The legal regime for urban leases is currently regulated by the Revised Text of the 1964 Urban Leases Act, approved by Decree 4104/1964 of 24 December.
The principles that inspired the reform of the leasing legislation carried out in 1964, according to the Exposition of Reasons of Law 40/1964, were to temper the liberalizing movement of urban property to the economic circumstances of the country and the demands of justice. However, the recast text failed to achieve its objectives of unblocking the situation of frozen incomes. The text also enshrined a system of subrogations, both “inter vivos” and “mortis causa”, favourable to the interests of the tenant.
These two circumstances created a regulatory framework which, in practice, showed little encouragement for the use of the leasing institute.
Under these circumstances, Royal Decree-Law 2/1985, of 30 April, on Economic Policy Measures, introduced two modifications to the regulation of the regime of urban leases that have had an enormous impact on the subsequent development of this sector. These modifications were the freedom to transform housing into business premises and the freedom to agree on the duration of the contract, eliminating the mandatory nature of the forced extension in urban lease contracts.
Royal Decree-Law 2/1985 has had mixed results. On the one hand, it has allowed the downward trend in the percentage of rented housing that was occurring in the early 1980s to come to a halt, although it has not been able to substantially reverse the sign of the trend. On the other hand, however, it has generated enormous instability in the rental housing market by giving rise to a phenomenon of short-term contracts. This in turn has produced a very significant increase in rents, which has been aggravated by its simultaneity in time with a period of rising prices in the real estate market.
At present, the market for urban housing leases is characterised by the coexistence of two clearly differentiated situations. On the one hand, the contracts entered into under Royal Decree-Law 2/1985, which represent approximately 20 per cent of the total and are characterised by high incomes and a significant degree of occupational rotation as a result of their generalized annual duration. On the other hand, contracts entered into prior to the effective date of Royal Decree-Law 2/1985. In general, these are contracts with low incomes and, in the case of contracts entered into prior to the 1964 Law, approximately 50% of the total, with incomes that may be classified as uneconomic.
The dysfunctions that this situation generates in the market are such that they have made leasing an unattractive alternative to the acquisition of property in relation to the solution to the housing problem. In this sense, only approximately 18 per cent of the total housing stock is rented.
For this reason, the ultimate aim of the reform is to contribute to strengthening the urban rental market as a basic part of a housing policy oriented by the constitutional mandate enshrined in article 47, recognising the right of all Spaniards to enjoy decent and adequate housing.
The achievement of this objective requires a regulatory modification that allows an adequate balance to be established in the services provided by the parties, and although it is evident that the regulatory change in itself is not a sufficient condition to strengthen the offer in this sector, it is a necessary condition for this to take place.
The substantive regulation of the leasing contract must be based on a clear differentiation of treatment between housing leases and those intended for any use other than housing, since it is understood that the underlying economic realities are substantially different and deserve, therefore, dissimilar regulatory systems that reflect that difference.
In this sense, at the same time as the tuitive nature of the regulation of housing leases is maintained, a regulation based absolutely on the free agreement of the parties is chosen in relation to those destined for other uses.
In addition, the law contains a partial reform of the regulation of leasing processes and the modification of the system of contracts currently in force.
The regulation of housing leases presents significant novelties, fundamentally in relation to their duration. In this sense, it has been decided to establish a minimum term of the contract of five years, because it is understood that a term of these characteristics allows a certain stability for the family units that allows them to contemplate the lease as a valid alternative to the property. At the same time, it is not an excessive period that could constitute a brake for both private owners and business developers to place housing in this market.
This minimum period of duration is articulated from the free agreement between the parties on the initial duration of the contract plus a system of obligatory annual extensions until reaching the minimum of five years of duration, if the initial agreement had been for a shorter period.
The law also introduces a mechanism for tacit renewal, after at least the five-year guarantee period has elapsed, which gives rise to a new period also articulated over annual periods of three years.
The recognition of the existence of situations that require shorter terms of duration has led the law to provide for this possibility, although linked exclusively to the need, known at the time of the conclusion of the contract, to recover the use of the rented dwelling for the landlord’s own home.
The establishment of a limited term allows to mitigate the impact that the institute of subrogations could have on the balance of benefits. To the extent that the right of subrogated persons to continue to use the rented dwelling is only maintained until the end of the contractual term, there is no inconvenience in maintaining this right in the area of “mortis causa” in favour of those persons directly linked to the tenant. A novelty is the recognition of this right to the “more uxorio” cohabitant.
