Draft Bill of a new Spanish Law on housing - four key features for the real estate private sector
1. WHAT IS THE STATUS OF THIS INITIATIVE? WHEN WILL IT COME INTO FORCE?
After a long preliminary process led by the Government and marked, among others, by the delay of the Spanish General Council of the Judiciary (Consejo General del Poder Judicial) in approving its consultation report, the Draft Bill of a new Spanish Law on Housing has finally entered into Congress.
The Draft has already been officially qualified by the relevant Congressional bureau but has not been published in the Congress' bulletin. However, the Government released the text submitted to the Congress last Thursday through the Transparency Portal. This note is based on that text.
Please note that the parliamentary process has just begun and, therefore, the text of the initiative will be modified to a greater or lesser extent as such process progresses. In its initial phase, it could even be returned to the Government if any of the suggested parliamentary amendments affect the text as a whole and have the backing of the majority of the Congress. Therefore, everything we say in this note is provisional.
As to when the new Spanish Law on Housing will be approved and in force, it is impossible to know at this time. The Draft Bill is being processed as urgent but the majority of the parliamentary stages have no set deadlines. The presentation and study of amendments could take months. The only deadline currently in place is the one included in the regulatory timetable the Government sent the European Commission together with the Recovery, Transformation and Resilience Plan, in which it indicated that the Law would be in force in the third quarter of 2022.
2. WHAT ARE THE KEY FEATURES OF THIS DRAFT FOR THE PRIVATE REAL ESTATE SECTOR?
The most relevant issues included in this Draft for the private real estate holding and development sector are:
(a) Firstly, the enactment of a basic statue regarding the ownership of residential units that expressly includes a set of duties and burdens for owners.
(b) Secondly, the creation of "stressed residential market" areas that will entail significant limitations on lease agreements and on the promotion of urban transformation actions.
(c) Thirdly, the amendments to the Spanish Civil Proceedings Act which strengthen certain protective measures already provided for vulnerable tenants in eviction proceedings and extend such protection to certain occupants.
(d) Fourthly, tax measures aimed at providing incentives for residential leases and, therefore, discouraging the holding of unoccupied residential units.
The Draft addresses many other aspects, some of which are summarised at the end of this note. However, these pages are not intended to be a study of the entire contents of the Draft, but only of the most significant measures included in it that may affect the housing development and operational sector.
Some sections of the Draft Law have a wording that allows several interpretations. We have reflected in the following lines the one that seems to us the most reasonable in the context of the entire initiative and specially taking into account its memorandum. It is quite possible that the wording of these sections will be clarified during the parliamentary process.
3. FIRST KEY POINT: DUTIES FOR OWNERS OF RESIDENTIAL UNITS
3.1 The Draft sets out, at a state level, a basic statue regarding the ownership of residential units. In this way, the Draft includes a number of rights and obligations for owners of residential units.
3.2 The Draft indicates that the right of ownership of residential units includes:
(a) The powers of use, enjoyment and disposal of such units in accordance with its qualification, condition and factual features.
(b) The right to ask the relevant authorities on the urban planning situation of the unit and of the building in which it is located.
(c) The carrying out of conservation, rehabilitation, extension or improvement works, in accordance with the conditions established by the Administration and, where appropriate, the authorising title when this is legally required.
3.3 In addition, it imposes on the Administrations the duty to act in concert and collaborate in the promotion of actions that favour access to housing, including:
(a) grants and subsidies;
(b) tax incentives;
(c) management of the public housing stock;
(d) collaboration with third sector entities;
(e) promotion of private initiative through agreements with the owners of residential units for their transfer to the relevant public administrations or other formulas to encourage an increase in the supply of social or affordable leases and actions to facilitate the intermediation in the housing lease market in order to promote the units' effective occupation.
3.4 Probably the most remarkable feature of this section is the inclusion of a list of duties, some of them new, that are assigned to owners of residential units. Specifically:
(a) The appropriate and effective use and enjoyment of the residential unit in accordance with its qualification, condition and factual features and taking into account housing regulations and other applicable laws, guaranteeing in all cases the social function of the ownership.
(b) The maintenance, conservation and, where appropriate, rehabilitation of the residential unit in accordance with the Draft, of the legislation on territorial, urban and housing planning, and of the instruments approved under it.
