The regional Government of Andalucía and the Government of Spain have come into direct collision with respect to the adoption of a series of legal bodies in the autonomous region that regulate the social objective that housing should have. Thus, the Junta de Andalucía shall be empowered, for example, to fine companies that own empty homes or landlords who do not maintain the property in good state of habitability. A register of uninhabited houses shall be set up and the Authorities will be able to request information from owners and service providers about the use of utilities. Finally, they will be able to expropriate temporarily the use (not the ownership) of the properties from those banks that acquired them by repossession, provided that the debtors have no financial means and where the property was their main and only residence, being therefore in risk of social exclusion.
What is the chronology of the conflict?
In April last year, the Andalusian Government (“La Junta”) adopted its Decree Law on the social function of property, which was appealed by the Government of Spain to the Constitutional Court so that its application was suspended. La Junta opted to approve on the 1st October 2013 the Andalusian Law of measures to ensure the social function of property, which repealed the decree law but basically copying and expanding its original content. The Central Government reacted immediately and on the 18th December 2013 submitted a second constitutional challenge that was accepted for consideration on the 14th January 2014. As a result and according to Article 161.2 of the Spanish Constitution invoked by the Government, the Law was provisionally suspended until the Constitutional Court decides on the appeal.
What does the Andalusian law appealed by the Central Government pretend?
It begins in its preamble by invoking the Universal Declaration of Human Rights, the International Covenant on Economic, Social and Cultural Rights and the Spanish Constitution, where, in one way or another, it is provided that everyone has the right to enjoy decent and adequate housing.
“La Junta” keeps arguing that such right to a decent and adequate housing should not be limited by the individual’s right to private property as the Spanish Constitution itself establishes that this right is contingent upon a social objective, so an “antisocial” use should not be protected by the Constitution. Thus, the regional Government considers that not to give the properties a residential use is to make an “antisocial” use of them.
In the second point of the preamble “La Junta” slightly clarifies its intentions stating: “Among the various forms of not using the properties for housing, it deserves greater blame the group of properties that belong, in its different forms, to legal entities, specially those owned by financial institutions and their real estate subsidiaries, asset management entities, including those from bank restructuring and real estate development entities. They have also a quantitative importance within the statistics on empty properties.”
The preamble continues saying: “Notoriously, the use of housing as investment goods is predicated on legal entities against the natural exercise of the right to own property of the individuals, that along with other of economic and social nature becomes a distinctive element that qualifies the breach by the legal entities of the duty to target the effective housing use to be given to property.”
And then it connects all this with the very high estimated uninhabited housing park in Andalusia, and the fact that it is one of the regions with the highest number of bank evictions and a very low percentage of rented dwellings compared to neighboring countries.
“La Junta” finds that the solution to this problem is to establish policies of census, inspection and control of unoccupied housing owned by legal entities, with the aim of imposing penalties that can reach up to 9,000 Euros per empty dwelling. Similarly it articulates the possibility that the regional Government may temporarily expropriate for a maximum period of three years the use of those properties that are to be evicted by foreclosure. The purpose is that the families affected can continue to live in them as long as they meet a number of requirements (being their usual residence, not having any other property, lack of any income, risk of social exclusion, etc.).
What are the articles appealed by the Spanish Government?
A) The new wording that the Andalusian Law 4/2013 of the 1st October gives in its Article 1 to the following articles of the Andalusian Law 1/2010 of 8th March:
Article 1.3. (link)
It sets that allocating a residential use to housing is part of the essence of the right to private property.
Article 53.1.a) (link)
It classifies as very serious offense not giving the property a residential use as established by Article 25, provided that the owner of the property is a legal entity (company).
Article 25 (link)
It defines uninhabited houses as those in physical and legal situation of being inhabited and that are not occupied for periods exceeding six months a year, calculated from the moment when they could have been inhabited (new construction) or from the last time they were. It is presumed that they are uninhabited if they do not have contracts for the supply of water or electricity or if having them, they show a very low or no consumption. It is excluded the regulated housing for tourism, the properties which are owned by individuals, and those that are leased seasonally or for the exercise of an activity (industrial, commercial, professional, educational, etc.). There will NOT be penalties for uninhabited houses whose ownership corresponds to individuals.
