Letting in Spain: The Safe Way

Raymundo Larraín Nesbitt, October, 10. 2012

Quo Vadis Hispania? At a time of widespread financial uncertainty and even political instability, you may want to read a few tips that will help you stay ahead in the letting game as a landlord in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
10th of October 2012

 

 

Original article from 31st January 2.008

 

Introduction

Landlords in Spain are all too familiar on having been stung by troublesome tenants that made them wish they had never let their properties in the first place.

The aim of this article is to provide some tips on the pre-emptive measures and safeguards that ought to be put in place in advance of renting to achieve a hassle-free let.

1. Tenant Screening.

One of the major problems landlords face post credit crunch is the increasing number of non-paying tenants. Many ex-pat landlords rely on a let partially or wholly to offset mortgage repayments. No one wants to be tangled in a long protracted eviction procedure which may lead a landlord into arrears or even end with his property being repossessed. Spanish lenders pursue borrowers for negative equity even in their home countries as explained in my article Spanish Creditors Pursuing Debts Abroad (Recognition and Execution of EU Member State Rulings).

One of the best ways to avoid non-paying tenants is to take pre-emptive measures such as carefully screening candidates, weeding out those with unsuitable profiles. Haphazard screening can only lead you into trouble.

There is now a helpful website available that lists non-paying tenants in Spain: ‘Fichero de Inquilinos Morosos’ (FIM). For a reasonable small fee you will be able to search – in English – if your prospective tenant has actually defaulted previously on a Tenancy Agreement. There are professional defaulting tenants that roam the country in search of their next victim, preying preferably on trustful non-residents. In hard times such as these, many struggling landlords cannot endure the hardship of a financial leach that eagerly exploits Spain’s Tenancy laws’ shortcomings.

This website’s database is continuously updated with the input provided by both eviction rulings as well as by other users’ feedback. You can additionally include your own non-paying tenants in their list providing you comply and follow the online form’s instructions. Professional non-payers – who’ve made a lifestyle out of it – will already be included in this black list.

I would advise using this website only for those candidates who’ve been shortlisted in your screening process. You might as well spend a few dozen Euros now rather than having to fork out thousands at a later date in an eviction. Better safe than sorry.

2. Arbitrage Clause

Adding this clause to a tenancy agreement allows eviction associated disbursements to be curbed down significantly as well as saving considerable time.

This system was created back in 2004 and allows to significantly reduce both the associated expenses as well as the necessary eviction time compared to a normal court procedure (which spans normally ten months). However, this system only works if both parties, tenant and landlord, abide the mandatory Arbitral Award something which does not always happen as non-paying tenants may only be buying time with no real intention of paying the arrears. On which case the matter is passed on to a judge. On average it is estimated that 30 to 40 per cent of arbitrage cases are settled out-of-court. So it is not all that is cracked up to be to be honest.

The main advantage would be the swiftness in which the arbitral award is obtained. The Arbitral Court guarantees that a case will be examined within 30 days, often even less. This is particularly important in cases in which the landlord offsets the rent against his mortgage repayments and risks slipping into arrears which may lead to a bank repossession.

The second advantage would be the considerable amount of money it saves the landlord. It only costs €40 plus a further €300 in case of a protracted conflict (£240). A normal court procedure would have an average cost of at least €2,000 (£1,600).

It is only necessary to request it in a real estate agencies of your region homologated by the Arbitral Court or simply including it as a clause in a Tenancy Agreement waiving an ordinary court procedure – at least initially.

3. Rental Insurance

Increasingly you will find more and more insurance companies offering relatively inexpensive tenancy insurance charging typically a one-time annual fee equivalent to 60% to 100% of a monthly rental. This insures the landlord against the tenant defaulting, and covers lawyers’ fees during the eviction process (up to around €2,000). They also insure different scenarios i.e. a disgruntled tenant destroying the home furniture during an eviction procedure up to a pre-agreed capped amount. Normally this amount is in the region of €3,000.

