Draft Bill on the „Rent Increase Cap“ in Residential Tenancy Law and the Orderer Principle in Housing Agencies
The Federal Ministry of Justice has submitted the draft bill of a „Law to Curb the Increase in Rent in Tight Housing Markets and to Encourage the Orderer Principle in Housing Agencies“ (Tenancy Law Amendment Act – MietNovG) dated March 18, 2014. The law aims to resolve two identified deficits in the housing market that promote the „gentrification“ brought about by the displacement of the low income re sident population, and increasingly, average income households as well. On the one hand, it is intended to prevent an unchecked increase in rent in prosperous cities due to high demand and short supply of housing space. On the other hand, in order to relieve the financial burden on tenants, the customary passing on of letting agent fees to the tenant irrespective of an exclusive order by the tenant, is to be prohibited. Instead, the letting agent‘s client will pay the fee in accordance with the Orderer Principle. According to the rationale of the draft bill, the landlord is almost always the client in tight housing markets. CoSt ASpECtS The draft assumes an annual saving for tenants of just above 854 million euros and an annual additional ex penditure for landlords of nearly 521 million euros. Whereas annual po tential savings of 282.8 million euros in rent are envisioned for tenants, for landlords it will mean an annual burden of 301.79 million euros in expenditure to determine the permis sible rent and to fulfil duties to supply Elmar Günther Of Counsel, Notar, Frankfurt T +49 69 7941 1141 firstname.lastname@example.org brown 3 information to tenants. The draft envisions poten tial annual savings of nearly 572 million euros in letting agent fees, offset by a mere 219.09 million euros of additional expenditure for landlords. The comparatively low burden for landlords is accounted for in that they will be letting the premises them selves instead of calling upon a letting agent, and in a reduction of letting agent fees due to increased competition between letting agents. REnt InCREASE CAp The legal options currently in place to curb exag gerated rent increases are deemed insufficient. The ministry considers the civil law instruments to be inadequate. For example, under Section 558 the longstanding limit on rent increases up to the reference rent refers only to increases in existing tenancies. The option to lower the legally stipulated cap in tight housing markets from 20% to 15% for five years by means of State government’s ordinance, newly introduced as part of the amended tenancy law, merely applies to the maximum amount that existing agreements may be adjusted to the refer ence rent within three years. Until now there has been no provision governing the rental of flats that have returned to the market. The penalty under criminal law (usury) requires as facts a noticeable incongruity, which generally is only assumed to be the case when the market rent is exceeded by 50%. In addition, there are high standards to be met to determine the intentional exploitation of an identified individual dilemma by a landlord or a reprehensible attitude. This may be able to stave off individual cases, but cannot correct undesirable developments arising from a special market situation. The regulatory offence (excessive increase in rent) under the Economic Offences Act is likewise deemed to have not taken effect. It penalises disproportionately high fees for renting housing space. This is the case if the rent (i.e. the fee) exceeds the reference rent by 20% as a result of an exploitation of a reduced supply of comparable housing spaces. The facts rely on an exploitation of the reduced supply, but also draw on the reference rent for the entire community area. Here again, the tenant must be in a dilemma, unable to fall back on more affordable flats for valid reasons, and must prove his unsuccessful attempts. The provi sion may only take effect if this is apparent to the landlord. The draft deems this provision to be too complicated and therefore impractical. It is thus to be abrogated without a replacement. For this reason the draft envisions the introduction of new paragraphs Sections 556(d) ff. to the Civil Code. They will stipulate a maximum increase in rent of 10% over the reference rent when existing flats are re-let. This will apply only in „areas subject to tight housing markets“. Said markets must be expressly specified as such for up to five years by State government. In order to protect the landlord from being re quired to let below the effective rent agreed previ ously, the landlord may also set the new rent above the 10% cap up to a maximum of the rent paid by the previous tenant („previous rent“). To protect against fraudulent use however, changes to rent agreed in the year prior to reletting will not be considered when