B) The first additional disposition of Andalusian Law 4/2013 of 1st October (link)
It authorizes the regional Government to expropriate from financial institutions, its subsidiaries or real estate asset management companies, for a maximum period of three years, the use (not the ownership) of housing acquired by foreclosure proceedings, where debtors or guarantors of debts have no financial means or any other property and are at risk of social exclusion.
What has been argued by the Spanish Government to call the law unconstitutional and appeal against it?
The Government has presented a constitutional challenge against the aforementioned articles based on the following reasons:
1.- The Government believes that all contested provisions violate Article 149.1.13 of the Spanish Constitution as they affect the overall country planning of economic activity. According to the Government, the measures taken by the Andalusian Law jeopardize the restructuring of the financial system and the stability of the banks, diminishing the flow of credit and creating uncertainty in the sector, which may affect the premium risk and the economic growth.
2.- According to the Government, the new wording of Article 1.3 is also unconstitutional because it defines the “essence” of the right of private property, which does not fall within the competence of “La Junta”, because it is precisely this essence the limit that lawmaker cannot pass invoking demands of social objectives. That essence emanates directly from the Spanish Constitution and the Constitutional Court as sole interpreter of it. The Andalusian Government cannot define the essence of the right of private property from its property or urban planning sectoral competences, because it would affect the regulation of basic conditions guaranteeing the equality of all Spaniards under the law.
3.- The appeal considers unconstitutional to define “what is meant by uninhabited property“, because “a system of legal presumptions and probative evidence is articulated against the principle of presumption of innocence” guaranteed by Article 25 of the Spanish Constitution.
4.- On the other hand the Spanish Government believes that it is not sufficiently established that the owner of an unoccupied dwelling has indeed had the minimally reasonable circumstances and offers to rent, so that the penalties set forth in the law for having empty properties could be imposed.
5.- The appeal also qualifies as arbitrary the discrimination between owners incurred in housing eviction proceedings because the Junta would only expropriate the right of use to certain property owners (financial institutions, its subsidiaries or real estate asset management companies), which violates the principle of equality and non-discrimination.
Considerations to both positions
It is obvious that the discussion is not just about a legal issue, nor the battle is limited to having a different economic or social concept, but there are also other factors that are much closer to the political opportunity, potential electoral gains or wear the opponent down. The regional government tries to project the image of a reactionary Central Government, which only serves financial institutions and economic powers and oblivious to the pain of the families with less resources. The Spanish Government on the other hand draws a picture of an unfair and slightly revolutionary regional Government, politically kidnapped by their government agreements with the communist (social democrats were the second voted party behind the conservatives but achieved to keep the Government by agreeing with a coalition of left parties) that intends to sink the economic recovery with almost subversive measures that attack the right to private property. Obviously, the reality outside the political trench is neither one nor the other.
Whatever it is eventually considered and decided by the Constitutional Court, the Andalusian Government has already won the media and opinion battle in what regards to the additional disposition 1 that regulates the possibility of expropriating temporarily the use (not the ownership) of dwellings that are to be evicted by foreclosure in those particular cases already seen (sole property, no financial means, risk of social exclusion, etc). Obviously we all tend to take the side of the weak and moreover not just few ones blame the financial institutions for much of the global economic crisis. So, in this issue it is not surprising that banks do not find too many allies in the streets. It does not help that some of the reasoning for the appeal given by the Spanish Government in this specific point in the direction that prevent those evictions (only the ones that meet the requirements of the Andalusian law) for a maximum period of 3 years can blow the viability of the economic recovery, dry the flow of credit, shoot the risk premium, etc, seems quite exaggerated, especially if you consider that a similar law is in force in Catalonia, and it seems that the system has not sunk.
