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Rent Freeze: Few Ramifications for Private Investors

In the future, landlords negotiating a new lease may raise the rent only up to ten percent above the local reference rent – or so the draft bill suggests that was presented by the Federal Ministry of Justice for the contemplated rent control scheme commonly called “rent freeze.” Apartments let for the first time are to be exempt from the rent control regulation.

Heiko Maas, the Federal Minister of Justice, recently announced that new apartments might also be exempted. The draft bill moreover stipulates that landlords may apportion only ten percent of their modernisation costs to tenants, and only until the costs have been recovered. So far, the recoverable cost share has been eleven percent. The real estate industry has criticised, sometime harshly, the plans of the Federal Minister of Justice. But what would the regulation actually imply for private apartment owners who let their condominiums?

Re-Letting: Rent Reductions not Required

Perhaps the first thing to note is: Rents already paid by incumbent tenants need not be lowered once they move out and the same apartment is re-let. Accordingly, owners need not worry about impairments of their investments. It is only when a landlord wishes to raise the rent on a new lease that the aforesaid limit must be observed. Here is an example: If the local reference rent is 6.00 euros per square metre, rent rates may not be raised higher than 6.60 euros per square metre of residential floor area. If the previous tenant already paid a higher rent than that, the landlord may continue to ask the same rate. Important to remember: The rent freeze concerns only lease agreements yet to be signed. It does not apply to unexpired leases. Apartment owners planning to raise the rent should start by finding out what the local rent level is. As Heiko Maas, Federal Minister of Justice, recently announced, the first three or four leases signed for a new apartment are to be exempt from the rent freeze as well.

Modernisation Allocation Cut: Costs to Take Longer to Amortise

If the recoverable share of modernisation costs is lowered from eleven to ten percent, it will obviously take apartments owners slightly longer to recover the costs for modernisation measures they may have undertaken. Whether this will keep owners from investing in their existing flats is hard to say. Ultimately, though, there is no telling whether the rent freeze will be introduced at all, and, if so, what form it will take. Word has it that the Federal Cabinet will discuss the draft bill after the parliamentary summer recess.