determining the previous rent. As an alternative to agreeing the previous rent, the maximum increase may also be exceeded if refurbishments were undertaken within the last three years prior to reletting. As with an existing tenancy, costs for refurbishment may be included in the new rent by way of a surcharge of up to 11% of the refurbishment costs per year. The restriction to the last three years is based on the assumption that only costs incurred during this period are not already included in the previous rent. In order to avoid double consideration in the landlord‘s favour, the surcharge is made on 110% of the reference rent that would be applied to the flat in its nonrefurbished condition. This cap on rent increases does not apply (i) to ag reements made later in an existing tenancy, (ii) to newly constructed and thus newly let units, or (iii) to the rental of extensively refurbished flats. The rationale of the draft considers extensive refurbish ments to be those of a scope comparable to a new building. The rationale consults adjudication on council housing law as its point of contact. Accord ing to this, a comparable scope is found to be the case if the expenditure reaches one third of the costs for a comparable newly built flat. The rent increase regulations governing the rent increase cap are likewise inapplicable to housing let for temporary use, furnished rooms in the landlord‘s flat, and special council offers for per sons with an urgent need for housing. Such consti tute special tenancies outside the normal housing market. The prohibition of deviation common in residential tenancy law is also standardised for the new regula tions. Accordingly, any deviation from the legal sti pulations that put the tenant at a disadvantage will render that contractual provision ineffective. However, restitution claims are governed explicitly. And yet it is only clear from the rationale of the draft that a rent agreed in violation of the maximum limit is not wholly ineffective due to the prohibition of deviation. It is merely that part of the rent which ex ceeds the permitted maximum limit that will not be due. The tenant is only entitled to claim restitution of that part which exceeds the ineffectively agreed rent, yet prior to doing so, the tenant must have made a complaint in text form (such as by email) specifying the material facts of a violation of the provisions. The tenant is privileged with respect to the law of unjust enrichment, as the tenant is always the weaker party in a negotiation in a tight housing market. Therefore the tenant‘s claim for restitution is possible despite payment made in the knowledge of the ineffectiveness or despite a violation of a statutory prohibition. A right to information from the landlord will be included in order to permit the tenant to verify the facts. Accordingly, the landlord must provide the tenant in text form with all facts that generally are not publicly available and are relevant to the permissibility of the agreed rent. Finally, the provisions on the rent increase cap also apply to stepped rent and index rent agreements, whereupon for index rents it is only applied to the starting rent, while stepped rents are subject on the date on which the respective stepup becomes due. 6 Real Estate | Recent Developments and Decisions | Summer 2014 oRdERER pRInCIplE Generally, a person looking for a flat will answer an ad placed by the letting agent commissioned by the landlord. In order to prevent that person from being required to pay a (separate) fee or the fee owed by the landlord, the law governing housing agencies will be amended. Accordingly, a person looking for a flat will only owe a fee if he or she has instructed the letting agent in writing to find a flat, and the letting agent also becomes active solely on the basis of this mandate. Any deviating agreements are ineffective on the one hand, and on the other constitute a regulatory offence that may be punished by a fine of up to 25,000 euros. outlooK It is not expected to enter into force before 2015. Particularly, if extensive changes to the draft are demanded within the coalition government. The legislator would increase its market regu lation in social tenancy law with these planned provisions. The existing instruments would be complemented by a cap on rents when flats are relet. As the cap for adjusting existing rents is only reduced acrosstheboard for entire towns and municipalities, it can be assumed that the State governments will also introduce the rent cap for reletting in a similarly undifferentiated and broad manner. For example, Berlin and Hamburg have each been sweepingly and jointly defined as mu nicipalities in which the population is particularly at risk of experiencing a shortage of rented flats at reasonable terms 1 . North RhineWestphalia and Bavaria have also enacted decrees introducing the cap in major cities such as