New Measures to Bolster Spain’s Ailing Rental Market

Raymundo Larraín Nesbitt, July, 8. 2013

The Government has drafted a new rental law in an attempt to bolster and streamline the ailing rental market, but curiously one of the biggest beneficiaries will be the hotel industry.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2013

 

 

 

Introduction

Property ownership in Spain is deeply embedded in the national psyche as I have analysed over the years in my articles. Some would even call it a national obsession (followed by football and not necessarily in the same order). Property ownership is widely viewed as ‘superior’ to renting almost as a social status all unto itself (!). Several popular well-known mantras upholding such (false) belief have endured over the boom years. But the receding tide of prosperity, induced by this recession, has exposed them for what they always were – false myths:

  1. Alquilar es tirar el dinero” which loosely translates as ‘renting is throwing away (good) money’
  2. Another good one is “nunca bajan” translated as ‘(house prices) never fall’
  3. And last is my all-time favourite: “siempre lo podrás vender” translated as ‘(don’t worry) you can always sell it’; yeah right!

Spanish parents are obsessed with leaving their children property when they should really be concerned on gifting them a top-notch education allowing them a chance in life to win their spurs.

Unsurprisingly, because of this historical national fixation for property ownership 83% of properties in Spain are inhabited by their owners as opposed to only 17% being rented out. Compare these (very) sad figures with a far more developed rental market in Europe which boasts an average of 30 to 40% rental occupation. Moreover, all this money that is (foolishly) ploughed into property is a wasted opportunity cost that could be better put to use in the money markets investing in companies and start-ups, creating jobs and wealth, rather than saddling with debt legions of Spanish families who now face the grim prospect of a lifetime sentence in the form of a financial millstone around their necks for the remainder of their existence. A huge change of financial culture in Spain is urgently required in line with Protestant countries (historically more financial savvy) that can only be achieved through education from an early age at school. I venture that one positive outcome of this ‘recession’ will be that scores of Spanish will now be forced to rent as opposed to buying outright.

The underlying historical reasons on this fascination are numerous and exceed the object of this article so I won’t digress. What matters is that the Government, with millions of properties standing empty and millions more of young – and not so young – workers unemployed, has finally smelled the coffee. They have been busy drafting a new law in an attempt to bolster and streamline an ailing rental market in the hope of making it more dynamic and robust.

Ley 4/2013, de 4 de junio, de medidas de flexibilización y fomento del mercado del alquiler de viviendas

Ley 4/2013 is the law published in Spain’s Official Law Gazette on the 5th of June that heralds these changes. The official line is that it brings on a slew of novelties which will hopefully bring a breath of fresh air into a stale rental market. This new law significantly amends Spain’s all-important Tenancy Act (Ley 29/1994, de 24 de noviembre, de Arrendamientos Urbanos). Popularly known by its acronym ‘LAU’.

However I speculate that the ‘real’ agenda being pushed by this law is another and I elaborate further in my conclusion below. In my opinion this is yet another patchwork law that attempts, for the umpteenth time, to do something about Spain’s chronically failing rental market – and most likely will fall flat on its face.

Major Highlights of Spain’s Amended Rental Law

  • The exclusion of Spain’s Rental Act for touristic property lets. This is hands down the most significant change in my opinion made by this reform as it now purposefully leaves out what are known as ‘touristic tenancies’. The LAU used to rule on all tenancies (except those deemed as ‘luxury’ rentals). Touristic tenancies will now be ruled by Spain’s seventeen regional autonomous communities. To make it more complicated, not all autonomous regions have such laws implemented. Touristic rentals require a licence from the local administration. The matter is so complex that it easily merits its own article given the fact there are seventeen autonomous regions in Spain capable of enacting their own laws on the matter compounding it furthermore. Always making administrative matters easy.
  • The legally mandatory five-year rental period for long-term rents is now reduced to a three-year period.
  • As a direct result of the above, deposits must now be reviewed after the three-year period has elapsed (as opposed to the former five-year period).
  • The tacit renewal is reduced from a three-year period down to one year.
  • A landlord may now recover the possession of the property after a year has elapsed under certain circumstances. Unlike before, this now does not have to be expressly worded into the contract.
  • The landlord may now sell the property and the new owner may terminate the existing tenancy agreement so long as it is not lodged at the Land Registry. Before this law, the new owner was forced to respect the existing mandatory tenancy until it ended. This is a very welcome measure indeed. So for all new contracts signed after the 5th of June 2013 it would be advisable for a tenant to have their tenancy agreement lodged at the Land Registry if they want some degree of protection against the owner selling the property and the new owner moving in and have them vacated. On lodging the tenancy agreement if the owners sells on the property, the new owner will be forced to respect the tenancy for the mandatory three-year period (used to be five years before this law).
  • Tenants may now notify their landlords, at any moment, with only 30 days in advance of their will to terminate a tenancy provided they have already rented it for a six-month period. Before a tenant needed to wait until almost till the end of the tenancy or else face compensating the landlord for the lost rental if they decided to bail out ahead of time. Notwithstanding a suitable compensation can still be agreed. This is an advantage for tenants really, not for landlords, as it allows them more flexibility to terminate a tenancy.
  • If in agreement, the let can now be forfeited for a set period of time so long as the repairs in the property are shouldered by the tenant. This must be mutually agreed.
  • Both parties may now opt-out of the IPC, as the annual benchmark to increase a tenancy, and choose another index. IPC stands for ‘Índice de Precios al Consumidor’ which is a Consumer Price Index which is widely used in Spanish contracts as a benchmark to increase services in line with the annual rise of inflation.
  • It can now be agreed by both parties that long-term tenants may waive their pre-emption and buyout rights (‘derecho de tanteo y retracto’) in a resale as is stipulated in section 25 of Spain’s Tenancy Act.
  • Changes to Spain’s all-important Civil Jurisdiction Law, (1/2000 – LEC) to further streamline the eviction procedure. Non-paying tenants will now be given only a ten-day deadline to bring arrears up to speed. The more legal fat is stripped away, the more efficient and streamlined will the resulting eviction procedure turn out. This is frankly positive but hardly groundbreaking.