(c) The duty to avoid over-occupation or the lease for uses and activities that do not comply with the requirements and conditions of habitability legally demanded.
(d) In the sale or lease of residential units, the duty to comply with the information obligations established in the Draft.
(e) In the event that the residential is located in a stressed residential market area, the reporting obligations referred to below (see section 4.3).
According to the Draft Bill, it is up to the Administration with competences in housing matters to declare non-compliance with these duties associated with the ownership of a residential unit. According to our understanding, this implies a referral to the action of the Autonomous Communities which, according to the Draft, could adopt, ex officio or at the request of a party and after hearing, in any case, the responsible party, as many measures as are foreseen in the legislation on land-use planning and urban planning and housing.
4. SECOND KEY FEATURE: STRESSED RESIDENTIAL MARKET AREAS
4.1 What are the "stressed residential market" areas?
The "stressed residential market" areas already existed in some autonomous communities such as Catalonia. However, with the approval of the Draft the stressed market regulation may be extended throughout the Spanish territory.
The declaration of a zone as a "stressed residential market" area will require a prior procedure to be followed the Administration and which is set out in the Draft.
The most important milestone in this procedure is the preparation by the Administrations with competences in housing matters (in our understanding, this is a referral to the Autonomous Communities) of a report justifying with objective data that there is a risk of insufficient housing supply in a given area due to the following circumstances:
(a) in that particular area the average mortgage or rent burden (including basic supplies) exceeds 30% of the average income or average household rents; and
(b) in the last five years the purchase or rental price has had a cumulative growth of at least five percentage points higher than the cumulative growth percentage of the consumer price index of the relevant autonomous community.
In addition, the Administration will have to draw up a specific plan to correct the imbalance with a development timetable for a three-year reference period.
In order to prepare this documentation, the Administration should obtain information (including studies of the special distribution of population and households, their structure and dynamics, and zoning by prices and types of housing) and then make it public.
The procedure will finish with the formal declaration of an area as "stressed" The area so declared will maintain this status for an initial period of three years, which may be extended indefinitely on an annual basis (if the requirements for such declaration are still in existence) . In the last quarter of each calendar year, the Ministry of Transport, Mobility and Urban Agenda will approve a resolution listing all "stressed residential market" areas throughout Spain.
The Ministerial Department responsible for housing, within the framework of the exercise of state powers, may develop a specific action programme for "stressed" areas that will modify or be annexed to the state housing plan in force, and will enable the State to:
(a) Promote formulas for collaboration with the competent administrations and the private sector to stimulate the offer of affordable housing in the area and its surroundings.
(b) The design and adoption of specific financing measures in the area that could favour the containment or reduction of rental or sale prices.
(c) The establishment of additional specific public measures or aids within the applicable state housing plan, in accordance with the provisions established in such plan.
In addition, the declaration of an area as a "stressed residential market" entails, as we will see below, special reporting obligations for large holders of residential units and also has other consequences for the property development and rental sectors.
4.2 Who are considered large holders under the Draft?
The Draft defines a large holder, in general, as an individual or legal entity that owns more than ten urban properties for residential use or an aggregate built surface area of more than 1,500 square metres for residential use, excluding in all cases garages and storage rooms.
4.3 What reporting obligations are imposed on large holders in "stressed" areas?
According to the current wording of the Draft, the Administration may require large holders to provide information on the use and destination of the residential units they own that are located in "stressed" areas. This information will include, at least:
(a) The identification data of the residential unit and the building in which they are located, including the postal address, the year of construction and, if applicable, the year and type of refurbishment, built area for private use by use, cadastral reference and energy rating.
(b) Regime of effective use of the residential unit, in the context of the uses foreseen in the land and urban planning instruments.
(c) Justification of compliance with the duties associated with owning residential units (as mentioned in previous section 3.3).
In the report accompanying the proposal for the declaration of an area as "stressed", the Administration will define who will be considered for these purposes as large holders in the area in question, taking as a basis the definition of large holders of residential units included in the Draft (see previous section 4.2) and including, if deemed convenient, additional criteria in accordance with the reality and characteristics of the area.
The information to be provided shall relate to the previous calendar year and shall be submitted no later than three months after it is requested.