Munich and Dusseldorf, as well as a large number of other cities and mu nicipalities (59 in North RhineWestphalia and 89 in Bavaria). With the exception of Munich, however, the cap was only agreed in Bavaria until the end of 2015. This means that the application of the new rent cap can be anticipated to be very widespread. Particularly as it is not clear that the federal legislator will limit the State regulators in their assessment by stipulating clear and verifiable criteria for determining if a market is tight. However, the rationale of the draft does contain considerations discussing what an appropriate assessment would need to consist of, to also satisfy constitutionally guaranteed protection of pro perty. Landlords would be required to challenge an unjustified blanket designation themselves, with corresponding court proceedings potentially dragging on for years. Stepped rents, which previously were easy to manage, might lose in appeal as the rent increase cap provision is applied to each stepup increase. As a result, the index rent might grow in popularity. It is also problematic for landlords that they can only obtain legal certainty from (qualified) rental indices. It is only possible to make a reasonably reliable calculation if a reference rent can be de termined. If not, the risk of the rent turning out to be excessive will increase, and the landlord will be faced with a tenant‘s claims for restitution. While the rent increase cap may be suited to curb the price development in the housing market, it is questionable as to whether it improves the chances of lowincome and averageincome earners in re sidential areas that are in high demand. It merely secures the financial possibility to rent. This may potentially result in (even) more applicants for one flat, and will not do much to change the fact that landlords prefer tenants with a good credit history for obvious reasons. However, according to a publication accompanying the draft, the federal government plans further measures to ease the shortage of housing Impermissibility of the use of a tenancy deposit during an existing tenancy in the event of contentious claims by the tenant under residential tenancy law BGH VIII ZR 234/13 of May 7, 2014 FACtS The appellant is a tenant in a flat owned by the respondent. She remitted EUR1,400.00 to a tenancy deposit ac count in accordance with the tenancy ag reement. An additional agreement by the parties to the tenancy agreement states: „The landlord may use the deposit to satisfy any claims due during the tenancy. In this case the tenant is obliged to increase the deposit to the original balance...“ In the course of the tenancy the appellant asserted a reduction in rent and partially retained the rent payments. The respondent then had the tenancy deposit paid out to him during the tenancy. The appellant now demands that the respondent pay the amount into the deposit account and invest it protected against insol vency. The district court has upheld the complaint, the regional court has dismissed the respondent‘s appeal. The respondent appealed the decision by the regional court as permitted by the appellate court, pursuing his motion to dismiss. ContEnt And SubJECt oF tHE dECISIon The respondent‘s appeal to the Federal Court of Justice was unsuccessful. The VIIIth Civil Senate of the Fe deral Court of Justice ruled that the respondent was not entitled to claim the tenancy deposit during tenancy. The respondent‘s actions contradicted the trust relationship of the tenancy deposit as expressed in Section 551 para 3 Civil Code. The Federal Court of Justice holds that the tenancy deposit is not intended to grant the landlord an avenue to quickly satisfy alleged claims against the tenant in an ongoing ten ancy. Under Section 551 para 3 sentence 3 Civil Code, the landlord is required to invest the amount ceded to him as a security separate from his own assets; the earnings are accrued to the tenant. This expresses the legislative intention that the tenant will receive back the full tenancy deposit after termination of the tenancy, even in the event of insolvency on the part of the landlord, insofar as the landlord has no claims against the tenant secured by this deposit. This goal would be undermined if the landlord were able to access the tenancy deposit due to a contentious claim during tenancy. The Federal Court of Justice there fore found the additional agreement enabling said access to be ineffective under Section 551 para 4 Civil Code. IMpACt on dAY-to-dAY buSInESS It is questionable as to which ramifications this deci sion by the VIIIth Civil Senate of the Federal Court of Justice will have for the tenancy of commercial premises. Section 578(2) Civil Code, which among other things governs which provisions apply to com mercial premises, does not reference Section 551 Civil Code and the landlord‘s obligation to invest governed