Berlin’s rent cap: Interview with a real estate lawyer

He advises people who want to acquire property in Berlin, checks documents and contracts for them, and uncovers the opportunities and risks associated with a specific purchase situation and a concrete property. Under his blog, he frequently blogs about current issues of real estate law in Berlin.

A review of the 2019 Mietendeckel

Mr. Scheidacker, on 22 October 2019, the Berlin Senate passed the “Mietendeckel” bill that is set to cap rents in Berlin for the next 5 years. Many observers doubt that this law is compatible with the German constitution and, therefore, will be refuted in the aftermath by the German Supreme Court. Do you see the current version of the Mietendeckel legally standing a chance? What could be a compromise?

Until today, several legal opinions have been issued by well-known constitutional lawyers, who agree in unison that a Berlin rent-ceiling law cannot endure. I cannot contradict them. 

However, the plans of the Senate have real effects on the market: Orders to craft companies have been canceled; the banks are rethinking their lending limits and credit conditions; prices are temporarily not increasing at the growth rate as before, and the uncertainty in the public is high. Naturally, we also receive many inquiries from our clients.

I do not see a compromise. The German tenancy law is already extremely restrictive in international comparison. For example, tenants can be terminated only under certain conditions, rental rates for new rentals and rent increases in the current contract are strictly limited, and a temporary rental is only possible if there is a valid reason. This can not really be further aggravated without making the real estate market so unattractive that the rental business model ends.

The proposals of the parties involved in the actual rent cap plans are purely political from a legal perspective. 85% of Berlin's inhabitants live in rented property. Of course, these people like to hear such suggestions from politicians. The only question is whether the courts will decide before the next election that the law is void or after that.

Assuming the rent cap in Berlin comes into effect with a version conforming to the constitution, do you see a possibility for the federal government to introduce a general rent cap in other German cities that have also experienced sharp increases in rental prices?

At the level of individual cities or states, I do not see a legally possible opportunity in which a version conforming to the Constitution could be put into effect.

It would be different if the federal government had such plans. This is currently not in sight. Our left-wing parties in the Bundestag, such as Die Linke, the Greens, and the SPD, regularly put further tightening of tenancy laws on the agenda, submit legislative proposals or require investigations and information with so-called small requests. However, this is not supported by the incumbent government and the other parties in this form.

Of course, one never knows which political compromises will be made in the future and which positions will be sacrificed to achieve other goals. Also, we cannot assume that the current political conditions at the federal level are stable and will remain so.

However, as I said, German tenancy law is already so restrictive that the limits set by our constitution are not far away. After all, we are still organized in a market economy. This also applies to the real estate market.

Does it still make sense to buy property in Berlin?

In your opinion, does it still make sense for people to buy property in Germany? For own-use? And what about investors?

For your own use, it is and always makes sense to buy property. Also, it is cheaper in the long term than renting.

For investment purposes, I can imagine that there are more economically attractive markets. From an external point of view, the price per square meter is still favorable for the location in the heart of Europe. 

However, the opportunities to earn rental income are limited accordingly. Thus, the quality of the investment depends heavily on the purchase price, which in Germany, artificially increased through high land transfer taxes and ancillary costs. On the other hand, we have a functioning, stable legal system, well-organized local banks, and a population accustomed to renting and paying on time and at the agreed rate.

Consider somebody who is looking to buy a tenanted property, intending to evict the tenant to move in themselves (“Eigenbedarfskündigung”). What common legal pitfalls do you see that buyers commit when they wish to terminate a tenant’s rental agreement?

If you make that qualification, the dangers are manageable.

Before buying, you should have a lawyer check whether the lease excludes a termination due to personal use. This was not uncommon for older contracts of formerly governmental housing companies. You should also check whether the tenant has a long notice period. This can take up to 10 years if the house was split during the current lease.

If one of these two points applies, you should not buy the apartment.

After the apartment has been purchased, the buyer can declare the cancellation as soon as he is entered in the land register as the owner. This takes several months after the sale at the notary. The cancellation should be made by a qualified lawyer because if the tenant must later be sued in court to return the apartment, the process is by law limited to the content of the termination letter. What is not included, legally, does not exist. There are also some formalities to consider.

Then a notice period of usually between 3 and 9 months begins, depending on the age of the lease contract, after which the tenant has to return the apartment to its owner. That was it.

If the tenant is in a special situation, such as very old age, an acute and heavy illness, pregnancy shortly before birth, in a difficult phase of the examination, or because he finds no other accommodation despite intensive and prolonged housing search, it may be that he can require an extension of the lease for as long as the exceptional situation persists — mostly temporary, in some cases (like the very old age) permanently. But these are exceptions. 

Before you buy the apartment, you can ask the seller who the tenant is and in which situation, and you can talk to your lawyer if he sees any personal risk.

What do you recommend first-time buyers who don’t speak German to pay attention to when a notary sends them the first draft of the purchase contract?

Our system of allowing purchase contracts and their settlement only with notaries leads to extraordinarily high quality and reliability. The notary contract should not contain any problems. 

Of course, the buyer should understand exactly what is set out in it. If the notary has evidence that a person participating in a contract certification does not sufficiently understand the German language, he will, of his own accord, call in an interpreter. Some notaries certify bilingually, and there is also an English (or Spanish / Italian / Russian) version.

Buyers unfamiliar with the German market should consult a qualified lawyer to have the whole complex checked. In addition to the pure purchase contract, there are various other documents, such as the division declaration, which is the basis for the legal relations between the owners of the house, protocols of owner meetings of the house, annual statements, and possibly a lease contract. All this can give hints that help to assess the investment better. 

For old buildings, you should also have someone familiar with them visit them once to check the risk of maintenance costs or upcoming repairs.

It is common for real estate agents and sellers to let potential buyers pay a reservation fee of 0.5-1% of the purchase price to lock in the property for a certain period of time. In case the buyer cannot qualify for a mortgage or the deal does not come through after all, can the fee be fully refunded, or is the agent allowed to keep it?

Such clauses are problematic for two reasons. On the one hand, German law necessarily prescribes notarial certification if one wishes to undertake to buy property. If a reservation fee is so high that its economic effect equals that of a purchase obligation, it violates this principle and is, therefore, ineffective. 

The case law assumes that the limit is exceeded if the reservation fee exceeds 10 to 15% of the usual brokerage fee. Depending on the region and the purchase price, the broker receives between 3 and 6% (plus VAT) of the purchase price, the limit of a reservation fee without purchase obligation is therefore somewhere between 0.3 and 0.9% of the purchase price.

On the other hand, German law provides that the broker receives a commission only if a contract of sale is actually concluded. If there is no contract, then there is no money for the broker. Depending on the specific arrangement of the brokerage contract, a fee that does not exceed the aforementioned limits may still be effective.

Apart from that, there is no lock. The seller cannot undertake either himself or the broker effectively without a notary not to sell during the reservation period. So, if the seller sells during this time, that is permissible. If the interested party has relied on the seller not to do so, he may claim damages for his expenses, for example, legal costs for the due diligence. The property is then gone anyway.

Mr. Scheidacker, thank you for taking the time to share your insights!