By contrast, in relation to Article 1 and the new wording introduced on certain articles of the Andalusian Law 1/2010 of 8th March, other considerations are accurate. The first is that, curiously, in view of the public opinion and the media coverage of this conflict, this has been left in a discreet (almost non existent) background. The Andalusian Government, consciously or not, has been nifty in placing the idea of temporary expropriations from banks at the epicenter of the discussion since from that position it is easier to receive social support assuming a role of champion of the disadvantaged against abuses of the economic powers protected by the evil Central Government.
But these articles have some gray areas with a complicated lace, on which, either the Andalusian lawmaker has not done all the work that should have, or has directly legislated on the right to private property from some starting ideas who might not understand the essence of such.
Already in the preamble there are some statements that show certain manichaeism and simplicity in some conceptions with respect to legal entities that the people responsible for drawing this law seem to have, such as considering that uninhabited properties owned by companies deserve more blame (as opposed to those owned by individuals) or that the use of housing as investment goods is predicated on legal entities against the natural exercise of the right to own property of the individuals. Is this right? Do really all homes registered in the name of companies belong to financial institutions and their real estate subsidiaries, asset management companies and real estate developers? And on the contrary, are all the homes registered in the name of individuals used by the owners to exercise their right to housing?
The answer is obviously NO. Provided that there is nothing perverse, strange, unexpected or illegal about banks executing their mortgage guarantees or that developers may have immobilized property in their hands, there are many individuals who once managed the purchase of their property through a company owned by them, something perfectly legal, and that might be supported by different reasons of tax, economical or legal nature. Similarly there is a number of individuals who may have many or several properties registered in their name and that do not keep them all occupied.
Beside the Spanish citizens who might have bought a property in the name of their companies, the Regional Government does not seem to be aware that there is a huge number of foreign owners. In their home countries, owning property through legal entities, with or without economic activity beyond the holding of the titles, it is a widespread practice, by tradition, for reasons of tax efficiency, for expediency in transfer or traffic of family wealth, etc. Those people who may have used a Spanish company or a company domiciled in their countries to buy a property in Spain, in the vast majority of cases, do not differ at all from those who acquired the property in their own name, that is, they give a personal use to the property for recreation and relax, with varying frequency. Does the regional Government consider that for the sake of acquiring the property through a company (something completely and totally legal) those purchasers are already in breach of the social objective required from private property? Are the individuals who bought their properties through a company required to keep their holiday homes occupied over six months a year under risk of penalty for not doing so? Does the regional Government believe that individuals that buy properties do not invest on them but only reside on them?
If the Andalusian Government wanted to define the content of the law exclusively to those properties in the hands of financial institutions and their real estate subsidiaries, asset management companies and real estate development entities, being quantitatively those that make up the bulk of the vacant property statistics, they have missed a great opportunity to specify so. But the law, with the current wording, throws them all into one big pot, without distinction.
I believe that the target of the regional Government is not those who buy a property through a company and give it the same use that an individual would. However, the law makes no distinction, so it remains a mere assumption.
It also seems disproportionate and more like of a police society than of a society that seeks to ensure the right to personal data protection of its citizens to create a data control system to collect information from citizens, utility companies, municipalities and financial institutions, asset management and real estate developers on the use given to private properties.
For the time being and pending the outcome of the appeal submitted to the Constitutional Court, we should not hide this matter from those foreign clients interested in buying a property in Andalusia using a company structure to hold the titles.
This method of purchase has become very familiar lately for the following reasons:
- The 3% Special Tax was abolished (except for companies domiciled in tax heavens) as well as therefore the annual reporting obligations of the effective tax residence of the company and shareholders.
- The use of corporate property by shareholders or directors is no longer subject to tax as benefit in kind in some countries as the United Kingdom and it may be worth assuming the costs of it in other countries.
- Acquiring a property, from certain values, through a foreign company can provide a considerable cost saving. These companies are exempt from paying Wealth and Income Tax in Spain, as opposed to individuals. There are also some considerations with regard to Inheritance Tax although we would look at them in a different post.
Luis M. Vicente Burgos
VICENTE & OTAOLAURRUCHI ABOGADOS