 

Conclusion: more beating around the bush

Although some of the above changes are indeed a positive step in the right direction, most are superficial. I remain largely sceptical of this new law because, once again, it doesn’t really address the main issues which historically hamper Spain’s rental market, and only beats around the bush.

So why on earth bother to approve a law that seemingly won’t make much of a change in the rental market? The cynic in me can’t help but think that, brushing aside negligible cosmetic changes in the overall picture, the real agenda being pushed is that of the hotel industry.

After a decade of booming construction, where thousands of new-build properties were bought en masse and let out to foreigners at large, the hotel industry has experienced massive losses as a result of all the unregulated competition from a myriad of humble property investors dotting the Spanish coastlines. It has reached the point where many first class hotels now close down during the low season, something unheard of previously. This new law – quietly but relentlessly – effectively introduces a restriction to letting by private individuals, leaving it to autonomous regional communities to rule on the fine details of what a touristic licence actually entails. Which is why I place it as the first, and most significant, point on reviewing and listing above the amendments brought about to Spain’s Tenancy Act (LAU).

One would have to ask oneself: who stands to benefit with this reform and whose interests are served by it? Cui bono? Certainly not the countless foreign small-time investors looking into buy-to-lets to make some money on the side to supplement their (meagre) income. Again an ill-conceived political measure that meddles in the economy that will prove to be counterproductive on the long-term as it will foreseeably deter would-be buyers who would have otherwise invested had they unrestricted freedom to rent. Talk about shooting oneself in the foot.

Forcing home owners across Spain to ensure their properties comply with the same regulations already imposed on hotels (minimum quality standards, health and safety, kitchen appliances etc.) is daft and may be safely labelled as an unnecessary exercise of interventionist legislation aimed to thwart or restrict the sacred use of private property (in benefit of the hotel industry). No to mention treating as equals those who are financially unequal as both hotels and private individuals stand to comply with the same set of standards if they want to attain a licence to rent. In any case, let’s not rush ahead as the fine details will be ruled by the seventeen autonomous regions so we will just have to wait and see before judging in advance regional legislations. Few communities have already ruled on this i.e. the Balearics.

EDIT 2015: My conclusion was correct. Fast-forward two years for the new batch of holiday rental laws that restrict private rentals:

Holiday Rental Laws in Spain - Explaining The Latest Changes – 8th of March 2015

 

Back on topic, to foster a robust rental market we’d be better off taking a bold stance and resolutely reworking the whole eviction system from the root rather than approve a string of half-hearted piecemeal laws which honestly will scarcely make a dent on matters. What would *really* kick-start the rental market in Spain would be chiefly:

  1. Change the predominant Spanish mentality towards rental and ownership achievable only through an early education at school. Rental must stop being demonised by society at large and accepted as a perfectly valid option in life. State and private schools should teach finance to children. A long-term goal.
  2. Have non-paying tenants evicted in less than ten days from a property instead of having to wait for months on end or even years to make it happen. A short to medium-term goal reworking the legal (procedural) system.

These two measures would greatly help to nurture and consolidate a budding rental market in Spain. Granted, it wouldn’t happen overnight. It takes considerable time to change people’s mentality. Besides, there are far too many legal constraints and guarantees safeguarding non-paying tenants’ rights. What about the landlords I ask? Long eviction periods lead to tenants trashing properties, to landlords losing rental to offset their mortgage repayments (which in turn may even lead to a repossession of the rented property), besides unnecessarily increasing tenant eviction legal fees paid for by distressed landlords. This nonsense should clearly be put to an end.

