Marbella-based lawyer Raymond Nesbitt goes on to explain the new changes afoot in rental laws in Spain.
EDIT (23-01-2019): Congress repealed this new rental law. Please read our blog post for all the details: Congress repeals Spain’s new rental law after just 35 days – 23rd January 2019
Article copyrighted © 2019. Plagiarism will be criminally prosecuted.
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of January 2019
Soviet mural in Karaghandy, Kazakhstan.
Last December saw a number of changes afoot which could easily trip you up faster than having to explain to someone why Brexit will have no impact in our life’s, ha!
If you have been following our articles and blog posts, you will be aware that Spain has undergone a spectacular two-digit rental yield growth YOY over the last three years. This outstanding advance can be pinned down to a number of factors, but it is not the point of this article to digress and delve in the underlying causes. To simplify, the main two causes have been a landmark pro-landlord amendment to Spain’s Tenancy Act from June 2013 and foremost the irruption of new big players such as property portals i.e. AirBnb. Adopting more relaxed laws coupled with the advent of holiday platforms, account for this huge spike in asking rental prices.
As a result of the unbridled growth in rental yields, given how Spain’s rental market traditionally remained sluggish as laws were clearly biased pro-tenant for historical reasons, whole generations of young Spaniards are now being locked out of the market. Despite a severe correction of property prices post-bubble that saw an average price drop of 50% across the board, the truth is that Spanish youngsters still struggle to get a grip on the first rung of the property ladder. A combination of precarious jobs, low wages and high asking rental prices has led to almost 50% of those aged 18 to 35 years old to still live with their parents in Madrid, for example (source: El País).
Spain’s government, ideologically of centre left wing, has taken a series of measures to ensure these problems are challenged in benefit of society. They have increased the minimum wage by almost 30%, the largest increase over the last 40 years, and have now directly tackled the rental problem by enacting a batch of new pro-tenant regulation that greatly empowers long-term tenants (in detriment of landlords). These changes - fortunately - hardly affect holiday lettings.
There is talk that the government’s hard left-wing allies, feel these changes fall short and want to take matters a step further; they have steadily mounted pressure to take a bolder stance and actually go as far as to determine - by decree - rental prices. Whilst this state price allocation has not occurred as of yet, it would indeed be a very misguided step in the wrong direction. Some would even argue this policy has a whiff of communism.
In all my articles I clearly position myself against such state interventionism because, at least to my mind, they clearly introduce market distortions creating serious anomalies and imbalances. We are not in fact living in a planned economy and the government has no business in fixing renting prices by decree.
As an example of this, back in 2017 the Balearics property market was booming, it was Spain’s undisputed hot spot leading the property pack. The local ruling hard left-wing coalition decided to cool down sales prices and asking rental prices in benefit of youngsters seeking affordable accommodation by passing a new stringent regulation that severely restricted holiday lettings. In their minds, they thought these well-intentioned changes would bring down asking rental prices to a more affordable level allowing more young people on low wages to let. Reality bites.
I unequivocally criticized these new measures as counterproductive in my article New Balearics holiday rental law – 8th September 2017. Not 6 months had elapsed since this clumsy law had been approved, when the Balearics property market crashed, going from a spectacular 15% growth year-to-year to sales plunging by almost 30% as can be read in a local newspaper.
You would think that, at the very least, after grinding the Balearics market to a standstill the ruling coalition managed to cool off asking rental prices, yes? Wrong. They increased by over two digits YOY.
This is because the market is 'wise' and will adjust itself accordingly. If you artificially stifle supply (by creating draconian requirements for holiday lets that effectively wipe out 50% of supply) but demand remains unabated, then the logical consequence is a price hike of the good or commodity, which is exactly what’s happened. Moreover, ironically a hard left-wing coalition have made the rich richer and the poor, poorer. They have indirectly greatly benefitted well-off owners of detached villas, who are now unshackled to offer their properties as holiday lets without restrictions, as opposed to more humble landlords who own city centre flats and who have seen their owner's rights curtailed as they have been outright banned from offering them as holiday lettings.
Regarding the 'brutal' increase in the minimum wage from last December - whilst commendable - in practice will likely greatly disincentivise (understatement) businesspersons from hiring new employees as in addition to the minimum wage, employers must also pay for Social Security which is over 1/3 of the wage on top. Furthermore, it may even lead to massive layoffs. January 2019 in fact saw the largest figure of employees being let go by companies, with over 274,000. This is the worst figure in over a decade, not even during the recent Great Recession were the figures this bad. To put these numbers into perspective, that is 100,000 more workers losing their jobs than in the same period in the previous year (176,000 in January 2018). Clearly, there is a correlation between the government's (clumsy) vast increase of the minimum wage last December (the largest in four decades) and thousands of people losing their jobs on the following month (source: Idealista).
Whilst it is always commendable in life to aspire to lofty ideals, these have real consequences when put into practice; this is particularly true of those politicians who have a penchant for them and who have never in their life worked in the private sector having lived off public stipends for all their life.
Politicians wield huge power and should carefully ponder the consequences of their ill-thought actions in the real economy and above all, and most fundamentally, on how these changes impact on ordinary families’ life’s.
