Spanish Real Estate Regulations
Legal Tittle on Real Estate Transactions
The acquirer of a property holds its ownership right with full legal effects as from the time at which both title and transfer are completed:
- The title (“título”) is the sale and purchase agreement executed by the purchaser and the vendor, which is deemed to exist when the parties have agreed on the subject and on the price of the sale and purchase.
The manner in which the agreement of the parties is manifested (verbally, in writing, in a letter, a private contract or a public deed) does not affect the validity of the title, since Spanish Law does not require the sale and purchase agreement to be concluded in writing in order to be valid between the parties. However, most real estate transfers are concluded in the form of a notarial deed, mainly because:
(ii) it achieves the actual transfer and the full acquisition of ownership (see (b) below); and
(iii) it fulfils the formal requirements established in order for the sale to be recordable at the Land Registry.
- Transfer of the property (“modo”): the most commonly used method is the execution of a notarial deed of sale and purchase (“tradición instrumental”), which is deemed to be the actual hand over of the property at stake to the new acquirer.
The recording of real estate operations does not add anything to the validity of the transactions themselves (with the relevant exception of mortgages): a transfer of real estate may exist and be legal and valid without being recorded at the Land Registry. However, a non-recorded acquirer does not benefit from the protection granted by the registration, and cannot oppose his validly acquired right to bona fide recorded third parties.
In order to be recordable at the Land Registry, real estate transfers must be executed in a public deed (“escritura pública”) before a notary public and the relevant Transfer Tax (“Impuesto sobre Transmisiones Patrimoniales”) or Stamp Duty (“Impuesto sobre Actos Jurídicos Documentados”) must be paid prior to registration.
In practice, and as a consequence of the above, the transfer of real estate and the constitution of liens and encumbrances are almost always documented in a public deed and recorded at the Land Registry.
- On the protection of the interests of the community and of the rights of others of the same or superior rank. Most of these limits are imposed by the zoning regulations enacted by the local, regional and national authorities. These regulations may involve charges, easements and encumbrances, limitations on the use given to a property, limitations on a plot’s buildable area and even, in rare cases, expropriations. With respect to expropriations, Spanish legislation establishes that no one can be deprived of his properties without just cause based on the interests of the community, in exchange for an indemnity and pursuant to an expropriation procedure enforced by a competent authority (e.g. Town Council, Regional Government or National Government).
- There are also certain limits on the exercise of the right of ownership by proprietors who belong to a condominium of owners, i.e. those who own property within a complex real estate ensemble which has been divided into several registered units (“finca registral”) by means of a public deed recorded at the Land Registry.
- Easements (“servidumbres”) confer upon the owner of a plot or building (the dominant plot) limited rights over another person’s land (the servient plot). Easements may be positive (permitting the owner of the dominant plot to do something on the servient land, e.g. passing through) or negative (preventing the owner of the servient plot from doing something, e.g. to build over a certain height).
In order for such easements to take effect vis-à-vis third parties, they must be set out in a public deed executed before a notary and registered at the Land Registry. Easements are rights in rem and as such are transferred along with the relevant property.
- The law imposes restrictions on ownership rights over property in order to regulate relations between neighbours.
- At the free will of the owner of the property who accepts them, Spanish Law has always upheld the general rule of freedom to enter into agreements, provided that the agreement does not deal with illegal goods or activities.
By means of a lease, the owner grants the tenant exclusive possession of the leased property for a limited period of time. Long-term leases (e.g. for a 50 or 90-year duration) are not usual in the Spanish market; the standard duration of non-residential leases is between three and five years.
Although the tenant is entitled to fully use the property and carry out works which do not affect the configuration, safety and stability of the property, the owner retains all the prerogatives for encumbering and disposing of the property.
A non-recorded holder of a right cannot oppose his title to the recorded holders of rights acquired at a later time over the same real estate property (i.e. if the first acquirer of the right, chronologically speaking, does not record his title, any subsequent bona fide acquirer who does record his title will be given preference for registry purposes). A recorded acquirer is protected by the publicity of the Registry, being deemed the only legal holder of the right at stake, unless it is proved that he acted in bad faith (i.e. that, at the time of acquiring his right, he knew of the existence of transfers or encumbrances which had not been registered).
The Spanish Civil Code provides that the seller of real estate is obliged to deliver the property free of hidden defects and encumbrances (“vicios ocultos”), even those defects of which the seller is unaware, the seller being obliged to remedy such defects. Moreover there is an implied warranty given by the seller that the property is fit for its intended use. However, this obligation does not extend to defects which on minimal inspection would have been apparent to the purchaser.
The seller’s liability for hidden defects may vary depending on the circumstances. If the seller has carried out some building works for the purchaser the possible defects would most likely be regulated by the building contracts.