The rental sluggishness in Spain can largely be pinned down to landlords being afraid of renting out properties given how biased historically laws are in favour of (non-paying) tenants. This is the crux of the problem – fix it and you are half way there to pave the way to a robust rental market.

It is Spain’s ruling political class who wield the power to alter matters if they willed it – but I guess they don’t have the backbone for change; too unpopular and ‘politically incorrect’ or maybe they are simply complacent with the current status quo. Real statesmen do, at all times, what’s best for their country no matter the unpopularity or electoral cost. Because they have a long-term vision of matters with their hearts set in the country’s future prosperity as opposed to career politicians who take decisions on the hoof based on short-term opinion polls. Piecemeal attempts from career politicians will only further the pain and foreseeably set back recovery by several years.

But hey, politicians and lawmakers, in general, are also entitled to make a (very) nice living by drafting and publishing half-baked laws, such as this one, to justify their outrageous public stipends and perks whilst the rest of the country languishes bearing the brunt of an unending ‘recession’.

Off with their heads!” ? Lewis Carroll. Alice in Wonderland.

English writer, mathematician, logician, Anglican deacon and photographer.

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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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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Rent-to-Buy in Spain: The Smart Choice

Raymundo Larraín Nesbitt, April, 8. 2012

A rent-to-buy contract let’s you enjoy a Spanish property now, whilst leaving the door ajar for purchasing later, if house prices continue to fall in Spain (as most people expect them to!).

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of April 2012

 

 

Original article from 5th November 2.009

 

Introduction

It has become Spain’s favourite sport to second-guess on when the real estate market will pick up again. Reputed experts, both national and foreign, are jumping in giving all sort of contradicting timelines for its recovery i.e. 2014, 2017 and the most pessimistic ones on 2020. Although it may be fun to indulge on this sport on whether it will be an “L”,“U”,“W” or X-shaped recovery the gist is that it remains a fairly futile exercise as everyone – both experts and laymen alike – are basically clueless on where the market will be heading next. Property prices are now cheap but who is to say they won’t be cheaper next year or even the year after?

As appealing an amusement as may be, I believe it is impractical and rather sterile for most would-be buyers who are now sitting on the sidelines waiting for events to unfold, as in hindsight very few people call the market bottom correctly and most miss out on a lifetime opportunity to snatch a bargain in the dip.

These potential buyers who are now sitting on the fence musing over how much lower house prices can fall may in fact already – unbeknownst to them – profit from today’s market turmoil. A rent-to-buy contract does exactly that. It is an interesting alternative worth looking into in times of uncertainty (such as these) on where house prices will be heading next. In this article I will show you how to take advantage of today’s market uncertainty turning it around in your favour.

A lease purchase simply removes all the associated angst on whether one should still be holding out or else be moving in for the kill. The truth of the matter is that no-one has a clue on when the market will finally hit rock bottom. And even then it may be lingering on a valley for quite a while until it picks up again. So it may be worthwhile playing it smart following this rent-to-own option, jumping in today at tomorrow’s prices.

What is a Let-To-Own Contract?

This type of contract, “contrato de alquiler con opción a compra”, allows you to lease a property, whether off-plan or resale, with an option to buy it within a given deadline normally spanning 2 to 5 years. The main advantage is that the full let is discounted from the final purchase price. So if you finally opt to buy the property within the deadline, the paid rent (rental premium) will be deducted in full from the pre-agreed sales figure. Alternatively, should you choose not to, you can simply walk away and move on.

This contract has multiple advantages for both grantor and grantee in the context of a deflationary environment – such as the current one –. If you are of the opinion that property prices in Spain will be falling steadily over the next years, rent to buy will appeal to you.

The advantages under normal circumstances far outweigh the potential disadvantages. It is worth noting that the below listed advantages are almost certain to take place under normal circumstances; however, the disadvantages may – or may not – take place, which is why I label them as “potential”.

 

Advantages

 

For the option holder

Foremost is the flexibility it allows you. You can actually withdraw from the contract as if it were a normal Tenancy Agreement should you spot a better opportunity within the next years, forfeiting the lease of course. At no time are you forced to buy the property at the end of the deadline, it is your choice. This lack of commitment actually enables you to be on the prowl looking out for other opportunities without being tied down.

As written in the definition, the rent premium is deducted in full from the sales price, so it is not forfeited as it would normally be the case in a Tenancy Agreement.

The pre-agreed price of the property stipulated within the contract is normally well below the current market price so as to provide a reasonable incentive to prospective buyers. A markdown varies from contract to contract, but in my opinion should span 20 to 30 per cent discount on current sales prices to warrant signing it. This helps to offset the risk of property prices decreasing even further in the near future (next couple of years) as the pre-agreed sales price has already factored this in. By the same token, should property prices rise again, the pre-agreed price is respected. Win-win.

