After a year filled with talks and debates, it just became official: Berlin’s rent cap violates the German constitution. It was struck down by the Constitutional Court (BVerfG) in Karlsruhe, Germany’s top court. The court argued, for one thing, that ever since the enactment of the rent freeze (“Mietpreisbremse”) in 2015 by the federal parliament, the legislative powers have been vested exclusively in the latter. The German states, according to the court, hold the power to pass laws only if federal law does not already fully cover the respective subject area, as is the case here through the enactment of the rent freeze. This means that the rent cap had been introduced by the Senate of Berlin unlawfully as a parallel law for the purpose of regulating rent rates, as the judges in Karlsruhe elaborated. (source: www.handelsblatt.com).

The rent freeze legislation of 2015 authorises the German states to limit the rents negotiated for new leases to a level that exceeds the local reference rent by no more than ten percent in cities and regions with strained housing markets. Legal action against the rent cap had been taken by Bundestag members of the Christian Democrat bloc and the Liberals as well as by a number of private property owners and cooperative housing associations.

Socially Compatible Solutions for Tenants Wanted

The Senate of Berlin will now have to deal with the fallout from the court ruling. It will have to find socially acceptable solutions for tenants, because many are facing not just higher rent rates but may also have to pay back the balance between rent cap rent and the contractual rent that built up over the past months. Numerous landlords had written conditional rents, so-called “shadow rents,” into their lease agreements precisely against this eventuality.(source: www.handelsblatt.com). At the time the rent cap became effective, Berlin’s tenant association had advised tenants to set aside the money thereby saved until the court had ruled in the matter. However, it is doubtful that everybody heeded the advice.

“The Federal Government’s job is now either to create an effective rent regulation to ensure a socially balance community in the cities or else to delegate the competence for doing so to the states,” said Sebastian Scheel of the Left Party as he commented the ruling by the Constitutional Court without assuming any responsibility for the rent cap disaster.

But it was Berlin’s incumbent city government of Social Democrats, Left Party and Greens that had sought to clamp down on the rapid rise in rent rates in the German capital. As a result, the rents of 1.5 million flats had virtually been “frozen” at the level of June 2019 since 23 February 2020. This meant that landlords had to comply with officially set limits when letting residential units on new leases. These limits depended on a variety of factors, such as the age of the flat and the type of heating system.

Dubious Effectiveness

In the fall of the same year, on 23 November 2020, the second stage of the rent cap kicked in, forcing landlords to lower even rents on unexpired leases that exceeded the limit by more than 20 percent. This was the case with around 340,000 tenant households in Berlin. The upper limits was 9.80 euros per square metre. New-build units completed in the years since 2014 were exempt. The rent cap was originally intended to be limited to a five-year period.

In the course of the past twelve months, the rent cap had been widely criticised because the real estate industry considered it an inroad on the right of ownership. Moreover, its effectiveness was subject to debate: It may be true that passing rents in Berlin did decline by around 7.8 percent between January 2020 and January 2021 as a result of the rent cap regulation, as an analysis by the ImmobilienScout24 real estate portal revealed. Yet the asking rents quoted in three of four listings on the same real estate portal still exceeded the permissible upper limit, namely by an average of 2.76 euros per square metre.

As far as Berlin’s housing market goes, there is reason to expect rents to surge in the months ahead. At the same time, the gap between new-build rents and passing rents will start closing again.