therein. However, adjudication of the higher regional courts tends to award commercial tenants a claim to insolvency protected investment by way of an additio nal interpretation of the contract (Nuremberg Higher Regional Court). As early as 1994, the Federal Court of Justice had ruled that an agreed tenancy deposit inferred an obligation to pay interest on the amounts resulting from a business requirement for security, and that said interest should generally be paid app lying the rate usual for savings, with a notice period of three months. Thus, according to the prevailing view in literature, a contractual exclusion of interest constituting as it does an inappropriate disadvantage for the tenant while providing no benefit to the landlord will be deemed ineffective. However, the aforementioned decision only affects the landlord‘s obligation to pay interest, and does not make any statement as to whether he or she may make use of the tenancy deposit during tenancy. Commercial tenancy agreements often contain a clause permitting the landlord to make use of the tenancy deposit during tenancy. In the absence of such an agreement, the landlord may only access the deposit in the event of claims that are undispu ted and upheld by a court or are obviously justified. Whereas parts of adjudication confirm the permis sibility of a corresponding clause in commercial tenancy law under an inspection of General Terms and Conditions (e.g. Karlsruhe Higher Regional Court), there are opinions in literature that consider such a clause inappropriate due to it being an in appropriate disadvantage for the tenant. However, use of the deposit during tenancy is not in any way restricted by legal provisions. The Karlsruhe Higher Regional Court in its decision mentioned above emphasised that it was merely a controversial matter in adjudication and literature as to whether use of the deposit should be possible without an ex plicit contractual provision if the tenant disputes the existence of the principal claim. If such an agree ment has been made, the landlord may make use of the deposit. It is likely the decision by the VIIIth Civil Senate of the Federal Court of Justice will not change this principle either, given that as outlined above, Section 551 Civil Code applies exclusively to residential tenancies and does not impose any re strictions on commercial landlords. This provision is also mentioned expressly in the present ruling, where the court rejects relevancy of its decision of January 12, 1972, which was based on a tenancy for a commercial premises. However, the decision of 1972 itself makes no mention as to whether an agreement governing the landlord‘s access to the deposit during tenancy is permissible in the event of a disputed claim and holds up to an inspection of the Terms and Conditions. A final decision by the Federal Court of Justice on the permissibility of such clauses in commercial tenancy is yet to be ruled. It remains recommendable as a tip in practice to ex pressly include corresponding clauses in the tenancy agreement, which permit the landlord to use the de posit and which obligate the tenant to subsequently balance the deposit. There is a residual risk that such clauses will not bear up under an judicial inspection of General Terms and Conditions.In this respect the adjudication of higher regional courts on use of the tenancy deposit after termination of the tenancy remains relevant. For example, the Karlsruhe Higher Regional Court in its decision of August 18, 2008 ruled that following termination of tenancy, the tenancy deposit acquired the function of realisation in addition to that of a security. The result is that a landlord may generally access the tenancy deposit at the end of tenancy provided a proper ac counting was made to the tenant. Accordingly, the claims do not have to be undisputed and the tenancy agreement need not contain a corresponding clause. In this case the tenant is referred to legal action, as he has no recourse to temporary injunction. However, so far this decision has not been upheld by other higher regional courts and the Federal Court of Justice has not yet voiced its own opinion on the matter.