It allows you the opportunity to scout the area and know your neighbours well before you move in for the kill (commit to purchase). Did you know your next door neighbour may be a local DJ playing music late into the night? Well you could have easily avoided all those sleepless nights if you had first rented the property rather than buying it outright. When you are a foreigner it is important you carefully choose an area where you can blend in nicely. For example, not all areas are family friendly, so it may take a while until you find one that ticks all the right boxes.

If you are still based abroad, and find yourself constantly commuting to Spain, this contract is a great option as it gives you freedom and you only commit if you decide so. No strings attached.

You may freely agree on the time frame to exercise the purchase option tailoring it to suit your needs. Normally they span 2 to 5 years but can agree elsewise.

In some contracts you may assign the option to buy. This allows for even greater flexibility as the would-be buyer can sell on the right to a third party allowing for a speculative angle.

Unlike the UK, there is no option fee to be paid on exercising the option right.

For off-plan you can actually claim back the VAT you are overpaying for the lease which will be set at 18%. Buying off-plan freehold property has currently set a VAT of 8%. You are entitled to claim back the difference only if you exercise the option to buy from a developer. It is advisable there is a clause specifically worded on this point.

You are actually living in the property that will be yours in a near future without being riddled now with the associated stress of applying for a mortgage loan. Although you may not qualify for a mortgage loan at the present time you may qualify in a few years’ time when the credit market ease’s up again. Currently lenders in Spain are focusing on lending only against properties they own (because they are desperate to get rid of them).

If the property is within a Community of Owners you may come to know of internal problems which are non–apparent. You may possibly never have come to knowledge of these quirks unless you had gone through the hassle of leasing the property first. Not least is worthwhile mentioning that you will not be expected to pay the Community fees, these will be taken care of by the landlord.

The applicable laws will normally be Spain’s Tenancy Act (Law 29/1994), the Spanish Civil Code and the Private Contract of course. Tenancy laws in Spain are historically biased towards tenants so it’s always good to be protected by them being a tenant. I advise lodging this contract before the Land Registry.

For the option grantor

The advantages are self-evident. Foremost you actually have a tenant who is foremost interested in buying the property not just in renting it out, avoiding pesky time wasters altogether. An option to buy actually increases the pool of genuine potential buyers as it makes it easier for them to commit now.

The let can help offset any mortgage repayments, community fees or expenses in general thus avoiding slipping into arrears.

Having a tenant inside should normally ensure the property will be looked after properly avoiding it sitting empty which may lead to break-ins or in the worst cases even being vandalised.

On very long-term options it is normal to implement additionally an option fee. If you’re tenant defaults you can always pocket it besides the let’s deposit and the rental premium. It’s a win-win.

 

Potential Disadvantages

 

For the option holder

You are actually letting a property. You must ensure you will be able to meet the let on time otherwise you will be jeopardising the contract. Bear in mind currency exchange rate fluctuations if you’re source of income comes from abroad i.e. sterling pounds or dollars against the euro.

As it’s a let, the rent premium may be revised annually by your landlord bringing it in line with inflation. Spanish Tenancy Agreements are normally referred to the Consumer Price Index (IPC in Spanish).

For very long-term options, exceeding normally 3 years, an additional deposit (option fee) may be requested by the landlord besides the normal 1 or 2 months’ deposit for letting out the property. This may not appeal to everyone of course but it is done as a sign of a serious commitment on behalf of the potential buyer.

The main disadvantage is that these contracts last typically 2 to 5 years and in the interim the landlord’s financial circumstances may change – for the worse – i.e. if the property has a mortgage loan taken against it and the landlord defaults, it may lead to a full-blown repossession procedure. You would still have a right to let the property if it’s repossessed, as the lender must respect long-term tenants, albeit you may no longer have the option to exercise the purchase of the property in the same conditions as you agreed to initially. You would actually have to raise the funds now and pay off the outstanding mortgage on the property if you wish to buy it off from the bank. Not to mention that if you additionally paid an option fee you would likely forfeit it in the event of a foreclosure. But truth be said, lenders are showing themselves very flexible with properties they own allowing for plenty of room to negotiate. It is a buyer’s market after all and they are unlikely to let go easily of a potential buyer caving in where necessary to secure the sale.

Buyers prefer long-term options to build up equity and in the interim keep an eye on where the property market will be heading next. Short-term options appeal to vendors but on doing so they will be reducing the pool of potential buyers as few buyers will be interested. It’s a tug of war on which a consensus, balancing both opposed interests, must be sought. At the end of the day concessions will have to be made by both parties.

