New regulation on Spanish long term leases for housing purposes

New regulation LAU

 

The Spanish government has recently passed Royal Decree 21/2018 of 14 December 2018 where it has included (inter alia) several significant amendments to the Spanish Lease Law (“LAU”) affecting the lease for housing purposes (“arrendamiento de vivienda”) that basically benefit and protect tenants and jeopardize landlord’s interests. Such Royal Decree has entered into force last 19 December 2019 meaning that these new rules will only apply to lease contracts signed as of such date. These new rules amending the LAU have been agreed between the current Spanish socialist government together with the support of the communist party “Podemos”. It is foreseen by the central government that these amendments to the LAU that benefit and protect tenants will be extended and increased in the forthcoming months by passing a new law on housing. These are the most important new features of the amendments to the LAU law only applicable to leases for housing purposes (“arrendamiento de vivienda”):

1.- The minimum term of the lease (compulsory for the landlord) is of 5 years as it was the case until 2013 when the former conservative party PP reduced the same to 3 years. In addition, in the case the landlord being a company, the minimum compulsory term for the lease (compulsory for the landlord) has to be of 7 years. This latter rule was initially thought to be applied only to hedge funds, real estate funds, banks etc. but has been finally also extended to little investment vehicles (SPVs) that in Spain are profoundly used by small/family investors. This measure will have a negative impact in the yields resulting from the investments of these type of little investors.

2.- Once the relevant leases have expired (5 or 7 years) unless the parties confirm their intention to not extend the term of the lease, the term of the same will be extended automatically 3 additional years (until now it was 1 additional year).

3.- On leases for housing purposes, the tenant is compulsory obliged to provide the landlord with a month’s rent of legal deposit for the term of the lease. The LAU permitted until now the landlord to ask (without restrictions) for additional guarantees (to the legal deposit) which and according to standard real estate market practice where normally additionally month’s rent deposits. The amended LAU now allows the landlord to ask the tenant for only 2 additional month’s rent deposit in addition to the compulsory 1 month’s rent deposit. Accordingly and from a practical point of view, the landlord can ask the tenant to provide him with maximum of 3 months’s rent deposit during the term of the lease. This measure will not affect too much the current market because this is more or less what landlords were getting from tenants currently, save to coast markets (like the Balearic Islands) where the amount of deposits paid by tenants were slightly more than that.

4.- These new rules offer the possibility for tenant and landlord to reach an agreement with respect the landlord doing improvement works on the property and as a result of this being able to increase the rent for the rest of the term of the lease.

5.- In the case the landlord being an SPV (company), the same has to assume all the formalization and marketing costs of the relevant lease transaction. This new rule appears to be at first sight very hard on landlords that are a company but depending on its future interpretation (especially by the Spanish courts) the result will be very different. A strict interpretation of this new rule can be that the landlord has to pay all the marketing costs of the lease transaction: the real estate agent’s fees (when participating in the deal; according to Spanish market practice these are paid normally by the tenant) as well as the execution costs of the lease. However, the same new article of the LAU states also that the landlord will assume all these costs unless “such services have been contracted by direct initiative of the tenant”. According to this wording, it can be interpreted that the real agent’s services are services “contracted by direct initiative of the tenant” and thus not to be assumed by the landlord. In addition and from a practical point of view, when executing a lease there are normally no execution costs since it is done on a private contract. If it is executed before a notary, such cost should be paid in principle by the landlord. Having said this, we will have to wait how this new rule is going to be applied in the near future by the different players in the Spanish real estate market and interpreted by Spanish courts.

6.- According to the LAU, the tenant has a pre-emption right or right of first refusal over the leased property in the event of the sale of the same during the term of the lease. Such right does not apply when (i) excluded through agreement between landlord and tenant and when (ii) a whole building (including for example several flats) is sold to an investor or several investors as a whole in a single transaction. In this latter case, the LAU now foresees the possibility of the future housing law (already mentioned above) to include a pre-emption right or right of first refusal in favour of public entities over such buildings in such sale transactions. In summary it is a possibility that it still does not exist and if it finally does exist (we will find out in the forthcoming months) will probably represent less interest of foreign institutional investors (banks, hedge funds, real estate funds etc.) in investing in Spanish housing real estate assets.

7.- From now on the tenant will not have to pay anymore the transfer tax on housing leases that was legally compulsory but that in practice only very few tenants have paid until now.

8.- The new LAU excludes short term touristic leases from its regulation being the same now regulated exclusively by the laws of the different 17 Spanish Autonomous regions and additionally the different local councils where the properties are located. A bad decision that can only make less unified the Spanish market for the same kind of business and less interesting for foreign investors.

As a summary of the above, the new amendments on the LAU give more protection to tenants who are currently having a difficult time in finding properties to be leased for reasonable prices but at the same time makes the Spanish housing real estate market less attractive to  investors, in particular foreign ones. It is always difficult to find a balance between social fairness and economic development. Finally to mention that it was initially agreed between the socialist government and the communist party “Podemos” to limit and restrict by law the amounts of the rent in certain areas in Spain. This agreement has not been finally included in the above mentioned Royal Decree by the current government but since it has no sufficient majority in the Spanish Congress it might be forced by political parties like “Podemos” to include in the near future such limitation/restriction on amounts of rents in leases for housing purposes.

 

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