Constitutional concerns about planned framework law on nationalisation of housing companies

On 28 June 2023, the commission presented its final report on the “Referendum on a Resolution on the Drafting of a Bill by the Berlin State Senate on Nationalising the Housing Stock of Large Housing Companies”. In the report, the expert commission considers whether the nationalisation of housing companies with more than 3,000 residential units by the State of Berlin would be legally possible and how such a law could be designed. The main content of the final report is presented below. Based on the final report, the Berlin Senate plans to pass a framework law on nationalisation, which it would like to have reviewed by Germany’s Federal Constitutional Court. In order to be able to make a substantiated assessment of the constitutionality of a nationalisation framework law, the specific details of the law will need to be examined. However, if its provisions are based on the material legal assumptions made by the Commission majority, it would be open to constitutional challenge.

A. Background

On 26 September 2021, a majority of 57.6% in Berlin voted in favour of the referendum initiated by the campaign group Deutsche Wohnen und Co. enteignen (Expropriate Deutsche Wohnen and Others) on nationalising the housing stock of large housing companies. The then governing coalition in Berlin consisting of the Social Democrats, the Greens and the Left agreed to set up an expert commission to clarify the constitutionality of nationalising the housing stock of large housing companies. The commission was also called upon to explore legally watertight methods of nationalisation and to make recommendations. The commission, appointed on 29 March 2022, had 13 members, three appointed by each of the Social Democrats, the Greens and the Left and three by the campaign group Deutsche Wohnen & Co enteignen. The commission was chaired by Herta Däubler-Gmelin, former Federal Minister of Justice.

B. Main content of the commission report

The 156-page commission report focuses on the legislative competence of the State of Berlin, the factual requirements of Article 15 sentence 1 of Germany’s Basic Law (= Constitution) and the amount of compensation to be granted under Article 15 sentence 2 of the Basic Law.

I. Legislative authority

The commission concluded that the State of Berlin has the authority to enact provisions on the nationalisation of large housing companies. The federal government has not made use of the relevant competing legislative powers of Article 74(1) no. 15 of the Basic Law to transfer land, natural resources and means of production into common ownership or into other forms of a social economy, so the State has full regulatory authority. Other provisions of social tenancy law such as rental prices do not have a blocking effect on nationalisation by the State, as they are based on a different rule, namely Article 74(1) no. 1 of the Basic Law.

II. Requirements of Article 15 of the Basic Law

According to Article 15 of the Basic Law, land, natural resources and means of production may be transferred to common ownership or other forms of a social economy for the purpose of nationalisation by a law regulating the type and extent of compensation. As regards the amount of compensation, Article 14(3), sentences 3 and 4 of the Basic Law apply mutatis mutandis. Most commission members considered the factual requirements of Article 15 sentence 1 of the Basic Law to be met. Nationalisation could also cover real estate, including heritable building rights and apartment ownership, the commission said.

The majority of the commission also assumed that the requirement of proportionality, the legal consequences of which had to be considered, would be observed in the nationalisation of properties belonging to large housing companies in Berlin. It follows from the absence of material requirements for nationalisation, the commission said, that it was impossible to examine the proportionality of nationalisation for the pursuit of the common good, as the aim and means of nationalisation were identical. The principle of proportionality was therefore only to be applied in a modified form, it added. In addition to nationalisation as an end in itself, putting Berlin housing into public ownership would also promote general welfare such as ensuring affordable rents for people on lower incomes, both directly in the publicly owned stock and indirectly in the rest of the stock. The transfer of housing into public ownership was appropriate for achieving the purpose of nationalisation and the other purposes of general public interest.

The commission majority held the view that examining the need for nationalisation was limited to the question of finding means which are obviously less drastic but equally suited to achieving the other purposes of general welfare. At present, no obviously less drastic means were apparent, according to the commission. In the opinion of the commission majority, more new construction was not an obviously less drastic solution, since it was not certain new construction would have a significant effect on rent levels. As part of examining appropriateness, in the view of the majority of the commission, the general purpose of nationalisation and the recognition therein of a public interest in the non-profit management of the property referred to in Article 15 sentence 1 of the Basic Law were of particular importance. The commission majority concluded that the project of nationalising the housing stock of large housing companies was appropriate, partly because it was urgent to solve the drastic housing shortage and the associated above-average rent increases.

The majority opinion of the commission was not supported by three commission members. In a special vote, those three members believed less weight should be attached to the matter of nationalisation than claimed by the majority of the commission and that a conclusive assessment of appropriateness was not possible at that time, as the necessary findings based on facts were missing.

