover is permitted. They refer to the federalism reform, which transfers responsibility for housing to the federal states. With art. 28 exp. 1 of the constitution of Berlin, so the appraisal, it lies in the judgement of Berlin to enact a rent law. The Berlin Senate refers to Article 70 para. 1 of the Constitution, which gives the federal states the right to legislate, unless the constitution gives the German federal government legislative powers. In particular, the question of the delimitation of jurisdiction between the Federation and the states, i.e. of competing legislation, occupies lawyers in the case of the rent cap. SenSW (housing and city development senate) argues that the federal legislature is only responsible for civil rent law under Article 74.1 No. 1 of the Constitution. Article 74 lists the areas of competing legislation. If the regulations made by the State of Berlin were of a public law nature, i.e. if they were enforced by the authorities, there would be no competition with civil law.
What the rent cap is intended to achieve and what it really does
The planned rent law is intended to relieve the tense situation on the Berlin housing market by interrupting the market mechanisms. By law, rents are to be frozen for a period of five years as of 18 June 2019. "Excessively high" rents for new rentals are to be reduced to an "appropriate" level. The law is also intended to make it possible to verify whether existing leases are excessive and to reduce them. The audits are to be carried out by the districts.
It is not only the real estate sector in Berlin that expects this to have a negative impact on the residential market. On the one hand, construction activity in Berlin is expected to decline rapidly and significantly. Investors, including many small investors who have to fear that the rent reductions will lower the value of the properties, will not (or no longer) build. This not only affects future projects, but also those that have already been approved. In addition, apartments that become vacant will no longer be let, but will be put up for sale and removed from the rental market. Increased conversion activity is also to be expected and can already be observed, which will withdraw further units from the rental market in the long term. There are also fears that the rent cap will have a negative impact on urban development. Covered rents reduce the motivation for a change of location. Sickle processes are suspended, young families wait for large apartments because under-occupancy remains affordable for the ageing population group. In the neighbourhoods, ageing is stimulated, people who want to build property are forced into the new construction market, which in turn shrinks due to the rent cap and continues to rise in price. Even if there will be an increase in the sales figures for apartments that become vacant in the medium term, these will not be available to the rental market as a relief. The structural effects are serious. Kitas and schools are no longer being used to capacity as the neighbourhood population grows older. Funds for the maintenance of the building structure are lost and the stock erodes.
Introduction and validity
The introduction is planned by state law in 2020, but the regulations already take effect on the cut-off date for the adoption of the parameters by the Senate, 18.06.2019. The rent levels have since been frozen for five years.
Which apartments are affected?
All approx. 1,500,000 rental apartments in apartment buildings in Berlin are affected, with the exception of new construction apartments and subsidised apartments from social housing construction.
How high may the rent be in the future?
In the course of drafting the draft, maximum rent limits are defined for building age classes. This rent table is between EUR 5.95 and EUR 9.80 for normally equipped apartments. The table rents are based on the values of the rent index for 2013, which were updated with inflation and wage data. The coalition has agreed to introduce a so-called "breathing cap".
| First time occupancy of the apartment and equipment | Rent per sqm |
|---|---|
| until 1918 with central heating and with bathroom | 6,45 Euro |
| until 1918 with central heating or with bathroom | 5,00 Euro |
| until 1918 w/o central heating and w/o bathroom | 3,92 Euro |
| 1919 until 1949 with central heating and with bathroom | 6,27 Euro |
| 1919 until 1949 with central heating or with bathroom | 5,22 Euro |
| 1919 until 1949 w/o central heating and w/o bathroom | 4,59 Euro |
| 1950 until 1964 with central heating and with bathroom | 6,08 Euro |
| 1950 until 1964 with central heating or with bathroom | 5,62 Euro |
| 1965 until 1972 with central heating and with bathroom | 5,95 Euro |
| 1973 until 1990 with central heating and with bathroom | 6,04 Euro |
| 1991 until 2002 with central heating and with bathroom | 8,13 Euro |
| 2003 until 2013 with central heating and with bathroom | 9,80 Euro |
What is a new building?
The common definition of a new building is apartments that are still covered by the 5-year developer's warranty. In the course of the legislative process, it will be clarified how the term "new construction" is used for the Rent Act. It is not yet clear whether only first lettings will be spared, or also subsequent lettings in new buildings. It is possible that in the event of re-letting, the last contractual rent will be assumed as the upper rent limit. However, this has not yet been secured.
Reduction of rents in existing leases
Beyond the capping of rents, tenants are to be given the option of checking the current rent for rent excess. Tenants should be able to reduce the rent to the permissible level with a so-called reduction request.