The recently enacted Law on Construction establishes that developers, constructors, architects and suppliers involved in the development and construction process are subject to a ten-year liability for substantial construction defects (e.g. those affecting the structure of the building), three-year liability for defects related to the habitability of the building and one-year liability for defects which have appeared in the finishings. Please note that, at present, only developers and constructors of residential buildings have a statutory obligation to take out insurance covering their ten-year liability for substantial construction defects.
In cases where no building work is carried out, the seller’s liability for hidden defects lasts only six months from hand over of the property. However, if the appearance of hidden defects may be construed as representing a breach of contract by the seller (because a specific covenant was included in the sale and purchase agreement in respect of such defects), the purchaser may take action subject to the general time-bar period of fifteen years from the point that he became aware of the defect in question.
There is also an implicit guarantee imposed by law that the property being sold belongs to the seller, meaning that the seller must compensate the purchaser if a third party demonstrates that it has title to the property and deprives the purchaser of all or part of it (“evicción”).
Private agreements for the sale and purchase of property generally contain declarations from the seller as to good title and the fact that the property is free from any charges or encumbrances. Furthermore, the seller normally declares that the property is transferred with vacant possession, where this is the case. Additionally, specific warranties can be demanded from the seller in the sale and purchase agreement.
Finally, the Civil Code contains a series of regulations which provide for the purchaser to terminate the sale and purchase agreement if the property does not have the agreed surface area (providing that the discrepancy reaches at least 10% of the agreed surface area, where the actual surface area is smaller than the agreed capacity, or 20% where the actual surface area is bigger than the agreed capacity).
Development, i.e. the transformation, construction and use of land is regulated in Spain by a complex variety of regulations set out by the State, Regional Governments and Local Councils.
State regulation is basically contained in RDLeg 2/2008 (approve the refund text of Law of the Soil). This is merely restricted to dealing with matters such as land classification, the general rights and duties of owners and the valuation of land, fundamentally for the purposes of expropriation.
As regards regional regulations, most of the Spanish autonomous regions (Comunidades Autónomas) possess planning laws containing extensive regulation covering aspects such as planning, land management and urban planning discipline.
The classification and grading of the use of land is basically carried out on the basis of the General Plan, while the execution or management of development land (or where relevant, urban land) is carried out through the process of the so-called “development plan”, i.e. through the use of the Zoning Action Programme (Programa de Actuación Urbanística), the Partial Plan (Plan Parcial), the Special Plan (Plan Especial), the Detailed Study (Estudio de Detalle), etc., or through the use of other similar regional planning structures. Urban discipline is manifest in the control exercised by the Local Councils through the grant of licences and also through the imposition of the relevant penalties when an individual party infringes any of the urban planning regulations. One should also remember that in spite of the above mentioned urban planning powers conferred on Local Councils, in certain cases the Regional Governments often reserve the power to supervise municipal development activity, as may be observed in their final approval of certain planning structures or even in their imposition of high financial penalties.
1- Master o General Plan (Plan General de Ordenación Urbana, PGOU)
The PGOU is the most important planning structure as regards urban land because it contains detailed regulations regarding use, construction on land and building restrictions. It also indicates any building renovations that must be undertaken and furthermore sets out the stages for the development of the land, establishing the basic conditions for this development.
In addition, and this is where the enormous importance of its content lies, it is the planning structure which classifies the land, i.e. it determines what is urban land, development land and non-development land, thus defining the owners’ rights as regards the construction of buildings.
A PGOU may be developed further in the following ways:
- Zoning Action Programmes (Programas de Actuación Urbanística, PAU): these apply to development land which is not zoned in detail by the PGOU.
- Partial Plan (Plan Parcial, PP): the objective of a Partial Plan is the detailed classification of development land which has been zoned, complementing the general specifications of the PGOU in respect of this land.
2- Special Plan (Plan Especial, PE): the objectives of a Special Plan may be several, such as the renovation or refurbishment of urban land, the development of communication networks and public spaces, the improvement of rural environments or natural zones which need to be preserved, etc.
3- Detailed Study (Estudio de Detalle, ED): the aim of a Detailed Study is to complete, or where relevant adapt, the specifications set out in the PGOU for development land and the specifications set out in the PP for land which has been zoned, mainly through the establishment of horizontal and vertical elevations and/or the regulation of three dimensional space used.
1- Compensation Plan (Proyecto de Compensación): this is also called the “Redistribution Plan” (Proyecto de Reparcelación) in the co-operative system for land development and it defines the rights of the owners of the properties which result from the new organisation of the land. It also sets out the assignment of the development costs to be borne in financial terms by each of these owners. Once the Compensation or redistribution Plan has been finally approved, the properties which result from the new urban organisation of the land can be directly registered at the Land Registry, although it must be remembered that the amount assigned to the owner in respect of development costs must also be recorded at the Registry in order to guarantee its payment to the Local Council.
