Law 12/2023, of 24 May, on the right to housing

The Law includes the necessary aspects governing public housing planning and programming policies, such as creating public housing parks or establishing regulations for protection and transparency in housing purchase and rental transactions. However, the Law also introduces a series of measures directly impacting the regulation of the Spanish rental market.

To understand the scope of this new regulation, the Law introduces two basic concepts: Stressed Housing Market Area and Large Holder.

Stressed Housing Market Area

To guide public action on housing in Spanish territory where there is a particular risk of a shortage of affordable housing, the Law authorises the relevant authorities to declare, according to a series of criteria and procedures, areas where the residential market is considered to be under stress.

The criteria for making this declaration in each area will be the following (any one of them, without the need for them to be cumulative):

• If the average burden of the cost of the mortgage or rent on the personal or household budget, plus expenses and supplies, exceeds 30% of the average income or average household income.
• If, in the 5 years preceding the declaration, the cumulative percentage increase in the purchase or rental price of the dwelling has been at least 3 percentage points higher than the cumulative percentage increase in the consumption index of the Autonomous Community in which the area is located.

To declare a stressed housing market area, the relevant Administration must follow a procedure to obtain the required information to determine compliance with one of the two criteria set out above to expose it to a public information procedure afterwards. The declaration must necessarily justify the existence of deficiencies in the housing market in the relevant area, as well as its specific characteristics.

The duration of any declaration of a stressed housing market area is set at three years, which may be renewed annually further to the same procedure described above, provided that the circumstances that led to the declaration continue to exist.

The Administration responsible for the declaration will implement a specific plan of measures to rectify the existing deficiencies or inequalities. However, the Ministerial Department in charge of housing may also develop a separate programme for these areas, considering the territorial diversity, both in urban and rural areas, such as public-private collaboration formulas, specific financing measures, or public aid.

It should be noted that, within the framework of the procedure for declaring a stressed housing market area, the Law imposes an obligation on large holders (a term that will be developed below) to cooperate with the public administrations in providing information on the use and destination of the residential units they own in that stressed areas.

Large holder

The concept of the large holder is not new in Spanish legislation, as Royal Decree-Law 11/2020, of 31 March, which approved supplementary urgent measures in the social and economic field to deal with COVID-19, introduced this concept to determine the application of the standards that were approved at that time to deal with the economic situation arising from the pandemic.

Based on this concept, the Law now stipulates that, for the Law's purposes, large holder is a natural or legal person who owns more than ten urban properties for residential use or a built area of more than 1,500 sq. m. for residential use, excluding garages and storage rooms, shall be considered a large holder. Therefore, for the Law's purposes, the concept of large holder is limited to the scope of the Law, i.e., residential use.

Similarly, within the framework of the latest negotiations on the text of the Law, the possibility was introduced for autonomous communities to determine that, in areas declared as stressed housing market areas, the definition of the large holder would also include owners of 5 or more urban properties for residential use. 

Based on these two concepts, and to provide greater regulation of the rental market, improve access to housing and make it more affordable, the Law introduces certain highly relevant modifications to existing legislation:

1.    Law 29/1994, of 24 November, on urban leases

The changes that the Law introduces in the provisions of Law 29/1994, of 24 November, on urban leases ("Urban Leases Act") have a significant impact on the Spanish rental market since the primary measures affect the two main elements of the regulation of leases: the duration and the rent.

(a)    Duration

The first significant measure concerns a new regulation on the extensions applied to the housing lease agreement.

At the end of the mandatory extension period and, where applicable, the tacit extension period, a new compulsory, extraordinary extension of 1 year is applied to tenants in a social and economic vulnerability situation. This extension is mandatory if the landlord is a large holder unless the parties formalise a new agreement.

It should be noted that the mandatory extension of the Urban Leases Act is that which establishes that at the end of the lease, the contract will be extended for annual periods of up to a minimum of 5 years if the landlord is a natural person or 7 years if the landlord is a legal person.

As for the tacit extension, this is the one that applies once the mandatory extension has ended. In this event, once the mandatory extension has ended, if neither of the parties gives notice to the contrary, the contract shall be extended for successive annual periods up to a maximum of 3 years, unless the tenant gives notice to the landlord one month before the date of termination of any of the annual extensions, of his/her will not to renew the contract.

Therefore, once either of the two extensions above (mandatory and tacit) has expired, if the tenant is in a vulnerable situation, he/she may request the application of the new extraordinary extension of 1 year.