An important problem to consider is committing yourself on a pre-agreed price that on the long run, despite the hefty built-in discount acting as an incentive, may still be above the current market price. Obviously it makes no sense to execute the option if you are buying a property above the current market value. It would then be a case of a lost opportunity; what could you have done with the rental money if you hadn’t signed this contract? At no time are you forced to buy the property but you will of course forfeit – in full – the paid rental (opportunity cost) negating the main advantage of pursuing a let-to-buy. If you are of the – gloomy – opinion that property prices will be cheaper in five years’ time, you may want to hold out a little longer until you sign a rent to buy contract.

For the option grantor

From the grantor’s perspective it’s that you are letting your Spanish property with a potential view to selling it on at some point in the future. Letting entails the risk of the tenant defaulting becoming a non-paying tenant in which case a formal eviction procedure would have to be followed before the law courts. This can however be mitigated to a great extent requesting for long-term options (those exceeding 2 or 3 years) a deposit (option fee) from the option holder as a token of good will or else you can always include an arbitration clause in lieu of having to resort to the civil courts which brings down significantly the timescale – and costs! – on having the non-paying tenant removed from your property.

The opportunity cost. On signing this agreement you will be held legally bound for whatever timeline you’ve agreed upon. This is particularly annoying in the event of a cash-buyer springing out of the woodwork knocking at your door… Although it may sound unrealistic given today’s bleak outlook, should the market pick up again this is bound to happen and must be carefully weighed in. By accepting a rent-to-buy contract you are implicitly gambling the market will remain depressed for the next years. It makes no sense whatsoever to grant this option if you expect the market to rebound in a couple of years.

It goes without saying you will have to carry out a thorough screening procedure on potential candidates weeding out unsuitable profiles (bad debtor´s list). Fortunately you can now rely on external databases, such as FIM’s, which can greatly assist you eliminating professional non-paying tenants that abuse Spain’s legal system.

In Conclusion

Rent-to-own schemes may not be everyone’s cup of tea albeit it is a very interesting option to pursue if you’re serious and committed on buying a property below the market value (BMV) taking advantage of today’s market turmoil. On following it, you will simultaneously retain a certain degree of freedom should either your personal circumstances – or the markets’ – change. Buying property is always a serious decision for most people and this type of contract actually allows you the flexibility to live in it without forcing you into buying it.

When the market picks up again in “X” years’ time (take your pick), these contracts will no longer be as widely available as they are today both on off-plan and resale property. It is precisely the current financial uncertainty which drives landlords and developers to offer this type of contract that may benefit both them and the would-be buyer (option holder).

Those who are resolute on buying a cheap property, which has already a pre-agreed significant built-in discount in relation to today’s prices, may already profit from the current market uncertainty removing all the associated stress – and potential lost opportunity cost – of second-guessing where today’s property market will be heading next. Might as well leave all the guessing-work to experts throwing darts, however fun it may be, and just play your cards right. Mind you, these “confounded” experts do seem to always get it right… in hindsight.

And to close this article, I recommend you hire a registered Spanish lawyer to either draft this contract or else to review an existing one (if it’s the case) so as to avoid rash decisions that may lead you to future losses.

Remember: only because a contract is labelled as a “let to buy” it doesn’t automatically qualify it as a good deal (it could very well be a raw deal); especially if the built-in discount is not high enough to offset the risk of prices decreasing over the next years – very likely.

All that glitters is not gold” – Aesop.

Ancient Greek fabulist or story teller.

 

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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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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Renting in Spain: Top 10 Mistakes

Raymundo Larraín Nesbitt, June, 8. 2011

As summertime draws lazily upon us, with its beckoning sunny days and even longer nights, the rental season in Spain reaches its peak. With this in mind, I thought it would be a good idea to summarise in a brief article the most common faults that both landlords and tenants stand to make on renting in Spain.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of June 2011

 

 

Introduction

Despite what poet Thomas Gray would have us believe, “Where ignorance is bliss, ’tis folly to be wise”, this line of thinking when it comes to renting in Spain can get you into trouble. Some of these slip-ups, besides being expensive, may even lead landlords to be criminally prosecuted by their own tenants in the most extreme cases.

Many problems can be traced to the fact that landlords remain largely unaware of the legal implications of renting out a property in Spain. What renting entails is actually losing possession of the property for a certain pre-agreed period of time in exchange of perceiving a regular income. This means you can no longer enter the property for the duration of the rental if it is not with the express permission, preferably in writing, of your tenant, regardless if he’s up-to-date or not with the rental; that is not an issue. Landlords cannot enter their own property even if it’s just for ‘inspection’ purposes without the said permission. This frequently overlooked blunder is single-handedly responsible for stemming most of the letting misunderstandings.

There are many more that I could have listed below, but for simplicities’ sake I’ve decided to weed them out to keep the article sharp and short. Read further to help avoid turning renting into ranting under the sun.

