Landlords win at the Federal Court of Justice

After the first-instance ruling of the Higher Regional Court in Munich, tenants had hoped to be able to defend themselves against rent increases that were imposed on them due to modernization announcements shortly before the deadline expired. The court’s ruling most likely was a disappointment to them.

While tenants had been successful in first instance at the Higher Regional Court in Munich, the Federal Court of Justice (Bundesgerichtshof – BGH) ruled in favour of the landlords: a landlord may announce modernizations on the reference date, in order to be able to increase the rent according to the old legal framework which allows a higher increase. This even applies, if the announced building measures are scheduled for the distant future (judgment of 18 March 2021, ref. no. VIII ZR 305/19 – full text not yet available).

Subject matter was the amendment of Section 559 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), which came into effect on 1 January 2019: in the case of comprehensive modernization measures, landlords can – as of this date – only increase the annual rent by 8% of the costs incurred. Previously, it had been 11%. In addition, the section now includes a cap. However, pursuant to Article 229 Section 49 (1) Sentence 1 of the Introductory Act to the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuche–EGBGB), rent increases may still be made under the previous legal framework, if the tenant has received a modernization notification pursuant to Section 555c (1) Sentence 1 BGB up to and including 31 December 2018.  

This is what happened in the case of the tenants of the Hohenzollernkarree in Munich: they received a modernization notice on 31 December 2018, the day the deadline expired. However, the announced building measures were not to take place until December 2019. Due to the time difference, the tenants considered a rent increase under the old legal framework to be inadmissible and filed a class action.

Ultimately without success: as the modernization announcement was valid, the landlady may increase the rent according to the previous legal framework, the BGH ruled. In order for the modernization announcement to be valid, the planning must be so well advanced, that the content requirements of Section 555c (1) Sentence 2 BGB can be met - and the BGH considered these requirements to be fulfilled in the case under review. According to the BGH, a close temporal connection between announcement and execution of the building measures, which the Higher Regional Court in Munich had considered to be necessary, was neither legally required nor necessary for other reasons. Also, the course of action was not abusive, even if it should have taken place at this point in time only in order to achieve a greater increase in rent later, the BGH stated. The court argued, that the deadline as set in Article 229 Section 49 (1) Sentence 1 EGBGB itself was an effort of the legislator to create a balance between the interests of landlords and tenants. To make use of it, therefore, could not be considered an abuse of rights.

Far-reaching impact

The decision will have an impact far beyond Munich, as many tenants are likely to have faced the same course of action. Now, there are hardly any hopes of successfully taking legal action. However, the Munich rental union announced that it would examine further legal avenues, probably meaning the examination of the enforcement of hardship provisions. Under Section 559 (4) BGB a rent increase is precluded, if it causes hardship for the tenant, which cannot be justified even under appreciation of the entitled interests of the landlord. In its ruling of 9 October 2019 (ref. no.: VIII ZR 21/19) the BGH applied this section and found the rent increase that followed from modernization to be inadmissible due to hardship. In the case, the tenant could no longer have afforded the apartment in which he had lived since he was a child. Although the apartment was too large with regard to the tenants needs and his financial means, having to move out was not within reason, according to the BGH.

Co-Author: Franziska Jordan