In early April 2020, Germany’s federal government, supported by the opposition Green Party, extended the country’s rental price brake for another five years. The legislation underpinning the rental price brake, which was originally designed to apply for five rather than ten years, was also significantly tightened. In all tenant/landlord relationships established after April 1, 2020, tenants are now able to reclaim any excess rent they have paid from the start of the lease – for two and a half years. Tenants who lodge complaints after the two-and-a-half-year period has ended will still be able to reclaim excess rental payments, but only from that point on.

Rental price brake hinders housing construction

Germany’s main libertarian party, the FDP, has been among the fiercest critics of the rental price brake. When the legislation was first being drafted, the FDP complained that ever greater state intervention in the housing market reduces incentives to develop new housing. “Rising rents are a sign of scarcity and a signal for investors to increase supply. If higher rents make it easier to refinance construction costs, more housing will be built,” explained Michael Theurer, an economist and FDP parliamentarian. If the government truly wants to reduce construction costs, Theurer argues, it should cut red tape, make it easier to fill the gaps between existing buildings and speed up building permit approval procedures.

Federal government stands by its rental price brake

While Germany’s main left-wing party, Die Linke, and the Greens wanted to go even further in tightening the rental price brake, the other opposition parties have opposed the law. Despite the criticism, however, the federal government has hailed the rental price brake as a balanced and effective instrument in the battle against spiraling rents, especially in Germany’s largest cities.

Impact – and side effects

The rental price brake, which has been fully or partially implemented in all of Germany’s federal states except Saxony, Saxony-Anhalt and Saarland, limits rent increases to a maximum of 10% above the local comparable rent, as well as imposing a rental price cap. Whereas previous legislation allowed for rental increase of up to 20% over any three-year period, this has now been reduced to 15%. The government has also extended the reference period for rent indexes, which will now include a larger proportion of older and therefore lower rental agreements, this means less leeway for new lease conclusions.

A way out for landlords

The federal legislation does, however, contain a number of exceptions, proving that more level heads prevailed on a national level than was the case in Berlin, whose rent cap and rent freeze goes much further. The federal legislation, for example, allows new tenants and landlords to maintain rental payments at the same level as the previous tenant, even if this makes the rent higher than would normally be permitted. The new law also continues to allow landlords pass on at least a proportion of any modernization costs to their tenants. In addition, the rental price brake also excludes new buildings first occupied after October 1, 2014. Of particular practical importance is the rule that the rental price brake does not apply after comprehensive modernization. This exception ensures, above all, that property owners are not discouraged from acquiring residential property or from investing in the upkeep of their real estate.

Will the federal rental price brake protect landlords from Berlin’s own rent cap?

in August 2019, Germany’s Federal Constitutional Court decided that, although the federal government’s rental price brake does seriously curtail the rights of property owners, the legislation is still within the scope of constitutional law. Now critics of Berlin’s rent cap, which operates completely independently of official rent indexes and has been described as completely arbitrary, are pointing to the introduction of the new federal legislation. According to a raft of experts, including the CDU parliamentarian Dr. Jan-Marco Luczak, the national rental price brake is the final word on rental increases, trumping any authority the state of Berlin may have previously claimed in its attempts to regulate the rental housing market. Thus, as painful as it might be, the new national legislation may at least protect Berlin’s landlords from the city state’s own rent cap.