Rental reform

Landlords and Tenants Locked in Dispute

Happy renters Source Gregor Schlaeger Visum
But what does the index say it's worth?
  • Why it matters

    Why it matters

    If the benchmark rent index is toppled, rents in major cities might skyrocket and put a government draft for a rent-cap law in danger.

  • Facts

    Facts

    • About 24 million flats are rented out in Germany, with 51 million people living in them.
    • The Mietspiegel is a benchmark rent index and forms the basis of most rental agreements in Germany.
    • Most of Germany’s 300,000 annual rental disputes concern renovations, operating costs and rent.
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    Audio

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The verdict is delivered in front of an empty courtroom in Charlottenburg, Berlin, as if it has no implications for the rest of Germany. Judge Silke Kullmann hands down her decision about the potentially most important number in today’s overheated residential rental market.

“The court assumes that the rent index in dispute here has not been created based on scientific principles,” she says. In other words, the so-called Mietspiegel, the benchmark residential rent index that gives an idea of prices for all major German cities, is not applicable to this court case anymore.

The decision was handed down in November, but it might mark the end of peaceful relations between tenants and landlords in Germany.

What the district judge ruled in this case affects all 50 million tenants in Germany. And Berlin’s rent index was supposed to be the best in the country, a model for many other indices.

The indicator lays out typical local costs for living in a neighborhood, guiding landlords as well as tenants. It is used to settle disputes and help avoid lawsuits. Courts count it as evidence. This year it is set to become the basis for the government’s rental price cap that Minister of Justice Heiko Maas is currently preparing.

“Without a qualified rental price index, chaos is imminent at our courts,” says Dieter Blümmel of the pro-landlord publishing house Grundeigentum-Verlag. And Reiner Wild, head of Berlin’s tenants association, warns that renters without legal expenses insurance or other legal assistance will face a lot of trouble.

“Without a qualified rental price index, chaos is imminent at our courts.”

Dieter Blümmel, Grundeigentum-Verlag publishing house

Judge Kullmann’s exposes a long-standing weakness in the law that politicians don’t want to fix. The problem is that nowhere in the law is it specified what exactly a “qualified rent index” is.

The Mietspiegel was introduced in Germany in 1974. After the war, housing was scarce. In the 1960s, rents exploded. Finally the government implemented a law that linked rent increases to customary local rents. But the fuzzy wording confused judges, who complained that judging disputes was an “impossible task.”

More than 500 of these indicators now exist across Germany. In small cities, they might simply be agreed on by representatives of the tenants and landlords. In big cities, the so-called qualified rent index – based on empirical data and updated every two years – was introduced in 2001.

But to date there are no rules regulating what scientific criteria it should be based on or how to create such an index.

In theory, therefore, any of the 300,000 rental disputes per year could have led to a fight over the principles of rent law in Germany. In reality, however, the decline of the rent index started many years ago, when a landlord, Burkhard Rauch, wanted to increase the rent of his tenant, Peter Borggreve.

At the turn of the century, the two men used to play in a band together. They later became business partners in Berlin, with Mr. Rauch, a lawyer, buying apartment blocks Mr. Borggreve, a leftist activist, had found.

In one, Mr. Borggreve supervised the renovation and in turn was promised an apartment at low cost.

On June 1, 2002, Peter Borggreve and his wife move into the new flat. Mr. Rauch asked for €490 ($570) rent not including heating costs. A couple of years later, he demanded a rent increase. From then on, Mr. Rauch resolved, he was going to ask for the full price suggested by the rent index.

He increased the rent every two years, and every two years, Mr. Borggreve objected. And every two years, they went to court to settle the matter.

Hundreds of thousands of rental disputes like this one end up in German courts every year.

More than half of all Germans rent their homes. Almost 24 million flats are rented out in the country. About 14 million of those are offered by small providers and private individuals, another ten million by commercial real estate companies.

More than half of all Germans rent their homes.

Tenants and landlords disagree on operating costs, renovations and, of course, the rent. In big cities, judges usually adhere to the qualified rent index. Germany’s constitutional court named it the applicable benchmark in 2013. In all court cases prior to Rauch vs. Borggreve, it had been applicable as well.