These insurance companies evaluate the credit risk of a prospective tenant unlike banks with rental bank guarantees. So basically they already do a tenant screening on your behalf as its their own money that’s at stake. However the catch is that these companies picky and may be only interested in insuring tenants which are regarded as ‘very safe’ from a financial point of view. They would be looking for a would-be tenant matching the following profile: long term job contracts (“indefinido” in Spanish) and are earning above €1,200 gross pm. Nowadays it is no small feat post Labour reform (implemented early on this year) to find such tenants. The significant change in Labour laws has translated into widespread reductions of 30 pc in Spanish wages. Not long ago a ‘mileurista’ (someone who barely earns one thousand euros a month and has attained a university degree) was socially derided; now it is the aspiration of the better part of today’s soaring unemployed youth.

4. Rental Bank Guarantee

My advice for landlords is to request from a prospective tenant what is known as a ‘rental bank guarantee’ (“aval bancario”). Commercial leaseholds are the natural niche that requires bank guarantees as these types of lets are fairly steep. But the benefits can also be extended to home rentals.

This would ensure the landlord against a tenant defaulting. The landlord may execute said guarantee and the bank would be obliged to pay them immediately. The bank in turn would claim this amount from the tenant. This bank guarantee should ideally be made to secure the following 5 years even if the tenancy agreement is only for short term.

However there is a catch, claiming on this rental bank guarantee is no substitution for an eviction procedure, rather a compliment to it. For example, a tenant may default on the second month, the landlord after having sent letters claiming the owed rental to no avail, executes the bank guarantee (which secures for example six months’ rental). But the non-paying tenant will still be living inside the property.

Ideally rental bank guarantees should be exercised after an eviction ruling, not before. It is common place that tenants on Spanish coastal areas have, naturally, no assets of their own so after an eviction process the landlord is still owed the lost rental income. The bank guarantee could then be claimed on to offset this rental loss. The tenancy contract would also have to be terminated of course for breach of contract according to art. 1124 of the Spanish Civil Code. I advise you to hire a lawyer on doing this.

In the current bleak financial context in which non-paying tenants – particularly awash in coastal areas – are defaulting, this bank guarantee would act as a heaven-sent safety net for landlords ensuring payment once the eviction process is over helping to remove most of the associated stress – because the money is already there, locked up in a bank account.

A rental bank guarantee are ideally suitable for long term tenancy’s (eleven months renewable) not for short periods such as summer lets (one month or a couple of weeks). Luxury summer lets, particularly mansions and villas, would be the exception, warranting making good use of rental guarantees because of the amounts involved.

The drawback is that a bank guarantee is expensive and requires a tenant to deposit lump sum an amount of money at their own bank, typically 12 months rental, which is left in custody. On top of this, banks normally charge 1% of the amount, notary fees, opening interest and a quarterly interest. Not all tenants find themselves in a comfortable financial position to provide this bank guarantee upfront either because they lack the funds or, even if they do, are unwilling to have it tied-up until the guarantee elapses which could be anything as long as five years.

A bank guarantee does not ensure in any manner a tenant is financially sound – you have been warned. Unlike insurance companies offering rental insurance (see point three above), banks at no time carry out a due diligence on the tenant’s assets and financial ability. It merely guarantees that a tenant deposited an amount of funds equivalent to say twelve months rental which the landlord can claim upon default. The tenant cannot dispose of said funds until the bank guarantee elapses. Notwithstanding banks may include clauses that hinder the execution of the guarantee which is why I recommend you to hire a lawyer to help arrange these guarantees and avoid abusive clauses.

This guarantee is handed over by a tenant at the time of signing a rental agreement, never after. The landlord will hold it and deliver it back once the tenancy is terminated satisfactorily with no pending amounts owed.

In Conclusion 

Careful screening and weeding of prospective tenants as well as implementing rental insurance, a rental bank guarantee and finally but not least an arbitrage clause will vastly increase your chances of successfully letting property in Spain.

Landlords that risk overlooking the above listed time-proved tips will do so at their own chagrin.

 

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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