Distinction between long-term and seasonal contracts

Raymundo LarraĆ­n Nesbitt, February, 10. 2018

Lawyer Raymond Nesbitt goes on to explain the key differences between long-term and seasonal contracts. He also points out the great advantages offered to landlords by seasonal contracts.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
21st of February 2018

Article copyrighted © 2018.Plagiarism will be criminally prosecuted

 

 

Introduction

Picking up from last October’s article, where I wrote on the differences between seasonal and holiday home contracts (Seasonal lets: an alternative to holiday home rentals), in this month’s article I’m going to focus on the key differences between long-term and seasonal contracts. I will also make a case on why seasonal contracts are by far the superior option for most landlords.

Frequently, both types of lease agreements are befuddled leading to a mishmash of poorly-drafted lease agreements. Unbeknownst to the parties, this may have serious legal repercussions when such cobbled-up contracts are challenged at court.

I should clarify that the article’s title can be somewhat misleading, as seasonal contracts in truth can also be long-term. For clarity’s sake, when I mention long-term contracts, I will be referring to those which are used as a permanent place of abode and create lenient tenant entitlements as opposed to seasonal ones, which do not. I’ll define both types below, bear with me.

Definitions, definitions

  • Long-term contract: for this article’s purpose, it is understood as a long-term lease agreement which constitutes the permanent abode of a tenant (and his family). These contracts are subject to Spain’s Tenancy Act or Ley de Arrendamientos Urbanos. This law is the backbone of rental agreements and creates a raft of tenant entitlements which landlords ought to be acutely aware of before entering into any such contract. More details on this in my article: Urban Rental Law in Spain – Spain’s Tenancy Act – 8th May 2016.
  • Seasonal let: is a type of contract whereby a landlord rents a property not as a permanent abode. It can be either short-term (days, weeks) or long-term (months, years). Seasonal long-term lets are NOT subject to the batch of tenant entitlements set out by Spain’s Tenancy Act (which only apply to rentals that constitute a permanent abode, see above).

 

Landlord: the importance of getting it right

Normally when a landlord hires our law firm to draft a lease agreement, he is blissfully unaware of the (legal) implications he is getting into on signing a standard long-term lease agreement. Chiefly, that a tenant (and his family) can stay in the property legally for three years plus one at his own choice. A landlord has no saying over this, nada, only the tenant!

If a landlord wishes to avoid having his property tied up for the next three years, or more, he should be signing instead a 12-month seasonal contract. When the 12 months are up, the tenant needs to leave the property unless a new seasonal contract is signed.

The significance of this is better understood with an example. The following is a real case.

An expat landlord has been struggling to sell his property in Spain for several years due to the Great Recession. In the meantime, to make ends meet, he rents it out to a family. This landlord - without taking any legal advice - downloads some random rental contract from internet and uses it. Once signed, sometime later, the landlord manages to find a buyer. The deal has a positive outlook. Regrettably, his buyer finds out the property has long-term tenants living in it (can stay in the property for up to 5 years or more) and at the advice of his lawyer pulls out of the deal. The landlord/seller has lost a great opportunity to sell on his house.

My client, out of ignorance, and because he wanted to save himself lawyer’s fees, used an old contract from internet which gave his tenants cast-iron rights to remain in the property for the following 5 years (plus one). The sales deal, which was a given, fell through because the buyer did not want to commit waiting for 5 years until the end of the lease agreement.

A common mistake in landlords is to think they can end a lease agreement (whenever they want) and ask their tenants to leave the property when they are selling – which is false. A landlord cannot end a lease agreement only because he is selling his house and must respect the whole duration of the signed lease agreement until it elapses (five years in this case).

More details on common mistakes on long-term tenancy agreements in my article: 7 illegal clauses in Spanish rental contracts – 8th January 2018.

Had this person hired me earlier on, before signing any document, I would have drafted him a 12-month seasonal contract and he would have sold on his property without any problems. Bottom line, speak to a lawyer before you do something rash like signing away lease agreements in a foreign language which give your tenant all sort of rights which you do not fully understand. Sounds easy enough, but few landlords actually follow through and end up in all sort of problems.

