Rent Reduction and Operating Costs: Defects, Statements and Deadlines

Rent reduction for defects under § 536 BGB

If the apartment has a defect that eliminates or reduces its suitability for use as agreed in the contract, the tenant under § 536 para. 1 BGB owes, by operation of law, only an appropriately reduced rent. The reduction takes effect automatically; it does not have to be applied for separately. What matters is that a significant defect actually exists.

Typical defects include a heating failure in the cold season, persistent damp or mould, a defective lift, water damage or significant, lasting noise pollution. How high the reduction is in an individual case depends on the type, extent and duration of the impairment and is a matter of the specific case. There is no flat-rate, generally applicable quota.

• Complete loss of the rent if the suitability is fully eliminated (§ 536 para. 1 sentence 1 BGB).
• Appropriate reduction if the suitability is only reduced (§ 536 para. 1 sentence 2 BGB).
• Invalid for residential space is any agreement deviating to the tenant's disadvantage (§ 536 para. 4 BGB).

Why the reduction is calculated on the gross rent

A question decisive for landlords is the reference figure for the reduction. According to the settled case law of the Federal Court of Justice, the reduction is calculated not on the net cold rent but on the gross rent (Bruttomiete) – that is, on the base rent including the advance payment for operating and incidental costs. Whether the operating costs are owed as a flat rate or as an advance payment is irrelevant here.

The BGH decided this both for commercial space (judgment of 06.04.2005, XII ZR 225/03) and for residential space (judgment of 20.07.2005, VIII ZR 347/04). The reasoning is the equivalence principle of tenancy law: the landlord's performance is matched by the tenant's entire consideration; if this performance is impaired by a defect, the entire rent owed is reduced.

For practice this means: with a reduction of, for example, 20 percent, the entire gross rent is reduced by 20 percent, not just the cold rent. Tenants should nevertheless proceed carefully, as a reduction that is too high or unjustified can lead to rent arrears and, in extreme cases, to termination. In case of doubt, payment under reservation is advisable.

Report the defect and secure evidence

A precondition of a justified reduction is, as a rule, that the tenant has reported the defect. Under § 536c BGB the tenant must report without undue delay to the landlord a defect arising during the tenancy. If the tenant culpably fails to report it, he cannot rely on the reduction to the extent that the landlord was unable to provide a remedy without the report – and he also becomes liable for damages.

Clean documentation is therefore important for both sides. The following have proven useful:

• a written notice of defects with date, precise description and request for removal;
• photos or videos that document the condition and the period;
• for heating or damp defects, where possible, temperature or humidity measurements;
• retention of the correspondence and the statements.

Only after the report and a reasonable opportunity for removal is the landlord responsible for restoring the contractually agreed condition.

When no reduction comes into consideration

Not every defect entitles a tenant to a reduction. In several constellations the right to reduce is excluded or restricted:

• Insignificant defect: A merely minor impairment is disregarded under § 536 para. 1 sentence 3 BGB.
• Caused by the tenant: If the tenant is himself responsible for the defect – for example, mould due to incorrect heating and ventilation or damage due to improper use – there is no right to reduce; on the contrary, he may be obliged to pay damages.
• Knowledge at contract conclusion or acceptance: If the tenant knows the defect at contract conclusion, the rights under § 536 BGB are not available to him under § 536b BGB. If he accepts the apartment despite a known defect without reserving his rights, they are likewise excluded.
• Energy-efficiency modernisation: For a period of three months a reduction is disregarded insofar as it is based on an energy-efficiency modernisation (§ 536 para. 1a BGB).

An exception applies if the landlord fraudulently concealed the defect – then the tenant's rights are preserved despite knowledge.

Objections to the operating cost statement

Besides the reduction, the operating cost statement is the second frequent point of dispute. Tenants may check and object to a statement they have received. A check in several steps is sensible:

1. Accounting period: Does it cover at most twelve months and is it clearly identifiable?
2. Apportionable items: Are only operating costs within the meaning of the Operating Costs Ordinance included, but not administration or maintenance costs?
3. Distribution key: Is it applied in accordance with the contract and comprehensibly?
4. Advance payments: Are the payments actually made fully and correctly deducted?
5. Calculations: Are the totals and the shares arithmetically correct?

A distinction is drawn between formal errors, which concern comprehensibility and can render the statement invalid, and substantive errors, which concern only the factual correctness and are corrected. Objections are to be communicated to the landlord specifically, for instance regarding an incorrect distribution key, non-apportionable costs or calculation errors.

Inspection of receipts and the 12-month period under § 556 BGB

So that tenants can check a statement at all, they have under § 556 para. 4 BGB a right that the landlord, on request, grant them inspection of the underlying receipts; the landlord may also provide the receipts electronically. Inspection takes place, in principle, where the documents are held, that is, at the business premises of the landlord or the property management. There is no general right to have copies sent for freely financed residential space; if, however, personal inspection is unreasonable for the tenant, sending copies against reimbursement of costs comes into consideration.

Both sides are bound by the deadlines of § 556 para. 3 BGB:

• The landlord must communicate the statement at the latest by the end of the twelfth month after the end of the accounting period (sentence 2).
• After this period expires, a back-claim by the landlord is excluded, unless he is not responsible for the delay (sentence 3).
• Objections by the tenant are to be asserted at the latest by the end of the twelfth month after receipt of the statement (sentence 5); thereafter they are excluded, unless the tenant is not responsible for the delay (sentence 6).

A credit balance of the tenant remains unaffected by the period: it can be demanded even if the landlord has rendered the statement late.

Right of retention where no statement is rendered

If the landlord fails to render a statement or renders it late, this has tangible consequences for him. If the twelve-month period is missed without a valid reason, he can no longer demand any back-payment beyond the advance payments made – the additional costs actually incurred remain with him.

As long as no proper statement exists at all, the case law moreover regularly grants tenants a right of retention over the ongoing advance payments for operating costs until the landlord renders the statement. Where inspection of receipts is refused, too, the tenant may withhold a demanded back-payment. The right of retention does not replace the statement; as soon as a correct statement is rendered, the withheld amount is to be settled accordingly.

For landlords the conclusion is clear: a timely, formally clean and substantively correct statement protects against loss of claims, retention and dispute. The same applies to the prompt removal of reported defects, which limits a justified reduction from the outset.