Rent cap introduced

The initial situation of the rent cover

The hotly disputed and bitterly debated law on rent caps in Berlin has been passed. In a roll-call vote on 30.01.2020, Berlin's parliamentarians approved the "Law on rent cap in the housing sector in Berlin" with the majority of the SPD, Left and Green parliamentary groups. The rent cap will come into force upon publication of the text of the law in mid-February. With this law, the red-red-green coalition in Berlin has passed the most serious intervention in the free market in recent history. The Berlin members of parliament voted for a law which, in the opinion of leading lawyers, is contrary to the German constitution.

Retroactive to 18 June 2019, the law provides for a 5-year rent freeze. Existing rental agreements will be reduced to newly set caps. The law is to come into force as early as February 2020.

This article does not deal with the question of whether the State of Berlin has the legislative competence to introduce its own law on rent caps, which is something that leading legal experts mostly do not assume. In this case, the norm introduced by the State of Berlin would be unconstitutional and would fail before the Constitutional Court and thus become void. Regardless of this, this article deals with the law as it is currently planned according to the current resolution. It outlines the main points of the bill that would take immediate effect when it came into force. It has been researched to the best of our knowledge and belief, does not replace legal advice and is provided without any liability.

Rent cap at a glance

• The rents in Berlin will be frozen for an initial period of 5 years at the level of 18 June 2019.
• Rent increases that were declared between June 18, 2019 and the effective date of the law and whose approval by the tenants falls within this period will revert to the last effectively agreed rent.
• New buildings from 2014 onwards are not covered by the rent cap.
• There is no specific regulation in the law for comprehensively modernised apartments. We assume that § 16 (1) WoFG is to be applied for classification in a building age class, so that it depends on whether the investment in construction was "substantial". "Substantial building expenses" are generally deemed to exist if the cost of refurbishment is at least one third of the cost of a corresponding new building.
  Social housing subject to rent does not fall under the rent cap.
• After a waiting period of nine months after the rent cap comes into force, tenants may reduce rents if they are 20 percent above the permissible table values, to which surcharges and discounts based on location and equipment must be added.
• Violations of the law are punishable by fines of up to 500,000 euros per apartment.
• Landlords must inform their tenants of the basis of the agreed rent within two months of the law coming into force, otherwise they may face heavy fines.

1. Scope of application

• Basically, the law applies to all "residential" properties. The term residential property is relevant insofar as it contains more than just "apartments" in the sense of building law. Rather, the focus is on the actual use, which results in substantial restrictions in the contract design. The law also covers commercial space used as residential space, temporary tenancies and furnished apartments. Thus, it is not a question of shaping the living space but of the living space itself. In all likelihood, only housing situations such as dormitories in the sense of assisted living are excluded, but not, for example, student housing.
• Apartments with first-time occupancy as of 1.1.2014 are excluded. All other privately financed apartments are subject to the law.
• Thus, special attention is paid to § 16 of the WoFG (Housing Promotion Act). New construction covers not only newly built buildings but also extensively modernised buildings or parts of buildings. The rule of thumb is that the investment must cover one third of the costs that would have to be incurred for a new building and sustainably increase the utility value of the living space or residential building, improve the general living conditions in the long term or bring about sustainable savings in energy or water. Repairs caused by modernisation measures are covered by modernisation.
• Buildings or parts of buildings that were extensively modernised before 2014 in accordance with § 16 WoFG fall back on the classification of the upper rent limit by year of construction, plus the increase of 1 euro per square metre for modern equipment and, if applicable, the upgrading location classification.
• Attic apartments are measured according to the year of construction.

2. Permissible rent

• Rent is understood to be the net cold rent, including all surcharges for furniture and equipment.
• Section 3 of the Rent Act imposes certain restrictions and obligations on landlords. Landlords who have increased rents before the 18 June 2019 deadline must expect the effective rent to fall back to the value before the 18 June 2019 deadline. § 3 covers all rents according to § 557 - § 559 BGB. This means that graduated rents and index-linked rents are also to be frozen at the level prior to the reference date. 
• Modernisation allocations which would have taken effect after the cut-off date are no longer to be claimed with this cut-off date regulation, irrespective of whether they have been announced with legal effect and have already been carried out. For example, a new heating system announced in 2018 but not completed until 2019 with accounting after 18.6.2019 can no longer be allocated to the planned and announced extent, but only to the amount of the maximum allocation amount of 1 euro per square metre, in accordance with § 6. 
• Modernisation allocations which would have taken effect after the cut-off date are no longer to be claimed with this cut-off date regulation, irrespective of whether they have been announced with legal effect and have already been carried out. For example, a new heating system announced in 2018 but not completed until 2019 with accounting after 18.6.2019 can no longer be allocated to the planned and announced extent, but only to the amount of the maximum allocation amount of 1 euro per square metre, in accordance with § 6. 
• From 1.1.2022, the rents can be increased by 1.3 percent inflation compensation annually up to the upper rent limit. 

