The Spanish rental law LAU – an insight – offered by your real estate specialist for your real estate in Majorca

Not until the Spanish rental law amended in November 1994 (“Ley de Arrendamiento Urbano – LAU”) was a development on the Spanish rental market possible. A rental prior to that date frequently equated to a dispossession of the owner. Many Spaniards are thus still sceptical of a rental of their property, which is why many properties are empty, particularly on the Spanish mainland.

For those who have adopted Majorca as their home, it is important to know that the Spanish rental law demonstrates a few considerable differences to the Northern European rental laws. The following provides a brief overview:

Contractual terms

A standard Spanish contract is concluded for the period of one year. Unless the lessee terminates such contract with a 30-day notice period to its annual fulfilment, this may be annually renewed for up to a maximum of four years. After the term of lease totalling five-years has expired, should the lessor not terminate the contract either, the latter may be renewed for up to a maximum of three more years. A new contract needs to then be concluded between the parties.

The obligatory renewal of the lease contract for up to a total of five years should however not be applied to all properties. So-called luxury properties may be excluded from this and the parties may freely determine the term of lease. Under certain circumstances, which have to be reviewed very precisely, special clauses or the selection of a seasonal lease contract may also prevent an automatic renewal of the contract.

Here it is — contrary to what is commonly incorrectly assumed — irrelevant whether the contract has a maximum contractual period of 11 months. Often these so-called 11 months contracts even mean that the contract can be extended against the desire of the owner for up to five years.

Rent deposit and guarantees

When leasing residential properties the Spanish rental law provides for only one month’s rent. However, in practice, two months’ rent is usually requested as a security against damages to the rental object. However, this amount may also be considerably higher for luxury properties. Payment of interest on the amount is rather unusual. The Spanish law does not permit a “living off” of the rent deposit in the last months of the term of lease. In so doing the lessee even makes himself liable to prosecution, with serious consequences being the possible result. However, the lessee is not powerless, should he fear that the lessor is unjustifiably withholding the rent deposit. A lawyer can provide the correct assistance in this instance, with the outstanding rental payments frequently then being deposited with a notary public, after prior notification of the lessor, until the parties have agreed on a solution.

In many cases the owner also requests a Spanish bank guarantee (“aval”) from the lessee to hedge the monthly rental payment. For a non-resident, who cannot demonstrate any bank history whatsoever with the local institutions, this means that the relevant amount is frozen on the account. The only advantage of this procedure is that interest is paid on the relevant amount. As a fee is incurred when creating guaranties and the latter also causes monthly costs, many rental parties agree to an advance payment of the rent, in order to avoid costs and bureaucracy.

Frequently an arbitration contract, concluded in addition to the rental contract, suffices in order to guarantee the contractual agreements on both sides. In this arbitration contract both parties agree to acknowledge the judgement of an arbitration court. This has an immense advantage with regard to cost and time saving, as the courts are sometimes very overtaxed and valuable time is lost before a hearing date is set. The important thing for the lessee is that he has exactly the same right to avail himself of the services of the arbitration court as the lessor has.

Rent increase – rent reduction

Unlike in many European countries, in standard contracts Spanish rental law provides solely for the rent to increase annually by the inflation rate (IPC). This is published every year by the national statistical institute and is easy to research on the Internet. The rent increase requires a written notification on the part of the lessor.

A very big difference exists with regard to the topic of rent reduction. The rent may only be reduced if part of the rental object is no longer usable. The rent may then only be reduced by the percentaged surface area – but not until after the 21st day and only after prior written notification. Should the lessee still reduce the rent he puts himself at risk of a termination of the lease contract without notice, as by reducing the rent he is committing a wanton infringement of an obligation in the contractual agreement. Should a defect prevail and the lessor does not eliminate such defect despite written request, the lessee must request a separate process to eliminate the defect. Legal assistance is important here and is to be recommended.

Short-term lets

A fantastic possibility to keep the running costs of a property in the sun low or even to receive a continuous income are short-term lets. In doing so, many property owners keep their options open to use their property for a few weeks per year and to let it to holidaymakers for the rest of the time. However, there are advantages and disadvantages. Generally, properties that are used for short-term lets suffer more wear and tear, and property owners should be aware of this right from the start and adjust the furniture and fittings of the property accordingly. Furthermore, they should comply with the regional regulations for holiday lets. In some areas of Spain property owners must have a license to be able to sign short-term letting contracts. If they do not comply they may be fined severely.

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