Regulations in Berlin? Don't panic!

Lefts do not know which buttons to push

Berlin's Building Senator Lompscher has caused a lot of confusion over the past few days and the waves are spreading abroad. First of all, it is important to know that the radical ideas of the Senator are not accepted by the coalition partners. Even among experts and lawyers it is out of the question that Lompscher's plans will be implemented. Nevertheless, the key points of the planned rent cap are creating a very nervous atmosphere among many investors. We believe that you as a foreigner must be just as well informed as local players. It is true that the Senate and the districts in Berlin share the common goal of strengthening market control and slowing rent increases.

The districts focus on the goal of increasing the communal housing stock through pre-emptive rights. Especially the districts Kreuzberg, Neukölln and Tempelhof-Schöneberg profile themselves with a large number of exercised pre-emptive buyouts. On the Senate level building senator Lompscher from the Left Party is currently intervening massively in the market at Senate level with the so-called rent cap. The rent cap was originally initiated by the Social Democrats with the aim of freezing rents on the Berlin housing market for a period of 5 years. The left-wing building senator wants to extend the rent cap by the option of massively reducing existing rents but it seems to be very clear that there is no legal option or way to reducing rents. 

Rent cover

Whenever there is talk of rising rents in Berlin, reference is usually made to new contract rents. As the rent index for 2019 shows, existing rents in Berlin are not as high as is frequently claimed by tenant associations and the coalition parties in Berlin. In the current rent index, the average rent for existing rental agreements is just under 7 EUR/m².

Rents: Current regulation...

In the case of new rentals, landlords may increase the rents within the legally permissible limits. This corresponds to the local comparative rent from the rent index. To date, it has been possible to exceed the representative list of rents by 10 percent. If the last rent collected was higher than the rent index, the landlord may also demand this rent for new rentals. The landlord must prove this to the tenant. If the landlord cannot prove that he has previously achieved this rent, the tenant may reprove the rent and, if necessary, reduce it to the rent index level. The landlord must reimburse any excess rent paid.

...and what the lefts intend to do

According to the idea of Berlin's building senator, in future all rents in Berlin would be frozen for a period of at least 5 years. In addition, rents above the upper limit should be reduced. For old buildings, the upper limit is 6.03 EUR/m². The highest rent at all should be 7.97 euros per square metre per month, for example in the case of practically new apartments, built until 2013. The lefts want to exclude only new buildings from 2014 or later. For classic apartments in old buildings or other, mostly extensively renovated apartment buildings built up to 1918, landlords would - in this case - only charge the above-mentioned 6.03 euros per square metre per month. Tenants paying more could hypothetically claim a reduction to a newly introduced maximum rent if the rent cap would come into force in this form. For comparison: in the attractive and central city centre locations, apartments of this construction year class are rented for 15 euros and more. Take a look at our bubble chart with rents by year of construction. We think we can reassure you: This project will never be realized under a mayor of the Social Democratic Party (SPD). 

Modernization

Often there is an immediate need to modernise an apartment before it is rented out. The landlord then has to invest considerable amounts to make the apartment liveable for the next tenant in a normal standard. This decision is often not voluntary but due to the poor technical condition of the property.

Modernisation: Current regulation...

The landlord is allowed to allocate 8 percent of the costs arising from the modernisation to the rent each year. Exception: In so-called milieu protection areas, which now affect large parts of Berlin, modernization measures are subject to approval. In this case, the landlords have little scope to maintain or develop their property and to allocate the costs to the tenants.

... and what the lefts would love to have

According to the senator, modernization work is to be kept to a minimum in future. The upper limits for rents may be exceeded by a maximum of 20 percent through cost allocations. There can be exceptions, which must be approved by the district office. Unfortunately, the district offices in Berlin already need up to one year to process even the simplest procedures.

Everyone knows, even among the Left: Such a scenario would lead to an erosion of the housing stock in Berlin, as no owner would invest in its preservation. We also believe here: The senator's plan is not being implemented in this radical way.