With the information it receives, the Administration will be able to establish formulas for collaboration with landlords in order to encourage an increase of the offer of affordable housing in the area.
4.4 What does the declaration of a zone as a "stressed residential market" area imply for property development?
In these areas, the only way of satisfying the urban obligations related to urban building and transformation promotion will be the delivery to the Administration of the percentage imposed under the compulsory transfer duty that must be used for the construction and management of social or public housing, unless other needs of social interest are accredited.
The Draft rejects the substitution of this duty by any other alternative form of compliance with the obligation of compulsory transfer of the urban development use in favour of the Administration (such as the monetisation of this use).
4.5 What does the declaration of a zone as a "stressed residential market" area imply for renting?
The Draft proposes to amend Law 29/1994 of 24 November on Urban Leases in order to, among other things, impose caps on rents in "stressed" areas and also specialties in lease duration.
In relation to rent, if the landlord is a large holder, the rent may not exceed the maximum limit under the reference price index system (referred to in Royal Decree-Law 7/2019, of 1 March, on urgent housing and rental measures). This measure will start to be applied 18 months after the new Spanish Law on Housing enters into force and once the aforementioned reference price index system has been approved.
If the landlord is not a large holder, the rent must correspond to the last rent in force in the previous five years (updated according to the consumer price index under the provisions of the relevant agreement) except for the possibility of increases of up to 10% in certain cases (such as when in the previous two years the residential unit has undergone certain improvement works, for example 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).
With regard to the duration of the lease, after the mandatory extension period (five years for individual landlords or seven years if the landlord is a legal entity) or the subsequent tacit extension of three years has expired, the tenant may demand that the agreement be extended annually for a further three years on the same terms and conditions that were in force at the time, unless the landlord needs the property for himself, his first-degree relatives by blood or adoption or his spouse (in cases of a final judgment of separation, divorce or marriage annulment) or unless the landlord manages to reach another agreement with the tenant (for example, by signing a new agreement with rent limitations).
5. THIRD KEY FEATURE: AMENDMENTS AIMED AT PROTECTING VULNERABLE GROUPS IN REPOSSESSION PROCEEDINGS
The Spanish Civil Proceedings Act already provides that in eviction proceedings for non-payment of rent or expiry of the lease, if the unit is the defendant's main residence, the Administration is notified to determine whether there is a situation of vulnerability. If the Administration confirms the vulnerability, the judicial officer will automatically suspend the procedure for a maximum period of one month (if the plaintiff is an individual) or three months (if the plaintiff is a legal entity) so that social services can take the appropriate measures.
The changes proposed by the Draft to this regulation are as follows:
(a) Expansion of the protected group: This procedure of notifying the Administration and suspending proceedings temporarily if vulnerability is confirmed is currently only applicable to evictions arising from for non-payment of rent or other amounts or expiry of the lease term. If the Draft is approved with its current wording, it would also apply in the case of proceedings:
- seeking the recovery of full possession of a property assigned in precariousness (precario);
- seeking summary protection of the tenancy or possession of the property by a person who has been deprived of it or whose enjoyment of it has been disturbed; and
- initiated by those holding in rem rights duly registered in the Land Registry who demand the effectiveness of those rights against those who oppose them or disturb their exercise, without having a registered title that legitimises the opposition or disturbance.
Also, in order to notify the administration, it would no longer be necessary to request the consent of the interested parties.
(b) The suspension will no longer be automatic: Until now, if the Administration confirmed the existence of a situation of vulnerability, the judicial officer automatically suspends proceedings. According to the Draft, however, it will be up to the judge to determine whether or not the suspension is appropriate after having heard the parties and also taking into consideration the situation of vulnerability in which the plaintiff may find himself or herself.
The Draft provides the judge with a series of criteria for assessing the situation, including whether the occupants of the residential unit include people in a situation of dependency, victims of violence against women or minors.
In the case of evictions due to non-payment, vulnerability scales are established by reference to the fact that the rent (together with supplies) represents more than 30% of the income of the family unit and that, in turn, this does not exceed three times the monthly Public Indicator of Multiple Effect Income. This Indicator is an index used in Spain as a reference for the granting of aid, subsidies or unemployment benefits which was set at € 564.90 in 2021. The Draft Law establishes corrective multipliers to the Indicator for cases in which the family unit includes minors, people over 65 years of age and people with disabilities. These multipliers are higher than those established in Royal Decree 11/2020, which initially established the so-called "social shield" against Covid-19.
