THE SPANISH CONSTITUTIONAL COURT ANNULS THE LIMITATIONS ON LEASE RENTALS IMPOSED IN CATALONIA

Last Thursday 10 March, the Spanish Constitutional Court issued a ruling declaring Catalonian Law 11/2020 of 18 September partially null and void. The ruling was unanimously approved by all members of the court.

We analysed Law 11/2020 when it was published (New law on limitations on lease rentals in Catalonia). We will now analyse this ruling of the Spanish Constitutional Court and its effects, in particular as regards its practical implications on the content of the Draft Law on the Right to Housing, which is currently under discussion in the Spanish Parliament.

1. WHAT WAS EXACTLY THE CONTENT OF THE CATALONIAN LAW THAT HAS NOW BEEN ANNULLED BY THE SPANISH CONSTITUTIONAL COURT?

Law 11/2020 entered into force on 22 September 2020 despite the fact that the Council of Statutory Guarantees (Consejo de Garantías Estatutarias) considered that it exceeded the powers attributed to Catalonian Parliament under the Spanish Constitution and the regional by-laws (Estatuto de Autonomía).

This law provided for the possibility of declaring certain municipalities or parts of a municipality as "areas with a tense housing market".

As a result of this declaration, lease agreements regarding residential units located in those areas (with some exceptions) were subject to certain tenants protection rules. These rules included limitations on lease rentals but also some additional measures such as information on reference prices, specialities regarding dispute resolution or restrictions on the possibility to pass on costs to the lessees. Finally, Law 11/2020 also established the right of tenants to be reimbursed for overpayments and a sanctioning regime.

Although the regulation was highly criticised from the outset, it was relatively successful among Catalan town halls. Currently, the website of the Generalidad's Housing Agency lists more than 60 municipalities declared as tense areas, including several municipalities in the Metropolitan Area of Barcelona and also Gerona, Lleida, Sabadell and Tarragona.

2. HAS THE CONSTITUTIONAL COURT ANNULLED LAW 11/2020 ENTIRELY?

No, some provisions have been confirmed and will remain, but they are minor.

The Spanish Constitutional Court has declared null and void the limitations on lease rentals (section 6 and third final provision). However, the court did not limit the declaration of unconstitutionality to these provisions but extended the nullity to the rest of provisions of Law 11/2020 that referred in any way to the limitations on lease rentals.

In particular, in addition to section 6 and the third final provision, the following provisions have been declared null and void:

• (a) those setting out the scope of the limitations on lease rentals (section 1, section 10, second additional provision, first transitional provision and fourth final provision b);
• (b) the one which specified the reference price for the limitations on lease rentals (section 7);
• (c) those regarding rental updates and the exceptional regime in case of improvements (section 8 and section 11);
• (d) the one which imposed restrictions on the possibility to pass on costs (section 9);
• (e) the one which gave tenants the right to be reimbursed for overpayments (section 12);
• (f) the one which obliged lessors to provide information to calculate the reference price for the limitations on lease rentals in a particular case (section 13);
• (g) those defining sanctions and setting out the consequences of non-compliance (section 15 and section 16.2);
• (h) the one which authorised the application, in certain cases, of corrective percentages (first additional provision); and
• (i) those establishing procedural specialities for disputes between landlords and tenants in relation to limitations on lease rentals (third and fourth additional provisions).

3. WHAT REMAINS IN FORCE FROM LAW 11/2020?

The only sections of Law 11/2020 that remain in force after the ruling are:

• (a) The procedure for declaring areas with a tense housing market (section 3 and section 4).
  
  The Constitutional Court justifies this decision because the declaration of an area as tense under Law 11/2020 was a mechanism not just to impose limitations on rents but also to impose a duty on the public administrations involved to comply with the list of measures included in the declaration to attenuate or reverse the tense situation.
  
  Therefore, the declaration as an area with a tense housing market will continue to involve a procedure conducted by the department of the Generalidad in charge of housing. In Barcelona, in addition to the Generalidad, the procedure can continue to be led by the City Council and the Metropolitan Council (for the Constitutional Court this attribution of competences does not violate article 25 of the Law Regulating the Local Regime Foundations, that is, the Ley Reguladora de las Bases de Régimen Local).
• (b) The definition of what are considered to be areas with a tense housing market (section 2 and section 5).
  
  Areas with a tense housing market are those areas that are at particular risk of not having enough residential units available for lease at an affordable price thus preventing access to housing for the general population. This can be determined by the fulfilment of any of the following conditions:
  
  (i) That the average price of residential units' leases in this area has experienced sustained growth clearly higher than the average for Catalonia as a whole.
  