 

Landlord’s Top Five Mistakes

 

Many expat landlords are unaware of the different mechanisms in place to secure rental income and often fail to implement them in their rental agreements which can leave them unprotected if the tenant does not, or cannot, pay the rent. These mechanisms are explained in-depth in my article Letting in Spain: The Safe Way.

Most blunders made by landlords are related to their tenants becoming non-paying tenants. This can understandably exert great pressure on landlords, especially if they are relying on the rent to offset it against their mortgage repayments, which can easily lead them to take rash decisions that may come back to haunt them later on in life.

1. Shutting off utilities (water & electricity). Landlords often feel the urge of doing this on their tenant missing out on their rental. If you happen to do this your tenant can report you to the police. Doing this may be labelled as either coercion or harassment or even both. Your tenant can prosecute you criminally on doing this and you may find yourself being remanded in custody. So maybe you ought to think twice before walking down this path. If the utilities are in the name of the landlord and he stops paying them on purpose to mount pressure on the non-paying tenant he can equally be prosecuted as it’s equated to shut-off the utilities physically.

2. Changing the locks. Same as above, it may be regarded as either coercion or harassment or both and you may be prosecuted criminally for this.

3. Taking justice into their own hands. Evicting non-paying tenants with the assistance of newly-acquired “acquaintances”. Landlords may feel tempted to take justice in their own hands and break-in their own property assisting the decision-making by bringing in some ad hoc square-jawed tattooed acquaintance as backup. This is seldom a bright idea and may land you and your “friends” in a Spanish jail for unlawful entry (trespassing). The only – legal – way to evict your tenant is to hire a lawyer and initiate a formal eviction procedure through the Spanish law courts. New laws have been enacted to help speed-up the eviction procedure. But on average it is still taking 5-9 months depending on how clogged local law courts are.

4. Entering the property under the guise of a ‘routine check’. Although it may be highly tempting to take a quick peak from time to time, especially after a noisy summer party that’s kept the neighbourhood up all night, it is seldom a good idea.“It’s my property and I will enter it when I please.” I’ve often heard this line from disgruntled landlords who just cannot stand the fact they are forbidden from entering their own property in Spain if it’s not with the prior –written– permission from their tenant. You simply need their permission following Spain’s Tenancy Act regardless if they are paying the rent or not.

5. Eleven-month contracts are short-term and watertight. Erm, I’m afraid not. This single blunder is responsible of many legal problems at a later date. What qualifies a rent as either short or long-term is not the fact that it’s labelled one way or the other. What matters really is that the tenant and his family are not using the property as their main residence and this must be expressly built and worded into the Tenancy agreement so it’s truly a short-term tenancy. Tenants can successfully challenge at court short-term 11-month contracts morphing them into long-term ones (5 years). During the next 5 years you will be unable to recover possession of the property whilst the tenant pays being forced to rent it out. The new Express Eviction Law has now amended this and allows landlords to introduce clauses that waive the statutory long-term requirement of 5 years i.e. a clause whereby it is stipulated that the property will be needed for the landlord’s own use or for that of his family. However, if after 3 months’ time the landlord – or his family – has not taken possession of the property, he will be forced to re-install his ex-tenant and award him a suitable compensation to offset the expenses of the move.

Luxury rentals waive this protection as Spain’s Tenancy Act does not apply to them; luxury rentals are ruled by the will of the parties. EDIT: luxury rentals in legal terms no longer exist after an amendment to the Tenancy Act.

 

Tenant’s Top Five Mistakes

 

To be fair to landlords tenants also make their fair share of mistakes.

1. A verbal Tenancy contract is better than a written one. Not really, no. I honestly don’t know where tenants get this idea from. In Spain verbal contracts are equally valid as written ones. The problem lies when there are disagreements. It’s very difficult to prove what was actually agreed in a verbal contract i.e. landlord pays for the utilities. It’s in the best interests of both tenant and landlord that rental agreements are always put in writing. Tenants have a right to demand having a verbal contract put in writing by their landlord.

2. I can always offset the 2 months’ rental security deposit against my unpaid rental. No you cannot. That two month’s initial security deposit serves its own legal purpose and at no time can be used to compensate rental shortfalls.

3. I can always leave the property ahead giving 30 day’s notice. Yes you can but you will be held liable to pay for the remaining months you agreed to rent i.e. say you signed an 11-month contract and on the third month of the let you give notice that you will be leaving ahead of the expiration of the agreed rental. You may leave ahead but you will owe the let for the remaining 8 months despite you giving notice; it is unrelated. Some landlords will pursue you legally if you fail to pay the balance owed while others will rather turn a blind eye thinking it’s hardly worthwhile all the legal hassle. The sum owed will normally be the decisive factor on whether legal action is warranted. Whatever the case may be, you ought to know that legally you owe the outstanding months and if you decide not to pay them you are taking a legal gamble that may or may not payoff.