2- Expropriation Plan (Proyecto de Expropiación): in cases in which the Local Council decides to use the expropriation of property as an instrument for land development, the definition of the area affected by the expropriation, the valuation of the properties to be expropriated and the organisation of the properties to be developed is carried out by the Local Council by means of the Expropriation Plan. Using expropriation as a system for the implementation of plans, Local Councils take a major role in the initiation and processing of plans necessary for development, although it is possible for individuals to take part in the expropriation in the form of grantees or beneficiaries of this process. In this case it will be the latter who must pay the expropriated party the adjudged price and who then becomes the new owner of the land to be developed.
3- Development Project (Proyecto de Urbanización): this contains all the technical and financial specifications necessary to provide the land with roadways, illumination and basic services such as electricity, water, telephone and the drainage of urban waste.
The State Land Law of 1998 distinguishes between three categories of land: urban, development and non-development. This classification of the land into three categories must be observed by the regional authorities, though they are free to give the categories different names.
There follows a brief analysis of the circumstances which determine whether land is classified in one category or another, along with a summary of the development rights granted to owners under the Law.
- Urban Land (Suelo Urbano): this is land which has already been built on or could be built on due to the fact that the infrastructure work necessary for proper urban use has already been carried out. In particular, the Law states that in order to be categorised as urban, the land must, at the very least, have road access, water and electricity supplies and sewage facilities.
- Development Land (Suelo urbanizable): the Land Law uses an exclusive criterion to define this category, stating that development land will be any land which is not classified as either urban or non-development land. In fact, development land is property which does not have the basic services enjoyed by urban land and, in consequence, must be prepared in order to be suitable for building. In addition, if a property is to be classified as development land it must not be subject to any form of special protection due to its agricultural, forestry or grazing value, neither must it be excluded from the development process by the Local Council because of its special characteristics.As a consequence, if development land is to be built upon it must first be prepared in order to provide it with the basic services and to bring it in line with the provisions of the PGOU. To this end a PP must be approved which further defines the specifications of the PGOU and there must be a Compensation or Redistribution Plan for the redistribution of rights and the assignment of costs. Finally, the Development Project must cover the technical, constructional and financial elements of the transformation of the property into development land.
- Non-development Land (Suelo no urbanizable): this is land which may not be built on, in general terms, for the reasons set out above, i.e. because it is subject to special protection which prevents its development or makes such development inadvisable.
The following are the most usual types of development licences for the construction and use of buildings and other constructions:
- Building Licence (Licencia de Obras): this is required for any type of construction, including the remodelling or fitting-out of existing buildings, as well as for demolition or the construction of new buildings. It is important to remember that in order for a licence to be granted for the construction of a new building on a plot occupied by a previous construction which is to be demolished, one has to obtain a demolition licence. The artistic or historic nature of the building or even the fact that it is subject to some form of municipal regulation for its protection may represent circumstances which prevent a building from being demolished or which impede interference with any of its protected areas.
- Activity Licence (Licencia de Actividades e Instalaciones): better known as an Opening Licence (Licencia de Apertura), this is necessary in order to be able to install items in the building such as lifts, air-conditioning, fire prevention systems and, in general, any items necessary for the correct use of the building in accordance with the purpose for which it was constructed. To this end, activities to be engaged in are classified as either harmless or qualified. The latter category contains four different sub-groups: nuisance, unhealthy, harmful and dangerous. The fundamental difference between the two main categories is that if one is going to engage in any qualified activities one must adopt certain corrective measures in the building which eliminate any risk or damage intrinsic to the activity in question.
- First Occupation Licence (Licencia de Primera Ocupación): this licence confirms that the construction has been built strictly in accordance with the technical specifications contained in the relevant Building Licence and its grant is usually preceded by an inspection of the building by the Local Council’s technical experts.
- Operating Licence (Licencia de Funcionamiento): the object of this licence is to authorise the operation of the buildings, commercial premises or fittings covered by the Opening Licence, following a check by the Local Council that the relevant measures have been taken in relation to any qualified activities, and also that development, environmental and safety conditions have been adhered to. In short, the Operating Licence confirms that the technical specifications set out in the Opening Licence regarding the building’s general facilities have been properly complied with and, as a result, the building may be used for the purpose set out in the Opening Licence.
In the event that any person or company carries out any acts or activities without first having obtained the relevant licence, the Local Council may impose a fine. The Council also has the right to adopt the following disciplinary measures: (i) to order the suspension of activity or work being carried out without a licence or in contravention of such licence; (ii) to order the demolition of work carried out without authorisation if such work is contrary to planning regulations, and (iii) to order the closure of the building or commercial premises.
