Contracting or own investment: which pays off for a landlord's new heating system?

The short answer

Whether contracting or own investment pays off is decided not by the technology but by the capital. With own investment the landlord builds and owns the heating system, receives the subsidy and the asset value, but ties up capital and becomes the operator. With contracting they pay only a heat price, keep their liquidity free and hand off the operating risk – paid for through a price that includes the contractor's investment, financing and margin.

The decisive catch sits on the tenant side: of an own investment, because of the cap in § 559e BGB, only part reaches the tenant in the first years. And contracting costs can be passed on only up to the cost neutrality of § 556c BGB. In both cases a remainder stays with the owner – where it is smaller depends on the individual case.

Own investment: what does the landlord's own heating really cost?

With own investment the owner bears the purchase (CAPEX). They commission the system, tie up equity or borrowed capital, and then take on operation, maintenance, billing and liability. In return the system is theirs, and they draw the subsidy themselves: the KfW basic grant under programme 458 is 30 per cent of the eligible costs and is expressly available to landlords too (for companies and legal persons via programme 459).

The calculation has three items that are often overlooked. First, tied-up capital has a cost – either loan interest or the return the money would have earned elsewhere. Second, ownership brings ongoing operator duties: maintenance, the heating inspection under § 60b GModG, hydraulic balancing, upkeep. Third – and this is the most underestimated point – the landlord may pass the investment on to tenants only to a limited extent.

What may the landlord pass on – and where is the limit? (§ 559e BGB)

For a heating measure that is also a modernisation under § 555b No. 1a BGB, its own § 559e BGB has applied since the reform of tenancy law. It calculates differently from the general modernisation levy:

Rule	§ 559 BGB (general)	§ 559e BGB (heating)
Levy rate per year	8 % of the costs incurred	10 % of the costs minus subsidy
Subsidy	reduces the costs (§ 559a)	deducted before the calculation
Cap over 6 years	3 €/m² (2 €/m² where rent < 7 €/m²)	0.50 €/m²

The higher rate of 10 per cent is deceptive: because the subsidy is deducted first and the cap sits at 0.50 euros per square metre, only a thin slice of the investment reaches the tenant in the first six years. If the owner deliberately did not apply for an eligible measure, they fall back into § 559 with 8 per cent and the 3-euro cap. Agreements to the tenant's disadvantage are void (§ 559e para. 5).

Contracting: how does the investment become an ongoing price?

With heat contracting a third party – the contractor – builds and operates the heating plant and sells finished heat to the building. The landlord invests nothing, finances nothing and is not liable for operation; the investment (CAPEX) becomes an ongoing supply (OPEX). For tax purposes the heat price is usually immediately deductible as an operating expense, whereas an owned system has to be depreciated over its useful life.

The flip side: the heat price contains the investment, the financing over the contract term and the contractor's margin. And for ongoing residential tenancies the landlord may pass these costs on only up to the cost neutrality of § 556c BGB – for the same amount of heat, the heat supply must not be more expensive than the old own supply. How this cap works in detail is set out in the article on heat contracting and the levy under § 556c.

Is heating contracting recoverable from tenants? (§ 556c BGB)

Yes, but only if three conditions are met together – and only the part that respects cost neutrality. When the landlord switches an existing residential tenancy from self-supply to commercial heat supply, § 556c para. 1 BGB lets them pass the supply costs on as operating costs if

Condition	What it means
Improved efficiency	The heat comes from a new plant built by the supplier or from a heat network (para. 1 no. 1)
Cost neutrality	The costs of the heat supply do not exceed the previous operating costs of self-supply (para. 1 no. 2)
Notice	The landlord announces the switch in text form at least three months in advance (para. 2)

If the existing system had an annual utilisation rate of at least 80 per cent before the switch, the supplier may limit itself to improving how the plant is run instead of building a new one. Agreements to the tenant's disadvantage are void (para. 4). Whatever exceeds cost neutrality is borne by the owner. The calculation is in the article on the levy under § 556c; this section is not legal advice for an individual case.

Worked example: 12 flats, one new heat pump

Assumptions: apartment building with 12 flats, 900 m² of living space. New heat pump including hydraulics and buffer tank: 180,000 € investment. KfW basic grant 30 % = 54,000 €. The owner's share financed at 4 % interest.

Item (own investment)	Amount
Investment	180,000 €
− KfW basic grant 30 %	− 54,000 €
= costs incurred (base for § 559e)	126,000 €
Levy in theory: 10 % p.a.	12,600 €/year = 1.17 €/m²/month
Levy after the 0.50 €/m² cap	5,400 €/year (450 €/month)
Remainder that initially stays with the owner	7,200 €/year

Of the 12,600 euros annual levy on paper, only 5,400 euros reach the tenant in the first six years – the rest stays with the owner until a new six-year window begins. On top come around 5,000 euros of interest on the owner's share in the first year and the operator duties. With contracting the 126,000-euro capital commitment falls away entirely; in return the financing and margin sit in the heat price, which can only be passed on cost-neutrally. Which route is cheaper depends on how expensive the tied-up capital really is for the owner.

What the decision really turns on

1. Cost the capital honestly. Count not only the loan interest but the return the money would earn in your core business or portfolio. If it is high, that argues for contracting.
2. Check the grant rate. The 30 per cent KfW basic grant is available directly only with own investment – with contracting the contractor draws it and it flows indirectly into the heat price.
3. Cap the levy realistically. Apply the § 559e cap of 0.50 €/m² across the living space and check how much of the investment actually reaches tenants in six years.
4. Weigh the operating risk. Do you want to carry maintenance, the heating inspection and liability yourself or hand them off? With contracting that is the core of the price.
5. Time horizon and exit. If you plan to sell the property, an OPEX solution without tied-up capital is often easier to transfer than a freshly financed system.
6. Clarify tax and balance sheet with your tax adviser. Immediate deduction of the heat price versus depreciation of your own system can tip the balance.