4. Deducting damages from the rent. All tenants feel tempted to fall for this one.

Classic examples of this would be:

i) After heavy rainfall I’ve had this terrible damp patch with an aggressive mold growth which has cost me €300 to be removed. Plus my new laptop got damaged as a result (€1,000). I’ll deduct the €1,300 from my let to make up for both.
ii) The washing machine broke down and cost me €150 to repair.
iii) My landlord is not paying the community fees and as a result I’m now being disallowed from using the complex’s facilities i.e. swimming pool. I’ll just pay €300 less a month to offset for this.

I could put more real-life examples of the queries I’ve received over the years but I think that will do for now. At no time can a tenant decide unilaterally to pay less rent or withhold part of the rent to offset against these unforeseen damages or expenses. First of all some damages have to be paid, under law, by the tenant himself; especially those relating to the normal wear and tear on renting out a property (Art 21 of the Urban Tenancy Act as well as Arts 1.563 and 1.564 of the Spanish Civil Code). It is seldom a good idea to practice a retention or withhold amounts when you feel it’s appropriate without having the landlord’s prior agreement in place, in writing. This may even be a cause for legal eviction as you are effectively breaching the signed Tenancy agreement.

5. The property is being repossessed and I’m being asked by the lender to vacate it. Actually you don’t have to in long-term tenancies (three plus years). Following Art 13 of Spain’s Tenancy Act it allows tenants to stay in the property until they complete 5 years providing it is truly a long-term tenancy (i.e. your usual place of abode). This is true for urban rentals signed after the 1st of January 1995. The bank after repossession takes on the role of landlord. Lenders on repossessing the property must respect by law outstanding tenancy agreements. The tenant must continue paying the rent to the new owner, the bank. Obviously both tenant and bank (now landlord) are free to reach an amicable settlement whereby it is agreed the former leaves the property ahead of the statutory five-year limit in exchange of a suitable compensation.

Renting in Spain: Top 10 Mistakes – In Conclusion

Spain’s Tenancy laws are biased towards tenants for historical reasons that need to be addressed immediately. Government, both at a national and regional level, has taken notice of this and are regularly passing new laws, i.e. Express Eviction Law, with the aim of streamlining rental procedures. There is still much to be accomplished if Spain’s rental market is to become as strong and relevant as that of fellow European countries.

Landlords and tenants should always seek legal advice on renting property, particularly prior to making rash decisions related to non-payment so as to avoid costly mistakes.

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

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

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          Home Rental TaxationSpain’s Tax Office Rental Advice in English (A.E.A.T. or Hacienda)

 

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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Landlord: Keys to Successful Rental Income

Raymundo Larraín Nesbitt, January, 31. 2008

Article copyrighted © 2008. Plagiarism will be criminally prosecuted.

By Raymundo Larrain Nesbitt
31st of January 2008

 

Over the last decade we have witnessed an explosive growth in the rental market in Spain. Coastal areas are awash with properties to let by expat landlords. However, many landlords are unaware of the different mechanisms in place to secure such rental income and therefore often fail to implement them in their rental agreements, which leaves them unprotected if the tenant decides to stop paying the rent. Mechanisms such as bank guarantees and rental income insurance enable them to rent out their property safely. In this article we strive to deliver some legal insight by identifying and employing such mechanisms in your own advantage.


The problem with defaulting tenants in Spain

Dafaulting tenants have become a real nuisance for landlords who rent out their Spanish property. The number of tenants who default on their monthly payments is increasing at alarming rates, to such an extent that it is considered the main reason as to why landlords don’t let their properties.

If your tenants stops paying the rent, it is advisable to start an eviction process as soon as possible. An eviction process can take anything ranging from 10 to 18 months. The loss of rental income during this period of time can leave the landlord in bad financial shape, and things may turn uglier if the rental income is partly being used to pay off a mortgage: if the monthly payments are not met, the bank could repossess the property. A horror story that many a landlord can be faced with.

Tips on how you can secure your rental income in Spain

There are different options you can implement either to reduce the risk of not being paid your monthly rental income, or completely eliminating it. The cost varies depending upon the level of protection each option offers, which ranges from ‘free’ for the most simple tenant credit checks, to the most expensive rental income insurance options (which can be up to one month’s rent fee for a one year insurance rental policy)

These options are the following:

  1. Know your tenant. A good starting point is to know well your prospective tenant. This is something which is done in the UK although not in Spain, safe in large cities such as Madrid and Barcelona. It would be most advisable to request from your prospective tenant a copy of their last payslips much like in Britain is done. If he has a labour contract (indefinido) he is –generally- more financially reliable than a self-employed (autónomo). Additionally, requesting a letter from their bank manager as to ascertain their financial ability might be a good idea.

