The Government, by means of a royal decree 6/2022, de 29th of March, establishes a new mandatory regime for the annual renewal of rental contracts.
Although this regime is only applicable until 30th of June, there are professionals that think this new regulation will be in force without an end date.
Believe it or not, the government has approved this new regime under the pretext of a “National Plan for Dealing with the Consequences of War” in Ukraine. Their excuse: “The restriction is motivated by the need to ensure that the evolution of the Consumer Price Index (CPI), in the context of the economic and social consequences of the war in Ukraine, is not reflected in the price of rental agreements”.
The Spanish government says it has created this mandate in this regulation to protect people living in rented accommodation in Spain. Housing is a basic need and paying rent should not be a stumbling block or become impossible. Most rental contracts refer to the Consumer Price Index as the reference for the annual rent adjustment. According to the government:
“The modification of this reference (..) responds to reasons of urgency and necessity in a context in which the Consumer Price Index reached 7.6% last February, which is the highest value in the last 35 years, which means that it is no longer an appropriate reference”.
This measure will affect long-term rental agreements whose rents must be updated annually from the entry into force of the Royal Decree on 31th of March until 30th of June 2022. Of the more than 3.5 million rental agreements that exist in Spain, the government estimates that 25%, or around 875,000 agreements, will be affected by this new law.
The regulation makes a distinction between large landlords and small landlords. Large landlords may apply a maximum rent increase equal to the standard set by the Índice de Garantía de la Competitividad (IGC), which is 2%. However, small landlords are allowed to negotiate with their tenants for increases above this percentage. However, if no agreement is reached between the two parties, the small landlord must also apply a maximum rent increase of 2%.
Large property owners
If the landlord is a large property owner, the rent increase in a new rental contract between parties will not exceed the result of the annual change in the index of the Índice de Garantía de la Competitividad (IGC) on the date of the said update, taking as the reference month for the update that month corresponding to the latest index published on the date of the update of the contract. In the absence of a new agreement between parties, the rent increase shall be subject to the same limitation.
A major landlord is defined as any natural or legal person who owns more than 10 urban properties for residential use or a built-up area of more than 1,500 m2 for residential use, excluding garages and storage rooms.
Small property owners
If the landlord is not a major landlord, the rent increase shall be the increase agreed in the new agreement between the parties. However, in the absence of a new agreement between the parties, the rent increase shall not exceed the result of the annual change in the index of the Índice de Garantía de la Competitividad (IGC) on the date of the said update, taking as the reference month for the update that month corresponding to the latest index published on the date of the update of the contract.
The professionals believe that this limit will be extended beyond 30th of June. This cap, which was set before the update of property rents in the next three months, is a new point of criticism within the real estate sector that has been drawing attention for some time now to the legal uncertainty in the free rental market with the current Housing Act. It is estimated that the restriction of rent increases by up to 2% will cost landlords 560 million. This will result in the withdrawal of housing stocks from the market and ultimately cause a rise in rental prices.
The reasons (or rather excuses) given by the government are not convincing. The consumer price index has not risen as a result of the war between Ukraine and Russia; in fact, by the end of 2021, inflation had already reached 6.5%. This increase was predicted by many professionals because of the economic interventionist policies, such as ‘punishing’ banks and people with negative interest rates for having money in the bank, or the failed energy policy. It is bad governance that has led to the rise in the consumer price index and these same politicians are now pretending to make landlords pay the price. It is clear that any government intervention in one area will have an impact on another. This is another setback for landlords who once again see the rules changed in the middle of the game. The effect can therefore be exactly the opposite of what is desired. Experience shows that any non-encouraging measure in the rental market has immediate consequences such as houses withdrawing from the market, rising rental prices and difficult access for people looking for rental housing.
Roeland van Passel