The second essential measure concerns properties in areas declared as stressed housing market areas. In this case, the Law introduces an extraordinary extension that will apply once the mandatory or, where applicable, tacit extension has expired. 

At the tenant's request, the contract may be extended by annual periods up to a maximum of 3 years, which is mandatory for the landlord, regardless of whether he is a legal person or a natural person and regardless of whether he is considered a large holder. However, the Law excludes the application of this extraordinary extension in cases where the parties agree on other conditions (which opens the possibility to decide on the non-application of this extension contractually), when the parties formalise a new contract (to which we advance that certain limitations regarding the rent will be applicable) or when the landlord needs to occupy the dwelling to use it as his/her permanent residence or that of his/her relatives, under the conditions set out in article 9.3 of the Urban Leases Act.

(b)    Rent

The second significant measure, with a major economic impact, is the introduction of rent-capping mechanisms.

When leasing residential properties in areas with a stressed housing market, the rent applicable to new contracts may not exceed the last rent charged for the same property during the previous 5 years, once the rent review clause agreed in the last contract has been applied. Furthermore,  there is no possibility of introducing new conditions for passing on to the tenant charges or expenses not included in the previous contract. In other words, if the last tenant of such property did not pay the condominium expenses, for example, the new contract cannot impose this obligation on the tenant.

As an exception, a rent increase of up to 10% is allowed in those cases where it is proven that the housing has been subjected to:

• Rehabilitation works (under the provisions of the Personal Income Tax Act) provided that this works have been completed within the last 2 years before the date of signing of the new contract.
• Rehabilitation or improvement works resulting in non-renewable primary energy savings of 30%, provided that they have been carried out during the 2 years before the date of signing of the new contract.
• Measures to improve accessibility provided that they have been carried out during the 2 years before the date of signing of the new contract.

In addition, a rent increase of up to 10% is allowed for new contracts with a minimum duration of 10 years or which enables the tenant to benefit from a voluntary right of extension until a minimum period of 10 years is reached.

In the case of large holders of residential property located in stressed housing market areas, there is also the limitation that the rents of new contracts may not exceed, in any case, the limit of the price applicable under the reference price index system, considering the conditions and characteristics of the rented housing and the building in which it is located. The following section explains what this index corresponds to.

This same limitation will also apply to residential property in stressed housing market areas that have not been rented in the last 5 years before the date of signing of the contract.

(c)    Index

Concerning the index for updating rents, the Law sets out that before 31 December 2024, the National Statistics Institute will define a new reference index for annually updating the housing lease agreements. This limit will apply to the rent limitations provided for stressed housing market areas and intends to avoid disproportionate increases in the rent of lease agreements. Since this index has not yet been defined, until then, the limitations introduced by Royal Decree-Law 6/2022, of 29 March, adopting urgent measures within the framework of the National Response Plan to the economic and social consequences of the war in Ukraine, which the Law takes the opportunity to modify, will apply within the following context:

• Regarding rents that must be updated before 31 December 2023, the update may not exceed the annual change in the Competitiveness Guarantee Index for large holders. Freedom of agreement is established for landlords not considered large holders. Still, in the absence of an agreement, the limit of the annual change in the Competitiveness Guarantee Index will also be applicable. It should be highlighted that under Law 2/2015, of 30 March, on the de-indexation of the Spanish economy, when the change rate of the Competitiveness Guarantee Index exceeds the upper limit of the European Central Bank's medium-term inflation target, which is 2%, this will be considered as the reference value for revisions. Therefore, for rents to be updated before 31 December 2023, the update may not exceed 2%.
• For rents that must be updated from 1 January 2024 to 31 December 2024, the increase in the rent of large holders will be capped at 3%. If the landlord is not a large holder, freedom of agreement is established, but in the absence of one, these rents will also be limited to a maximum increase of 3%.

(d)    Seasonal leases

Outside the scope of the Urban Leases Act, although it may also have important implications, the creation of a working group is provided for within 6 months of the approval of the Law to make progress on a regulatory policy proposal for the regulation of seasonal lease agreements. 

2.    Law 1/2000, of 7 January, on Civil Proceedings

(a)    Housing repossession procedures

The Law adds paragraphs 6 and 7 to Article 439 of Law 1/2000, of 7 January, on Civil Procedure ("CP"), introducing new requirements for the admissibility of claims relating to the proceedings regulated in numbers 1, 2, 4 and 7 of Article 250.1 CP.

