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14 05 2015
District Court in Berlin Declares City's Rental Index Ineffective

Rental indices are the basis underlying the so-called “rent freeze” rent control scheme that is to be introduced in many German cities, including in Berlin on 01 June. But according to a judgement by the District Court or Berlin-Charlottenburg, the city's rental index is unsuitable as yardstick for future rent ceilings. Indeed, the court declared it ineffective. Here is why: In the judges' opinion, the rent rates for the year 2013 were not determined in accordance with scientific principles. While the ruling has yet to become legally effective, it is safe to say that it will have far-reaching ramifications. On the one hand, the rental index cannot be recommended without misgivings as benchmark for rent increases. On the other hand, the court's ruling could affect the rent freeze that is to enter into force in Berlin in just a few weeks' time. After all, there will be not basis for the rent freeze without a “qualified” rental index. Unless you have one, there is just no way to define permissible re-letting rents that exceed the local reference rent by ten percent or less.

Failure to Apply Scientific Standards when Compiling the Rental Index

The District Court ruled in favour of the plaintiff, a landlady who thought the local rent cap too low. She had planned to raise the rent of a flat to the point where is would have topped the local rental index. When the tenant refused to consent to the rent increase by citing the rental index, the landlady took the case to court.

The reasons given for the judgement suggest that Berlin's Rental Index cannot be used as reliable guideline for the rent level because it was compiled without the use of adequate scientific method. For instance, breaking down residential locations into categories of “good,” “medium” and “fair” is incompatible with scientific standards. The court moreover considered it unjustifiable that rents of comparable level in the same residential setting did not enter into the calculation of the rental index. It concluded that the rental index therefore failed to match the rent situation on the ground. The court based its assessment of the rental index quality on an expert opinion.

Avalanche of Lawsuits Looming across Germany

In the eyes of the IVD Federal Investment and Asset Management Association, the District Court's judgement will serve as signal for other cities in Germany. According to the IVD, chances are that the rental indices of other German cities are just as inaccurate in mapping the local letting market. So there is reason to expect a barrage of lawsuits after the introduction of the rent freeze – and associable costs in an unforeseeable amount.

Meanwhile, Berlin's Senate Government sees no reason why the judgement should affect the city's rental index for 2015, which is to be released on 18 May 2015. According to city hall, it will be a qualified rental index.