(c) Extension of the suspension periods: The current suspension periods for the study of protection measures for these groups are extended by one month by the Draft, so that the suspension would be for a maximum period of two months (if the claimant is an individual) or four months (if the claimant is a legal person).
6. FOURTH KEY FEATURE: TAX MEASURES AIMED AT PROVIDING INCENTIVES FOR RESIDENTIAL LEASES AND DISCOURAGING THE HOLDING OF UNOCCUPIED RESIDENTIAL UNITS
6.1 How is the unoccupancy of residential units discouraged?
At present, town halls are already allowed to impose surcharges on the Real Estate Tax for the holding of permanently unoccupied residential units (up to 50%). However, the Draft strengthens this instrument by allowing the surcharges to be increased:
(a) Up to 100% when residential units remain unoccupied for more than three years.
(b) Up to 150% if the property unoccupied for more than three years belongs to one owner who owns two or more unoccupied residential units in the same municipality.
In addition, the Draft includes a definition of permanently unoccupied residential unit (which was previously left to sectorial regulations). An unoccupied residential unit is one that has been empty continuously and without just cause for more than two years, provided that, in addition, it belongs to owners of four or more residential units. Among others, justified causes of lack of occupation are considered to be that the residential unit:
(a) is subject to construction or rehabilitation works;
(b) is the subject of litigation that prevents its use; or
(c) is offered for sale or rent on market terms but only for one year in the first case and six months in the second.
In order for the surcharge to be imposed, the residential unit must have been previously declared unoccupied. The surcharges will accrue on 31 December and will be settled annually.
The relevant territorial Administration shall provide annual information in aggregate terms on the number of residential units identified as unoccupied within its territorial scope, as well as the number of properties to which the tax surcharge has been applied.
6.2 How are residential leases promoted?
The measures envisaged only affect individuals acting as landlords of property intended for housing, who may apply reductions to their income from the lease.
The applicable reduction percentages range from 60% to 90% in the following cases:
(a) if taxpayers sign new lease agreements for residential units located in "stressed residential market" areas with a rental reduction of at least 5% compared to the last rent of the previous contract (90% reduction);
(b) if, in the same areas, they lease a residential units for the first time, provided that they lease to young tenants (70% reduction);
(c) in the case of residential units covered by a public housing programme that establish limitations on rents (70% reduction); or
(d) when the residential unit has been the subject of a renovation that was completed within the two years prior to the date of the signing of the lease agreement (60% reduction).
In all other cases, the applicable reduction rate will be 50%, which is therefore reduced by ten points compared to the current reduction rate of 60%.
These reductions will come into force on 1 January of the year following the publication in the Spanish Official Bulleting (Boletín Oficial del Estado) of the new Spanish Law on Housing and will only apply to rents derived from lease agreements signed once the aforementioned law comes into force.
7. OTHER ISSUES INCLUDED IN THE DRAFT
7.1 What measures are included with regard to social housing?
One of the main purposes of the Draft Bill is to increase social housing's offer and, to this end, it establishes several measures aimed at increasing the public housing stock. These include:
(a) Incentivised affordable housing
The Draft creates a new category of privately owned "incentivised affordable housing", including third sector organisations and social economy entities. These are residential units that are intended to be leased or made available in any other temporary tenancy formula to people whose income level does not allow them to access housing at market prices. They are not subject to the formal procedure of qualification as social housing and may enjoy urban planning, tax or any other type of benefits.
Incentivised affordable housing will be one of the ways in which public-private partnerships can be instrumentalised for the creation of a privately owned social housing fund.
(b) Reinforcement of the qualification regime for social housing
Social housing that is developed in compliance with the obligation of the Administration to reserve land for this purpose will be subject to a permanent public protection regime.
In all other cases, the regional regulations may provide for the disqualification of residential units for justified reasons (for example, if the development was carried out on land that did not require such use and without any public support) or establish a limited qualification period that may not be less than 30 years.
If the property is transferred after disqualification, the benefits received will have to be paid back.
