Under the guise of protecting families from home repossessions, the Government of Andalusia, or Junta, introduces a very nasty little piece of interventionist legislation which perverse effects remain to be seen in the overall picture.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of May 2013
When one walks around Edinburgh, soaking in its breathtaking historic beauty, one cannot help but notice how many historical buildings are scarred with what seem like bricked-up windows. Baffled by this I couldn’t help but ask one of my colleagues the reason behind such a peculiar habit. He politely explained that this was a result of the unpopular ‘Window tax’ which was in place in Scotland in the 18th and 19th centuries. Landlords were taxed on the amount of windows a property had. So obviously many took the matter into their own hands and bricked-up windows with the unpleasant aesthetic effects we now witness. This is just an example of how a tax law can greatly influence society even shaping it two centuries on. Nowadays we have the ‘bedroom tax’ in the UK; hopefully no one will brick up their spare bedrooms in council housing!
Moving on to Andalucía, the ruling left-wing coalition approved on Tuesday 09/04/13 decree 6/2013 to ‘assure the social function of housing’ (see Andalusia plans to expropriate homes in foreclosure). This decree has come as a result of the difficult social and financial situation Spain is facing, which in the case of Andalucía has morphed into a full-blown depression, particularly amongst the unemployed and those who are being evicted as a result of widespread defaulting mortgage loans. In the introduction to this decree, it states that in Andalucía alone there is an average of 45 lender evictions taking place on a daily basis. I had already denounced this foreseeable situation back in 2007 when I wrote my article on Spanish Bank Repossessions. Yet the Government and autonomous Communities are only taking notice of this alarming phenomenon over the last year when it is arguably too late for thousands of families.
The object of this decree is double; on the one hand the main aim is to help those struggling borrowers who have fallen into arrears and are in the midst of being evicted by their lenders following a repossession procedure. The Junta plans to expropriate these properties, on a temporary basis, and hand them over to those who would be left destitute after a bank-repossession.
On the other hand, the decree also targets empty bank and developer-owned property at a time were homeless families can be tallied by hundreds of thousands (in Spain, as a whole, not just Andalucía). It is estimated that between 400,000 to 500,000 empty properties are registered under the names of legal persons in Andalucía alone.
These measures, which prima facie may sound good and even necessary, are in fact a very nasty little piece of interventionist legislation which perverse effects remain to be seen in the overall picture. A legal measure nothing short of communist if you ask me. Without further ado, I explain why.
It introduces the following obligations exclusive to the autonomous region of Andalucía:
1. The Junta will now be able to temporarily expropriate (for no more than a three- year period) bank repossessions from lenders and hand them over to defaulting borrowers who are in risk of social exclusion. These borrowers need to meet certain low-income requirements. In exchange lenders will receive the ‘justiprecio’ (fair price) of 2% of the properties’ value (certainly gives a new definition to what fair price is…). After the three years have elapsed the lender recovers the legal possession of the property.
This aggressive assault is dangerously reminiscent of South American banana republics’ lack of respect for private property rights. In fact, we have witnessed in Andalucía, more and more frequently, occupations (‘liberation’ in their jargon) of privately-owned fincas by large groups of the so-called Andalusian Workers Union even abetted by career politicians such as Juan Manuel Sanchez Gordillo (he has never worked for a private company and is proud of it). Margaret Thatcher would approve, not.
2. The Junta may apply fines (of up to €9,000 or £7,700 per annum) on all empty property located in Andalucía owned by legal persons (that is by corporate structures). Property under the name of physical persons is excluded from this decree. These dwellings must have a LFO or be in the process of attaining one. By the concept of ‘empty property’ is understood as all property that within a six month period has not been lived in.
3. A property will qualify as ‘empty’ on ticking one or more signs not limited to the following list (the Junta may add more as it sees fit):
4. Art 39.2 of this decree ‘reminds’ all town halls located in Andalucía that they are empowered to increase IBI tax (akin to UK’s Council tax) on all empty property by up to 50%, irrespective of whether it is owned by a physical or legal person. This is not new and is already ruled in art 72 of the LRHL. It was simply not used at all by town halls because of its unpopularity, that is, until now. It would seem the Junta is giving a gentle nudge to town halls, as if reminding them of this faculty they have to raise the IBI tax and create fiscal ‘incentives’ for owners not to leave their properties standing unoccupied.
5. Creation of an Empty Property Register. Inspectors will determine what properties qualify to be included in this new registry and subject of fulfilling their ‘social function’ i.e. letting them for a paltry sum to less well-off families so they can live in them
Excluded Property from this Decree
1. Property holding a touristic licence.
2. Second homes registered under the name of physical persons (not holding companies) i.e. foreigners who only use them during the summer season. These would not be fined.
