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May, 2021

Berlin´s Rent Cap is unconstitutional

The "MietenWoG Bln", Berlin's law to freeze and cap rents for residential property on the private housing market, is unconstitutional with retroactive effect. This is the verdict of the Federal Constitutional Court, which puts an end to the "Rent Cap" after just under 14 months.

However, the judges in Karlsruhe did not go into the content of the law but found that the state of Berlin had no legislative competence in this area (formal unconstitutionality), which makes the law void. Tenants who have benefited from a reduction in their rent since February 2020 are now required to pay back the retained rent to their landlords.

Image: Bild von Edward Lich auf Pixabay .

The Rent Cap Act and the Court´s Ruling

The controversial "MietenWoG Bln", the Rent Cap Act, came into force on 23 February 2020 for an initial period of five years stipulated that rents in Berlin were "frozen" retroactively at the level of 18 June 2019. In addition, landlords were prohibited from charging rents that exceeded the maximum permissible upper limit defined in the rent table of the Senate Department for Urban Development when renting or re-renting. The law also limited the modernisation levy to a maximum of 1 €/sqm. From 23 November 2020, tenants could demand a reduction in their rent from their landlord, if the rent was more than 20 % above the upper limit.

Numerous experts argued that the federal states did not have the competency to issue a law in this matter. As part of tenancy law, rent price regulations are a matter of the civil code and is governed by concurrent legislation between the federal government and the states (since the reform of the Federal System I in 2006). Only if the federal government did not make conclusive use of its legislative power, could the individual states pass their own housing law.

However, the federal legislatior had already passed the so-called rental break (Mietpreisbremse) in 2015, which limits rent increases in tensed housing markets to a max. of 10% above the local rent level. Therefore, the coexistence of two opposing regulations was problematic and did not provide legal certainty. Additionally, the Mietpreisbremse was based on local comparative rents while the Berlin rent cap abolished the existing rent index in the German capital to stipulate its own upper limits.

With this reasoning, the two parties CDU and FDP instituted proceedings before the Constitutional Court for a review of the law.

The Federal Constitutional Court confirmed with its decision of 15 April 2021, that the federal government "passed conclusive rent legislation §§ 556 to 561 of the Civil Code (Bürgerliches Gesetzbuch – BGB), This would leave "no scope for legislative powers of the Länder", the judges concluded. Therefore, the law is incompatible with the Basic Law (formal unconstitutionality).

The ruling was unanimous with 8:0 votes in the result (7:1 in the reasoning), which means that the four judges nominated by the SPD and the Greens also support the decision. The ruling cannot be appealed by the state of Berlin and all other proceedings pending before the First Senate of the Federal Constitutional Court have thus been ruled.

Implications

With its decision, the Federal Constitutional Court has created legal certainty for owners as well as tenants. As a consequence, higher rents that exceed the upper limit of the rent table of the Senate Department for Urban Development are effective, landlords can also demand the rent difference between the contractually agreed rent and the upper limit, with retroactive effect.

It is estimated that about 1.5 million Berlin households are directly affected by the overturned rent cap, whose upper rent limit has been frozen at the level of June 2019. In addition, the Senate Department for Urban Development and Building assumes that about 40,000 Berliners will get into financial difficulties if they are to pay back the saved rent in a single amount.

Of the approximately 340,000 tenants who were able to reduce their rent due to the rent cap, almost 10% of households would be affected by this. In addition, the almost 6,000 households who signed a new tenancy agreement during the term of the rent cap and thereby agreed to a so-called "shadow rent" could also get into financial difficulties.

Some apartment owners, including large private housing companies such as Vonovia or Heimstaden, but also the state-owned companies Degewo, Gesobau, Gewobag, Howoge, WBM as well as Stadt und Land, have declared of their own accord that they want to waive payment of the claims. Others at least emphasise their social responsibility and promise that no tenant will lose his flat as a result of the Karlsruhe decision and that they will find a solution together with their tenants.

Meanwhile, Berlin's red-red-green state government is trying to mitigate the effects of the ruling. It has set up a relief fund for affected tenants as a first step. This "safe-housing assistance" is constructed as an interest-free loan and is granted to those affected who are not entitled to housing benefit or receive transfer payments. The granting of assistance is dependent on the income. For example, the net income of a one-person household must not exceed the limit of 2,800 euros. In addition, those entitled to housing allowance can contact their competent district office and have a takeover of the additional claim in the context of the housing allowance checked.