Thus, under the new article 439.6 CP, the claim must specify the following: 

• if the property subject matter of the claim is the usual residence of the occupant; 
• if the claimant is a large holder (if not, a certificate from the Land Registry showing the list of properties must be attached to the claim); and 
• if the claimant is a large holder, whether or not the defendant is in a situation of economic vulnerability. To prove this circumstance, the claim must provide a supporting document, not more than 3 old, issued, prior consent of the person occupying the property, by the services of the competent public administrations that the regulations have specifically designated. 

Article 439.7 CP sets out that, for the procedures above, the claim will be inadmissible if it is not proven that the claimant has submitted to the conciliation or mediation procedure established by the competent public administration, provided that the claimant is a large holder and the property subject matter of the claim is the usual residence of the occupant, who must also be in a situation of economic vulnerability. 

Any of the following may prove the above requirement:

• a responsible statement issued by the claimant that he/she has resorted to the above services; or
• the supporting document from the competent services indicating the outcome of the conciliation or mediation procedure. This document may not be more than 3 months old. 

Similarly, in the proceedings regulated in numbers 1, 2, 4 and 7 of Article 250.1 of the CP, if the property subject matter of the dispute is the defendant's usual residence, the defendant shall be informed, in the decree admitting the claim for processing, of the possibility of calling on the competent public administrations. Without prejudice to this information, the court shall, immediately and ex officio, inform the competent public administrations of the existence of the judicial proceedings so that they may verify the situation of vulnerability and, if it exists, submit the appropriate proposals and measures to the court. 

The Law incorporates paragraphs 6 and 7 in Article 441 CP, which introduce, among others, a system of decision by the court on the possible suspension of the eviction proceedings after a considered and balanced assessment of the specific case. The time limits for the eviction proceedings are also extended to 2 months for natural persons and 4 months for legal persons (previously, they were 1 and 3 months, respectively). 

With the entry into force of the new legal text, section 4 of article 150 of the CP is also amended so that when the notification of the court decision includes the setting of a date for the eviction of the occupants of the dwelling, the competent public administrations will be informed for the event that their action were appropriate, without the need to obtain the consent of the parties concerned (as was previously the case).

A new paragraph 5 is included in Article 440 CP, which regulates that, in all cases of eviction and in all judicial decrees or resolutions that have the purpose of ordering the eviction, regardless of whether this has been attempted beforehand, the exact day and time at which the eviction will take place should be included.

(b)    Auction of real estate

Regarding real estate auctions, the Law introduces a new article 655 bis of the CP, which provides that when the property is the occupant's usual residence, and the owner is a large holder or a housing company:

• The enforcing party must prove, before the commencement of the enforcement proceedings and if this has not been done earlier in the proceedings, whether the debtor is in a situation of economic vulnerability. 
• In the event the mortgage holder is in a situation of economic vulnerability - under the provisions of the Law - the enforcement procedure may not be initiated if it is not proven that the enforcing party has submitted to the conciliation or mediation procedure between the parties established for this purpose by the competent public administrations. 

(c)    Foreclosure of mortgaged assets

The Law amends Article 685.2 of the CP in the following terms:

• In the case of a claim for foreclosure on the mortgaged property, the claimant is obliged to indicate whether the property subject matter of the claim is the debtor's usual residence and whether the claimant is a large holder. If it is indicated that this is not the case, the relevant certificate from the Land Registry must be attached to the claim. 
• In cases in which the claimant is a large holder, the property that is the subject matter of the claim is the mortgagor's usual residence and it is known that the mortgagor is in a situation of economic vulnerability; the claim will only be processed if it is proven that the claimant has submitted to the conciliation or intermediation procedure established for this purpose by the competent public administrations.

Royal Legislative Decree 7/2015, of 30 October, approving the revised text of the Law on Land and Urban Rehabilitation.

Increasing the buildability reserve in new developments for social housing 

The Law amends Royal Legislative Decree 7/2015, of 30 October, approving the revised text of the Law on Land and Urban Rehabilitation, providing that in those urban developments where rural land is to be included in new urbanisation actions, the buildability reserve for housing subject to a public protection regime increases from the 30% previously in force to 40%, while in new urbanisation actions on developable land that must be subject to internal reform or renewal of the urbanisation, the percentage increases from 10% to 20%. 

Measures in the field of taxation

The Law introduces two significant tax changes affecting Personal Income Tax  and Real Estate Tax. 

(a)    Personal Income Tax

Law 35/2006, of 28 November, on Personal Income Tax is amended concerning the reduction applicable to income derived from the lease of housing. 

Until the entry into force of the Law, the PIT regulations allowed a 60% reduction to be applied to the positive net yield obtained from the lease of housing (i.e., the positive difference between the rental income and the necessary expenses incurred to receive this income, such as Real Estate Tax, owners community expenses, etc.). 