3. Rented property that is used no less than 30 days a year.
4. Properties owned by physical persons are excluded from this decree.
Properties subject to be fined and included in the Empty Property Register (‘Registro de Viviendas Deshabitadas’)
1. Property owned and registered under the name of legal persons, such as holding companies. This is very frequent amongst foreigners who set up companies owning their summer homes for tax mitigation purposes amongst other reasons. Irrespective of whether this property is used during the summer season by its owners, family or relatives it will still be fined by the Junta with up to £7,700 per year as it does not fulfil its ‘social function’. Lenders and property developers will also be affected by this.
2. Properties lodged in this registry may be subject of la Junta’s action to ‘incentivize’ them going onto the rental market for an affordable let.
The Junta de Andalucía ‘sold’ this decree as a measure primarily to benefit struggling borrowers suffering repossession by expropriating the collateral (the dwelling) from the repossessing bank itself (!). The Junta will now expropriate family homes that are about to be repossessed for a ‘justiprecio’ (this is a legal term coined in Spain’s pre-constitutional Franco-era Expropriation Act dating from 1954) which amounts to 2% (yes, you read well, two per cent) of the property’s value. After the three years have elapsed the property would revert to the lender who instigated the repossession procedure. This is thought only for those worse-off families who would otherwise be left destitute. Their income must be no more than three times the monthly benchmark amount for entitlement to social assistance and grants, which for this year has been set at €532 per month.
This dramatically changes the rule of play for lenders in a spectacular fashion in a so-called ‘capitalist economy’. Hugo Chavez gives his seal of approval to the Junta’s new approach to social housing. This populist measure will translate into lenders incurring in massive losses and may even affect their credit-rating as well as hamper their borrowing ability, which frankly speaking is not exactly at an all-time high. It will foreseeably splinter society neatly furthermore in the two traditional sides (which waged war against each other during the Civil war) at a time when Spain is undergoing serious institutional instability at all echelon levels. This is not in the best interest for social cohesion really…
We are witnessing first-hand how the sacred legal principle of private property, enshrined in art 33 of the Spanish Constitution, is modulated ‘in the social interest’. This little tag of ‘social interest’ was added to art 33 by left-wing politicians during Spain’s Transition. Our Spanish Constitution is in fact an amalgamation of left and right-wing principles which find themselves united within a legal body as a symbol of compromise between both sides to reach peace and start over anew democratically at the end of Franco’s regime. This tag line was a testimonial wording, an anomaly, which one studies at Law faculty with no real relevance – until now.
These populist measures with a whiff of Communism, product of irresponsible regional politicians, may have far-reaching consequences for everyone – and none of them good.
At a time where Spain is desperately waging a losing battle in Europe and abroad to restore its tarnished credibility amongst foreign investors actions like this are counter-productive, to put it mildly. At a time where politicians, from all the ideological spectrum, should be acting united with one voice to bring the country back to its feet we witness how rogue autonomous communities are adopting legal measures that contradict the central government’s efforts in a spectacular manner. The image of Spain’s disjointed and disorganized political efforts, often in open contradiction with one another, before what is reckoned as the most serious challenge it has faced over the last 74 years is simply astounding.
Moreover these expropriations are unnecessary and redundant as the central government already passed a law last year (Royal Decree 27/2012) where bank repossessions would be paralyzed over a two-year period in the case of low-income families.
But it gets worse. The decree does not stop here. It introduces a battery of changes that will affect not only lenders, but real estate agencies, legal persons and even physical persons!
The Junta de Andalucía has its aim on the over the 500,000 empty houses in Andalucía region alone.
It will create an ad hoc body of ‘inspectors’ who will monitor empty property and added it to a special Empty Property Register in the community with the purpose of renting them at affordable lets.
I’m the first person to condemn the social tragedy that is going on, specifically in Andalucía, but this cannot condone the use of expropriations of private property or even fining housing that stands empty for perfectly good reasons. To incentivize the languishing rental market the government should pass legislation making tenant eviction quick and efficient as in a matter of weeks not months or even years. That is how you address the social housing agenda; not by stripping people or companies’ assets away by decree. State imposed re-distribution of wealth is called Communism in my book and we all know how that story ends. Making people equally poor is not the way out of the woods.
Surely there are other more sensible venues to explore to tackle ongoing social problems in Andalucía rather than instilling cold fear in investors and creating unnecessary legal insecurity by moving the goal posts mid-play? Foreigners are already reeling with the new asset reporting law for Spanish residents with stiff fines for all those who fail to comply. Let us not add more problems to the ones we already have at hand – please – or we may threaten economic recovery by setting it back several years.
I can only hope the Central government steps in – decisively – and quashes this decree for its obvious aggression to constitutional principles such as the sacred principle of private property. If not, whatever next? Expropriation of bank deposits on all accounts in excess of €100,000 for the ‘greater good’? Oh wait…
“Politics: the art of creating new problems where none existed.”
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2.013 © Raymundo Larraín Nesbitt. All rights reserved.
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