On 19 August 2026, the Federal Court of Justice (BGH) ruled that converted commercial premises are only permanently exempt from the rent cap if they were not previously suitable for use as a flat.
In January 2020, the claimants rented a flat in Berlin measuring approximately 73 m² at a net rent (excluding service charges) of EUR 979. The flat is situated in an area with a tight housing market. It is located in the side wing of an old building constructed before 1918 and was formerly part of a commercial unit. The rooms were partitioned off and converted into a flat.
The tenants alleged a breach of the rent control legislation. According to their calculations, the permissible rent was EUR 623. They demanded the return of approximately EUR 10,800 in overpaid rent and EUR 1,068 in overpaid deposit. According to their submission, even before the conversion, the premises had a toilet, washbasin, kitchen and a common room in which staff occasionally stayed overnight. The landlord put the cost of the building’s conversion at EUR 1,640.69 per square metre; the tenants disputed this.
The Charlottenburg Magistrates’ Court and the Berlin II Regional Court dismissed the claim. The Regional Court considered it sufficient that no regular residential tenancy had existed prior to the cut-off date. In its view, the cost of the renovation was irrelevant; this was only relevant in the case of comprehensive modernisation under Section 556f, second sentence, of the German Civil Code (BGB).
Background: Under Section 556f, first sentence, of the German Civil Code (BGB), the rent cap does not apply to flats that were first occupied and let after 1 October 2014. According to the explanatory memorandum to the Act, the nature of the use prior to the cut-off date should, in principle, be irrelevant; this also covers commercial use. The threshold lies where the residential property did not exist at all previously.
The Eighth Civil Senate quashed the appeal judgement and referred the case back to the Regional Court. The Senate is thus continuing its decision of 1 July 2026 (VIII ZR 50/23). The key points can be summarised as follows:
Prior commercial use generally precludes the exception. Section 556f, first sentence, of the German Civil Code (BGB) generally excludes commercial use up to the relevant date. This does not apply only if residential use was objectively precluded by the original structural layout and fittings and was made possible only through building works involving substantial construction expenditure. The fact that the premises are being let for the first time under a standard residential tenancy agreement is not sufficient.
Objective suitability rather than the agreed intended use. As intended by the legislature, the Federal Court of Justice (BGH) relies on Section 16(1)(3) of the Residential Tenancies Act (WoFG). According to this, the decisive factor is the structural nature of the premises, not their subjective intended use. What matters is the prevailing public perception, not an assessment under building law: the decisive factor is whether the rooms, as a separate area, would have enabled an independent household. In any case, a living room/bedroom, toilet, bathroom and a kitchen or cooking facilities are required; for the kitchen, connections for water, waste water and electricity are sufficient. Even if these elements are present, the premises may still be unsuitable in individual cases, for example if a separate flat would only be created by means of partition walls or a separate entrance.
Substantial construction costs: around one third of the costs of new-build construction. The construction costs are deemed substantial if they amount to approximately one third of the costs of a comparable new-build flat excluding the value of the land. The current new-build costs in the relevant region are decisive; the court may estimate these in accordance with Section 287(2) of the Code of Civil Procedure (ZPO). Only work specifically intended to convert the property into residential accommodation counts. Mere repair work is not sufficient.
Narrow interpretation and hierarchical relationship to Section 556f, second sentence, of the German Civil Code (BGB). Sections 556e and 556f of the BGB are exceptions that must be interpreted narrowly. The new-build exception permanently exempts a flat from the rent cap for all future lettings; whereas the comprehensive modernisation exemption, by contrast, exempts only the first subsequent letting. The more far-reaching exemption must therefore not fall significantly short of the requirements set out in the second sentence. If the premises were already objectively suitable for use as a dwelling prior to the conversion, only the second sentence applies, and even then only in the case of comprehensive modernisation.
Burden of proof lies with the landlord. The landlord must set out and prove that the conditions for the exemption are met. The tenants were therefore not required to demonstrate that the premises had previously been used as a let dwelling.
Duty to provide information prior to conclusion of the contract. The landlord must, without being asked, inform the tenant before the tenant submits their declaration of contract that the landlord is relying on the new-build exception (Section 556g(1a), first sentence, No. 3 of the German Civil Code (BGB)). If this information is not provided, the landlord cannot invoke the exception; if they subsequently provide it in the correct form, they may only do so two years later. The Regional Court has yet to clarify whether the landlady provided the information.
The ruling primarily concerns the conversion of commercial premises into residential accommodation in areas subject to rent control. It sets clear limits on the business model: not every expansion of the housing supply is favoured, but only the creation of residential accommodation through cost-intensive construction measures.
Cash flow risk in the existing portfolio. If the exception does not apply, the rent is invalid to the extent that it exceeds the local comparative rent by more than 10 per cent. The landlord must refund any excess rent paid following the notice of objection; the partial invalidity also affects the amount of the security deposit. In the case in question, according to the tenants’ submission, the agreed rent was around 57 per cent above the amount they considered permissible.
Valuation and exit. The new-build exception is permanent. If it ceases to apply, this affects not only the current tenancy but also all future lettings of the property. Rental assumptions in valuations and business plans based on an unverified new-build exception are accordingly compromised.
Project development. The exemption remains applicable to changes of use if the premises were structurally unsuitable and can only be converted into residential accommodation through substantial building work. Minor alterations to spaces that are already fitted out in a manner similar to residential accommodation, however, do not qualify. Whether the one-third threshold is met should therefore be checked at the project calculation stage.
Significant hurdles in demonstrating the construction costs. In practice, proving that the construction work is substantial is the real hurdle. The landlord must first provide evidence of the costs specifically attributable to the conversion into residential accommodation, and separate these from repair and maintenance costs, which do not count. They must then compare these costs with those of a comparable new-build flat without a land component, based on meaningful, up-to-date figures for the region in question. In the case of conversions carried out years ago, there is often a lack of reliable cost documentation broken down by measure; in the case of acquired properties, the documentation is often not even in the landlord’s possession. Lump-sum cost figures for the entire building are generally insufficient. Furthermore, experience shows that the Berlin courts, at any rate, apply the ‘new-build exception’ very cautiously and impose very high requirements on the demonstration of its prerequisites. Landlords should therefore not rely on being able to enforce the exception in the event of a dispute if the initial structural condition and the construction costs are not fully documented.
Outlook. No decision has yet been made on the specific case. The Regional Court must now clarify whether the premises were previously usable as a flat, what construction costs were incurred, and whether the relevant information was provided. However, the Federal Court of Justice’s criteria are clear and will shape case law in conversion cases.
Property owners should record converted units for which the new-build exemption is being claimed. For each unit, the structural condition prior to conversion (bathroom, toilet, kitchen connections, privacy and access) and the conversion costs in relation to regional new-build costs must be assessed. Existing plans, photographs, building specifications and invoices should be retained, broken down into conversion and repair costs.
The information required under Section 556g(1a), first sentence, point 3 of the German Civil Code (BGB) must be provided in the prescribed form prior to the conclusion of the contract. If this has been omitted, it should be provided retrospectively; in such cases, the exemption will only take effect two years later. At the time of purchase, the purchaser should obtain evidence of the conditions for the exception and the information provided. Any outstanding risks must be reflected in the purchase price or through guarantees.
(Federal Court of Justice, judgment of 19 August 2026 – VIII ZR 104/25)
Subscribe to our GvW Newsletter here - and we will keep you informed about the latest legal developments!
