Berlin's Rental Cap Overturned
The rent freeze in Berlin has been canceled
Update: As of April 13, 2021, the Federal Constitutional Court has ruled that the Mietendeckel, otherwise known as the rent freeze in Berlin, is unconstitutional. According to their ruling, the law is now void. This means that landlords are free to raise their rent on their investment properties.
Four months after the first information about a cap and freeze on rents in Berlin was announced, the senate passed a bill on which the city’s Red-Red-Green coalition (the Left Party, the Social Democrats and the Green Party) could agree. Titled the “Gesetz zur Neuregelung gesetzlicher Vorschriften zur Mietenbegrenzung“ (Law on the Revision of Legal Provisions regarding Rent Limitation]), the new law has a severe effect on the Berlin rental market. However, the constitutional court has decided that the legitimacy of the law is unconstitutional, making it now void. This article summarises what this draft legislation looked like and what consequences it would have had for property owners.
What does the law say?
After weeks of negotiations and debates, a compromise was reached on Germany’s first-ever rent freeze and cap in November. The new rental law achieved state parliamentary approval at the end of January 2020, and the landlord associations' attempt to stop the rent reductions was dismissed by the German consitutional court in October 2020. The rental legislation came into force in November 2020, dated retroactively to 18 June 2019. The law specified the key points that became known in June. The legislation said that rental prices in Berlin could not be raised for five years, allowing for a 1.3% increase annually from January 2022 onwards, in line with inflation. This freeze was supposed to additionally be accompanied by rental caps, subdivided into twelve categories, which were to be graded according to year of construction and fixtures and fittings and were based on the rent index of 2013, taking into account the increased income. The legislation only applied to properties built before 2014, and was due to affect around 1.5 million homes in Berlin.
Rental cap is unlawful
The Mietendeckel law initially said that if an apartment is newly rented, neither the previous rent nor the upper rent limit may be exceeded. This meant that rents that were previously higher than the upper limit must be lowered accordingly when new rentals are made. However, the rent caps were not only relevant for new rentals. Tenants in an existing rental contract could 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.
What was excluded from the law?
In the case of renovation and modernisation measures, rent increases of up to one euro per square metre would not have required approval. If the modernisation costs exceed this amount, subsidy programmes are available. Otherwise rent increases were 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" were not yet defined in this context. Besides the large housing companies, private investors who rent out their apartments were particularly concerned. Violations against this law are considered an administrative offence, punishable with a fine of up to €500,000. However, this law is now void. The rental cap no longer applies.
What's the next step?
In November 2020, the German constitutional court dismissed the landlord associations' attempt to stop the rental reductions. According to the Berlin government, around 200,000 property owners in Berlin receive revenue from rental yields. Now the Federal Constitutional Court has decided on the legitimacy of the law. The consititutional court has ruled that the rental cap is not legitimate, and no longer has any effect. The legal question which was determined unlawful, questioned if the Berlin state government has the right to enforce a rent freeze. Since this decision is now concluded, many landlords who had a "shadow" rent, with a caveat in contracts stating that if the rental cap law is overturned, they will require backpayments of the higher rent, will be collecting the money they are now lawfully owed.