Tenancy Law Amendment Act passed by the German Bundestag

Published 14 July 2016

Conversion Regulation enacted by Berlin Senate

On 5 March 2015, the German Federal Parliament (“Bundestag”) passed the Act on Softening Rent Increases in Tight Housing Markets and for the Strengthening of the Client Rule for Apartment Brokerage Services (Tenancy Law Amendment Act - MietNovG). The Act will lead to a limitation of the permissible rent amounts for the re-letting of dwellings in tight housing markets (also known as "rental price brake"), albeit with a multitude of exceptions. Furthermore, it will significantly change the requirements for a valid brokerage fee claim resulting from providing apartment brokerage services (also known as "client rule").

On 3 March 2015, the Berlin Senate has enacted the Conversion Regulation, which makes future conversions of existing rental apartments into condominiums in areas known as “milieu protection areas” subject to an approval by the Berlin districts.  

I. Main Subject Matters of the Tenancy Law Amendment Act

1. Limitation of Rent Amounts for Re-lettings

According to the core provision of the Act, when re-let, the rent for existing dwellings in areas with tight housing markets must not exceed the reference rent customary in the locality by more than 10%. At the same time, the Federal States are empowered to enact legal ordinances determining areas with tight housing markets for a maximum duration of five years. Based on the definition given by the legislator, such areas exist where the adequate supply of the population with rented dwellings under suitable conditions in a municipality or part of a municipality is particularly placed at risk. In order to further define this particular risk situation, the Act contains further criteria, which, however, are not final (e.g. rent increase/rent burden considerably above Federal average, low vacancy rate paired with great demand). 

2. Exceptions from the Limitation of Rent Amounts

The Act provides a number of exceptions.  

The limitation of rent amounts does not apply to the letting of dwellings that were used and let for the first time after 1 October 2014 (key date regulation for new developments). The exemption of new developments from the cap thus does not only apply to first lettings, but also to all further lettings. 

Further exempt are comprehensively modernized apartments with regard to their first letting. According to the explanatory memorandum to the Act, the term modernization here refers to the term as used in the current tenancy law, meaning in particular that the restoration of a former state (also known as remedial maintenance) is not included. A modernization is deemed comprehensive if it has a scope that makes an equal treatment with new development justified. For the interpretation, the explanatory memorandum refers to Sec. 16 para. 1 no. 4 of the Act for Social Housing Facilitation (WoFG), according to which a new development of apartments is assumed if residential dwellings are created under considerable construction effort in order to adapt to changed housing needs. Earlier case law assumed "considerable construction efforts" if an investment amounted to about a third of the costs of a comparable newly built apartment. However, of relevance besides the capital expenditure are also the qualitative effects on the entire apartment. Therefore, it has to be taken into account whether the apartment has been improved in several significant areas (particularly sanitation, heating, windows, flooring, electrical installations and / or energy consumption).

A rent that was permissibly agreed before can also be agreed again by when re-letting (“protection of status quo”). This means that the landlord will not be forced to rent out an apartment that became vacant below the previous rent even if the 10% cap is exceeded. However, when determining the previous rent, any increases of rent agreed with the former tenant within the last year before the lease agreement was terminated will not be taken into account. In addition, the Act allows a rent above the 10% cap pursuant to the rules of a (“catch up”) rent increase after modernization measures in existing leases in case modernization measures were carried out in the last three years before the start of the new lease agreement. In such a case, the contractual parties are thus treated as if the modernization measures had been carried out in the current lease and the rent had been adjusted on this basis. 

For lease agreements containing stepped rents, the above rules apply to every rent step, for leases containing indexed rents, they apply to the starting rent agreed upon.

The tenant has a right to information towards the landlord with respect to the facts influencing the pricing, as long as these are not generally know (e.g. due to a local list of representative rents) and the landlord can easily supply such information. According to the explanatory memorandum, part of such information is for example the age classification of the building or information about facilities not accessible to the tenant, like e.g. the type of the central-heating boiler, as far as this plays a role in determining the reference rent customary in the locality. The tenant’s right to information can also include information about the terms of the previous lease agreement. The landlord may in any case disclose data of the former tenant at least as far as he agreed to this. If the new tenant requests evidence regarding the rent amount agreed previously, the landlord is generally allowed to provide the tenant with a blackened document in which only the relevant information remains visible. On request, information also has to be disclosed if the landlord carried out modernization measures before letting the apartment and justifies exceeding the permissible rent amount with this.  

In order to reclaim any overcharged rents, the tenant has to make qualified objections to the agreed rent amount. A refund is only possible for the time period after such qualified objections have been raised, not for any previous time periods. Refunds are not excluded if the tenant knew about the rent amount being illegal at the time the rent was paid. 

3. New Requirements for a Valid Brokerage Fee Claim Resulting from Providing Apartment Brokerage Services

Brokerage agreements for apartment brokerage service will in future require a form known as text form. For this, an exchange of emails may suffice if both parties to the agreement have access to the required receiving devices. A brokerage agreement lacking the prescribed text form is void.  

In addition to the conclusion of a valid brokerage agreement between the broker and the party looking to rent an apartment, a brokerage fee may only be claimed from that party after the conclusion of a residential lease agreement if the broker obtained a “request” (or rather a consent) to offer an apartment from a landlord specifically in order to fulfill this brokerage agreement. A party looking to rent an apartment that contacts a broker after seeing an advertisement for a flat and eventually rents it may not be obliged anymore to pay a brokerage fee.  A prior consent to an offer by the landlord or another authorized person is also required if the broker wants to present an object to the interested party based on a concrete query.

Violations of these regulations by apartment brokers carry monetary fines. 

4. Entry into Force and Prospects

The Act does not require approval by the Federal Council of Germany, which is allowed, however, to object to it. The final deliberation will likely take place on 27 March 2015. Thereafter, it will be presented to the Federal President for execution.  

The regulations concerning the “rental price brake” are to already enter into force on the day after the Act has been promulgated in the German Federal Gazette. However, the Federal States still have to determine which cities or urban districts will be within the area of application of the Act as “tight housing markets”. According to reports, such an Ordinance is already parked in the drawers in Berlin, which is expected to cover the entire city. 

The new regulations regarding the provision of apartment brokerage services shall only apply from the second month following the Act entering into force.   

Against both parts of the Act, significant constitutional concerns have been raised in legal opinions and literature, which will probably lead to constitutional complaints. The Act’s fate will thus possibly be decided by the German Constitutional Court.    

II. Enactment of Conversion Regulation in Berlin

On 3 March 2015, the Berlin Senate enacted the “Conversion Regulation”. This ordinance entered into force with its promulgation in the Law and Ordinance Gazette on 13 March 2015. The conversion of rental flats into condominiums in areas known as “milieu protection areas” is thus now subject to approval by the Berlin districts (please also refer to the DSC Legal newsletter on this matter dated 16 February 2015.

Currently, 21 milieu protection areas have been established in Berlin. The protection of additional areas is already planned. The territory covered by the existing milieu protection areas in Berlin is marked in a map that can be accessed under the following link:

https://www.ihk-berlin.de/branchen/bauwirt/news/Karte_der_Milieuschutzgebiete/2271754

DSC Legal specializes in providing legal advice on the acquisition and sale of real estate and offers notarial services, in particular with regard to the partition into residential ownership (i.e. condominiums). Advising on questions of tenancy and brokerage law is also a core area of our legal practice. We will be pleased to advise you on the application of the new regulations and their implications on your project.