3. Capping of existing contracts

• The rental law defines rents using a rental table. 
• For the legislator, a rent is excessive if it exceeds the values in the rent table by more than twenty percent and does not represent a hardship case (§7). 
• Beside the table there will be a residential area classification by a statutory order. For simple residential areas 0.28 euro per square meter and for middle residential areas 0.09 euro per square meter are to be brought in deduction. Good residential areas receive a supplement of 0.74 euros. 
• Further surcharges of up to 1 euro per square metre are provided for additional furnishing and/or equipment features.
• The basic rent to be applied is calculated from the basic rent in the table plus or minus the location criterion, plus any equipment features to be applied, and may be exceeded by a maximum of 20 percent. 
• Section 5 (4) requires landlords to provide tenants with unsolicited information on the basis of which rent is calculated within two months after the law comes into force and before new tenancy agreements are concluded. At this point, however, the landlord is not obliged to carry out the calculation or to specify the required rent. If the landlords in Berlin do not comply with this obligation, fines may be imposed.

4. Modernizations

• Landlords must notify IBB of any intended rent increases of up to 1 euro per square metre. These modernisations include measures such as thermal insulation, the use of renewable energies, energy-efficient window replacement, heating replacement, elevator extensions and certain works to reduce hurdles. 
• The rent cap may not be exceeded by more than 1 euro. 
• Multiple modernisation measures may not exceed this amount in total. 
• If measures are planned which exceed the levy of 1 euro per square metre, IBB subsidy programmes must be used. The maximum limit is one additional euro per square metre.
• These regulations do not affect approval obligations for modernization measures arising from the maintenance statutes. For example, an energetic window replacement only has to be notified according to § 6 of the Rent Act, but can be excluded by a valid maintenance statute.With regard to new lettings after a modernization allocation, § 6 is not regulated. According to § 7, landlords may have to file a hardship petition to the IBB for maintaining the previous lease, as otherwise there is a risk of losses. (The draft is not clear in this point)
• With regard to the classification and delimitation of new building/modernised old buildings, it is assumed here that § 16 (1) WoFG will be applied. It is unclear whether new buildings after 1.1.2014 will fall back to 9.80 plus EUR 1.00 after 5 years of re-letting, especially as properties that were comprehensively modernised before 2014 in accordance with § 16 (1) WoFG fall under the rent ceilings according to year of construction classes. 

5. Breaches and Penalties

• Breaches of regulations on the part of the landlords can occur knowingly and unknowingly. Knowingly e.g. if a rent is demanded which exceeds the permissible upper rent limit according to §§ 3 to 6. 
• The risk of unknowingly committing irregularities is high. Thus, information not provided to the tenants pursuant to § 5 (4) and/or information not provided and/or documents not submitted to the competent district office may be punished.
• Violations of the law can be sanctioned with fines of up to 500,000 euros. 

Location

Beside the table there will be a residential area classification by a statutory order. For simple residential areas 0.28 euro per square meter and for middle residential areas 0.09 euro per square meter are to be brought in deduction. Good residential areas receive a supplement of 0.74 euros. 

What are the effects of equipment features?

For apartments with modern equipment, the value increases by 1.00 euros. A modern equipment is present, if at least three of the following characteristics are present: 

• Elevator accessible without steps
• Fitted kitchen
• High-quality sanitary equipment
• High-quality floor surface in the majority of living area
• Energy consumption indicator of less than 120 kWh/(m² a)

Rent reductions

If a rent is more than 20 percent above the upper rent limit, it can be reduced to 120 percent of the upper rent limit for existing leases. According to red-red-green, this regulation will come into force probably nine months after the law has come into force. There will be no link between the rent reduction and household income (30 percent rule).

Comments and questions

• Particularly affected are high-growth locations with simple to medium classification and apartment buildings that have already been modernised or energetically upgraded at considerable expense. There is therefore a risk that measures taken before 2014 will result in a coverage gap. 
• The aforementioned effects may lead to portfolio erosion, as private landlords are no longer able to refinance either their own funds or borrowed funds for modernisation projects. 
• Landlords who have in the past made use of the existing possibilities for rent increases will benefit. Landlords with a particularly social attitude are worse off because they have not yet exploited tenancy law to the full. 
• If the right to a profit through renting is questioned, flats are not rented out again in the event of vacancy, but sold, as a result of which flats are permanently removed from the rental market. As a result of the shortage, purchase prices will rise, especially in favoured locations. 
• Owners of apartment buildings will increasingly revert to the partition model. Blocks of flats will be split for stock. After a holding period (7 years tenant purchase), these apartments will be sold free or let. If rented, then with a special right of termination reduced to 5 years before own use.
• Downturn for urban development. Successful promotion and construction successes in the past (IBA new) always included economic, building law, tax and tenancy law effects.