Taxation on Real Estate Transactions
1.1 Taxable entities and taxable income
Companies resident in Spain pay Corporate Income Tax on all profits obtained as a result of operations both inside and outside the country at the general rate of 35%. A company is considered to be resident when it fulfils any of the following requirements:
- it has been formed pursuant to Spanish law;
- it has its registered office in Spain;
- its effective management headquarters are in Spain.
The taxable amount is made up of income derived from all sources (including income and capital gains resulting from real estate operations), less deductions, in general terms, for any costs incurred in earning the income. The income derived from the leasing of real estate includes rent received but does not include any deposits made by tenants.
1.2 Capital gains and re-investment
Capital gains (defined as any change in the value of the taxed entity’s assets which may arise in the event of some change in the composition of such assets) are not subject to a specific tax regime but are included in the normal taxable base as another item of Corporate Income for companies resident in Spain.
For the purposes of including any capital gain obtained when transferring fixed assets consisting of real estate (an increase is calculated as the difference between the value of the asset on disposal and the net book value, minus, where relevant, any costs and levies paid by the transferor as a result of the transfer) in the taxable income, one may deduct the amount of financial depreciation which has occurred since 1 January 1983 from the said capital gain, calculated in accordance with certain specific rules, up to the limit of such taxable income.
Capital gains arising from the transfer of fixed assets consisting of real estate will be included in the taxable income for the tax period in which the gain occurs, but a fiscal benefit will be applicable provided that the following requirements are met:
- the sale proceeds are re-invested in fixed assets (amongst them, real estate assets);
- a minimum period of one year ownership of the transferred elements is required.
- re-investment occurs during a period beginning in the year before the date on which the asset was handed over or made available and including the three years following this date, without prejudice to any possible special re-investment plans which may be approved by the authorities when justified by specific circumstances;
- a minimum period of ownership is fulfilled in respect of the elements in which the re-investment is made, as set out in Law.
This fiscal benefit consists of a deduction in the Corporate tax quote. The deduction basis will be constituted by the obtained capital gain in case the whole sale proceeds are re-invested, otherwise it will be constituted by the capital gain in a proportional basis to the re-invested sale proceeds.
1.3 Offseting negative results
Losses sustained during one financial year may be offset against profits obtained during the following fifteen financial years. With regard to newly incorporated companies, this period starts computing as from the first profitable year. Losses may not be carried back.
1.4 The withholding of amounts resulting from the leasing of urban properties
In certain cases (e.g. when the landlord is a Business Activities Tax taxpayer and the sum total of the cadastral value of properties owned by the landlord does not exceed one hundred million pesetas) the tenants of urban properties are obliged to withhold 15% of the rent paid to their landlord and to deposit this amount with the tax authorities on account of the landlord’s Corporate Income Tax or Tax on the Income of Non-Residents (please see Section 2.1.2 below).
1.5 Distribution of profits
Dividends distributed by a Spanish company to a non-resident parent company are subject in Spain to a general withholding tax at the rate of 21%, which is the same rate as that applicable to dividend payments between resident corporate entities. The rate of 21% may be reduced by the application of double taxation treaties. Dividends from a Spanish company paid to a parent company located in a EU members State are not subject to withholding tax in Spain provided that they meet the following requirements:
- the receiving company has a direct participation of 25% or more in the Spanish company; however, the Spanish tax authorities may allow this participation to be 10% under a reciprocal agreement;
- the aforementioned participation has been continuously maintained for one year prior to the date on which the distributed profits become payable (or this participation is maintained for the period necessary to complete one year, in which case the withheld amount will be reimbursed);
- the receiving company is subject to and not exempt from Corporate Income Tax or a similar form of tax;
- the distribution of profits does not result from the liquidation of the Spanish company.
1.6 Thin-Capitalisation Rules
Loans granted by non-resident companies to resident companies are subject to thin-capitalisation rules when the net indebtedness incurred, directly or indirectly, with an associated non-resident company or individual exceeds a ratio of 1:3 between fiscal capital and debt. Under these rules, any interest on this excess is considered as dividends for the lender company and may not therefore be deducted for tax purposes by the debtor company.
The taxable entities are companies which are not resident but which obtain income in Spain. A distinction should be made between two ways of earning income:
Income obtained through a permanent establishment
(a) Any company which is not resident in Spain will pay tax on all income attributed to the permanent establishment, which includes:
- income from activities or businesses run from this permanent establishment;
- income earned from assets belonging to the permanent establishment;
- the capital gains or losses resulting from assets owned by the permanent establishment.
Generally, a 35% tax rate will be applied to the taxable income. Certain deductions and allowances may be applied against the taxable income.
