On 18 September, the Parliament of Catalonia approved Law 11/2020 containing urgent measures for residential housing rent regulation in lease contracts. It amended Law 18/2007, Law 24/2015 and Law 4/2016, relating to the protection of the right to housing. Popularly known as the ‘Catalan rent control act’, this legal modification is particularly disliked by professionals in the property sector. But how does it affect landlords and tenants?
With rental prices in Catalonia rising by up to 44% on average in the last four years (even more in large cities), the Government of Catalonia has considered it necessary to regulate rental prices in this region through the approval of Law 11/2020 on urgent measures residential housing rent regulation in lease contracts (the ‘Rent Control Act’), which entered into force on 22 September 2020.
The approval of this regulation has been rather controversial, as it does not have the support of property sector professionals. They oppose it mainly because they believe that the Rent Control Act is intended to shift responsibility for ensuring access to housing (which should lie on the Government) onto property owners, due to the shortage of social housing.
The General Council of the Associations of Estate Agents in Spain expressed its disagreement with this law in a forceful statement :
‘This is a populist measure which may have an effective impact on rental prices in the short term, but it will actually lead to a reduction in the availability of rental property (…) It is essential to find the right balance between the protection of tenants and the legitimate defence of property owners’ interests. (…) There is not enough housing available to meet the current demand, so the government should promote the creation of a public stock of social housing and encourage construction by providing different tax incentives ‘.
Furthermore, from a strictly legal point of view, the regulation may impinge on some central government powers, which would make it unconstitutional.
Leaving any controversy aside, it will be interesting to see if the objective of the law is eventually met, that is, if housing rental prices are effectively reduced and moderated. In the first months of its entry into force, there have been decreases of up to 2% in rental prices in Catalonia, but it remains to be seen whether this has been due to the effect of the new legislation or the result of the economic slowdown caused by the COVID-19 pandemic.
Which lease contracts does the new law apply to?
First, it should be noted that the Rent Control Act applies only to regular dwellings (that is, those intended for the tenant’s permanent residence). Therefore, leasing contracts for use other than housing (such as business premises, office spaces, industrial buildings, etc.) are excluded.
In addition, the law does not apply to all of Catalonia, but only to the so-called ‘tight housing market Areas’. These are municipalities or areas of municipalities that are at risk of not having enough rental housing at an affordable price.
The law includes a list of the 61 municipalities considered ‘tight housing market areas ’, including Barcelona and its entire metropolitan area and the most populated Catalan cities. This is not a closed list; rather, the Rental Control Act provides the jurisdiction and procedure to ensure that any municipality or a part of it can be considered ‘tight market areas’. In the same way, a municipality defined now as having a ‘tight housing market area’ may lose this status in the future if circumstances change.
Based on the above premises, this new law is applicable to all new contracts executed after its entry into force (on 22 September 2020) that meet the above conditions (being a regular dwelling and being located in a tight housing market area).
What happens to rental contracts formalised before the entry into force of the Rental Control Act? It will also apply if the contract is renewed after the Act comes into force, provided that: (i) the home is in a tight market area and (ii) the renewal of the contract entails extending its term or a change of the rent amount.
However, the Rental Control Act is not applicable to any other lease contracts. This means that, if a contract existed prior to the entry into force of the Act and there is no change in the rent amount and duration, even if it is a tenant’s regular dwelling and the property is in a tight market area, the rental price limitation will not apply.
Even if the above requirements are met (tenant’s regular dwelling and tight housing market area), the Act does not apply to contracts subject to special rental schemes, such as those signed before January 1, 1995, social housing, and other similar cases.
How does the Rental Control Act affect rental prices for new leases?
The Rental Control Act will be different depending on whether it is a new lease contract or the renewal of an existing contract.
- For new lease contracts of a permanent residence located in a tight market area (therefore, subject to the Act), the agreed rent cannot exceed the reference price for the rental of similar housing in the same urban environment. The reference price can be consulted on the Housing Agency of Catalonia (Agència de l’Habitatge de Catalunya) website, where property details can be entered and the lower and upper price thresholds found, together with the relevant index. For the purposes of calculating the rental price, only the index is taken into account, not the lower or upper thresholds.
- For the renewal of existing lease contracts, or if the dwelling was rented within the 5 years before the Act entered into force, the rent cannot exceed the amount set in the last contract. This amount is updated according to the Competitiveness Guarantee Index (Índice de Garantía de Competitividad) of the Spanish National Statistics Institute) (INE). This indicator was established in Law 2/2015, of 30 March, on the deindexation of the Spanish economy (BOE 03/31/2015 ) and is applied on a cumulative basis in the period elapsed between the execution date of the previous contract and the starting date of the new one. The Rental Control Act only applies if it is a habitual residence located in an area considered to be a pressured market, and therefore subject to it.
What exceptions are included in the new Rental Control Act?
The new Rental Control Act provides for some exceptions depending on the type of landlord and possible refurbishments made to the rental property.
If the landlord is an organisation (legal person), the above limitations fully apply, without exceptions. If the landlord is an individual (natural person), the above limitations may apply with the following exceptions:
- If the lessee’s personal or cohabitation unit has income equal to or less than 2.5 times the Catalan sufficient income indicator (approximately 19,919 euros per year) or the tenant’s income is equal to or less than 3.5 times the indicator of the Catalan sufficient income indicator (approximately 27,887 euros per year), only the limitation of the amount agreed in the last contract will be applicable.
- If there is a kinship relationship between the parties who signed the last contract before the Act came into force, only the reference price will apply as a maximum threshold for the rent agreed in the contract.
Regarding the refurbishments made to rental properties, the rent amount may be increased by up to 5% in the following cases:
- If refurbishment works have been carried out in the previous year for the improvement of the liveability, security, comfort or energy efficiency in the rental property.
- If the rental property has at least 3 of the following characteristics: it is furnished, has a lift, parking, heating or air conditioning, communal areas such as a garden or roof terrace, communal pool or similar, concierge or special views.
Likewise, in new rental properties or in those that have undergone major refurbishment, for 5 years from the works completion certificate has been obtained, the agreed rent may be higher because rental price will be the upper threshold of the reference price. This will not apply if public subsidies have been obtained for the execution of the works.
Finally, it should be taken into account that the Act does not prevent the general expenses and individual services of the rental property (such as the Property Tax, owners’ association fees, household waste collection tax, concierge service or other similar expenses) from being passed on to the tenant. This was set out in Law 29/1994, of 24 November, on Urban Leases, provided that this has been agreed between the parties.
However, a new section related to expenses (section 3, Article 9) was added to Law 11/2020, on urgent measures residential housing rent regulation in lease contracts, after it had come into force. Section 3 provides that, under any lease agreements entered into within 5 years before the new law entered into force, any clauses that require tenants to assume general expenses that were not covered in the previous lease agreement will be regarded as null and void.
This change was enacted through Decree Law 50/2020 of 9 December, on urgent measures to promote social housing and new types of rentals. This Decree Law was mainly intended to amend Law 18/2007, of 28 December, on the right to housing, to adapt it to the current situation.
Do you want to rent a residential property or business premises and rest assured that everything will be taken care of in the process? Seek legal advice!