The new Law has established different types of reduction applicable to positive net yield derived from housing lease agreements entered into after the Law comes into force, provided that the requirements, set out for each one, are met:

• 90% reduction: where the same landlord enters into a new lease agreement in respect of a property located in a stressed housing market area, where the initial rent has been reduced by more than 5% compared to the last rent of the previous lease agreement (after applying, where applicable, the annual updating clause of the previous contract).
• 70% reduction:

1. When the property is rented for the first time, provided that it is located in a stressed housing market area and the tenant is between 18 and 35 years old. If there are several tenants, the reduction will be applied proportionally to the part of the income corresponding to those who meet this requirement.
2. When the tenant is a Public Administration or a non-profit entity covered by the special tax regime of Law 49/2002, of 23 December, and the dwelling is intended for social lease or for housing of people in a situation of economic vulnerability or when a public housing programme or social qualification covers the dwelling.

• 60% reduction: when the above requirements are not met, and the property has been the object of a renovation project completed within 2 years before the date of signing of the lease agreement. For these purposes and as a general rule, rehabilitation works are considered to be those whose purpose is the reconstruction of the dwelling through the consolidation and treatment of structures, façades or roofs and other similar works, provided that the cost of these works exceeds 25% of the purchase price of the dwelling (if it was acquired in the 2 years immediately before the start of the works) or, in other cases, of its market value, discounting in both cases the value of the land.
• 50% reduction: the general reduction that applies in all other cases is reduced from 60% to 50%, with the new reduction rates mentioned above being approved for the specific situations described above. The requirements, in each case, must be met at the time the lease agreement is formalised, and the reduction will apply for as long as the conditions continue to be met. The Law also establishes that the reductions will not apply to lease agreements not complying with the criteria for limiting rental income explained above. In addition, and in the same way as previously provided, the application of the relevant reduction will be conditional on the rental income being declared in the self-assessment of Personal Income Tax before the commencement of any regularisation procedure by the tax authorities. 

Finally, it is worth mentioning that a transitory provision has been approved which will allow the 60% reduction to continue to be applied, in the same terms as provided for in the Personal Income Tax Act until the entry into force of the Law, to positive net yield derived from lease agreements entered into before the entry into force of this Law.

(b)    Real Estate Tax

The other significant tax measure has its impact on the Royal Legislative Decree 2/2004 of 5 March, which approves the revised text of the Law Regulating Local Treasuries ("LRLT"), specifically concerning the surcharge on the net amount of the Real Estate Tax for residential properties that are permanently unoccupied.

In this regard, until the Law entered into force, the LRLT provided that local councils could demand a surcharge of up to 50% of the net tax liability of Real Estate Tax in the case of these properties. With the Law's entry into force, the application of this surcharge is maintained. However, the Law provides for the possibility of increasing it and modulating it up to 150% if certain additional circumstances are met. 

For applying this surcharge, properties are considered permanently unoccupied if they remain unoccupied continuously and without justified cause for more than 2 years, under the requirements and means of proof required by the local council in the relevant municipal ordinance. In addition, for the surcharge to be applicable, the unoccupied property must belong to an owner of 4 or more residential properties. Thus, from now on, local councils will be entitled to demand a surcharge of:

• Up to 50% of the net amount: if the property has been permanently unoccupied for at least 2 years.
• Up to 100% of the net amount: if the property has been unoccupied for more than 3 years, which may be modulated according to the period of unoccupancy.
• 50% in addition to the above: if the owner has 2 or more empty residential properties in the same municipality.

It should be noted, however, that there are some causes that justify vacating the property, for example:

• Temporary relocation for work or training reasons.
• A change of address due to a situation of dependency or for health or social emergency reasons.
• Properties intended for second home use, with a maximum of 4 years of continuous unoccupancy.
• Properties are subject to construction, renovation work, or other circumstances that make their effective occupation impossible.
• The property is subject to a lawsuit or case pending judicial or administrative resolution that prevents the use and disposal of the same. 
• Properties offered for sale or, where appropriate, for rent on market terms (with no description of what is meant by these terms), for a maximum of 1 year or 6 months, respectively. 

In the same way as before the entry into force of the Law, the surcharge will accrue on 31 December, and the situation of unoccupancy of the property will have to be declared by administrative act by the local council after hearing the interested party and after proving the indications of unoccupancy under the provisions of the municipal ordinance.

This article was updated on Thursday 1 June 2023.