When the permanent establishment transfers income abroad, the non-resident company receiving such income will be liable to an additional 25% tax on amounts transferred, including payments made in respect of royalties, interest, commissions and technical assistance, as well as amounts paid for the use of other goods or rights, unless one of the following conditions applies:
- the head office is resident in a EU member country with a reciprocal agreement;
- the receiving party or company is resident for tax purposes in a country with which Spain has signed a double taxation treaty, unless the said treaty sets out otherwise.
(b) Income obtained without the intervention of a permanent establishment.
Non-residents which obtain income in Spain without the intervention of a permanent establishment must pay tax separately on each partial or complete item of income submitted for taxation (i.e. operation by operation) and there is no offsetting of capital gains or losses.
The taxable income will in general consist of the total amount earned (i.e. without deduction of costs).
The applicable tax rate will generally be 25%, although this will rise to 35% in the case of capital gains.
(c) Special tax on real estate owned by non-resident companies
Non-resident companies which own real estate in Spain are subject to a special tax, the taxable income being the cadastral value of the property and the rate being 3%.
This tax is a deductible expense for the purposes of calculating the taxable income under the Tax on the Income of Non-Residents.
This special tax will become due on 31 December each year and must be paid during the following month of January. Any properties transferred will be liable for this special tax and any failure on the part of the taxpayer to make payment within the aforementioned period will result in its becoming payable through a charge being placed on the property.
This tax is not applicable to the following:
- companies which are resident in a country which has signed a double taxation treaty with Spain containing an information exchange clause, provided that their controlling shareholders are resident in Spain or have the right to apply a double taxation treaty containing an information exchange clause;
- companies which are continuously or habitually active in business in Spain, other than through the mere tenancy or leasing of buildings;
- foreign states and public institutions and international bodies;
- companies quoted on officially recognised secondary stock markets
- non-profit-making companies of a charitable or cultural nature recognised under the laws of a State which has signed a double taxation treaty with Spain containing an information exchange clause, provided that the properties are used for activities set out in their corporate object.
(d) 5% withholding tax upon acquisition of property from non-residents
In the case of the transfer of real estate located in Spain by a non-resident, the acquirer will be obliged to withhold 5% of the agreed price and pay it to the tax authorities on account of the transferor’s Tax on the Income of Non-Residents.
Real estate transfers are always subject either to VAT or to Transfer Tax. Where there is a charge to one tax, this will exclude the application of the other tax. The fundamental difference between the two lies in the fact that whilst the VAT paid on a real estate transfer is, as a general rule, deductible from any VAT payable to the tax authorities by the transferee, Transfer Tax is not deductible as an expense for the transferee’s Corporate Income Tax purposes. It is considered as a higher acquisition cost of the property for accounting and tax purposes.
The following real estate transactions are subject to VAT:
- the sale of new or refurbished buildings. The second and subsequent disposals of real property are in principle exempt from VAT, and consequently subject to Transfer Tax, although this exemption may be waived (and the transfer thus be subject to VAT) when the acquirer is a taxpayer exercising its professional activity and has the right to offset all the VAT paid in the operation;
- the sale of plots which have the benefit of the requisite planning permissions for development;
- the sale of properties for refurbishment or demolition. In this case the purchaser must invest more than 25% of the purchase price of the building in the refurbishment.
In other cases, sales and purchases of property will be subject to Transfer Tax as opposed to VAT.
The general rate for VAT is 21%, and in the case of housing the rate is 10%. Where a transaction is subject to VAT there is an additional 0.5% to 1.5% Stamp Duty, depending on the region where the property is located, provided that the transfer is executed in a public deed and can be registered in the Land Registry, as is normally the case.
The applicable tax rate is between 6% and 10%, depending on the region where the property is located.
Transfers of company shares or participations are, in principle, not subject to either VAT or Transfer Tax. However, to avoid the disguised transfer of buildings as tax-exempt operations, two important exceptions are established:
- transfers carried out on secondary markets and acquisitions on primary markets as a result of the exercise of preferential acquisition rights or the conversion of bonds into shares representing the capital or assets of a company where (i) more than 50% of the assets of such company consist of real estate located in Spain and (ii) the transfer allows the purchaser to gain control (i.e. holding of more than 50% of the shares in the company). Such transfers will be subject to Transfer Tax on the real value of the said real estate;
- a transfer of shares received in consideration of a contribution of real estate upon the incorporation or share capital increase of a company is subject to Transfer Tax if the share transfer takes place within the year following such contribution
The local authorities levy these taxes on the ownership of real estate, any increase in the value of the land which comes to light when a property is transferred, and on other real estate operations such as the carrying out of construction activities.
Property Tax (“Impuesto sobre Bienes Inmuebles”)
This tax applies to the ownership of both rural and urban properties and real rights. The taxpayer is the owner of the property or titleholder of the said rights. This tax is payable annually and the taxable amount is equal to the cadastral value of the property.
Tax on the Increase in Urban Land Values (“Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana”) a.k.a “Plusvalía” Tax.