In relation to “inter vivos” subrogations, their existence is only recognised with the prior written consent of the lessor. At the same time, a novelty is introduced in cases of judicial decisions which, in nullity, separation or divorce proceedings, assign the dwelling to the non-owner spouse. In these cases, this spouse is recognized “ex lege” the right to continue in the use of the rented housing for the time remaining from the contract.
The regime of rents is built around the principle of freedom of agreement between the parties for the determination of the initial rent both for new contracts and for those that are maintained with already established tenants. This will ensure, where necessary, that contract rents reflect market reality, if this reality could not have been transferred to the rent by means of the planned updates. This may be the case, given that the regulation establishes a mechanism for updating incomes linked to the percentage variations that the Consumer Price Index may experience in an annual period.
With regard to the rights and obligations of the parties, the law broadly maintains the current regulation, without introducing major new features. The exception is the establishment of a special provision for tenants affected by disabilities or with disabled persons under their care, who intend to make modifications to the leased property that will allow them to improve its use.
The tenant also retains the right of preferential acquisition in the event of the sale of the rented dwelling during the term of the lease, even though it refers to market conditions, since it is understood to be an instrument which, without entailing a serious charge for the lessor, increases the tenant’s chances of remaining in the dwelling.
Finally, with regard to the formalization of contracts, the law maintains the freedom of the parties to choose the oral or written form. At the same time, the possibility is expressly enshrined of all lease contracts, whatever their duration, to access the Land Registry, attempting, on the other hand, to enhance this possibility of access by linking certain incentive or benefit measures to the fact of registration. This fact not only contributes to reinforcing the guarantees of the parties, but also increases the information available to the State, allowing it to design and implement those measures that may contribute to improving the regulation and practice of leases.
The law abandons the traditional distinction between housing leases and leases of business premises and similar premises in order to differentiate between housing leases, which are those dedicated to satisfying the permanent housing needs of the tenant, his or her spouse or dependent children, and leases for uses other than housing, a category that encompasses second home leases, seasonal leases, traditional business premises leases and leases similar to these.
This new categorism is based on the idea of granting protection measures to the tenant only where the purpose of the lease is to satisfy the housing needs of the individual and his family, but not in other cases in which economic, recreational or administrative needs are satisfied.
To this end, in the regulation of leases for uses other than housing, the law opts to leave all elements of the contract to the free agreement of the parties, configuring a supplementary regulation of the free agreement that also allows ample recourse to the regime of the Civil Code.
The regime of obligations of conservation and works, the right of preferential acquisition, the right of transfer and the subrogations “mortis causa”, although limited to the spouse and children of the lessee who continue the activity, are regulated in this way as a supplement to the express will of the lessor and lessee.
This regulation introduces a novelty consisting of the tenant’s right to compensation when, wishing to continue with the lease, the tenant has to leave the premises for the expiry of the scheduled term, provided that in some way the lessor or a new tenant could benefit from the clientele obtained by the former tenant, or alternatively, from the transfer costs and damages arising therefrom, when the tenant is obliged to relocate his activity.
The rent deposit maintains its obligatory character, both in housing and in different use, fixing its amount in one or two monthly rent, depending on whether it is renting housing or different use. At the same time, Autonomous Communities with competence in housing matters are allowed to regulate their compulsory deposit in favour of the Community itself, since the income generated by these funds has been revealed as an important source of financing for autonomous housing policies, which should be maintained.
In the regulation of leasing processes, it is established that the competence to hear controversies corresponds, in any case, to the First Instance Judge of the place where the urban property is located, excluding the possibility of modifying the functional competence by means of express or tacit submission to a different Judge.
This does not preclude the possibility that the parties in the legal relationship may agree, for the solution of their conflicts, the use of the arbitration procedure.
The processing of lease proceedings is deferred to the judgment of cognition, expressly waiving the application of the judgment of eviction and verbal judgment when actions are taken, in the latter case, to determine rents or amounts to be paid to the tenant.
It also regulates the conditions under which the tenant may serve the action in evictions promoted by the failure to pay amounts due by virtue of the rental relationship. This regulation significantly qualifies the possibilities of enervation and rehabilitation contained in the rewritten text of 1964.
In cases of accumulation of shares, together with the traditional regulation, the possibility of accumulation has been established, which assists the lessees when the exercised actions are based on common facts and are directed against the same lessor. The latter is also allowed in the event of termination of the contract due to non-payment, the cumulative and simultaneous exercise of the action for termination of the contract and the claim for the amounts owed.
