Berlin Attempts to Put a “Lid” on Rents

By: Bradley Harrah

The story of Berlin’s rental prices has been as complex as the history of the city itself. After the fall of the Berlin Wall in 1989, Berlin became the capital of Germany once again and was actually a low-rent mecca for those seeking an escape from communist Europe.[1] For years following the wall’s collapse, Berlin offered cheap development opportunities for real estate companies, particularly seeking foreign investment.[2] The city also offered a big rent gap, a discrepancy between rents before and after the investment has been made in the property.[3] The international interest and a flood of investment capital into the city has transformed it into a harsh urban landscape for tenants.[4] The cost of rent has doubled since 2009.[5] Berlin has both a booming demand for housing due to population growth from the Middle East and other parts of the European Union, as well as a scarcity in supply.[6] The German Economic Institute found that over the past 3 years, about 283,000 new apartments were built in Germany, covering only 80% of demand.[7]

After a long drawn out campaign by a grassroots political movement designed to put pressure on German legislators, a rent-cap law was passed to protect tenants from big real estate companies acting as ruthless landlords.[8] The act, named Mietendeckel, which literally means a “lid” on rents[9], aims to help tenants out through the adoption of two major instruments: a rent freeze and upper rent limits.[10] For five years,  rents have to remain on the same level as they were in June 2019 and may not increase by more than 1.3 percent annually from 2022.[11] The rent freeze applies to all existing leases.[12] The provisions governing the rent caps in the new law provide an absolute upper rent limit and a reference point for rent reductions.[13]  In the event that a landlord violates the new restrictions, it could face up to a €500,000 ($542,000) fine.[14]

The law has faced serious opposition from both the real estate industry and political opponents in Germany’s legislature.[15] Economists and others argue that a rent cap will deter and disincentivize new construction, perpetuating the supply shortage.[16] Further, the cap’s benefits will also go to wealthy people who reside in top-end apartments and who can afford the rental prices.[17] This unintended consequence has been a common criticism against rent stabilization. For example, a study by the Citizens Budget Committee on New York City’s rent stabilization policy found that in 2010, 22,642 of the city’s 970,000 rent stabilized apartments were occupied by households making more than $199,000.[18] Of those, 2,300 apartments were people making more than $500,000.[19] Other opponents have challenged the new law not only through public criticism, but also by challenging the law in court.[20] On June 3, 2020, twelve constitutional complaints were filed with the Federal Supreme Court (Bundesverfassungsgericht) in Karlsruhe.[21] The plaintiffs are a representative selection of private owners of various apartments, which “seek an annulment of the rent price cap law based on the lack of legislative competence of the State of Berlin, the disproportionate infringement of the landlords’ property rights, and the violation of the constitutional prohibition of arbitrary rules.”[22] The complaints have been combined into a single court submission to serve as a model proceeding to determine the constitutionality of the new law.[23] A decision from the Federal Supreme Court in favor of the law would be a strong signal to the real estate industry that investment conditions in the city may not be as hospitable as they were in recent history. Although the law was aimed at easing the strain on tenants while housing construction could increase supply, it could have serious negative effects on the real estate market in Berlin.[24]

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[1] Kirsten Grishaber, Berlin Starts Controversial Rent Freeze on 1.5 Million Homes, AP News (Feb. 23, 2020), https://apnews.com/331a93c0cf0e0811a5b0a63e30a296b3. Following the collapse of the wall, the economic boom that was expected did not materialize, causing more housing supply than demand. See Christine McLaren, The History Behind Berlin’s Cheap Rents, Next City (May 16, 2012), https://nextcity.org/daily/entry/the-history-behind-berlins-cheap-rents.

[2] Katalin Gennburg & Frederick Coulomb, Stopping Berlin’s Rent Madness, Jacobin (Mar. 2, 2020), https://jacobinmag.com/2020/03/berlin-rent-cap-control-mietendeckel.

[3] Id.

[4] Id.

[5] Id.

[6] Loveday Morris & Luisa Beck, Berlin Is Taking Radical Measures to Control Rents. Can It Hold Back the Tide?, The Washington Post (Jan. 30, 2020, 10:06 a.m. EST), https://www.washingtonpost.com/world/europe/berlin-is-taking-radical-measures-to-control-rents-can-it-hold-back-the-tide/2020/01/30/bb5e49b2-3645-11ea-a1ff-c48c1d59a4a1_story.html.

[7] German Cities Struggle to Curb Housing Shortage, DW, https://www.dw.com/en/german-cities-struggle-to-curb-housing-shortage/a-49705919 (last visited Aug. 30, 2020).

[8] Katalin Gennburg & Frederick Coulomb, supra note 2.

[9] Id.

[10] See Christian Schede et al., Update: “Berlin Rent Price Cap” (Mietendeckel) – Adoption of the New Law by the Berlin State Parliament on 30 January 2020, GreenbergTraurig (Feb. 3, 2020), https://www.gtlaw.com/en/insights/2020/2/update-berlin-rent-price-cap-feb-2020.

[11] Why a Berlin Court Deemed the New Rent Freeze Law ‘Unconstitutional’, The Local (Mar. 13, 2020), https://www.dw.com/en/berlin-rent-cap-takes-effect-amid-urban-exodus/a-52486849.

[12] Christian Schede, et al., supra note 10.

[13] Id.

[14] Berlin Rent Cap Takes Effect Amid Urban Exodus, DW, https://www.dw.com/en/berlin-rent-cap-takes-effect-amid-urban-exodus/a-52486849 (last visited Aug. 30, 2020).

[15] See Loveday Morris & Luisa Beck, supra note 6.

[16] Id.

[17] Id.

[18] Jeremiah Budin, Millionaires Living in Rent-Stabilized Apartments, Curbed (Apr. 30, 2014, 2:25 PM EDT), https://ny.curbed.com/2014/4/30/10107290/millionaires-living-in-rent-stabilized-apartments.

[19] Id.

[20] Katalin Gennburg & Frederick Coulomb, supra note 2.

[21] Greenberg Traurig LLP, Update: Berlin Rent Price Cap “Berliner Mietendeckel” – 12 Constitutional Complaints Filed with the Federal Supreme Court, Lexology (Jun. 10, 2020), https://www.lexology.com/library/detail.aspx?g=beb9058a-3ef3-4a44-b5db-4b200e5da577.

[22] Id.

[23] Id.

[24] Melissa Eddy, Berlin Freezes Rent for 5 Years in a Bid to Slow Gentrification, N.Y. Times (Jan. 31, 2020), https://www.nytimes.com/2020/01/31/world/europe/berlin-gentrification-rent.html (“Limiting and reducing the income from rents will create uncertainty for investors and will ward off real estate developers from investing”).