This is a non-periodic tax which is payable upon any increase in the value of urban land becoming apparent as the result of its transfer or the establishment or transfer of any real right over such land. The taxpayer is the transferor of the land or the party which is establishing or transferring the real right, when such transfer is made for consideration (i.e. not free of charge).
Municipalities also have the power to tax a number of other activities connected with the use and exploitation of property, amongst which it is worth noting the Tax on Construction (“Impuesto sobre Construcciones, Instalaciones y Obras”) which is levied on all construction, fitting-out or building work projects for which a licence is sought under the applicable planning regulations. The rate of this tax varies depending on the municipality and it is calculated as a percentage of the actual cost of the construction, fitting-out or building work (normally between 2% and 4%).
Leases for Non Residential use
The currently prevailing Urban Leasing Law (“Ley de Arrendamientos Urbanos” of 1994, “LAU”) is based on a clear differentiation between leases for residential use (the regulation of which follows protective lines in favour of the tenant) and leases for any use other than residential, the regulation of which is almost entirely based on the free agreement of the parties.
Lease agreements for non-residential use (a category which includes the lease of commercial premises, offices and industrial units) signed under the currently prevailing LAU are basically governed by the covenants established by the parties, who may freely agree, among other things, the following:
- The duration and, eventually, extensions of the lease agreement;
- The initial rent and the system for its indexation and review. This may, in the case of commercial premises for example, be tied to the tenant’s sales figures or updated in line with the Consumer Price Index, or it may include review clauses in accordance with market rents or clauses allowing an increase due to improvements, etc.;
- Regime governing the tenant’s works at the leased premises;
- Reasons for the termination of the lease and the compensation to be paid in the event of termination due to breach of contract. Special care should be taken with regard to termination for breach because, in the event that the landlord opts to terminate the agreement on the basis of the tenant’s breach, if compensation is to include the rent outstanding to the end of the agreed period in addition to damages actually caused, this will have to have been expressly agreed. In any case, the courts have the power to moderate the amount of compensation paid, depending on the circumstances of each particular case;
- Costs to be charged to the tenant. It should be borne in mind that, unless the parties expressly agree which costs are to be borne by the tenant, any conservation and maintenance costs at the premises which are necessary in order for the premises to be used for the agreed purpose will be the responsibility of the landlord, except where deterioration is attributable to the tenant.
Mandatory rules, which cannot be waived contractually by the parties.
These include the following:
Upon signing the lease agreement, the landlord is obliged to request a security deposit in cash amounting to the equivalent of two months’ rent. The tenant is obliged to provide this security deposit or caution money and is not allowed to replace it with any other form of guarantee (such as a bank guarantee).
All regional authorities have enacted regulations which impose on the landlord the obligation to deposit this caution money, without interest, in the custody of the relevant regional government body until the lease has expired, and any breach of this obligation may result in the imposition of fines.
This caution money is, in principle, not subject to review during the first five years that a lease is in force. Once this period has elapsed, the review of the caution money will be governed by the covenants freely agreed by the parties (e.g. that the security deposit be updated so as to cover two months’ rent). In addition to this obligatory security deposit, the parties may agree any form of guarantee of the tenant’s fulfilment of its obligations (for example, a bank guarantee).
Although verbal lease agreements are valid and binding, each of the parties may compel the other to sign a written lease agreement, this being the usual form of procedure.
The court which has jurisdiction in actions relating to leases is the Court of First Instance of the place in which the building is located and submission to other jurisdictions is not admissible.
However, the LAU allows the parties to submit their disputes to arbitration, for which the corresponding board of arbitration will be convened. Notwithstanding this, where eviction of the tenant is sought a court decision will be required. Eviction may be sought by the landlord when the tenant breaches the lease contract, for the purpose of recovering the vacant possession of the property. The duration of the eviction proceedings is between three and six months, depending on the workload of the court at stake.
The LAU contains a series of provisions which are aimed at avoiding procedural abuse by requiring that, on lodging an appeal, the defendant must have paid or deposited any rental amount which has become payable. Failure to do so means that the appeal will not be admitted. In addition, restrictions are placed on attempts by the tenant to frustrate eviction by paying any rents due into court at some time prior to the date set for the hearing to be held.
Non-mandatory rules which may be waived by the parties
Under the Spanish Civil Code, if the tenant remains in the premises for more than fifteen days after the contractual period has expired and the landlord does not object, it is understood that the lease has been extended (tacit renewal) for a period of one year if an annual rent was originally agreed or for a period of one month if the rent was originally agreed on a monthly basis.