    These easy steps help to weed out professional squatters who move around the country only paying the first month’s rental or two and then stop paying all together. Unfortunately Spain’s laws are biassed to protect the tenant, not the landlord, and some unscrupulous people take advantage on this fact.
    By law you are entitled to request a month’s rental as a deposit following art. 36 of the Rental law for dwellings which the rental agency normally withholds.

  2. Agree to setting up an Arbitrage mechanism.- May be included in the contract’s clause as an alternative option in lieu of litigation. The ruling by the abitror compels both parties and cannot be appealed. This option is available mainly in large Spanish cities and saves considerable time.

  3. Implement a rental Bank guarantee. Our advice for landlords is to require from a prospective tenant a rental bank guarantee or “aval bancario”. This would ensure the landlord against the tenant defaulting. The landlord may execute said guarantee and the bank would be obliged to pay them immediately as it is an executive title in Spanish law. The bank in turn would claim this amount on the tenant. This bank guarantee should ideally be made to secure the following 5 years even if the tenancy agreement is for short term (eleven months).

    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, the tenant may default on the second month, the landlord after having sent to the tenant letters claiming the owed rental to no avail, executes the bank guarantee (which secures for example 6 months rental). In despite of this, the tenant will still be living in the property. The landlord would then have to wait until the six months are over to initiate an eviction proceeding at the court.

    Ideally rental bank guarantees should be exercised after the 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 Civil Code. We advise you to hire a lawyer on doing this.

    In the current economical context in which -specially in coastal areas- tenants are defaulting increasingly this bank guarantee would act as a safety net for landlords ensuring payment once the eviction process is over helping to take off stress.

    Is a rental bank guarantee suitable in all cases?

    No it isn’t. It is suitable for long term tenancy’s (eleven months renewable) not for short periods such as summer lets (one month or a couple of weeks).

    A bank guarantee is expensive and requires the 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 either because they simply do not have the money or, even if they do, are unwilling to have it tied-up until the guarantee elapses which could be as long as 5 years.

    Does the bank guarantee ensure the tenant’s financial ability?

    No. The bank at no time carries out a due diligence on the tenant’s assets and financial ability. It only guarantees that the tenant deposited an amount of funds equivalent to say twelve months rental which you can claim on default. The tenant cannot dispose of said funds until the bank guarantee elapses. Notwithstanding banks include clauses that might hinder the execution of the guarantee which is why we recommend you to hire a lawyer to help arrange these guarantees and avoid abusive clauses which render the guarantee virtually unclaimable.

    At what stage is this bank guarantee handed over to the landlord?

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


  4. Arrange a Rental Insurance. In Spain there are companies that offer relatively inexpensive tenancy insurance charging only a one-time annual fee equivalent to 60%-100% of a monthly rental. This insures the landlord against the tenant defaulting, and covers lawyers’ fees during the eviction process (up to around 2,100 €). They also insure different scenarios such as the tenant destroying furniture during the eviction process up to a pre-agreed capped amount (normally 3.000 €).

    These insurance companies do evaluate the credit risk of the prospective tenant unlike banks with rental bank guarantees.

    i.e. A typical monthly rental of 900 € would mean you would have to pay one annual payment of 900 €.


Duration of Spanish Rental Contracts

In Spain short term lets (typically 11 months) have been devised to waive the Rental Act (LAU). The LAU stipulates that any tenant staying longer than a year in a property without the landlord’s opposition is entitled legally to stay in it for the next 4 years making a total of 5 years (long term let). That is why a bank guarantee should last ideally 5 years even if the tenancy is for a short term let (eleven months).

Having signed a short term let is no guarantee as in case of default it might transform itself into a long term let if the landlord doesn’t act fast enough. That is why an eviction process becomes a necessity in case of unpaid rental. Landlords in general cannot afford to have someone occupying their property for the next five years. This is where a lawyer is needed.

 

Conclusion

Finding a tenant to let your property is no major feat albeit evicting one takes its toll both in time and money.
That is why it is most advisable to hire the services of a lawyer from the on start, before you even begin searching for a tenant. A good independent lawyer will draft a rental contract covering diverse issues such as bank guarantees and rental insurance protecting your interests even if the tenant defaults.

Besides, there is also a cost of opportunity in which your property will be occupied by the tenant during the eviction procedure for the next 10-18 months in which you will be both losing rental income and still be obliged to face mortgage repayments.

Hiring a lawyer may well mean the difference in saving yourself thousands of pounds in legal fees and expenses as well as removing all the associated stress of a defaulting tenant.

 

Are you Renting out your property?

We advise you to hire the services of a lawyer to ensure you are fully protected if your tenant should stop paying the rent. Lawbird Legal Services offers the Drawing up of a Rental Contract service, which includes options such as implementing rental bank guarantees or setting up rental income insurance policies. If you are interested in this service, please contact us.

 

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

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing, taxation, and inheritance. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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