New rules on rented homes lengthen lease terms

The amendments in Royal Decree-Law 21/2018 concern the legislation in:

• The Urban Leasehold Law, with the idea of recovering the spirit of the 1994 Law following the reforms introduced by Law 4/2013. This amendment of the Urban Leasehold Law focuses essentially on establishing longer rental agreements, limiting the requirements for additional security that owners may lay down for tenants, and setting out rules on the payment of property management costs.
• The Horizontal Property Law, to give greater flexibility to owners’ associations to restrict or veto tourist rentals, and facilitate accessibility to buildings.
• The Civil Procedure Law, by introducing changes regarding evictions involving vulnerable households.
• The Local Finances Law and the Transfer and Stamp Tax Law, by introducing tax reductions in certain cases.

1. Amendments of Urban Leasehold Law 29/1994 (LAU)

The amendments relate to residential leases. Notably:

1.1 Minimum term and renewal: The references to time periods in the LAU as regards the three-year minimum lease terms and their renewals for one additional year have been replaced with a five-year minimum term (seven years if the lessor is a legal entity) and a renewal for three years (if the lessor fails to give thirty days’ notice).

1.2 References to time periods: As a result, the references to time periods as regards the lessor's rights and the lessee’s waivers will consist of the new minimum term, namely, five years (seven years if the lessor is a legal entity). Namely, the time periods relating to the right to increase rent as a result of improvements by the lessor, the amount of the shared expenses of the property that are payable by the lessee, the review of the security deposit, or the option to covenant that, in the event of the lessee’s death, the lease may only be taken over for the minimum term.

1.3 Rent review: In reduced rent agreements the annual rent review cannot give rise to an increase above the variation in the CPI. The term “reduced rent” means any rent below the amount stipulated for the country as a whole and on a general basis in the royal decree defining the central government housing plan in force for the purposes of the right to apply for a rent assistance program. Elsewhere, it has left unchanged the rules determining that rent reviews are established by the parties, that they may not exist if not expressly covenanted, and that if a rent review is covenanted, but the applicable index is not specified, the review will take place in line with the Guarantee of Competitiveness Index (Índice de Garantía de Competitividad).

1.4 Security provided by lessees: Any security provided in addition to the security deposit may not be above 2 months’ rent in agreements with terms of up to five years (seven, if the lessor is a legal entity).

1.5 Management costs: All costs related to property management and to concluding the lease agreement are payable by the lessor if it is a legal entity, unless those services were entered into directly by the lessee.

1.6 Prospective and retrospective right of first refusal: The prospective and retrospective rights of first refusal continue not to apply if the home is sold together with all the homes or units owned by the lessor in the same property or if all the homes and units in the property are sold jointly by more than one owner to the same buyer. In these cases, however, the government may hold a prospective and retrospective right of first refusal in relation to the property as a whole if the housing legislation so provides.

1.7 Sumptuous homes: If the lease relates to homes measuring over 300 m2 or the initial rent computed on an annual basis is over 5.5 times higher than the minimum wage computed on an annual basis and the whole of the home is leased, the applicable regime will be determined by the parties, and in the absence of any specification Title II of the LAU will apply and, on a secondary basis, the Civil Code.

1.8 Homes for tourist use: The LAU continues not to apply to the rental of homes for tourist use, regardless of the channel used for marketing them to tourists.

2. Amendments of Horizontal Property Law 49/1960 (LPH)

2.1 Reserve fund: The reserve fund has been increased from 5% to 10% of the expense budget and it has been stipulated that the reserve fund can also be used for building work to facilitate accessibility. The time period for adaptation includes the following three expense budget years.

2.2 Building work to facilitate accessibility: This type of work will be mandatory where the owners’ association has access to public aid for up to 75% of the cost.

2.3 Restrictions on tourist rental homes: Even if it requires an amendment to the Bylaws or to the instrument establishing the system, the use of housing units for rental to tourists may be restricted by an affirmative resolution supported by three fifths of the total number of owners which in turn account for three fifths of the ownership interests. This measure will only apply to new tourist rental apartments not to any of the existing ones, because it has not been determined to apply retroactively. Resolutions may also be adopted with those same majorities to increase the shared expenses for those housing units provided the increase is not by more than 20%.

3. Amendments of Civil Procedure Law 1/2000 (LEC)

3.1 Lessees in vulnerable circumstances: The option has been given to lessees facing eviction proceedings to apply for social services to determine their vulnerable circumstances. In these cases the proceedings may be put on hold until the measures are adopted by social services, for a period of up to one month (or two months if the claimant is a legal entity). Those circumstances will be taken into account in the steps involved in court proceedings.

4. Amendments of the Local Finances Law and of the Transfer and Stamp Tax Law

4.1 No real estate tax charged if homes are rented with restricted rent: The public authorities are not allowed to charge real estate tax to lessees on the properties they have leased if they are subject to restricted rent under a statutory provision.

4.2 Real estate tax surcharge on vacant homes: Local councils may levy a surcharge equal to up to 50% of the net real estate tax charge (in one or more installments according to the period of vacancy) on properties for residential use that are permanently vacant. The reference to implementing regulations has been removed and the definition of permanently vacant residential properties has been determined by reference to the autonomous community or central government legislation on the housing sector. The surcharge is required to be defined in the relevant ordinances.

4.3 Real estate tax reduction: Local councils are allowed to provide a reduction equal to up to 95% of the real estate tax charge for rented residential properties subject to restricted rent under a statutory provision.

4.4 Transfer tax relief for residential leases: Transfer tax relief has been provided for the residential leases defined in article 2 LAU. The signing of these types of lease agreements will not give rise to the payment of transfer tax or to the ad valorem stamp tax charge if they are recorded in a public deed to be registered at the Property Registry.