Any party which acquires the leased premises will assume the landlord’s rights and obligations. However, there is an exception to this rule in cases where the lease has not been recorded at the Land Registry and the acquiring party has no knowledge of it (i.e. the acquirer acted in good faith). In this event, the acquirer would not assume the landlord’s rights and obligations and might evict the tenant who, in turn, might take action against the vendor (its landlord) for breach of the lease agreement.
In the event that the leased premises are sold, the tenant has the preferential right to acquire them. This right has the following contents: (i) a right of pre-emption (“derecho de tanteo”) which obliges the landlord to notify the tenant of the potential sale of the leased premises, the sale price and any other essential conditions of sale, giving the tenant the right to acquire the premises at the same price and under the same conditions; and (ii) a right to redemption (“derecho de retracto”) in the event that such notification is not made or if it is made incorrectly, or if the sale was made under conditions other than those notified. By exercising its redemption right, the tenant assumes the position of the acquiring party, to whom it must reimburse the price of the property and any related costs.
When a corporate or professional activity is carried out in the leased premises, the tenant may sub-let the premises or assign its lease agreement without gaining the prior consent of the landlord. However, the landlord must be informed of this sub-lease or assignment, which gives it the right to increase the rent by 10% in the case of a partial sub-lease or 20% in the event that the agreement is assigned or the premises are sub-let in their entirety
The general regulations contained in the Spanish Civil Code in relation to reciprocal obligations apply here, to the extent that any substantial breach by one of the parties gives the party not in breach the right to require compliance with the obligation in the courts or, alternatively, terminate the agreement, with the right to compensation for damages in both cases.
The LAU also contains a list of reasons which authorise the landlord to terminate the agreement legally and claim for compensation of damages, though this list is not all-inclusive and the parties may agree to include other reasons:
- Failure to pay the security deposit or its reviewed amounts.
- Failure to pay the rent or any amount which the tenant is obliged to pay under the lease.
- In the event that the parties have included in the lease a covenant whereby the tenant cannot sub-let the premises or assign the lease without the prior consent of the landlord, any sub-let or assignment which is carried out without such consent.
- Carrying out disturbing, unhealthy, harmful, dangerous or illegal activities at the premises.
- Carrying out works which affect the distribution, stability or safety of the premises without the prior consent of the landlord.
Please note that a unilateral early termination of the lease by either party would be deemed a breach of contract and would entitle the non-infringing party to claim for specific compliance before the courts or, alternatively, terminate the agreement, with the right to compensation for damages in both cases.
The parties may record the lease (or sub-lease) at the Land Registry, in which case the tenant’s rights will benefit from registry publication and will be additionally protected in the event of the sale of the leased premises to a third party, given that this third party will be obliged to assume the position of landlord.
The registration of lease agreements rarely takes place, in view of the imbalance between the costs that the registration entails and the protection surplus that it grants, which in general is not considered necessary by operators in the Spanish marketplace
Mortgage and Financing
Enforcement of Mortgages in Spain
Civil procedure law, including the judicial mortgage foreclosure procedure previously regulated in the Mortgage Law, was affected by Spanish Law 1/2000 dated 7 January 2000, Ley de Enjuiciamiento Civil (hereinafter “the Civil Procedure Law or LEC”). This new regulation came into force last 8 January 2001. This law has recently amended several times regarding mortgage foreclosure procedure
A creditor holding a mortgage as security would have the option to choose amongst four different possible procedures for enforcement of the credit.
- ordinary declarative procedure, “Procedimiento declarativo ordinario” (Art. 248 et seq LEC);
- executive procedure, “Procedimiento de ejecución dineraria” (Art. 517 et seq LEC);
- judicial mortgage foreclosure procedure, “Procedimiento de ejecución dineraria sobre bienes hipotecados o pignorados” (hereinafter “summary judicial procedure”) (Art. 681 et seq LEC); and
- extra-judicial mortgage foreclosure procedure, “Procedimiento ejecutivo extrajudicial” (“extra-judicial procedure”) (Final Disposition 9 LEC, amends Art. 129 of the Mortgage Law, and renders effective Art. 234 et seq of the Mortgage Regulation)
The ordinary declarative procedure requires a preliminary phase known as “cognición” (literally “knowledge”). Such phase is basically a process whereby the competent court verifies the actual existence of the debt and the creditor’s right to claim repayment. It would typically go through a preliminary review of the validity of any security provided.
Therefore, this procedure is not particularly advisable for mortgage creditors and, in practice, is not used by such creditors, which shall have the right to go through the specific procedure referred below.
Executory procedure does not require the “cognición” phase. However, the debtor will have the right to oppose the execution and, although the grounds for opposition are quite restricted by law, they will in many cases give the debtor a chance to delay the procedure. It is essentially for this reason that a mortgage creditor will typically try to enforce its rights through the procedure described below.
