The most important notion of German rent law is the `Vergleichsmiete' i.e., the rent which a comparable dwelling in the same area command. When the legislation was introduced in the early seventies it remained ambiguous as to whether tenants should be protected against rent increases in general.
As a result the notion of the Vergleichsmiete was vaguely understood as some sort of average rent in the region. In the next section it is shown that old contracts tend to have a lower rent than the more recent leases.
Therefore, the appropriate basis for the determination of the Vergleichsmiete remained controversial. In 1982 a reform clarified the issue in the sense that the Vergleichsmiete is determined by the rent of contracts which have been agreed upon during the last three years. The intention was to prevent rents in old contracts from lagging too much behind. At the same time, however, an upper bound on rent increases of 30% within three years was introduced in order to prevent hardship. There are three ways to determine this rent level:
1. through reference to at least three comparable dwellings commanding this rent in the same area, or
2. with the help of a public rent{survey provided by the local authorities (Mietspiegel), or
3. through a surveyor's report.
http://shortify.com/10942


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Note added at 1 hr (2010-08-24 09:37:27 GMT)
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In contrast to commercial real estate, residential lease contracts are highly codified by the Bürgerliches Gesetzbuch (abbr. BGB, "German civil code"). One of the central ideas there regarding real estate, is the </b?Ortsübliche Vergleichsmiete (local customary comparable rent). New leases must not be more than 20 percent (not exactly stated by BGB, depending on the jurisdiction) higher than the local customary comparable rent, or the rental contracts may be nullified. Within existing lease contracts, rent increases (i) must not exceed the local customary comparable rent, (ii) are only allowed for if the rent has not increased for the past 15 months, and (iii) must not exceed a total increase of 20 percent within three years.
http://en.wikipedia.org/wiki/German_income_approach

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The German Housing Market
An analysis of German tenancy laws suggests that German landlords have too little incentives to invest in their property. In a new lease as well as in an ongoing tenancy, tenants and landlords can set the rent essentially at any level by mutual agreement; i.e., courts will enforce the rent payment specified in the lease. Unilaterally, however, the landlord can adjust the rent only within very tight limits. She is constrained, according to §558 BGB (see p.540-594 Lützenkirchen 2003), by the so called comparison rent (in German: Vergleichsmiete). The comparison rent is calculated as an average of the rents of similar apartments in the same area. The average must include old leases as well as newly signed ones.
Typically, the comparison rent lags the market rent, because rents rise over time; i.e., tenants pay strictly less if they continue an ongoing tenancy than if they sign a new lease for a comparable dwelling. Therefore, the landlord is constrained by the comparison rent but not by the tenant’s willingness to pay.
http://www.bgpe.de/texte/paper/gebhardt.pdf

In case you haven't seen it yet, this is *the* dictionary to buy (and one of only a handful of German->English dictionaries worth buying in the first place):

Schulte, Lee, Paul (Hrsg.), Gier, Evans; Wörterbuch Immobilienwirtschaft/Real Estate Dictionary En-De/De-En; Immobilien Zeitung Verlag, 3. überarbeitete Auflage 2007; ISBN 978-3940219-00-8

And those of you who know me also know that I very, very rarely recommend any dictionaries....