Party representatives agreed on these and other sticking points in social policy during a four-hour late-night session at the Chancellor's Office that ended early Wednesday.
Under the draft law, new rental contracts in areas of high demand for housing can only exceed average local rents by a maximum of ten percent. This is calculated according to the square-metre floor space price.
Exceptions to the rent cap are new-build homes and "also initial leasing after extensive modernisation" of existing properties, Justice Minister Heiko Maas said after the meeting.
Individual states will determine which housing regions the rent caps will apply to, depending on the level of available housing. Existing rental contracts will not be affected.
In another win for tenants, responsibility for paying estate agents' fees will be transferred from them to owners or landlords who commission an agent's services.
But renters will still have to pay if they hire a broker to help them find an apartment.
The housing bill had divided Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and the leftist Social Democratic Party (SPD).
Due to heavy lobbying by the real estate branch, the CDU had vigorously opposed shifting responsibility for paying agents fees to owners.
"We welcome that the CDU/CSU and the SPD have finally come to an agreement," the director of the German Tenants' Association (DMB), Lukas Siebenkotten, said in a first reaction.
"The rent cap that we have long demanded will come, and the principle that he who orders pays will be introduced in broker's regulations. This is good news for tenants."
But conditions still contained in the rent cap legislation threaten to undermine it, the DMB said.
For example, there are no set penalties for landlords who disregarded the legally allowed rent increase, it noted.
A further planned review of the draft could still fix this shortcoming, Siebenkotten said. Landlords who set the rent too high may then be required to retroactively repay excess sums charged, he suggested.
The DMB expects the new legislation to come into effect by the end of March.
Estate agents fear losing out
At the moment, renters typically pay around two months of rent as brokerage costs, even if the agent is hired by the landlord to represent a property.
This in addition to the upfront cost of moving means many people simply cannot afford to move.
Almost six out of 10 Germans rent rather than own their homes, according to the federal statistics office.
With demand for available housing growing, rocketing rents and stiff agents' fees have created tensions in areas where people live on very limited means.
But the changes will not sit well with the real estate branch, which fears loss of revenues if landlords choose to rent properties independently to save on broker fees.
In November, leaders of Germany's Real Estate Industry Federation (BVI) urged its 12,000 members to mount a one-day strike action over the issue. But less than a third said they would participate and the idea was dropped.
SEE ALSO: Judge: Landlords can't stop men standing to pee