The summary judicial procedure is the type of foreclosure procedure that has been most used by mortgage creditors to date. In this procedure, provided the mortgagor’s title (i.e. the public deed of mortgage including the complete secured financial agreement and, in the event that the secured creditor is a financial entity, this financial entity is registered in Spain as such financial entity) has been granted and a number of formalities and requirements are complied with, the mortgage creditor shall request the competent court to auction the mortgaged real estate asset(s) in order to repay the secured debt. The role of the court is limited to basically guaranteeing that the debtor’s rights are fully protected and to monitor the sale of the asset(s).
The extra-judicial procedure involves the auction of the mortgaged property before a notary in satisfaction of a debt. The mortgage creditor takes the initiative for the competent notary to sell in auction the mortgaged property in order to repay the secured debt.
It should be noted that the extra-judicial procedure is a possibility contemplated in the Mortgage Law and the Mortgage Regulation. However, The Spanish Supreme Court has declared in several judgements that only Courts (Organos Jurisdiccionales) have executive jurisdiction (potestad ejecutiva). In addition, the Supreme Court also declares that regulations containing procedural rules shall be deemed null and void. Therefore, and although the recent Law of Civil Procedure (Law 1/2000, of 7 January) expressly amended the Mortgage Law to include the extra-judicial procedure as a foreclosure procedure, the judiciary might declare in the future that this procedure shall be deemed null and void.
The extra-judicial procedure is only available when the parties expressly agree in the public deed of mortgage to make use of it, and when the public deed of mortgage guarantees obligations for an amount determined ab initio. As a result, this procedure is not suitable when the debt secured by the mortgage is a credit line and the amount of the debt may not be known at the time of signing the public deed of mortgage.
Being a normal procedure, the role of the competent notary (a notary shall be deemed competent if the mortgaged property is located within his notarial district) is limited to basically guarantee that the debtor rights are fully protected and monitor the holding of one or more auctions for the sale of the property.
Enforcing a mortgage upon a real estate asset in Spain through any of the ordinary procedures (executive or, particularly, declaratory) may prove to be a very long process. Following the declaratory proceedings could take approximately 18 to 24 months in the first instance. The appeal would take around 12 to 24 months, while the appeal for reversal could take approximately 4 years. Subsequently executive proceedings could take approximately 6 to 12 months for the first instance.
A summary judicial mortgage foreclosure procedure may take around 12 months, although this may vary quite substantially from case to case since first instance courts in places tend to be overstretched. In such circumstances, the court would not always abide by the time scales provided by the relevant regulations. This situation may be exacerbated in those cases in which the debtor knows how to use the instruments that the laws give him to slow down the procedure.
Mortgages and Loans in General
The setting up of a mortgage requires, principally, the granting of the relevant public deed (in order for formalisation before a public notary) by virtue of which the terms and conditions of said charge are set out, as well as the registration thereof at the Land Registry.
There are some privileged creditors whose credits must be settled prior to the debt guaranteed by the mortgage. These privileged creditors are the following:
- Unpaid wages corresponding to the mortgagor’s employees for the last 30 days, provided that the amount of each monthly wage does not exceed twice the official minimum wage (“Salario Mínimo Interprofesional”);
- Tax credits corresponding to taxes that are periodically levied on properties recorded at a registry, for the period comprising the fiscal year in which the claim is made by the Tax Authorities and the year prior thereto;
- The payment of the service charges and common expenses relating to a property which forms part of a condominium, to the Owners Association and corresponding to the current year and year prior thereto (with priority over any of the other creditors of the owner of such property); and
- The unpaid insurance premiums with respect to the property accrued during the previous two years.
Pursuant to the Law against Usury, if the lender exceeds the interest rate according to such Law, the loan shall be deemed to be null and void. The consequences of the nullity are that the lender shall return the interest received from the borrower and bear the costs of the proceedings and the borrower shall return the principal borrowed.
Although there is an Act on Usury, of 24 July 1908, we do not consider it as being relevant for the purposes of this type of transactions.
Creditor-debtor rights are governed by the Spanish Mortgage Law (“Ley Hipotecaria”) and the regulations implementing it. According thereto, no rights in favour of the creditor as regards the mortgaged property exist until the mortgage is effectively enforced by the relevant proceedings. Meanwhile, ownership will be held by the debtor/mortgagee.
Should bankruptcy proceedings lead to the insolvency of the mortgagor, the mortgage shall have priority vis-à-vis the claims of third creditors with respect to any immovable property.
Without prejudice to the above, please note that the judge in charge of the bankruptcy proceedings may establish the retroactive effects of his/her judgement, and therefore, any disposal or management carried out by the debtor during the course of such specific period (as determined by the judge but usually a period between 6 months and 2 years) would be declared null and void. This could be important in the event that the mortgage in favour of the lender was set up during the relevant period.
Loans in Spain are generally recourse, without prejudice that non-recourse loans may exist.