Changes to Spanish rental laws
The Government approved by Royal Decree last December a spate of game-changers for the rental market. Legal persons acting as landlords should be acutely aware of such changes if they rent or plan to rent out in Spain long term. Physical landlords should take note of the first bullet point.
The idea is to keep it simple and briefly list the most significant changes without going into esoterics. All changes effective from the 19th of December 2018. Prior signed rental agreements follow previous regulation, unless agreed otherwise.
I will be taking as reference my 2016 article Urban Rental Law in Spain – Spain’s Tenancy Act (Ley de Arrendamientos Urbanos, LAU). I will take for granted legal concepts and will make no effort to explain them; if you are at a loss for example on mandatory and tacit renewal periods, you should read the above article to understand where I’m coming from.
It is strongly advised to read in tandem the above-mentioned article with the brief bullet points collated below to get the big picture on what’s changed in 2019.
- Physical landlords: 5 years mandatory renewal period on long-term rentals (plus 3 years tacit renewal periods). Was three years plus one.
- Legal landlords: 7 years mandatory rental period on long-term rentals (plus 3 years tacit renewal periods). Was three years plus one.
- Legal landlords: additional bank guarantees demanded by a landlord on long-term rentals may not exceed a two-month deposit. Landlords typically request additional guarantees besides the compulsory one-month tenant deposit, especially when a tenant is a non-resident (because of the increased financial risk). These guarantees are now capped for legal persons acting as landlords. For physical landlords there is no change and may keep requesting additional guarantees in excess of the 2-month deposit.
- Legal landlords: landlords - by law - will pay the commission to estate agencies on tenancy agreements: it was the case that tenants paid half or all this commission whether directly or not.
- Holiday lettings: Spain’s Horizontal Act is amended allowing Community of Owners to vote by a simple majority of 3/5 to ban outright holiday rentals within a community. I had already pointed out in a blog post in 2017 that this step was necessary, as the Horizontal Property Act at the time required unanimity to ban them, which logically was never going to happen because landlords would vote against it because of their vested interest. This measure has no retroactive effects.
- Holiday lettings: Spain’s Horizontal Act is amended allowing Community of Owners to increase the communal quota assigned to a landlord (capped at 20%) of the overall community budget. In plain English, communities of owners may now vote to increase the community quota of a property owner who uses his property/ies as holiday lettings. This agreement will have no retroactive effects.
In my view these changes are a faux pas and will understandably make landlords (specifically those acting as legal persons) wary of renting out long-term thereby greatly restricting supply (as legal persons have thousands of units in their possession). Who in their right mind wants to lock themselves into an eight-year contract, or a ten-year for legal persons, losing possession of the property for that long? There has to be an attractive incentive to counter the increased risk these changes bring.
Whilst these changes no doubt can be electorally capitalized, garnering legions of votes on polling day from disenfranchised young men and women who are in need of affordable accommodation, it is uncertain they will actually benefit tenants.
It should be noted that landlords had already been dumping long-term contracts over the previous three years in benefit of the far more lucrative short-term holiday lettings restricting furthermore the long-term supply of properties.
These new changes in law will further compound and exacerbate an already scant supply of long-term accommodation leading to a foreseeable hike of rental prices across the board as more and more landlords will pull out from long-term rentals because of the increased perceived risks for them; exactly the opposite effect of what is sought by lawmakers on passing this new regulation nationwide which is vying to make accommodation more affordable for everyone, especially the more vulnerable collectives on precarious McJobs with low wages, namely youngsters.
Alas don’t fret, ‘fortunately’ for us the government has this base covered as there is talks of planning to intervene rental prices (shortly), goaded by their left-wing political allies, setting them out by decree like in a planned economy! Let us hope common sense prevails and this clumsy policy is not adopted by the incumbent.
I just cannot begin to express how wrong and harmful this decision would be and how counterproductive it could prove for the overall rental market. We’ve already seen last year how a well-meaning (albeit naïve) political decision by a hard-left-wing coalition in the Balearics led the property market to plunge into chaos resulting in fact in the opposite effect of what was sought; a two-digit hike in rental prices YOY (and mounting) making life of all those seeking affordable rental accommodation in the Balearics even more miserable.
Only time can tell whether these well-meant pro-tenant changes introduced by Spain’s government will in fact benefit (long-term) tenants, or not.
My money is it won’t.
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"Everyone thinks of changing the world, but no one thinks of changing himself.” – Leo Tolstoy.
Count Lev Nikolayevich Tolstoy (1828 – 1910). Was an unparalleled writer of universal acclaim author of pivotal novels such as War and Peace and Anna Karenina. His works attained the pinnacles of realist fiction. The strife’s of the Crimean War imbued in him a strong religious sense that would lead him to reinterpret the teachings of Jesus coalescing in his ideas of non-violent resistance. These ideas are epitomised in his work The Kingdom of God is Within You which would go on to greatly influence two of the most towering figures of the 20th century, Mohandas Karamchand Gandhi, and Martin Luther King, Jr.
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Article also published at Spansih Property Insight: Changes to Spanish Rental Laws.
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