Essential modifications to the lease contract- but only for a limited period of time!

Essential modifications to the lease contract- but only for a limited period of time!

At the end of 2018, a Royal Decree-Law came into force, introducing several modifications that affect the regulation of the lease contract significantly. This rule, which has character of law, modifies substantial aspects like the duration of the lease contract, its extensions, the additional guarantees to the deposit, related taxes, etc. Because it is a Royal Decree-Law, it should have been ratified by the Congress of Deputies, but this ratification has not taken place. As a result, we find ourselves before a regulation that has been in force during approximately one month, and therefore only regulates the contracts of rents that were celebrated during such period of time.

On 19.12.2018, Royal Decree-Law 21/2018, of 14 December, on urgent measures regarding housing and renting (Royal Decree-Law) came into force, introducing substantial modifications in the global regulation regarding housing and renting, especially in the lease contract. Among other arguments, the need for this reform is justified by the current difficulty of access to rented housing and the current weak position of the tenant.

The main novelties are as follows:

Modification of the Law on Urban Leases (LAU)

On the one hand, the term of the mandatory extension is extended to 5 years (7 years if the landlord is a legal entity). In other words, if a period shorter than the mandatory extension has been agreed upon, when this period expires and the tenant does not express his/her intention to terminate the contract, the landlord is obliged to allow the annual extensions until 5 or 7 years have elapsed. It should be borne in mind that the term will begin to run from the date the contract was signed or from the date the property was made available to the tenant, if this was later.

On the other hand, the term of the tacit extension has also been extended to 3 years. This implies that once the mandatory extension period (5 or 7 years) has been completed and neither of the two parties has expressed its will to not renew the lease agreement, it will automatically be extended for another 3 years. At the end of this extension, if again neither party expresses its will to not renew the contract, it will be extended for another 3 years.

It is also established by law that the costs of property management and formalization of the contract will be borne by the landlord, when it is a legal entity, except those services that have been contracted on the direct initiative of the tenant.

Another important aspect to highlight is the limitation of the maximum amount of the additional guarantees to the deposit, which is limited to a maximum of two monthly payments (apart from the compulsory deposit). These additional guarantees are usually required in the form of a deposit or bank guarantee.

Tourist contract leases are excluded from the scope of application of the LAU. This type of contract will be regulated by a specific regulation, which varies in each autonomous community.

Likewise, dwellings that are considered to be “luxurious”, this is, dwellings whose surface area is greater than 300m2 or in which the initial income in annual calculation exceeds 5.5 times the minimum wage in annual calculation, are to be regulated by the will of the parties and only supplemented by the LAU.

Amendment to the Law on Horizontal Property (LPH), the Law on Transfer Tax and Documented Legal Acts (ITP-AJD) and the Law on Civil Procedure (LEC)

Among other changes incorporated in LPH, it is worth mentioning that from now on a qualified majority is required for the ownership community to be able to limit or condition the exercise of the tourist lease activity. This requires the favourable vote of three fifths of the total number of owners who, in turn, represent three fifths of the total share quotas.

As for the ITP-AJD tax, an exemption is established for the signing of lease contracts, intended for housing, which agree on a stable and permanent use.

Finally, it is also worth mentioning that there is a modification in the eviction procedure regulated in the LEC. In this sense, homes that are considered to be vulnerable will suspend the procedure of eviction until the measures that the social services deem appropriate are adopted. These measures will have a maximum term of one month, or two months when the claimant is a legal entity.

Final considerations:

As a Royal Decree-Law approved by the Government, it should have been ratified by the Congress of Deputies, and this has not happened, as a result, the Royal Decree-Law has been repealed. However, this repeal does not have retroactive effects and so, the regulation contained in this rule is perfectly valid for all lease contracts that were signed during the validity of this rule.

In short, the lease contracts signed during the time the Royal Decree-Law was in force are valid, and it is not necessary to sign a new lease contract. Furthermore, it should be borne in mind that these amendments are not retroactive, i.e. they do not apply to lease contracts entered into prior to the entry into force of this Royal Decree-Law, unless there is an express agreement between the landlord and the tenant.

This leads to the unusual situation in which lease contracts signed prior to the publication and after the repeal of the Royal Decree-Law are subject to different regulations than contracts signed during the life of the same.

As a result of this unusual situation, we strongly recommend that both landlords and tenants, who have signed a lease contract during the time the Royal Decree-Law was in force, to be informed of the specific regulations governing these lease contracts.

Marinel-lo @ Partners