How did the Federal Constitutional Court justify its decision?

Germany’s highest court decided that the Berlin local government had exceeded its powers, which are regulated in the Basic Law or Grundgesetz, by introducing the rent freeze. 

The capital’s “Mietendeckel” law or rent cap “violates the Basic Law and is thus ruled void”, the court in the southwestern city of Karlsruhe said.

The court was acting on the procedure involved to form the rent cap, rather than the content of the law itself.

What does this mean for tenants?

Berlin tenants who have had to pay less rent because of the rent cap now face a problem: their rental costs will increase, and they will likely be forced to pay back the difference for the months that they’ve paid lower rents. 

READ ALSO: Berlin’s ‘Mietendeckel’ rent freeze ruled unlawful: What does it mean for tenants?

Is there any room for negotiation?

Not really. Renters have to rely on the goodwill of landlords to waive the back payments. And it doesn’t look promising.

Tenants of Deutsche Wohnen, Berlin’s biggest private landlord, are being forced to pay either in a one-off payment or in instalments. 

In cases of social hardship, solutions will be found, the company said, adding that no one would be made homeless as a result of the decision.

However, another big private landlord Vonovia has said that it will waive back payments.

“There will be few tenants who have a piggy bank in which they put aside this part of the rent, as recommended by politicians,” Vonovia CEO Rolf Buch told Spiegel. “Especially not this year, when we all have a lot of fear and anxiety anyway because of the pandemic.”

The ruling is likely to boost support for a campaign calling for a referendum on expropriating large property developers in a bid to deal with the housing crisis in Berlin.

The “Expropriate Deutsche Wohnen & Co.” initiative targets companies with more than 3,000 apartments in their portfolios.

READ MORE: How Berliner’s are plotting a radical ‘expropriation referendum’ to fight housing crisis

How did the rent cap or ‘Mietendeckel’ work anyway?

The law, which came into force in February 2020, froze rents for around 1.5 million apartments at the level from June 2019 until 2025. After this point, increases would have been limited to 1.3 percent per year in line with inflation.

Exceptions included social housing and new homes built after 2014.

Under certain conditions, some landlords were forced to lower rents. The Berlin Senate had published a table which listed apartments according to the year of construction and amenities and gave them a maximum rent. 

Meanwhile, if an apartment was rented out again, the landlord had to adhere to upper limits based on the age, furnishings and location of the apartment, as well as the last rent charged.

Why did the Berlin Senate introduce the rent cap in the first place?

The coalition – made up of the centre-left Social Democrats, the Greens and the far-left Linke (Left) parties – was trying to ensure affordable housing for Berliners, and limit real estate investors from swooping in and pushing up prices. 

According to Spiegel, an economic upswing provided some people with above average increases in income. In view of the short supply, this led to above-average rent increases over several years. According to calculations by the umbrella association Zentraler Immobilien-Ausschuss (ZIA), new rental contracts climbed by 27 percent between 2013 and 2019 alone.

Berlin housing. Photo: DPA

But all those who could not benefit from the upswing and whose incomes could not keep pace with the rent spikes were left behind.

The nationwide rent brake (Mietpreisbremse), introduced in Berlin in 2015, is supposed to stop landlords in areas with strained housing markets from increasing rents by more than 10 percent than the local benchmark average.

But in the view of critics, such as Berlin’s urban development senator Sebastian Scheel (Left Party), The Mietpreisbremse has not prevented the significant rise in rents in the capital.

What have been the consequences of the rent cap so far?

The cost of renting has gone down in Berlin. Between January 2020 and January 2021, rents fell by just under eight percent, an analysis by the real estate portal Immoscout24 shows.

However, people who live in sought-after residential areas such as Prenzlauer Berg, Wilmersdorf, Charlottenburg or Wannsee appear to have benefitted the most.

According to a survey by the real estate association BFW Berlin/Brandenburg, tenants had to pay a rent of €2,619 for a 171-square-meter apartment in an old building on Ladenbergstrasse in Wilmersdorf before the rent cap came into effect; afterwards it was only around €1,483.

Low-income earners, on the other hand, who often live in districts such as Neukölln, Rummelsburg or Mariendorf, don’t experience the same price cuts, according to BFW’s analysis.

But there’s another problem: the supply of rental apartments has shrunk. Since the cap came into force in February 2020, the number of ads fell by 19 percent. For apartments, where the rent cap definitely applies, it was even a drop of 30 percent.

Anyone new to Berlin or those who want to move within the city have found it even more difficult than before to find an apartment due to the rental cap. Within a year, the number of prospective tenants per property for apartments covered by the rent cap rose from an average of 128 to 214.

Landlords were accused of keeping properties off the market due to the uncertainty surrounding the rent freeze law.

READ ALSO: 7 things you should know when looking for a flat in Berlin

Meanwhile the rent cap also restricted investment in existing properties. The Swedish housing group Akelius, for example, announced that it would no longer refurbish any apartments for the duration of the cap.

What developments can we expect now?

Combined with the heated mood in the city fuelled by politics and activists, the ruling could further strain the relationship between landlords and tenants.

The ruling will likely have an effect on the supply of rental apartments in the city, at least in the medium term. This is because investors and cooperatives now have planning security again and more income to continue projects that have been put on hold, or initiate new ones.

What significance does the ruling have beyond Berlin?

The Federal Constitutional Court has made clear the limits to which Germany’s 16 states are subject to in legislation. In this respect, the decision is of huge importance for the discussion on the balance of power between the federal and state governments.

In very practical terms, the ruling is likely to have an impact on the efforts of citizens’ movements that have launched similar initiatives in centres with a squeezed rental market. What is clear from now on: anyone who wants to limit the increase in rents must launch a legislative initiative at the federal level.

But even at this level, there would be limits to a rent cap. The right of ownership regulated in Article 14 guarantees the owner of a property a certain freedom in setting the rent.

The judges in Karlsruhe did not comment on the extent to which the Berlin rent cap restricted this freedom beyond what’s allowed.