On the time of requirements for a termination due to arrears Flensburg Regional Court, decision of March 28, 2014 – 1 T 8/14 If the tenant is in arrears with the rent, the landlord is entitled – taking into account the legal pro visions of Section 543 para 2 no. 3 Civil Code – to an extraordinary termination of the tenancy. How ever, in this context the question as to whether such a right to termina tion is present (or endures) if the tenant makes part payments, thus subsequently reducing the existing arrears of rent after the landlord has given notice, is not unambig uously regulated. The Flensburg Regional Court in its decision of March 28, 2014 has now taken up this question. GuIdInG pRInCIplE The circumstances leading to a termi nation no longer need to be present at the time of termination. The landlord‘s right to termination is only excluded if full settlement is made. ContEnt And SubJECt oF tHE dECISIon The Flensburg Regional Court in its decision held the termination of a re sidential tenancy by the landlord to be permissible under Section 543 para 2 sentence 1no 3b Civil Code. According to said provision, a compelling reason for termination is given if the tenant is in arrears, on two successive dates, of payment of the rent in an amount equal to two months‘ rent. These re quirements were met in the present case, irrespective of the fact that the tenant had made part payments to wards the rent owed following receipt of termination. Thus it should be considered that once extant, a reason for termination only lapses when all debts to the landlord have been settled. Neither does the validity of a termination without notice due to arrears require that the circumstances of the ter mination still be extant at the time of termination; rather, it is sufficient that the circumstances of the termination were extant prior to issuance of the ter mination letter. IMpACt on dAY-to-dAY buSInESS The Flensburg Regional Court, with its decision that applies equally to commercial tenancy law, joins the relatively unanimous opinion in adjudication and literature. Accordingly, landlords may uphold the termination they issued, even if the tenant has made subsequent payments to reduce the arrears in rent. The situation only changes if the tenant has paid all outstanding rent prior to receipt of the termination. The legal opinion voiced is welcomed by landlords. As the Flensburg Regional Court correctly points out, a different interpretation would result in the tenant being able to consistently escape termination by making a minor part payment when arrears total two months‘ rent, thus bringing the total arrears just below the limit. This would constitute an un reasonable burden on the landlord, particularly over a longer period of time, as it would not only make it significantly more difficult for the landlord to dis pose of the arrears but also to calculate anticipated future rent income. However, it should be noted in this specific con text that the above question regarding if and to what extent a right to termination, once extant, may lapse following subsequent payment, must be separated from the question of the time by which circumstances for termination must be present by the latest. The legal position is far more ambiguous in this context and thus far has not been decided by the highest court. Whereas some in adjudication and literature hold the view in this case that cir cumstances of termination must already be present when the termination is issued, a slim majority hold that it is sufficient if circumstances for termination are present only at the time of receipt of the termina tion letter. If one agrees with the latter opinion, this would mean that a termination is permissible, even if the arrears justifying the right to termination only commence after issuance of the relevant termination letter, but prior to or simultaneously with receipt of the termination letter. Basis for fee claims and ineffectiveness of Section 6(3) HOAI 2013 [Fee Structure for Architects and Engineers] (Section 6(2) HOAI 2009) Federal Court of Justice, decision of April 24, 2014 – VII ZR 164/2013 Precisely one year after the amended draft bill of the Fee Structure for Architects and Engineers (HOAI 2013) – published in the Official Gazette part I no. 37 on July 16, 2013 and which entered into force a day later – was forwarded to the Bundestag for ap proval by cabinet decision, the Federal Court of Justice (BGH) handed down its ruling of April 24, 2014 (VII ZR 164/2013), finding inter alia Section 6 para 2 HOAI 2009, which corresponds to the provision in Section 6(3) HOAI 2013, to be ineffective. In the event that no plans had been submitted for a cost estimate or cost calculation at the time of commissioning, according to this provision parties to a contract could agree in writing that the fee would be calculated based on the chargeable costs of a building costs agreement under the terms of the HOAI, whereby verifiable building costs could be deter mined jointly by the parties. The HOAI is a federal decree that was enacted on the basis of the Law Governing Engineer and Architect Services (ArchLG), Article 10, Sections 1, 2 MRVG (Act to Improve Tenancy Law and Cap Rent Increases as well as to Govern Engineer and Architect Services). While the primary objective of the reform in 2009 was to simplify the provisions and arrange for greater transparency, to include incentives for cost-efficient construction and, by creating room to negotiate, to enable flexible responses to respective market conditions, the amendments in 2013, in addition to updating the fee table