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Germany: Constitutional Court Rules Rent Control Law Constitutional

(Dec. 5, 2019) In an order published on August 20, 2019, the German Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) declined to hear three cases that challenged the constitutionality of the federal rent control provisions. It stated that the rent control provisions do not violate the guarantee of private property, freedom of contract, or the general guarantee of equality. 

Facts of the Case

On June 1, 2015, the Tenancy Law Amendment Act entered into force in Germany, authorizing the individual German states to enact regulations to designate “tight housing markets” in which a rent cap would apply for the next five years. The “rent brake” (Mietpreisbremse) prohibits landlords from charging rent that is more than 10% of the local average rent for a new lease in an area that has been designated as a tight housing market. (BVerfG paras. 1–4; BGB § 556d.) Tight housing markets are defined as “municipalities or parts of a municipality in which the sufficient provision of affordable housing for the population is at particular risk.” However, a higher rent may be charged when the previous rent exceeded the maximum allowable rent, the premises were constructed after October 1, 2014, or the premises have been thoroughly modernized. (BGB §§ 556e, 556f.)

In 2015, Berlin issued a rent control regulation effective for the next five years that designated all of Berlin as a tight housing market. (BVerfG para. 8.) The Berlin Regional Court referred two cases to the Federal Constitutional Court, asking whether the rent control provisions violated the right to equality because the maximum permissible rent that landlords are allowed to charge differs depending on the state in which the property is located. Furthermore, the Court asked whether the exceptions to the rent control law unlawfully favored landlords who already charged an excessive rent before the law was enacted. (Paras. 13–14, 16.) In addition, the Federal Constitutional Court received a constitutional complaint from a landlady who was sued by her tenants for rent paid in excess of the 10% limit and alleged that the rent control provisions violated her property rights, the right to equality, the principle of legal certainty, and her freedom of contract as part of the general freedom of action. (Paras. 17, 20; Basic Law art. 2, para. 1; art. 3, para. 1; art. 14, para. 1; art. 80.)

Decision

The Federal Constitutional Court did not accept the referrals for review because the referring court did not give sufficient reasons why it was convinced that the rent control provisions are unconstitutional and that its decision depends on those provisions. Nor did it accept the constitutional complaint, as it had little prospect of success because the constitutional rights of the complainant had not been violated, in the opinion of the Court. (BVerfG paras. 32, 48.)

The Court stated that the constitutional right to property codified in article 14, paragraph 1 of the Basic Law had not been violated because, even though the provisions on rent control did infringe the right to property, the infringement was justified. It reiterated that the right to property is of particular significance for the social state. Any infringement must be justified by public interest and be proportional. The Court also stated that the rent control provisions aim to prevent the direct or indirect displacement of economically weaker segments of the population from areas where demand for residential housing is high, which is a legitimate goal in the public interest. In the view of the Court, while rent regulations may exacerbate the lack of housing due to a higher number of renters who can afford apartments in tight housing markets, rent caps eliminate price peaks and have a restraining effect on the development of the average local rent. (BVerfG paras. 54, 55, 60, 62, 63.)

The Court held that the rent control provisions are necessary. It is not certain that other means, such as the promotion of housing construction or the extension of housing benefits to more people, are equally effective. (Paras. 66, 67.)

The Court further stated that the rent-cap provisions are proportionate. It reiterated that the legislature must strike a fair balance between the rights of property owners and the common good and that it has broad discretion in doing so. The legislature may amend property provisions even if this results in negative consequences for property owners. Especially in the area of tenant law, which is a highly contentious social policy topic, a property owner must expect frequent changes in legislation and cannot rely on a currently favorable legal position. The constitutional guarantee of private property does not protect the expectation of receiving the highest possible rent from that property. (Paras. 73–76.)

The Court opined that the federal legislature may assume that the state legislature is generally better able to assess the local housing market than the federal legislature. Limiting rent control to tight housing markets ensures that it is applied only in areas in which renters are in need of special protection. Furthermore, the way in which courts interpret the term “tight housing market” limits tenant claims to those that are compatible with the legislative aims. (Paras. 78, 81.)

With regard to the use of the owner’s property, the Court held that linking the maximum permissible rent to the average local rent is not unreasonable. The impact of the rent control provisions is not immediate but will materialize gradually over time and is mitigated by the fact that the local average rent may be exceeded by 10%. Furthermore, exceptions exist for properties constructed after October 1, 2014, and for premises that have been thoroughly modernized. Lastly, the rent regulations are limited to a five-year period. The fact that a landlord may not be able to get the maximum profit out of his or her property does not constitute a permanent loss for the landlord, a threat to the substance of the property, or the loss of any reasonable use of the property. (Paras. 83, 85–88.)

The Court stated that the right to equal treatment codified in article 3, paragraph 1 of the Basic Law is also not violated by the rent control provisions. In the opinion of the Court, it is already doubtful whether landlords in different cities are in comparable situations. In any case, different treatment is justified. By referring to the local average rent, the federal legislature ensures that the rent is market-orientated and the property profitable. That criterion is also suitable and necessary. Differences in the maximum permissible rent reflect local differences in the housing market. Furthermore, even though landlords cannot influence the location of their property, it does not follow that there must be a federal uniform maximum permissible rent. Such a federal uniform maximum rent would lack a sufficient link to a tenant’s economic capacity and would not satisfy the legislative aim of preventing the displacement of low-income tenants. (Paras. 91, 96, 97, 99.)

The rent control provisions also do not violate the right to equal treatment by treating private and commercial landlords the same. In the opinion of the Court, the legislative aims justify an application of the rent control provisions irrespective of the economic significance of the rental income for the landlord. (Paras. 100, 101.)

The Court further stated that the rent regulation that Berlin passed did not violate the right to property because the state legislature had complied with the requirements of the Tenancy Law Amendment Act. (Paras. 108, 113.)

Related Development

On October 9, 2019, the German federal government adopted a draft act that would extend the regulations on rent control until 2025 and improve tenants’ rights to demand the return of rent that was paid in excess of the maximum allowed rent.