The Government approved on 1st March 2019 the Royal Decree-Law 7/2019 on urgent measures for housing and rentals that modified the Urban Leasing Law (LAU). The idea behind this modification is to increase the protection and security of the tenants, even above the levels they enjoyed before the changes introduced in the 2013 reform that was approved to make more flexible and boost the market. It is still something to see if this changes that pretend to protect the interests of the tenants, do not end up slowing down the market or making it more expensive if the result is that there are fewer owners willing to rent due to the implemented changes.

What changes in the LAU does include the Royal Decree approved in March?

1.- Duration of the contract and its extensions:

The LAU previously stated in article 9 that the duration of the leases will be the one freely agreed by the parties although these are automatically extended for annual periods if there is not, with at least 30 days in advance, an express statement by the lessee that he/she doesn’t want to renew it. Contracts in which a term of duration has not been stipulated, or is indeterminate, shall be deemed signed for one year.

The new wording of the LAU in this article 9 extends from three to five years the duration of the mandatory extension for the rental contracts of habitual (non-temporary) housing, as it existed before the 2013 reform, but also extends the mandatory extension to 7 years in cases where the landlord is a company or legal person, and that is a novelty.

That is, the contract may be agreed for as long as the parties agree, but the tenant may renew it, for annual periods until 5 years have elapsed (if the landlord is a natural person) or 7 years (if the landlord is a company or a legal person) without the landlord being able to oppose it.

There are important changes also in relation to the tacit extension of the contract, that is, when the parties have not communicated their intention to not renewing the contract after the mandatory extensions, since in these cases now the renewal or tacit extension is for three years instead of one year as it happened until now. Therefore if the tenant or the landlord do not wish to continue with the contract after the legal minimum duration of the contract, they must notify with four months in advance in case of the landlord and two months in advance the tenant, since otherwise the contract will be legally extended for another three years, making a total of 8 years or 10 years.

2.- Recovery of the house for use by the landlord:

It also changes the power to recover the property by the landlord in case they need it for their own use. With the new wording of the LAU the following requirements must be met so that the mandatory extension in favour of the tenant does not proceed:

• That one year of contract has elapsed
• That the landlord is a natural person.
• That there has been an specific mention in the contract that before the minimum duration of the mandatory extension of 5 years there will be a need to use the home as habitual residence for the landlord, his children, his parents, or his spouse in case of divorce or separation.
• Notify the tenant with two months in advance explaining the causes.

But if three months have elapsed after the termination of the contract or, if applicable, the effective eviction of the dwelling, the landlord or their relatives had not come to occupy the dwelling, the tenant may opt, within thirty days, between:

• Be replaced in the use and enjoyment of the leased housing for a new period of up to five years, respecting, in the rest, the existing contractual conditions at the time of extinction and with compensation for the expenses that the eviction of the house would have supposed until the moment of reoccupation
• Be compensated for an amount equivalent to one monthly payment for each year that remains to be completed until the five years of the mandatory extension are completed

Before the Royal Decree it was not necessary to include specifically this in the contract nor was the calculation of any compensation established.

3. Sale or transfer of the rented dwelling:

Article 14 establishes that the letting contract is not extinguished in the event that the landlord sells the property to a third party.
The new owner takes over the obligations of the contract and replaces the previous one during the term of the contract (5 or 7 years depending on whether the landlord is a natural or a legal person unless the tenant expresses his intention to terminate it) regardless of whether the lease was or not registered in the Land Registry.

If the contract was agreed for a longer time, the new acquirer will give the tenant a compensation of 1 month’s rent for each of the years that exceed 5 or 7 and that he/she will not enjoy, unless specifically stated in the lease contract that the transfer of the property will extinguish the contract, in which case it will only be obliged to keep the contract for the period of minimum duration established by law (with mandatory extensions) but not to the aforementioned compensation.

