What is the impact of Spain's limitation on annual residential rent reviews?
Published on 24th Oct 2022
An extraordinary limitation was extended to 31 December 2022 – it remains to be seen if the government will extend it further.
Within the context of the political and economic uncertainty mainly caused by the war in Ukraine, and with the rate of inflation being higher than in 2021, the Spanish government approved 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. Among the law's measures there was the extraordinary limitation on the annual updating of the rent in housing lease agreements. Royal Decree-Law 11/2022, of 25 June, extended the measure until 31 December 2022, which raises the question of the impact of this limitation in practice.
Residential leases subject to limitation
Firstly, this measure only affects housing lease agreements, thus excluding leases on other assets, such as offices, commercial premises, or logistics warehouses.
Secondly, the limitation affects any housing lease agreements subject to Law 29/1994, of 24 November, on Urban Leases whose rent must be updated because it has been agreed, and the corresponding year of validity is fulfilled between 31 March 2022 and 31 December 2022. We will have to wait and see if the government decides to extend the measure.
Content of the limitation
The tenant is able to negotiate with the landlord the increase to be applied in the annual rent review, subject to the conditions set out in the law. Therefore, the rent increase will result from a new agreement between the parties (who may agree to whatever they deem appropriate).
In the absence of a new agreement between the parties (for example, if the landlord rejects the tenant's demands), the rent increase may not exceed the amount resulting from applying the annual variation of the Competitiveness Guarantee Index (Índice de Garantía de Competitividad) (CGI) on the date the review takes place. This is one of the main changes in the law, given that, without this measure, the limit of the rent increase would be the Consumer Price Index (CPI).
Large owners
In addition, if the landlord is a large owner (gran tenedor), the rent increase will be the amount that the parties set out in the new agreement, without exceeding the amount resulting from applying the annual variation of the CGI on the date of the review (in this case, the ability to agree is limited, since the parties are unable to agree on a higher increase than that set out in the law).
In the absence of a new agreement between the parties, the rent increase will be subject to the same limitation.
A large owner is defined as a natural or legal person owning more than ten urban properties for residential use or a built surface area of over 1,500 sq. m. for residential use, excluding garages and storage rooms.
However, as some commentators have already pointed out, since the entry into force of the measure, the distinction between common landlords and large owners is deceptive. In practice, and without considering other circumstances between the parties in each case, it would not make much sense for a tenant to agree to an increase above the CGI when, in the absence of an agreement, the update cannot exceed the CGI.
Osborne Clarke comment
A landlord who must update the rent before 31 December 2022 should focus on the Competitiveness Guarantee Index. As a guideline, between July 2021 and July 2022 the CGI was 5.42%. However, as set out in the Annex to Law 2/2015, of 30 March, on the de-indexation of the Spanish economy, "when the rate of change of the CGI is negative, the revision value will be considered to be zero, and when it exceeds the upper limit of the European Central Bank's medium-term inflation target (2%), this will be considered the reference value for any revisions."
In summary, for rent reviews taking place up to 31 December 2022, the landlord will most likely not be able to apply an increase of more than 2%.
