Newest changes to residential lease regulations

Written on 22 Mar 2019

Since the approval of Royal Decree 21/2018, of 14 December, on urgent measures relating to housing and lease regulations, we have witnessed three different residential lease regimes in four months, which is quite exceptional. 

Royal Decree 21/2018  (“RD 21/2018“) came into effect on 19 December 2018, and was revoked on 24 January 2019, after the Spanish House of Commons (Congreso de los Diputados) refused to approve it, as there were different views among the rest of the parliamentary groups. Consequently, Act 29/1994, of 24 November, on Urban Leases (Ley de Arrendamientos Urbanos) (“LAU“) came into effect once again in its 2013 version. Finally, on 1 March 2019, the Government approved Royal Decree 7/2019, of 1 March, on urgent measures relating to housing and lease regulations (“RDL 7/2019“).

Since its failure to modify the regulation of residential leases through RD 21/2018, the Government has not ceased in its objective to modify the LAU and has finally approved RD 7/2019, which should improve the situation of tenants. In this respect, RD 7/2019 has the same objective as last December’s failed reform although it does introduce some major new features.

Extension of the mandatory and tacit renewal periods

RD 7/2019, in the same manner as RD 21/2018 did, extends the duration of the agreement, thus the minimum mandatory term increases from 3 to 5 years if the landlord is an individual, and to 7 years if the landlord is a legal entity. Likewise, the extension of the tacit renewal period increases from 1 year to a maximum of 3 years in successive annual terms, in the event that neither party notifies the other of their intention of not renewing the agreement.

Extending the notice period

As a novelty, RD 7/2019 increases the notice period if one of the parties does not wish to extend the tacit period. Therefore, the notice period increases from 1 to 4 months if the landlord does not wish to extend the tacit period, and from 1 to 2 months if the tenant wants to terminate the lease.

Recovery of the property

Regarding the right of the landlord to recover a leased property in the event that the landlord or their relatives want to move back into it after the first year of the lease, without the mandatory extension being applicable, RD 7/2019, as the 1994 LAU version did before it, requires that this right can only be exercised if it is expressly recognized in the lease agreement.

Landlord’s termination rights

RD 7/2019 also recovers a 1994 LAU measure, which sets out that in the event that during the first 5 or 7 years of a lease agreement, a landlord loses its rights on the property in the event of a retroactive right of first refusal, a replacement of a trustee, a mandatory sale of the property due to its foreclosure, a judicial order or a purchase option, the tenant would be able to stay in the leased property during the remaining initial 5 or 7-year term, as applicable.

However, if the agreed term exceeds 5 or 7 years, once this term has elapsed, the lease agreement would be terminated unless the agreement had been registered in the Land Registry with priority to the right that caused the termination of the landlord’ s right.

Also, and as set out in the 1994 LAU, if the landlord appears to be the true owner, this guarantees the term of the lease agreement during the initial 5 or 7-year term. This is applicable in the event that the tenant has signed, in good faith, a lease agreement with the apparent owner, whether because it is listed as such in the Land Registry, or because it is in possession of the property due to causes attributable to the true owner.

Effects against third parties of lease agreements that are not registered with the Land Registry

After the criticism that RD 21/2018 received for not covering this issue, the new reform recovers the principle of legal publicity of lease agreements that were regulated in the 1994 LAU version. This was to guarantee the tenant’s legal protection against third parties. Therefore, residential lease agreements no longer need to be registered with the Land Registry to be effective against a third party.

Consequently, if a leased property is sold, the lease agreement would still be valid against a third party during the first 5 years of the agreement, or 7 if the landlord is a legal entity, and even if said agreement had not been registered with the Land Registry. If the agreed term exceeds 5 or 7 years and the agreement is not registered, the acquirer of the property will only have to accept the lease during the first 5 or 7 years, and the seller will have to compensate the tenant with an amount equal to the monthly rent in force for every remaining year exceeding the mentioned 5 or 7-year term. Lastly, if the term of the lease exceeds 5 or 7 years and it has been registered with the Land Registry, the acquirer will be replaced during all the agreed term.

Maximum limit of rent reviews

Regarding the limitations to update lease rents, the revoked RD 21/2018 limited the increase to the annual variation experienced in the Consumers’ Index Price, but only for those agreements that were considered to be “reduced rent”. In this case, RD 7/2019 extends this limitation to all residential lease agreements.

Non-application of the LAU to the temporary use of private property by tourists

Agreements for the temporary use of a private properties by tourists, which are marketed through specific traveller channels also known as tourist tenancy agreements, had already been excluded from the LAU after the 2013 amendment. The new regulation maintains a technical specification which was also included in RD 21/2018, and which removes the restriction of having to market these properties through traveller channels, as well as extending the exclusion of these agreements regardless of their marketing or promotional methods.

Regime applicable to lease agreements for specific types of housing

The exception included in the 1994 LAU has been recovered. This exception sets out that residential lease agreements over a property with a surface that exceeds 300 square metres or that has an initial rent over 5.5 times the national minimum wage will not be regulated by the LAU. Therefore, if the leased property complies with one of these requirements, the lease agreement shall be governed by the will of the parties and, failing this, by title II of the LAU and, supplementary, by the Spanish Civil Code.

Limit to additional guarantees

The RD 7/2019 keeps the measure introduced in the revoked reform setting out that a landlord may not ask for an amount that exceeds 2 monthly rents, as an additional guarantee to the legal cash deposit, unless the term of the lease agreement exceeds the 5 or 7-year period, as appropriate.

Tax measures

The new reform keeps the exemption, already introduced in the revoked RD 21/2018, from the Tax on Property Transfer and Stamp Duty when signing main residency lease agreements.

Other modifications

RD 7/2019 recovers the impossibility to exclude the right of subrogation in the event of the tenant’s death if the subrogated tenant is in a vulnerable position or it affects minors, or people that are disabled or over 65 years old.

Likewise, the new regulation, like its revoked predecessor, sets out that any expenses related to real estate agencies or to preparing the lease agreement must be paid by the landlord when it is a legal entity. However, the previous wording excluded this obligation when said service was directly being hired by the tenant. With the new wording, these expenses will be paid by the landlord in all cases, this is, regardless of who hires the services.

Finally, the reform maintains the measure included in RD 21/2018 which sets out that the regulation on housing matters may establish first refusal and pre-emptive rights in favour of the Administration when a whole property (housing and premises) owned by a landlord or various owners is sold as one to the same acquirer.

Transitional period and entry into force

RD 7/2019 will be applied to residential lease agreements signed from 6 March 2018 onwards. However, as with every other royal decree, it must be submitted for approval in the next 30 days, that is, before 6 April 2019. In this case, the Standing Committee (Diputación Permanente del Congreso de los Diputados) will vote on RD 7/2019 and not the Spanish Parliament (Congreso de los Diputados) since it was dissolved on 5 March 2019 due to the upcoming elections in April 2019.