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.

I. Background

In a press release on 9 January 2015, the Senate Department for Urban Development and the Environment announced a new regulation on the conversion of rental flats into condominiums. It was previously agreed among the coalition parties at a closed-door meeting. According to the statement from the Senator responsible for Urban Development and Environment, Andreas Geisel, a political instrument will now become available to protect tenants against displacement and increasing rental costs in Berlin. In the past years, the number of conversions of rental flats into condominiums increased from 4,535 in 2010 to nearly 10,000 at present. The new regulation will be submitted for resolution to the Senate at the beginning of March 2015.

II. The Regulation

1. The legal basis of the regulation

With this statutory regulation, the Berlin Senate will obviously exercise the right authorized under section 172 para. 1 sent. 4 Federal Building Code. According to this provision, the state governments have the authority to determine by legal ordinance valid for up to five years in respect of plots in areas affected by a statute issued pursuant to section 172 para. 1 sent. 1 no. 2 Building Code (such areas are so-called “Milieuschutzgebiete”) that the establishment of individual ownership for personal use (i.e. condominium and part-ownership pursuant to sec. 1 of the Condominium Act) in respect of buildings which are scheduled either wholly or in part for residential use may only proceed where permission has been obtained.

2. Temporal and regional scope of the regulation

The ban on conversions may only apply in areas that have been designated by districts of Berlin pursuant to section 172 para 1 sent. 1 no. 2 Building Code in order to preserve the composition of the local residential population. Presently, there are twenty-one protected areas in Berlin which are located in the boroughs of Pankow (10), Friedrichshain/Kreuzberg (7), Tempelhof/Schöneberg (3) and Mitte (1). In these areas are approximately 160,000 apartments with 300,000 residents. Several boroughs have already announced future plans to designate additional protected areas, among them are Neukölln and Tempelhof/Schöneberg (Source: Berliner Zeitung, 12th January 2015).

The future regulation will most likely provide for the approval requirement pursuant to section 172 para. 1 sent. 4 Building Code relating to all city areas designated by a statute under section 172 para. 1 sent. 1 no. 2 Building Code (such statutes are so-called “Milieuschutzsatzungen”).

The statutory regulation is limited to a maximum of five years, with the possibility of an extension.

3. The material scope of the regulation

The new duty of authorization for the purpose of apartment ownership, respectively part-ownership, is only applicable to existing buildings that fall within the scope of a special statute pursuant to section 172 para. 1 sent. 1 no. 2 Building Code, whereby currently about 10 percent of the rental apartments in Berlin would be affected (Source: Berliner Zeitung, 12th January 2015). The duty of authorization would apply to the establishment of ownership of condominiums (sec. 1 para. 2 Condominium Act) or part-ownership of non-residential rooms (sect. 1 para. 3 Condominium Act). It would thus cover cases where residential buildings are intended to be divided into condominiums and rooms used for commercial purposes.

However, the authorization duty would not affect the partition of newly constructed buildings.

4. Requirements for the refusal of permission for conversion

The permission for conversion may only be refused pursuant to section 172 para. 4 sent. 1 Building Code, where special urban development grounds exist to justify preserving the composition of the residential population. The danger of displacement of local residents, which according to jurisdiction may constitute sufficient ground for refusing the permission, may be indicated when refurbishment measures would lead to rents above the average rent determined for the protected area.

Since the law does not contain any further criteria as to what constitutes a danger of displacement, in practice the methods used to ascertain such a situation refer to maximum levels (thresholds) that are, for example, derived from the so-called area-specific rent. A danger of displacement may be assumed, if the intended refurbishment project would presumably cause a rent increase above the maximum threshold determined for the preservation area (VGH Kassel, order of 11 May 1992, ref.: 3 UE 174/89, NVwZ-RR 1993, 401; BVerwG, judgement of 18 June 1997, ref.: 4 C 2/97, ZfBR 1997, 311). According to case-law, such critical maximum levels must be determined in a manner which is sound, fair and transparent. In addition, a threshold must be determined according to which a displacement would have to be expected.

5. Requirements to authorize a conversion

a) Authorization requirements in cases of economic unreasonableness

Permission for conversion shall also be granted when refraining from the establishment of individual ownership is no longer economically viable even in due consideration of general public interest. The common good must thus be weighed against the economic reasonableness of the non-establishment of ownership.

b) Precise permission claims pursuant to sec. 172 para. 4 sent. 3 Building Code

Furthermore, section 172 para. 4 sent. 3 no. 2-6 Building Code contains several cases in which permission would be granted. An authorization for conversion is hereafter compulsory when:

• the property forms part of a decedent’s estate and application has been made for individual ownership in favour of joint heirs or legatees to be established,
• application has been made for individual ownership for personal use to be alienated to members of the owner’s family,
• in the absence of permission it would be impossible to meet claims to individual ownership lodged by third parties for whose protection a priority notice has been entered in the land register prior to the reserved right to require permission to be granted becoming effective,
• at the time of the application for the establishment of individual ownership the building is not being used for residential purposes, or
• the owner undertakes to sell individual dwellings only to the respective tenants within a period of seven years of the establishment of individual ownership.

 

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). We will be pleased to advise you on the application of the new regulation and its implications on your project.

According to a recent survey among German in-house counsels that was conducted for the study “kanzleimonitor.de” 2014/2015, DSC Legal belongs to the most frequently recommended law firms. In Eastern Germany, DSC Legal took the 1st place regarding real estate and construction law and ranked 2nd in corporate finance, based on the ratio of recommendations to the number of employed lawyers. In the overall ranking for Berlin, our law firm is ranked within the Top 10.

Between January and May 2014, the Federal German Association of In-house Counsels (Bundesverband der Unternehmensjuristen, the “BUJ”) conducted a survey among in-house counsels for the 2nd edition of the major study “kanzleimonitor.de”. The survey was conducted among in-house counsels of 578 German companies of all sizes and industries.

Real estate law and construction law – DSC Legal no. 1 in Eastern Germany and among Top 20 in Germany

Within the field of real estate and construction law, DSC Legal was ranked number 1 in Eastern Germany (i.e. Berlin and 5 new federal states) and took the 20th place in the nationwide overall ranking.

DSC Legal was also acknowledged as the outright growth champion within the real estate sector („ganz klarer Wachstumschampion“).

Corporate finance – DSC Legal no. 2 in Eastern Germany

With regard to legal advice on financing, DSC Legal managed to be ranked 2nd in Eastern Germany and was named “hidden champion”.

Corporate law – DSC Legal named “hidden champion”

In the field of corporate law, we have specialized in due not least to our strong notarial practice, our law firm was selected into the circle of “hidden champions”.

Contract law and M&A – DSC Legal repeatedly recommended

DSC Legal was also repeatedly recommended within the very important practice areas of contract law and mergers & acquisitions.

This presentation was part of a special panel recognizing IR's most valuable members. DSC Legal are IR's exclusive member in Germany for Real Estate speaking. Peter is also the global head of the IR Real Estate group.

IR Global Youtube: https://www.youtube.com/watch?v=dhZzHIt7uMw