In a decision this past 18th of July, Germany’s Federal Constitutional Court ruled against a constitutional complaint alleging that the 2015 Tenancy Law Amendment Act violated certain articles of German Basic Law.
The Tenancy Law Amendment Act
Passed in 2015, the core provision of the Tenancy Law Amendment Act (§556d of the German Civil Code, the Bürgerliches Gesetzbuch or BGB), stipulates that in areas identified as having a ‘strained’ housing market (according to a predetermined definition), the rent at the beginning of a tenancy may not exceed the local comparative rent by more than 10%.
The provision authorizes state governments to determine such areas by ordinance for a maximum period of five years. The rent cap is only effective in areas identified by ordinance. As an example, the Senate of Berlin passed an ordinance in 2015 that defined the entire city as an area with a strained housing market.
There are, however, some exceptions: if the rent last owed by the previous tenant exceeds the otherwise maximum permitted rent, the landlord may, in accordance with § 556e BGB, agree a rent up to the amount of this pre-rent. Other exceptions concern living space constructed after 1 October 2014 and the first rental following extensive modernization.
What were the claims made in the constitutional complaint?
The case ultimately brought forward to the Constitutional Court concerned a landlady who sued local authorities for being ordered to repay tenants after charging a rent that was too high, citing specifically the right to property, the freedom of contract, and the general principle of equality.
The case was passed on to the Federal Constitutional Court, asked to determine whether § 556d (1) and (2) of the Civil Code (the Tenancy Law Amendment Act) was incompatible with Article 3(1), which sets out the general principle of equality, and with the second sentence of Article 80 (1) of the Basic Law, which regards the content, purpose, and scope of government ordinances.
The Constitutional Court found no violation and upheld the Act as consistent with the Basic Law.
Constitutional Court Arguments and Ruling
The Constitutional Court argued that regulating the rent at the beginning of a lease in accordance with §556 (1) does not violate the guarantee of property; the freedom of contract, or the general principle of equality. What follows is a summary of arguments and principles used by the court on questions of proportionality and public interest, property rights; and equality.
Proportionality and Public Interest
The court held that the degree of interference with property is proportionate and necessary to achieve the goal in question. Furthermore, the definition of what constitutes a ‘strained’ housing market limits the enforcement of tenants’ interests to a degree that complies with the objectives of the law.
It argued further that it is in the public interest to counteract the displacement of economically disadvantaged groups from highly sought-after neighbourhoods, and that the legislature was not exceeding its scope of action, but rather was bringing the interests of the owners and the interests of the common good into a fair balance.
Property Rights (Art. 14 para. 1 GG)
In response to the alleged violation of the landlady’s property rights as laid out in Article 14 (1) of the Basic Law, the court argued that a rent limit does not interfere with ownership in any way that would reasonably imply permanent losses for the landlord, substantial harm to the leased property or its value, or the hindrance of commercial use of the property.
The court indicated that the right to property does not guarantee that no further changes in legislation will be made, particularly in a socio-politically controversial area such as tenancy law. The court stipulated that obtaining the highest possible rental income from a property was not protected by the property guarantee.
Response on Equality before the law (Article 3 (1))
With regards to the alleged violation of the general principle of equality, the court argued that determining permissible rent limits based on local comparative rent was not in contradiction with the principle of equality. The regulation treats private and commercial landlords equally, and the objectives pursued by the rent regulation justify the application of the rent cap without distinction and irrespective of the economic importance of the rental income for the landlord.
