Late in 2020 we blogged about the Spanish government (a left-wing coalition between the Socialist Party and Unidas Podemos) announcing its intention to approve a new housing law introducing rent controls (the New Housing Law). In October 2021 the government revealed the main measures of the bill, which remains a work in progress.
An election pledge
As commented in previous blogs, new regulations on housing were demanded by Unidas Podemos as part of negotiations on the coalition agreement, which was signed in December 2019. The Socialist party had been reluctant to progress with the new regulations given the devastating effects of Covid-19 on the Spanish economy and the opposing views expressed by investors, as well as some of the main economic actors.
The first controversy has already manifested in the non-binding consultation report issued by Spanish General Council of the Judiciary (Consejo General del Poder Judicial). According to this report, with the new regulations the Spanish State would encroach upon competences constitutionally attributed to the regions (comunidades autónomas).
The process for the approval of the New Housing Law has just begun and, therefore, the text is still subject to amendments. Final approval is expected in the third quarter of 2022.
Quite a lot of theory…
One of the noteworthy things on a first reading of the bill are the pages devoted to explaining theoretical principles (or almost philosophical considerations), as opposed to the specific measures covered by the New Housing Law, which are much more limited.
Sometimes the New Housing Law seems more aspirational, like an election manifesto, announcing policies to be carried out (which will then have to be specified in other national, but mainly regional, regulations), than a law with measures on how to carry out those policies. This probably has to do with its marked origin as electoral promise and the encroachment issue (mentioned above) pointed out by the Spanish General Council of the Judiciary.
The attempt to determine a common framework within which regional regulations must operate to avoid (i) the overreaching that some autonomous communities have tended to do in recent years, and (ii) which could create inequalities among citizens of different regions, is laudable.
Main features of Spain’s New Housing Law
While there are elements of the New Housing Law that are aimed at the development, by public authorities, of housing plans and programmes to increase the available housing stock, we will focus our analysis here on measures that directly affect investors and owners. In this regard, here are some of the highlights:
New duties for owners: emphasis is placed on the constitutional principle of the social function of ownership (función social de la propiedad) and the New Housing Law sets out a number of duties and obligations for owners. However, most of them do not go beyond generic references to compliance with other regulations, including urban planning or specific ones established in this new law in certain cases (information obligations, etc).
Stressed residential market: in line with regulations passed in Catalonia, the New Housing Law would create the concept of ‘stressed residential market’ areas with the aim of:
- Setting out an additional mandatory extension in favour of the lessees (up to three years).
- Imposing information obligations for ‘large-scale holders’ (ie those owning 10 or more residential units or an aggregate built surface area of more than 1,500 square metres for residential use, excluding in all cases garages and storage rooms).
- Imposing rent control measures on legal entities who are ‘large-scale holders’ as opposed to individuals. While ‘large-scale holders’ who are legal entities will have to adjust the rent to the official price index mandatorily (which is expected to lead to decreases), individuals will receive tax rebates if they voluntarily lower the price. In any case, even if they are not obliged to adjust the rent as per the price index, they will be obliged to freeze rent in line with rent in force in the previous five years (updated according to the consumer price index under the provisions of the relevant agreement). Only increases of up to 10 per cent are permitted in certain cases (in line with ESG trends, for instance when in the previous two years the residential unit has undergone certain improvement works to improve energy efficiency or accessibility, or when the agreement is signed, initially or through mandatory extensions for the landlord, for ten years or more).
- In any case, a vacatio legis of 18 months is foreseen for the application of the limitations to ‘large-scale holders.’ In this way it is expected that new regulations are applied to new agreements enter into once the 18 months have elapsed and therefore on the basis of more updated indexes.
- Obliging developers, in case of municipalities with stressed residential market areas, to satisfy land transfer rules (ie transfer cannot be replaced by an alternative way to satisfy the planning obligations) and the land transferred must be used for the construction and management of social or public housing, unless other needs of social interest are evidenced.
Tax measures: these are aimed at discouraging the holding of unoccupied residential units, by imposing property tax surcharges up to 50 per cent; the surcharge is increased up to 100 per cent and 150 per cent when residential units remain unoccupied for more than three years and also belongs to an owner of two or more unoccupied residential unit in the same municipality. These measures are also intended to provide incentives to landlords of residential leases by reducing their income from the lease for tax purposes. The applicable reduction ranges from 60 per cent to 90 per cent vs the reduction of 50 per cent applicable in general.
Vulnerable tenants: the Spanish Civil Proceedings Act is amended to strengthen protective measures for vulnerable tenants in eviction proceedings and to extend such protection to certain occupants (not limited to non-payment or expiry of the lease). However, the suspension of the eviction proceedings due to vulnerability situations will no longer be automatic; the judge will determine whether the suspension is appropriate after having heard the parties and also taking into consideration the situation of vulnerability of the plaintiff. Suspension periods are extended a maximum period of two months (if the claimant is an individual) or four months (if the claimant is a legal person).
Incentivised affordable housing: a new concept of affordable housing is created for residential units that do not qualify as social housing but are intended to be leased or made available temporarily in to people whose income level does not allow them to access housing at market prices. Owners providing incentivised affordable housing will enjoy urban planning, tax and other benefits.
Reservation of land for social housing: 30 per cent of land will be reserved in case of new urban development and 10 per cent in case of renovation. In addition, the New Housing Law indicates that, at least 50 per cent of the reserved land must be allocated to housing under a public rental protection scheme except for exceptional and justified cases.
Amounts delivered in advance in developments under construction: clarifications on interest to be covered by the relevant bank guarantee or insurance have been included, also amendments in relation to the term of the guarantee, the repayment obligations or the developer obligation to notify the purchaser before declaring the early termination of the sale and purchase agreement due to lack of payment. Regulations will be moved from Spanish Construction Law to New Housing Law.
Purchasers and tenant’s information rights: no relevant variations or additional obligations are set out, especially in view of the information obligations already applicable under consumer protection regulations.
Social housing regime: the qualification period will not be less than 30 years, and if the property is transferred after disqualification, any benefits received will have to be returned. Sale or lease will be subject to prior authorisation by the region (comunidad autónoma). The administration will be entitled to exercise the right of first refusal while authorisation is being processed, and after the authorisation has been granted, the buy-back right or other preferential rights established by the applicable regional legislation.
As mentioned, it is expected that the New Housing Law will be debated, amended and approved within the next few months. We are following the developments closely, please do not hesitate to contact the Freshfields team if you would like to consider any of these issues in further detail.