The Berlin government’s envisaged five-year rent cap on residential properties has caused significant uncertainty among investors in housing portfolios.
On 18 June 2019, the Berlin Senate published a position paper specifying details of an envisaged five-year rent cap on residential properties in the German capital. The cap would significantly strengthen current restrictions on rent increases, which can only occur subject to certain rules and within certain limits. Berlin’s government aims to pass the statute later this year and enter it into force no later than January 2020.
The position paper outlines the following key terms of the rent cap:
- Landlords must not increase the rent in any existing residential lease, even if the rent is considerably below the level permissible according to the current rent index.
- Absolute rent limits will be determined. Tenants may request that their rent be reduced to the rent limit if their lease agreement provides for a rent above the rent limit.
- If landlords re-let a residential property, the new rent must neither exceed the rent owed by the previous tenant nor the rent limit.
- New residential developments are exempted from the rent cap provisions.
- An increase of the gross rent (including ancillary costs) of more than €0.50 per square meter and per month on the basis of modernization is subject to regulatory approval.
- Landlords risk a fine of up to €500,000 if they infringe the rent cap provisions.
- The provisions are limited to five years, with a retroactive effect from 18 June 2019.
- The rent cap covers all residential properties in multi-family houses in Berlin (with the exception of subsidized residential properties).
The Berlin Senate’s initiative has received significant criticism, including from several Berlin housing cooperatives and other players that are not primarily profit-oriented. In particular, critics argue that the statute could inhibit new residential developments, modernization, and other investments in residential properties. The rent cap is also controversial from a legal perspective. There are persuasive arguments that the state of Berlin lacks legislative powers in the field of rent regulation. The Berlin Senate, however, claims to have legislative powers due to the federal states’ right to pass legislation with respect to the housing sector. Content-wise, there are many indications that an undifferentiated, blanket rent cap, especially one with a retroactive effect, may disproportionately infringe the constitutional property guarantee. The Berlin Senate, on the other hand, feels it is in the right on the basis of the appropriate housing guarantee established in the state constitution of the state of Berlin.
Implications for Investors
Although the rent cap statute has not yet been drafted, investors in and owners of residential portfolios have already found themselves in an uncertain situation, as the Berlin Senate intends to apply the rent cap with retroactive effect from 18 June 2019 – meaning all rental payments as of this date could be affected.
Legal disputes over the Berlin rent cap seem inevitable. Whether the rent cap will be upheld in court – and if so, to what extent – cannot be predicted with certainty, and will also depend on how the statute is designed. Investors will ultimately need to wait until a court decision before gaining clarity on the legal situation.
In principle, judicial review of a statute raising constitutional doubts is possible even independent of a specific dispute resulting from the application of the statute (e.g., a dispute between a landlord and tenant after the landlord has requested a rent increase despite the rent cap). However, judicial review is not possible as a “preventive measure” before the rent cap statute has come into force. In any case, an initial court decision will take some time.
Similar models to “freeze” rents are also being discussed in other German federal states and at the federal level, although in less tangible detail than in Berlin – in part because political majorities vary in the different federal states and at the federal level. Latham & Watkins will continue to monitor further developments closely.