That was until early 2013, when Mr. Rauch wanted to increase the rent again, asking for almost €950 from his tenants. The lawyer decided that this time, he was going all in: He did not just want to file a case against his tentants, but bring an action against the rent index.

The state of Berlin alone spends about €500,000 every two years to update its rent index. There is a Europe-wide tender for the contract, obligations are set down by a task force of up to 12 representatives of all parties involved, including tenants and landlords associations, a statistician, a judge, a data protection expert, a representative of the state government.

This task force defines the criteria on which the rent index is based. It decides how to evaluate results, and which private institute collects the data for the Berlin rent index.

In 2013, that was Michael Clar’s company. The German capital bought the premium offer from the sociologist: Mr. Clar sent out 74 interviewers to go knocking on the doors of randomly sampled households. A total of 5,144 inhabitants of Berlin participated in the survey, an additional 10,091 datasets came from landlords, mostly bigger housing associations.

“No one has to answer our questions. With every enquiry we’re obligated to repeatedly stress that the survey is voluntary,” says Mr. Clar. Many doors close again after this clarification. The quality of sampled data is tested on a random basis. That is not enough to guarantee the accuracy of the data – and therefore of the rent index.

Burkhard Rauch has his doubts about the rent index. And in the district court in Berlin, his doubts were heard.

The court even ordered an expert to check the rent index, professor Walter Krämer, a statistician at the technical university in Dortmund. In Mr. Krämer’s eyes, the rent index is statistically starkly insufficient: The sample too small, the selection of participants wrong, the classification of residential areas too undifferentiated. “The rent index is a mess,” says Mr. Krämer.

Mr. Krämer adds that his expert report was “written quickly.” The opposing party calls it “spewed out.” Many in the field of rent law consider the professor an egotist who doesn’t grasp the consequences of his acts.

But the district court in Berlin has to judge facts, not feelings. And that is why the federal government was handed a problem after the November court ruling.

Some experts think the federal government should issue a decree specifying what exactly a qualified rent index is.

That very same day, Minister of Justice Mr. Maas sent out his draft for a rent cap law. The draft says that in prosperous cities rents rise “considerably above the customary local comparative rents.” This development led to even average earners not being able to find affordable flats, according to the document.

That is what Mr. Maas’ so-called rent cap wants to counter, targeting a cutoff at 10 percent above the customary local rent.

But what Mr. Maas’ draft leaves out is that the local customary rent level in Germany is determined by the qualified rent index. If the rent cap depends on the rent index, however, then the draft might be challenged in court as well.

This is an easy target. When contacted by Handelsblatt, the ministry of justice admits that the qualified rent index has such “significance” in the proposal that an inquiry is supposed to determine how “customary local comparative rents are depicted in the rent indices.”

The ministry seems to realize the danger lurking in the fuzziness. Disputes between the parties about the appropriate rent “might lead to additional costs of unpredictable proportions for landlords, tenants and the judiciary,” the draft reads.

But there are several proposals on how to fix rent law. One possibility is that it becomes obligatory for citizens to participate in the rent surveys to increase the response rate, much as is the case with the highly unpopular census.

Another option would be a rent database where all landlords have to enter current rents – that would accurately reflect all rents in Germany. But data protection concerns are raised regarding this idea.

Rent law experts Dieter Blümmel and Reiner Wild jointly advocate for the easiest option: The federal government should issue a decree specifying what exactly a qualified rent index is. “That would mean countrywide equality. And it wouldn’t be so easy for judges to devalue the rent index with dubious statistical reports,” says Mr. Wild.

Statistician professor Krämer won’t mind the pinch. He views the chaos surrounding the rent index with a certain distanced amusement: Mr. Krämer doesn’t rent; he owns his home.

 

Massimo Bognanni works as an investigative reporter at Handelsblatt. Simon Book covers small and medium-sized business for the paper. To contact the authors: bognanni@handelsblatt.com, book@handelsblatt.com

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