Finally, and as the most significant novelty of the law in procedural matters, the regulation of the cassation appeal in leasing matters is established because it is understood that the matter, given its importance and the transcendence of the normative changes that this law introduces, should be able to be the object of a jurisprudential doctrine elaborated in the headquarters of the Supreme Court. As further characteristics of the cassation appeal, the following may be noted: only judgments rendered in the proceedings followed by the cognition trial shall be subject to such appeal, provided that the first and second instance judgments are not in conformity, and the income of the contracts is below the limits established by law
With regard to the contracts existing at the entry into force of this law, those entered into under Royal Decree-Law 2/1985 do not present a special problem since it was the free will of the parties that determined the relationship regime in terms of duration and income. Therefore, these contracts will continue until their extinction, subject to the same regime as until now. At that time, the new lease relationship that may be constituted on the property will be subject to the new regulations. This regulation does not exempt contracts that, although dated after May 9, 1985, have been entered into subject to the system of forced extension, as this derives from the free agreement between the parties.
With regard to contracts entered into previously, the law opts for a solution that attempts to combine the greatest possible simplicity with a balanced treatment of the different situations in which the conflicting parties find themselves. For this reason, an approach is introduced that maintains the criterion of differentiated treatment between contracts for the rental of housing and business premises, granting softer conditions for the modification of the tenant of the dwelling than that of the business premises.
Taking into account the detrimental effects of the prolonged validity of the mandatory extension imposed by the 1964 Law, the need to limit the duration of this mandatory extension is addressed by re-establishing the temporality of the tenant relationship in accordance with its own nature, but this modification is made taking into account the social and economic effects of the measure taking into consideration the personal and family situation and the economic capacity of the tenants.
In this sense, in the renting of dwellings, the total suppression of “inter vivos” subrogation is opted for, except for that derived from a judicial decision in matrimonial proceedings, and for the gradual suppression of the rights of subrogation “mortis causa” that the recast text of 1964 recognized.
As this measure affects situations where the potential contents of rights are different, initial tenants, first subrogation tenants and second subrogation tenants, the rule must provide adequate answers for each of them. Hence, the suppression of subrogation is all the more gradual the greater the potential content of rights that the law contemplates for each case, starting from the general principle of keeping the current tenant and his spouse the right to continue in the use of the rented housing until his death, where this right was recognized by the legislation of 1964.
As for the system of rents, the law chooses to try to unblock the situation of frozen rents. To this end, a revision system was established, applicable to all contracts prior to 9 May 1985, with the aim of recovering variations that had not been affected by inflation since the date of conclusion of the contract or since the last legal revision, as the case may be. This revision does not take place immediately but gradually, increasing the number of years in which the total revision takes place in inverse function of the rent of the lessee, making it possible for lessees of lower economic level to adapt their economies to the new reality.
In the case of tenants with a low level of income, below two and a half times, three or three and a half times the minimum interprofessional salary depending on the number of people living in the rented dwelling, the review of the rents is excluded and the Government is instructed to set up, within one year from the entry into force of the law, a compensation mechanism of a fiscal nature for those lessors who have not been able, due to the aforementioned circumstances, to update the rents.
Likewise, lessors are granted the right to enjoy benefits in the Wealth Tax, in the Real Estate Tax, in the expenses of conservation of the leased property and the cost of the services and supplies enjoyed by the leased dwelling, in the latter three cases by charging their amounts to the lessees.
In the case of leases of business premises, the decision was made to establish a timetable for the temporary termination of these contracts, although a distinction was made between leases in which the lessee is a natural person and those in which the lessee is a legal person, presuming greater economic solvency where the organisational framework is more complex.
For this reason, “mortis causa” subrogation rights are maintained, albeit on a limited basis, in the first case, guaranteeing the family group linked to the development of the activity a minimum term of twenty years, which may be exceeded as long as the lessee and his or her spouse live and continue the exercise of the activity that has been developed in the premises.
In the case of leases of legal entities, resolution periods of between five and twenty years are set, depending on the nature and volume of the activity carried out in the leased premises. A short term is set for leases in which activities with such economic potential are carried out that the holders of these contracts are placed in a position of equilibrium vis-à-vis the lessors when negotiating new lease conditions.
With regard to the rent paid in these contracts, the revision scheme established for housing leases is reproduced, temporarily graduating the rhythm of the revision according to the categories described above.
In order to favour the continuity of the tenants, the law regulates a newly created figure which is the preferential rental right, which grants the tenant a preferential right to continue in the use of the rented premises at the time of the termination of the contract, as opposed to any third party under market conditions.
A right to compensation is also provided in the event of not continuing to use the leased premises when another person, whether the owner or a new tenant, can benefit from the clientele generated by the activity of the former tenant.
As regards similar leases, both the tenancy and the business premises, they are treated in a similar way to business premises leases, in terms of duration and rental regime.