Four months after the first information about a cap and freeze on rents in Berlin was announced, the senate has passed a bill on which the city’s Red-Red-Green coalition (the Left Party, the Social Democrats and the Green Party) could agree. This article summarises what this draft legislation looks like and what consequences it will have for property owners.
What does the bill say?
After weeks of negotiations and debates, a compromise was reached on Germany’s first-ever rent freeze and cap. Although the legislation still requires state parliament approval, it is expected to come into force at the beginning of 2020, dated retroactively to 18 June 2019. The draft law now specifies the key points that became known in June.
The legislation will freeze rents in Berlin for five years, allowing for a 1.3% increase annually from 2022 onwards, in line with inflation. This freeze will additionally be accompanied by rental caps, subdivided into twelve categories, which are graded according to year of construction and fixtures and fittings and are based on the rent index of 2013, taking into account the increased income. The legislation only applies to properties built before 2014, and will affect around 1.5 million homes in Berlin.
If an apartment is newly rented, neither the previous rent nor the upper rent limit may be exceeded. This means that rents that were previously higher than the upper limit must be lowered accordingly when new rentals are made. However, the rent caps are not only relevant for new rentals. Tenants in an existing rental contract can have their rent reduced upon application to the Urban Development Administration. However, the prerequisite for this is that the upper rent limit is exceeded by more than 20% and is therefore considered to be “extortionate”. Location-dependent increases and reductions are also taken into account.
In the case of renovation and modernisation measures, rent increases of up to one euro per square metre do not require approval. If the modernisation costs exceed this amount, subsidy programmes are available. Otherwise rent increases are only permissible by the landlord in cases of economic hardship and are to be absorbed by a rent subsidy in households entitled to WBS. However, the terms of "economic hardship" have yet to be defined in this context.
Besides the large housing companies, private investors who rent out their apartments are particularly concerned. Violations against this law are considered an administrative offence, punishable with a fine of up to €500,000.
What's the next step?
The draft legislation will now be presented to the state parliament, where it will be discussed and decided upon. While the tenants' associations are happy with the proposals, the opposition and the real estate industry in particular are voicing their opposition to the rent cap in Berlin. The legal situation is still not clarified. For this reason, the CDU, among others, has announced that it will take legal action against the legislation. Ultimately, the Federal Constitutional Court will probably have to decide on the legitimacy of the law.