 

Comparison: Long-term leases vs. seasonal lets

 

 

Long-term lease 

 

Seasonal lease

 

Applicable law

Spain’s Tenancy Act

Spain’s Tenancy Act

Place of permanent abode

yes

no

Urban property

yes

yes

Rural property

no

yes

Accommodation time

More than 2 months, varies between regions

no time limit (days, years)

Contract renewal

Automatic 12-month renewals (leading up to 3 years plus)

no

Can you rent out individual rooms?

yes

yes

Tenant entitlements

yes, significant

no

Creates right to stay and live in the property

yes, 3 years plus one

no

Rental deposit

one-month

two-months (minimum)

VAT

exempt

exempt

Enforced

nationwide

nationwide

Licence of First Occupation required?

yes

yes

Landlord tax relief available? *

yes

yes

Tax on rental income to be declared and paid in Spain?

yes

yes

 

*lenient landlord tax relief is only available to EEA/EU-residents.

Advantages of a seasonal let

  • No tenant entitlements.
  • No automatic contract renewals.
  • Your tenant cannot (over)stay in the property for 3 years plus one.
  • Smoother eviction procedures.

 

 Disadvantages of a seasonal let

  • A (minimum) of a 2-month rental is required.
  • Seasonal lets need to be drafted by lawyers to ensure they comply with all legal requisites to be upheld (successfully) before a law court if challenged.

 

The myth of the 11-month lease agreements

You may have heard, or been offered by layman, a 10-month contract as a universal panacea to all that is wrong in Spain with tenancy agreements. In theory, the idea behind these ‘magical’ contracts are to circumvent the automatic 12-month renewal periods Spain’s Tenancy Act sets forth.

In practice, you should know these contracts are not worth the paper they are written on. Should your tenant seek advice from a lawyer, or take you to court, they will be informed they can stay in your property for the next three years plus (providing they pay the rent, of course).

The only – legal – way to waive a tenant having the right to remain in your property for three years plus is to sign a seasonal contract. Seasonal contracts have a number of requirements to enforce them. Only because you label a contract as seasonal, it will not make it seasonal and can be easily challenged at court. Only lawyers are aware of the requirements, so they can be successfully upheld at court.

Do I need to declare and pay tax on my rental income in Spain in both cases?

Yes.

We have a competitive taxation service for non-residents that deals with holiday home accounting service (HRAS).

On average, we can reduce a non-resident landlord’s rental income tax by 40% using tax relief (available to all EU-residents, UK nationals included). Ask us.

Conclusion

Most landlords wrongly assume they must rent out their Spanish property using a standard long-term agreement – which is simply untrue.

For decades, landlords all over Spain have been letting their properties out using seasonal lets without a problem. Seasonal lets are by far the superior option for most landlords.

Don't be goaded into using lease agreements that only exist for the benefit of tenants. Be smart and make it easy on yourself – speak to professionals!

If you want to avoid stressful situations for you and your family, it is strongly advised you hire a law firm before you commit signing on the dotted line. Taking legal counsel ahead pre-empts most legal problems saving you money (and grievances) on the long run. This advice applies both to landlords and tenants. You can hire our contract drafting service from €165 plus VAT: Rentals (contract drafting). Rental contracts in English also available.

Be proactive, talk to a lawyer. We can make it happen.

"La acción es la clave fundamental de todo éxito." – Pablo Picasso.

Loosely translated as: "Action is the key to all success".

Pablo Picasso was a Spanish painter, sculptor, printmaker, ceramicist, stage designer, poet and playwright who spent most of his adult life in France. Regarded as one of the most influential artists of the 20th century, he is credited for co-founding the Cubist movement. Child prodigy, Malaga-born Picasso achieved universal renown and immense fortune for his revolutionary artistic accomplishments, becoming one of the best-known figures in 20th century art. He is one-of-a-kind towering figure that casts a long shadow over every other artist that has followed in his wake.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in taxation, inheritance, conveyancing, and litigation. We will be very pleased to discuss your matter with you. Please contact us for a free initial consultation. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on 951 894 675 or by completing our contact form.

 

Article originally published at Spanish Property Insight: Distinction between long-term and seasonal contracts.

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