Do I have to worry about being the owner of a property in Berlin?

Let's put it this way: The Senate and the districts want you to worry. Owners are put under pressure in different ways. On the one hand, the authorities are very reluctant in their communication with owners. On the other hand, there is usually no clear information as to what rights you should have as a landlord in Berlin in the future. Be prepared, however, that no rent increases will be possible in the next 5 years.

What rights do my tenants have?

At the moment nothing has changed in the rights of your tenants. Even if the rent cover should become effective, we do not expect it to be possible to reduce existing rents. However, for a period of 5 years you will have no possibility to increase the rent. This period may be extended by a further 5 years.

Should I be afraid of taking less rent in the future?

It is not yet known exactly how the rents for new rentals will be fixed. If the possibility is provided for tenants to subsequently reduce agreed rents, long waiting times can be expected when processing applications. Applications will probably have to be submitted to the district office and examined there. The cut-off date for rent reduction is probably the day on which the application is submitted and not the day on which the permit is granted. If this information is correct, you as the landlord would have to reimburse the excess rent retroactively from the date of application.

What is the rent brake (Mietpreisbremse)?

The rent brake is a "rent cover light". With this instrument introduced at federal level, the legislator wants to dampen the rise in rents in tense metropolitan areas. Many of the above points correspond to the rent brake. If you rent out your apartment for the first time, the rent index determines the maximum permissible amount, except if you have already taken a higher rent. If apartments have been extensively modernized before being rented, the rent brake does not apply. New buildings are also excluded. Attention: If the rent cap is introduced in Berlin, it will override the rent brake. There is a rule by which the courts calculate whether your rent is too high in case of dispute. If your investment in modernization reaches one-third of the cost that would have been required for a new building, the rent brake does not apply. New buildings are currently calculated at around EUR 3,500/m², without land. In this example you would have to prove that you have invested about EUR 1,170/m² for the modernisation.

What happens if I violate it?

If you ignore the legal regulations when renting a new apartment, the tenant can refuse and force the rent to be reduced. If the tenant is successful, you have to reimburse the rent you have earned "too much".

Why do the districts have a right of first refusal when I sell my property in Berlin?

This only applies to the sale of apartment buildings in milieu protection areas. In this case the districts have a right of first refusal according to § 24 BauGB.

What does the right of first refusal mean for the value of my property and for the timing of the sale?

For buyers and sellers of apartment buildings in Berlin, the right of pre-emption is primarily a time-related aspect, as it is associated with deadlines. As soon as you have signed a sales contract with the buyer of your apartment building, the district will be informed in writing. The district has 2 months to check whether it wants to exercise the right of first refusal or not. After these 2 months there is a further period of 4 weeks during which the buyer can file an action against the district's decision. You should therefore be prepared to assume an extension of the normal periods by 3 to 4 months in milieu protection areas. With our advice on the drafting of contracts, you can make your sale safe and quick.

As far as the sales value of your apartment building in Berlin is concerned, the right of first refusal has a limited effect. Needless to say, the uncertainty as to whether the district is exercising the right of pre-emption or not is neither pleasant for you as seller nor for the buyer. There are possibilities to influence the sales process so that the district decides not to exercise the pre-emptive right. This requires early cooperation with us. Please contact us to find out more about the possibilities.

Our recommendation

Stay calm, but don't underestimate the situation. You should ponder for yourself whether after years of appreciation, the moment has come for a sale. As we mentioned above, the situation is ambivalent. On the one hand, the demand for empty apartments is very high. So if your tenant moves out, we would recommend a sale. On the other hand, the property market in Berlin has been overrun with a series of regulatory measures and others will follow. Once the ten-year speculation period has expired for you, it is advisable to consider selling rented apartments in Berlin as well. Please inform yourself about the current developments in our very comprehensive Market Report Berlin.