Proposed reforms to the Mietpreisbremse aim at strengthening and solidifying restrictions on steep rent increases in German urban areas.

By Christian Thiele and Eun-Kyung Lee

After intense discussions within the ruling coalition, the German government this week adopted a draft bill regarding the reform of German tenancy law.

What is the Mietpreisbremse?

The Mietpreisbremse (literally “rental price brake”) introduces a considerable element of rent control into the German legal system and is one of the largest political projects in the German rental market in recent years. Adopted in 2015, the measure allows the governments of the 16 German federal states to cap landlords’ rental price raises for new rentals by way of regulation. The main purpose is to prevent landlords of apartments in urban areas from significantly increasing rents following a change of tenant. According to Section 556d of the German Civil Code, the rental price in a new residential lease contract must not exceed the local comparable rent by more than 10% if the regulations have declared the relevant region as part of an area with a strained residential market. Of the 16 federal states, 11 states, including Berlin, Hamburg, and metropolitan areas in North Rhine-Westphalia and Bavaria, have so far passed such a regulation.

Flaws of the Mietpreisbremse

A German Institute for Economic Research (Deutsches Institut für Wirtschaftsforschung) study found that — within approximately the first year of the introduction of the Mietpreisbremse — both rental and property prices remained largely unaffected by the measure.

In December 2017, the Regional Court of Berlin presented the enabling provision — Section 556d of the German Civil Code — to the German Federal Constitutional Court (which has the sole power to declare federal statutes unconstitutional). In its order for reference, the Berlin court voiced concerns about the effects of the Mietpreisbremse on the principle of equality and the principle of legal certainty. The German Federal Constitutional Court likely will render its decision in the course of 2018. For now, however, the Mietpreisbremse remains in effect. Therefore, landlords still need to comply with its provisions.

Lastly, the Mietpreisbremse is subject to various exceptions. These exceptions have been at the centre of the discussion that has led to the proposed reform measures. Furthermore, according to Section 556f of the German Civil Code, the Mietpreisbremse is also not applicable to new buildings (built after 1 October 2014) and comprehensive renovations.

What is the proposed reform supposed to achieve?

The bottom line according to the coalition agreement between the union of the Christian Democratic and the Christian Social Parties and the Social Democratic Party is that the government wants to maintain the Mietpreisbremse. Landlords will now have a pre-contractual information obligation towards the tenant prior to entering into a new lease agreement if the landlord now or later wants to refer to an exception, i.e., intends to request a rent exceeding the local comparable rent by more than 10%. This in particular includes the landlord’s obligation to disclose the rent owed by the previous tenant. If the rent is too high in the tenant’s opinion, a simple complaint is sufficient, i.e., the tenant no longer has to substantiate facts based on which he or she has made the complaint.

Furthermore, the tenant’s contribution rate for modernisation costs the landlord has incurred in areas where the sufficient availability of rental properties is critical will be reduced from 11% to 8% over five years. A cap will be introduced for the amount by which the landlord may raise the rent (€3 per square meter within six years). Moreover, a simplified procedure will be introduced for smaller modernisation measures of up to €10,000 per apartment, allowing the property owner to give notice of and claim an increase in rent following a modernisation. Finally, a new misdemeanor will be introduced under criminal law to prevent (further) gentrification and to protect tenants from the so-called Herausmodernisieren (literally “to modernize out”), i.e. in cases in which the landlord utilises modernisation measures in an improper manner to force the tenant to move out. Legal presumptions aim at easing the burden on tenants to claim damages caused by such behaviour of the landlord.

What next?

The Mietpreisbremse is subject to many ongoing developments, discussions, and challenges on various levels. Whether the German Bundestag will adopt the draft bill as it stands remains unclear. Moreover, whether the Bundestag will make any final decision before the Federal Constitutional Court has decided on the effectiveness of the Mietpreisbremse is also uncertain. Therefore, exactly how the Mietpreisbremse will develop is not yet foreseeable.

This blog was prepared with the assistance of Ivo Wanwitz in the Hamburg office of Latham & Watkins.