Germany’s cabinet proposes ‘rent brake’ law to ease housing market pressures

Implementation of the rent brake would constitute a reform of German tenancy law and the measure has been the highly-controversial subject of discussion within the government over the past few months.

According to the draft law, approved on 1 October, special rights will be granted to the federal states of Germany. The states will be able to restrict the rents charged for re-letting in certain “designated” areas where housing demand and prices are high. In these areas, landlords will not be allowed to increase the rent beyond a maximum 10% above the customary comparative rent.

In addition, the draft law would effectively switch responsibility for paying most of a broker’s fees from renters to landlords. Currently, renters in Germany typically pay brokers’ costs, even if brokers are hired by a landlord for rental transactions, which increases the upfront costs for prospective tenants.

Munich-based head of German real estate practice Joern Fingerhuth of Pinsent Masons, the law firm behind Out-Law.com, said: “The new law is seen by some people active in the real estate arena to have the potential to scare away investors, in particular foreign investors, from the German residential market. It is true that some investors may need to adjust their business model, but it should be noted that German residential property remains an attractive asset class to many market participants.”

Fingerhuth said: “It is still highly disputed amongst investors whether or not the proposed law might lead to less investment in the German real estate market.”

The move was part of a power-sharing agreement drawn up by the conservative Christian Democrats and left-of-centre Social Democrats, who formed the governing coalition following federal elections in 2013. The government said the draft law is designed to address “urgent” problems in housing markets, particularly in Germany’s more prosperous cities, “where average wage earners cannot find affordable flats to rent”.

However, new buildings and properties put on the rental market immediately after major modernisation work are excluded from the rent brake, in an effort to encourage projects that will provide additional housing stock in the longer term.

Federal justice minister Heiko Maas said the government’s decision was “of great importance for millions of tenants”.

Maas said the rent brake would ensure that rents “remain affordable for average earners”. He said: “Rental increases of 30% to 40% in some metropolitan areas are simply unacceptable.”

On exemptions for new and renovated properties, Maas said it was right that “those who invest money continue to make money”, while also “striking a fair balance” between the interests of tenants and landlords.

Maas said measures concerning payments to agents were “not unconstitutional, but overdue” and would correct a situation where, in some circumstances, “tenants are exploited”. However, renters will still pay if they hire a broker to help them find a flat.

If approved by Germany’s parliament, the draft law would come into force in the first half of 2015, Maas said. Each of Germany’s federal states would then have the power, for a five-year period, to specify the areas in which the rent brake would apply.