III. Amount of compensation

Even in the run-up to the referendum, one of the key points of discussion was whether the housing companies affected could be compensated with sums below the market value of the properties in question. The commission majority concluded that this was possible. Under Article 15 sentence 2 of the Basic Law, Article 14(3) sentence 3 of the Basic Law was applicable to compensation, in other words the amount of compensation should be determined by a fair weighing of the interests of the general public on the one hand and the interests of the parties involved on the other. The majority of the commission believed the legislator had a wide margin of discretion in calculating compensation. It proposed various different assessment approaches:

• One conceivable compensation approach was the income from non-profit management for the remaining useful life of the residential property, based on a total useful life of 40 years, which is usually applied to valuations.
• Secondly, assessment by fiscal feasibility could be considered. If, in principle, nationalisation cannot be realised for financial reasons if compensation of market value is paid for the expropriated or nationalised properties, the government would be authorised to pay compensation in line with its fiscal means.
• A further assessment approach could be the hypothetical market value based on a potential restrictive provision. Restrictive provisions that could be drawn up in view of the general interest purposes, which are to promote the project beyond the purpose of nationalisation, would have to be accepted by those affected without compensation and at the same time reduce the value of the property. The remaining value would then be the compensation sum for the loss of rights brought about for the “purpose of nationalisation”.

Three commission members took a different view in a special vote. In their opinion, because Article 15 sentence 2 of the Basic Law referred to Article 14(3) sentence 3 and 4 of the Basic Law, the same standards applied in principle to nationalisation as to expropriation. Thus, in principle, the market value was to be taken as the basis for assessing the amount of compensation, they said. Deductions due to the nature of nationalisation were conceivable – however, there had not yet been any clarification in case law, they added.

C. Assessment and outlook

In the coalition agreement of the new Christian Democrat-Social Democrat State government in Berlin, the parties agreed to launch a nationalisation framework law if the expert commission deemed nationalisation constitutionally admissible. According to the coalition agreement, the nationalisation framework law is meant to establish a legal framework and objective qualitative indicators or criteria for nationalisation in accordance with Article 15 of the Basic Law in the business areas of public services (e.g. water, energy, housing) as well as principles for the appropriate compensation required in each case. It is to come into force two years after its promulgation. During this time, the Berlin Senate would like to have the nationalisation framework law reviewed by the Federal Constitutional Court.

One of the main focuses of a review by the Federal Constitutional Court would most likely be the “modification” of the proportionality principle advocated by the commission majority. According to the established case law of the Federal Constitutional Court, all state conduct must be proportionate. The principle of proportionality or the elaboration of its sub-conditions (legitimate purpose, appropriateness, necessity and proportionality in the narrower sense) is an essential achievement of the modern rule of law, whose origins, however, can be traced back to ancient doctrines of justice. It is an indispensable vehicle for effecting fundamental rights. Although case law recognises that the principle of proportionality is subject to different levels of scrutiny, the argument that with respect to Article 15 of the Basic Law this pivotal principle of the rule of law is to be understood differently than in the case of other state conduct is therefore met with reservations.

In this context, one must also ask whether the supposed “special status” of Article 15 of the Basic Law, which is justified based on legal history in particular, perhaps represents a constitutional relic from a time in which, at least in German legal circles, the meaning and scope of the principle of proportionality still had to be fully absorbed and accepted. It is therefore obvious that Article 15 of the Basic Law must be re-evaluated in the light of more than 70 years of constitutional case law. The US constitutional theory of originalism, which posits that legal sources are to be interpreted primarily in the spirit of the time of their origin, was never able to establish itself in German constitutional jurisprudence and theory.

The question of whether and how the principle of proportionality is to be understood in the context of Article 15 of the Basic Law also has an impact on the question of possible compensation. The methods of calculating compensation advocated by the commission majority would amount, to varying degrees, to a partial deprivation of property without compensation, which, if one rejects the said modification of the principle of proportionality, would not be proportionate – especially given that the State itself has contributed to higher rents through its housing and construction land policies. The wording of Article 15 sentence 2 of the Basic Law also suggests that the type and manner of compensation cannot be understood any differently than in the context of the property guarantee under Article 14 of the Basic Law. Regarding Article 14 of the Basic Law, the Federal Constitutional Court has indicated that owners may have to accept certain deductions due to the socially binding nature of property. However, this probably would not have meant unlimited reductions based on what is (allegedly) fiscally feasible.

In order to be able to make a substantiated assessment of the constitutionality of a nationalisation framework law, we need to wait to see what specific form it takes. However, if its provisions are based on the material legal assumptions made by the commission majority, it would be open to constitutional challenge for the reasons set out above.