The Senate is initially providing 10 million euros in aid money, which is supposed to come from "existing funds" that were previously earmarked for the Rental Housing Act. The failed law will therefore turn out expensive for the taxpayers.

Reactions to the Court´s Decision

Needless to say that the Christian Democrats (CDU) and the Free Democratic Party (FDP) greatly welcome decision from Karlsruhe and the legal certainty that comes with it. Berlin´s intervention in the markets with the Rent Cap Act is viewed as mere symbolic politics, putting the brakes on investment and creating uncertainty in the housing markets. Instead, the solution should address the root cause of the problem by providing more housing and faster constructions.

The ruling was also met with relief by the Federal Association of Free Real Estate and Housing Companies (BFW) and the Association of Property Managers in Germany (VDIV). The latter sees it as the legislator's duty to designate more building land, reduce acquisition and ancillary building costs and promote private ownership of the residential property.

On the other hand, Berlin's mayor Michael Müller (SPD) is calling for a new legislative initiative at the federal level with which the federal government must quickly combat the prevailing housing shortage. Gregor Gysi of the Left Party interprets the ruling as meaning that the Federal Constitutional Court demands a nationwide solution for the rent cap. The German Tenants' Association calls on the legislator to act quickly and put an end to the explosion of rents in many German cities. In addition, the association will fight for a nationwide rent freeze.

The Berlin Senate for Urban Development defends the rent cap insofar as the federal judges in Karlsruhe had only clarified the question of jurisdiction. Appropriate measures must still be taken to effectively curb the further rise of rents in the capital as well as in other German cities.

Is a nationwide rent cap realistic?

According to Jan-Marco Luczak, legal policy spokesperson for the CDU/CSU parliamentary group in the Bundestag, the federal government had already introduced several rent regulations in the past, such as the rent cap, the extension of the period of observation for rent indexes and the capping of the modernisation levy. In doing so, the federal government had pursued the same social objectives as the initiators of the Berlin rent cap, but at the same time has weighed the interests of tenants and landlords.

Accordingly, it would appear difficult to enact a stricter, nationwide regulation. This would also raise the questions of material constitutionality of such law on which the Constitutional Court has not ruled. A rent cap at the federal level would probably lead to new constitutional proceedings and thus to renewed legal uncertainty.

Concluding Remarks, Outlook

The failure of the Berlin rent cap comes as no surprise as many experts had expected it. Regardless, the rent cap is clearly not an effective instrument to tackle Berlin´s housing crisis. On the contrary, it aggravated the problem as many private owners withdrew their property from the rental market to avoid negative returns. In particular, the share of affordable apartments in the total supply saw a sharp decline.

Making matters worse, Berlin has greatly missed its targets for social housing construction: instead of the 8,500 new flats planned for 2019 and 2020, only 5,800 flats were actually built - a deficit of more than 30%.

On a positive note, the ruling on the Rent Cap Act will likely result in an increase of housing units on the rental market as the rental business for existing stock as well as new development regain their attractiveness. Rents are not expected to grow and could in fact stagnate in the short term as a result of the increased supply. According to Immowelt, rents were at the level 11.10 € per square metre before the introduction of the rent cap and are expected to settle at 8.70 € by the end of 2021.

On the other hand, the share prices of large housing companies such as Deutsche Wohnen or Vonovia benefited from the ruling from Karlsruhe and saw a significant increase.

Interestingly, the decision of the Federal Constitutional Court also had an impact on the housing markets of other cities, according to Deutsche Bank analysts cited in Thomas Daily: "In all German cities, rental growth slowed down with the extensive media coverage of the Berlin rent cap", therefore, the house price cycle could potentially be extended, although only to a limited extent, because some positive impulses for supply could also be expected.

Finally, as for the Berlin housing market, there is a further ambiguity that results from the invalided local rent indices, which remove the basis for the application of the Mietpreisbremse. In this respect, legal uncertainty remains for landlords and tenants.

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Berlin´s Rent Cap is unconstitutional

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