values, were aimed primarily at revising the scope of works from a building expert aspect, taking into ac count digitised work methods. In the present case, in addition to the ineffectiveness of Section 6 para 2 (para. 3 as amended), the Federal Court of Justice also had to deal with the question whether ignoring the provisions on the preparation of a budget renders a fee agreement null and void. FACtS The State, as the principal, and the agent had agreed a fee of EUR24,478.04 for the planning and struc tural engineering design of the renewal of a road bridge of federal motorway 65 in a contract dated November 26/December 10, 2009, which falls under the scope of HOAI 2009. The respondent State paid the agreed fee. The appellant, the insolvency practi tioner administrating the agent‘s assets, asserts that the agreement is ineffective and based on an updated cost calculation, demanded payment of an additional fee calculated according to the minimum rate. ContEnt And SubJECt oF tHE dECISIon The Federal Court of Justice ruled that the appellant was entitled to an additional fee based on the merits of the case. The Federal Court of Justice deemed the fee agreement concluded based on the building costs jointly determined under Section 6 para 2 HOAI 2009 to be ineffective. The Federal Court of Justice found that the provisi ons on the preparation of a budget are not prohibitive laws under the meaning of Section 134 Civil Code, thereby not rendering the fee agreement null and void – in opposition to the decision of the appellate court – due to a breach of Sections 24 and 54 of the State Budget Code of RhinelandPalatinate. It re asoned that the budget drawn up annually under these provisions served to determine and cover funds required by the State to meet its obligations, but was not intended to prevent the economic success of an agreement concluded under private law. Rather, the Federal Court of Justice cites as the basis of its decision the ineffectiveness of Section 6 para 2 HOAI 2009 as a basis for calculation. As this provision allows the parties to determine the fee jointly, it permits an undercutting of the minimum rates without the existence of a permis sible exception (such as in the case of close legal, economic, social or personal ties). The desire for a price guarantee in particular does not justify an exception. Thus the provision is not covered by the enabling provision of Article 10, Sections 1, 2 MRVG. The spirit and purpose of minimum rates and the impermissibility of undercutting is inten ded to promote quality competition and to avoid ruinous price competition. This is not only contra dicted by the ability to agree a fee below the mini mum rates, but also by a provision under which the factors in a calculation of a minimum fee can be negotiated to result in an undercutting of intended rates. Therefore, the fee should have been calculated based on Section 6 para 1 HOAI, insofar as no cost calcu lation was available, using the cost estimate for the works as a basis. The Federal Court of Justice furthermore clari fied that a fee agreement may be concluded within the minimum and maximum rates, in which the chargeable costs or their underlying factors have been contractually agreed. IMpACt on dAY-to-dAY buSInESS A fee agreement must be concluded within the limits of the decreed minimum and maximum rates in order to be effective. Insofar as a fee agreement was concluded based on Section 6 para 2 HOAI 2009/ Section 6 para 3 HOAI 2013 and is below the minimum rates defined by HOAI, the principal bears the risk that said rates are ineffective and that the agent will be entitled to additional claims pursuant to Section 6 para 1 HOAI. In light of the Federal Court of Justice finding that Section 6 para 3 HOAI 2013 is ineffective, it is recommended to no longer base fee agreements on this provision in future, and instead to include appropriate cost estimates as a basis and/ or to conclude a variable fee agreement taking into account future actual building costs. Overview Real Estate Transfer Tax Rates The following table provides an over view of the current status of the real estate transfer tax rates in the indivi dual federal states (May 15, 2014). To the extent that specific information and indications regarding a change of the real estate transfer tax rate exist in a state, this was noted accordingly. Changes since the last issue in spring 2014 are marked in bold.
baden-Württemberg 5.0% bavaria 3.5% berlin 6.0% brandenburg 5.0% bremen 5.0% Hamburg 4.5% Hesse 5.0% (increase to 6.0% planned as from August 1, 2014)* Mecklenburg-Western pomerania 5.0% lower Saxony 5.0% north Rhine-Westphalia 5.0% Rhineland-palatinate 5.0% Saarland 5.5% Saxony 3.5% Saxony-Anhalt 5.0% Schleswig-Holstein 6.5% thuringia 5.0% * pursuant to a draft law by the Hessian state government amending the budget act for the financial year 2013/2014 (19/387).