The rules provided for in this section shall apply irrespective of the date of qualification of the residential unit, even if it is prior to the final enactment of the new Spanish Law on Housing.
(c) Reservation of land for social housing
It is proposed to amend the Spanish Law on Land Planning and Urban Rehabilitation (approved by Royal Legislative Decree 7/2015) to maintain the same land reservation percentages for social housing (30% in new urban development and 10% in renovation) but adding that in the rest of the cases the Administrations will establish compensation mechanisms to ensure that a proportionate part is allocated to public protection.
In addition, the Draft indicates that, with some exceptions, at least 50% of the land set aside for public housing must be allocated to housing under a public rental protection scheme.
(d) First refusal and call-back rights
The sale or lease of subsidised housing will be subject to prior authorisation by the autonomous community, which may only grant such authorisation when the sale or lease is in favour of applicants registered in the public registers provided for this purpose by the autonomous community or municipal regulations and the price of the sale or lease does not exceed the maximum established for this purpose. During the authorisation period, the Administration may exercise the right of first refusal and, after the authorisation has been granted, within the same period, the call-back right as established by the applicable regional legislation.
(e) Limitations on the transfer of assets forming part of the public housing stock
The real estate assets included in the public housing stock may only be sold to other public administrations, their instrumental entities or to non-profit legal entities dedicated to the management of housing for social purposes.
7.2 What measures are included with regard to the protection of tenants and buyers of residential units?
The Draft proposes to repeal the first additional provision of the Spanish Construction Regulation 38/1999, of 5 November and to include in the new Spanish Law on Housing the regulation on the obligation of developers to guarantee the amounts paid on account, including minimal changes:
(a) Under the current text of the Spanish Construction Regulation, the guarantee already covered to the amounts provided by buyers, including the applicable taxes, plus the legal interest. But the new regulation proposed by the Draft clarifies that this interest will be that which accrues from the date of the transfer of the corresponding amounts and that lower amounts cannot be established in the insurance policies.
(b) The obligation to repay the amounts is no longer linked to obtaining the building permit, but arises from the moment that amounts are received on account of the price.
(c) The joint and several guarantee (aval) for the sums advanced will expire after a period of four years from the developer's breach of the guaranteed obligation if the buyer has not requested the termination of the agreement and the return the sums advanced (until now the expiration period was two years).
(d) Developers may not terminate agreements for non-payment of partial payments unless they have requested buyers to pay beforehand, giving them an additional period of at least 30 days in which to make payment. The sale and purchase agreement may not provide otherwise.
The Draft also envisages the creation of a public register of lease agreements regarding residential units linked to the autonomous registers of lease deposits (fianzas) and to the Land Registry, which will be subject to subsequent regulatory development and which will provide the Administration with information to feed the reference price index system.
Furthermore, the Draft regulates the information rights of buyers of residential units and tenants, although it does not include any major novelties as compared with the regulations in force at state and autonomous community level. The obligations of real estate agents are also regulated.
7.3 Are there any other measures of interest to owners?
In order to prevent speculation, the Draft provides that state plans may establish measures to redistribute socially the profit obtained, where appropriate, as a result of the sale, within the time limit established by such plans, of residential units that have benefited from public support for the carrying out of urban rehabilitation, regeneration and renovation works, either through the return of the aid, through tax levies on such sale, or other measures that may be established.
On the other hand, the Draft incorporates a new definition of "homelessness" as the vital circumstance that affects a person who cannot sustainably access adequate housing in a community environment and forces people who suffer from it to reside on public roads or other inadequate public spaces, or to use alternatives of institutionalised collective accommodation provided by the different public administrations or non-profit organisations. However, there are no other mentions of this concept except those referring to the general purpose of the Administration to fight against this phenomenon and promote the full inclusion of homeless people from an integrated and intersectoral perspective.
Finally, the Housing Advisory Council (Consejo Asesor de Vivienda) is created to try to ensure the participation of all agents in the drafting and development of housing policies. It will be a collegiate body providing the State technical, advisory and consultative support for the programming of public housing policies and will be made up of ministerial representatives, associations from the third sector, other associations of affected groups, representatives from the real estate business and professionals from the financial sector and other experts in housing, from the university or research fields.