30 percent rule
Tenants can apply for a reduction if they spend more than 30 percent of their disposable household income on housing. The question arises as to the impact of changing living conditions. What happens if household income falls due to illness, unemployment or retirement, for example, and the housing cost ratio shifts to 30 percent? If landlords have to bear the risk of tenants' living conditions, the state privatises the welfare system and transfers the duty of care to landlords.
Tenants must open up living conditions
In the course of evaluating rent reductions, tenants should reveal their household and income situation. This should also include an assessment of whether the living space is considered appropriate. Only for an appropriate square meter number a lowering request is to be granted. The Berlin Housing Act scales the term "appropriate" according to the number of residents and the size of the apartment. A one-person household is estimated with 50 square meters, two persons with 65, three persons with 80 and four persons with 90 square meters. Further household members are added with 12 square metres each. This makes it less likely that families will be able to enjoy larger apartments, as landlords will make sure that the ratio of household size, income and apartment size fits together despite the rent cap in order to avoid rent reductions. Even with regular income, large families may be more dependent than before on social housing construction, as competition with smaller households with higher household incomes grows on the free housing market.
Cases of hardship for landlords
The draft provides for hardship provisions for landlords. Landlords who are of the opinion that a rent exceeding the upper rent limit is necessary to avoid permanent losses or to endanger the substance of the rental object may apply for a hardship clause. The Berlin Building Senator is quoted elsewhere as saying that there is no right to a yield. The hardship provisions of the rent cover are intended to ensure only acute maintenance of the substance without taking into account long-term planning horizons or the history of a property or owner. In the first draft, it was planned to have hardship cases examined by Investitionsbank Berlin (IBB) at the request of the landlord. If there is evidence of an economic shortfall, IBB should approve rent increases and higher rental agreements. In return, tenants in social housing programs were to be financially compensated for the difference between the official maximum rent and the upper rent limit.
Modernisation
The design of the rent cover provides for a further tightening of the rules for modernisation. New approval and notification obligations will be created. Costs for modernisations with levies of up to 1 euro per square metre must be reported. Modernisation projects over the 1 Euro limit require approval. In the key points paper on the rent cover, it was planned to have the approval process run by the IBB (Investitionsbank Berlin) and to link approved applications to IBB funding measures, which in turn would lead to occupancy commitment over a period of 15 years. In the key points of the draft published by SenSW, there are currently no references to this point.
Energetic modernisation
In the future, energy modernisation will be accompanied by a number of documents. The official approval depends on whether the rent increases are in a certain proportion to the savings achieved in operational costs. The expected savings in operational costs must be proven in writing by an expert.
Further modernizations with rent increases are subject to approval. The unrefusability and appropriateness of the costs for the implementation of the measures and the effects on the amount of rent are examined. An approval must be given for example if it is a question of legally prescribed measures, if barriers in the dwellings are to be reduced or dwellings with so-called substandard (for example external toilet) are to be equipped according to contemporary standards. However, approval is only granted if the housing modernisation is carried out with the use of the subsidies of the housing modernisation regulations.
Violations
Violations of the Berlin Rent Act are classified as administrative violations and can be subject to fines of up to 500,000 euros.
Market reaction
Even before the presentation of the key points paper from the Senate Department for Urban Development, there were nervous reactions on the Berlin real estate market. Although it is still uncertain whether and in what form the rent cap will be introduced, the confidence of owners and investors in the Berlin real estate market has suffered. In addition, the draft bill raises many legal questions. According to an internal SPD dossier, the lawyers in the responsible senate administration who are concerned with the rent law also consider the rent cap to be illegal. Banks report that property developers are partially suspending or abandoning plans. Overall, the already very complex situation on the real estate market in Berlin is becoming even more challenging for investors. However, the ongoing low-interest phase and the further increase in demand pressure are currently still hindering price corrections. Some banks are already calculating higher deductions for the financing of leased properties in order to compensate for possible rent losses. The technical condition of real estate is attracting more attention and the equity ratio in financing is rising.
Are prices going down?
According to our weekly updated market analyses, there is currently nothing indicating a price drop. On all sides there is currently a cautious mood. In August, after a brief downward jump in the previous month of July, there were significant increases in supply rents. Supply prices have not yet reacted. Our comprehensive report on the Berlin real estate market, including rents and purchase prices for all 22 Berlin districts, can be found here.
What can landlords do?
The extent of the planned rent cap is not only a concern for owners of apartment buildings in Berlin. Even small landlords, cooperatives and the municipal housing associations are looking at the Senate with deep scepticism. Losses due to capped or reduced rents, losses in the value of properties and the lack of legal certainty influence the behaviour of owners and buyers. Owners who are considering selling their properties in the short or medium term should rent out apartments that become vacant on a temporary basis or consider selling them directly. Temporary leases must be justified. To avoid formal mistakes, we recommend legal advice. Even if no sale is desired, an expert or a lawyer should be consulted for the drafting of the lease.