Update in Light of the revised Draft Bill dated 22 October 2019

On Tuesday, 22 October 2019 the senate of Berlin has passed the draft bill on the so-called Berlin Rent Price Cap. The draft bill is scheduled to be enacted in the beginning of 2020 by the Berlin parliament and shall come into force with retroactive effect as of 18 June 2019. In comparison to the draft bill dated 30 August 2019 several and in some instances quite substantial changes have been made, some of which are summarized in the following.

Scope, relevant Authorities

Rent Caps and Rent Decreases

Rent Cap/Adjustments Due to Fit-Out/Modernizations

Cases of Hardship

Judicial Remedies

Scope, relevant Authorities

The scope of the draft bill pursuant to sec. 1 has not been amended materially. The exception regarding new developments has remained unchanged. In a response to the concern that the district exchanges (Bezirksämter) are not sufficiently equipped to enforce the law, certain responsibilities have been shifted to the senate administration responsible for housing and to Investitionsbank Berlin.

Rent Caps and Rent Decreases

Changes have been made to the benefit of such landlords which had let residential space as of the cut-off date 18 June 2019 for such rents ranging even below the limits stipulated in the draft bill. Pursuant to the previous draft, such landlords would not have been able to achieve a higher rent in the event of a re-letting subsequent to the enactment of the draft bill. Now they will have the opportunity to at least increase the rent in such scenario to up to EUR 5.02/sqm, however, only in the event of "modern equipment" as stipulated in sec. 5 para. 3 being available, whereas provision of corresponding proof by the landlord is likely to be difficult due to the drafting of such provision (inter alia, three of five features of the listed fit-out need to be in place) and due to the use of vague legal terms. The provision pursuant to which a contractually agreed rent with an existing tenant which is higher than the applicable rent under the Rent Price Cap can no longer be agreed in subsequent lettings has remained unchanged, thereby giving existing tenants substantial leverage to press for rent reductions. The revised draft bill addressed this apparent flaw of the previous draft by stipulating that now all rents agreed at the time of the cut-off date can be challenged by tenants irrespective of their (potentially superior) financial strength and of the size of the leased space. The only prerequisite for an application for reduction of the agreed rent shall be that such rent is 20% higher than the rent stipulated in the Rent Price Cap (and there is no hardship situation pursuant to sec. 7 which resulted in an approval of a higher rent).

In this respect, it seems likely that the relevant authorities will have to bear a substantial workload since there are no longer any existing lease agreements which are exempt from the Rent Price Cap due to the financial strength of the tenant, and due to the fact that the decrease is subject to the location of the lease object, whereas one needs to distinguish between ordinary, average and good locations. However, the draft bill does not define these terms. The allocation may be conducted by the senante administration responsible for housing pursuant to a corresponding decree. 

Rent Cap/Adjustments Due to Fit-Out/Modernizations

While the thresholds regarding the rent permissible under the Rent Price Cap, which depend on the age of the leased premises and available facilities (only the existence of collective heating and of a bath shall be decisive) have remained unchanged, the provisions regarding the rent adjustment due to modernizations have been amended considerably. Modernizations prior to the Rent Price Cap being enacted shall no longer lead to an increase in the permissible rent at all. Rather, the quality of the leased premises shall be a factor, whereas the decisive features (three of five need to be fulfilled to qualify for an increase) due to the vague wording ("high quality sanitary equipment", "high quality floors in the majority of the leased premises") will be rather hard to assess. Consequently, the landlord bears a very high risk that a substantial fine incurs, as the landlord shall be obliged to notify the (potential) tenant of the permissible rent pursuant to sec. 5 para 4 and the communication of an incorrect amount is an administrative offence that is subject to a fine of up to EUR 500,000.

Modernizations being conducted subsequent to the enactment of the draft bill shall in principle no longer lead to an increase of rent. Solely such measures stipulated in sec. 6 (removal of barriers, installation of elevators, legal obligations to conduct building measures, energy based refurbishment) shall allow an increase of up to EUR 1.00/sqm. With respect to costs of modernizations in excess of such amount, the senate shall provide subsidy programs. 

Cases of Hardship

The provisions regarding cases of hardship (sec. 7) which shall allow an increase of the rent to levels above the Rent Price Cap subject to a corresponding application of the landlord have for the most part remained unchanged. No further clarity has been given on the rather ambiguous terms of "durable losses of the landlord" and "endangering the substance of the leased premises" which shall demonstrate the existence of a hardship. In this respect, a corresponding ordinance issued by the senate administration responsible for housing shall provide guidance regarding the interpretation.

Judicial Remedies

Filing an action immediately with the responsible administrative courts is no longer permissible, contrary to the provisions in the previous draft bill. Each time, a preliminary proceeding pursuant to sec. 68 of the Administrative Procedures Code needs to be conducted. The responsible authority is the senate administration for housing.