The new rent freeze in Berlin
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 will decide the legitimacy of the law later this year. This article summarises what this draft legislation looks like and what consequences it will have 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. 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 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 January 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?
In November 2020, the German constitutional court dismissed the landlord associations' attempt to stop the rental reductions. However, landlords still have means to protect some of their rental income. Hundreds of landlords have already applied for permission to charge higher rents due to economic difficulties at a local state investment bank. This is a state instrument for special cases to protect those who depend on rental income for their livelihoods. According to the Berlin government, around 200,000 property owners in Berlin receive revenue from rental yields. Ultimately, the Federal Constitutional Court will have to decide on the legitimacy of the law. The consititutional court is expected to make a crucial decision regarding the issue later in 2021. The legal question which remains to be determined is whether the Berlin state government has the right to enforce a rent freeze. Since this decision has yet to be concluded, many landlords have 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.
High Rental Yield Investment Units
Despite the new law, rented apartments are still considered valuable long-term investments in Berlin.