  (ii) The burden of lease costs on the household or personal budget exceeds on average in that area 30% of the standard household income, or the average lease rental exceeds 30% of the average income of persons under 35 years of age.
  
  (iii) That the lease rental has experienced, in the five years prior to the time of the declaration, a cumulative year-on-year growth of at least three percentage points above the year-on-year rate of the consumer price index in Catalonia.
  
  Furthermore, the declaration can only be made in municipalities or parts of municipalities to which the reference index of housing rental prices, determined by the department of the Generalidad in charge of housing, is applicable.
  

4. SO, ARE THERE STILL "AREAS WITH A TENSE HOUSING MARKET" IN CATALONIA?

Yes, the municipalities or parts of municipalities that currently have this status will maintain it after the ruling. However, from the time it is published, lease agreements signed in these areas will no longer be subject to rental limitations.

This declaration will now only have the effect of binding the administrations involved to comply with the list of actions aimed at attenuating or reversing the tense market situation that was approved together with the declaration of a tense area.

In any case, these municipalities can now request the early cancellation of the declaration as tense areas due to a change in the circumstances that led to it (in accordance with article 4.3 of Law 11/2020, which remains in force). These requests will be analysed by the department of the Generalidad's in charge of housing.

5. WHEN DOES THIS JUDGMENT TAKE EFFECT?

In principle, this ruling will have general effects as soon as it is published in the Spanish Official Gazette (as per section 38 of the Organic Law of the Constitutional Court, that is, Ley Orgánica del Tribunal Constitucional). This publication is likely to take place in the next few days.

However, this effectiveness raises a number of questions:

• (a) What about lease agreements already signed?
  
  The ruling itself expressly states that lease agreements already signed are maintained in their terms.
  
  Therefore, lease agreements signed between 22 September 2020 and the date of publication of the ruling in the Spanish Official Gazette that were within the scope of application of the lease rental limitations of Law 11/2020 must maintain such limitations until their termination in accordance with the general regulations of the Spanish Law on Urban Leases (Ley de Arrendamientos Urbanos).
• (b) What if the signed lease agreement included a clause according to which, if Law 11/2020 was declared unconstitutional, the rental price would rise (the so-called "Berlin clause")?
  
  The answer to this question is highly debatable. In fact, opinions have been published arguing that such clauses are null and void.
  
  However, in our opinion, as long as the clause is well drafted and included by mutual agreement, it would now allow the rent of the lease to be raised even if the agreement was signed before the publication of the ruling in the Spanish Official Gazette. The ruling expressly states that has effects "pro futuro, maintaining in their own terms the agreements signed previously" and in the agreements that included the Berlin clause those terms already foresaw the increase of the rent if Law 11/2020 was annulled.
  
  The argument of legal certainty and the need to ensure the stability of trade relations is weaker in these cases since the parties were clearly aware of the risk of unconstitutionality of the law and agreed between themselves what the materialisation of this risk would mean for their mutual contractual relationship.
• (c) Do limitations apply to lease agreements signed between the date of the ruling and the date of its publication in the Spanish Official Gazette?
  
  In principle, these agreements should be subject to the limitations on lease rentals of Law 11/2020 which, until its publication in the Spanish Official Gazette, is not considered to be annulled with general effects.
  
  However, in our opinion it is possible to agree that these limitations apply only until the publication of the ruling in the Spanish Official Gazette (that is, for just a few days).
  
  Another option for owners would be to wait until the day of the publication of the ruling in the Spanish Official Gazette to sign the lease agreement. In this latter case, there is no doubt that the agreement can be signed without taking into consideration Law 11/2020, which will already be considered effectively annulled (to the extent mentioned earlier in this note).

6. WILL THIS RULING AFFECT THE DRAFT LAW ON THE RIGHT TO HOUSING WHICH IS CURRENTLY UNDER DISCUSSION IN THE SPANISH PARLIAMENT?

This question is relevant because the Draft Law on the Right to Housing, in its current version, also establishes a system enabling limitations on lease rentals.

In principle, however, the Draft Law will not be affected by the ruling of the Spanish Constitutional Court.

The Constitutional Court bases the unconstitutionality of Law 11/2020 on the fact that it exceeds the powers attributed to Parliament of Catalonia under the Spanish Constitution. It did not analyse other arguments linked to the potential contravention, by any official system imposing rental limitations on lease agreements, of the right to free will or the right to private property, arguments which could be also applicable to the Draft State Law.