4.- Rent

The parties can agree on the rent, which remains free, but its revision must be expressly agreed in the contract, so that if there is no agreement, the amounts will not be reviewed. The revisions in any case, when they are agreed, must be made from year to year and in any case they cannot be superior to the variation of the CPI.

In addition, Article 19 establishes that the rent may not be raised for improvement works carried out by the landlord on the property during the first five or seven years of the contract. It can only be raised in the event that the contract is of a longer duration and in the amount resulting from applying the legal interest to the invested capital, increased by three points, but without being able to exceed 20% of the current income in any case.

The raise will take place from the month following the tenant is notified, providing the landlord in that notification all the relevant documentation and calculations.

The parties may agree that the general maintenance costs of the property that are not subject to individualization are borne by the lessee, including the cases with properties under horizontal law ownership (those that share common areas). In any case the agreement must be included in the contract and it has to be determined the annual cost of the same. The agreement on the payment of taxes will not be applied when the tenant is the Administration.

The expenses of real estate management and formalization of the contract will always be paid by the landlord if it is a company or legal entity.

5.- Preferential right and pre-emption right

Article 25 has been modified so that the Public Administration now has a preferential purchase right and pre-emption right when the leased property is sold together with the remaining dwellings or premises owned by the landlord that are part of the same building or when the all the properties and premises of the building are sold jointly by different owners to the same purchaser.

6. The rent guarantees

At the signing of the contract it is still required and mandatory the payment of a deposit for the equivalent of a monthly rent for the lease of houses and two monthly payments in the case of different use to housing (commercial, garages, storage rooms, etc.). After the 5 or 7 years of mandatory extension of the contract the deposit will not be updated, but its increase or decrease may be requested if once extended the term the amount of the monthly rent varies up or down.

The novelty is that now the parties cannot freely agree on additional guarantees to the deposit in cash that they wish for the fulfillment by the lessee of their obligations, as they are now limited to a maximum of two monthly payments of the rent.

7. Improvement works

The agreement between landlord and tenant for the realization of works that may also increase the rent is allowed to happen before finalizing the contract. The works do not interrupt the period of mandatory extension. It is also maintained that the improvement works carried out at the end of the legal term of 5 years, or 7 years in the case of a legal person, give the possibility of increasing the rent up to 20% of the amount it was paid up to that point, having in mind the value of the refurbishment but discounting the subsidies that might have been received.

8.- Management fees

The costs of real estate management and contract formalization will be always borne by the lessor when it is a legal person or a company.
The Royal Decree also includes changes in other legal texts:

In the Horizontal Property Law

On the one hand, the communities of owners are now empowered to limit the activity of tourist rentals within it, so that by qualified majority of three fifths of the owners, the communities of owners can adopt agreements that limit or condition the exercise of the activity of the tourist rental of properties. Prior to this legislative modification, the communities of owners only had the possibility to limit or prohibit the activity of tourist rental or accommodation by modifying the statutes, which required the unanimous approval of the co-owners. Now they can limit the time when is rented, the percentage of properties, forbid the activity, set conditions for its exercise or increase community expenses and fees to the owners who exercise that activity.

In the Civil Procedure Law:

Article 441, in section 5, includes the stoppage of eviction in case of social and / or economic vulnerability of the person evicted. When the judge orders the eviction, social services must be notified and can interrupt the period of suspension in a month, if the landlord is a natural person, and three months, if the landlord is a legal person, in case there is a situation of vulnerability for the tenant and until a housing alternative is sought for them.

In the Regulatory Law of Municipalities and Councils:

The Real Estate Tax (IBI) regime is modified, excepting the obligation to pass it on in cases of social rent; enabling municipalities to establish different types of tax, allowing a surcharge of up to 50% for unoccupied real estate or allowing bonuses for residential real estate intended for rental of housing with limited income by a legal rule.

Consequently, we can summarize that it is an eminently protective and very advantageous law for the tenants and that it aggravates the treatment that existed for the landlords, and especially when they are legal persons.

 

Luis M. Vicente Burgos
Vicente & Otaolaurruchi Abogados