Month: August 2022

Warning to readers: we have tried hard, but we have not been entirely successful at simplifying the text as much as we like. It is a very technical subject, and it was hard to achieve. Despite this, we are airing it because we think it is a very interesting topic for investors.

The Urban Leasing Law (“LAU”), for housing leases, sets put that the purchaser in an auction cannot terminate the contract if the minimum term of 5 years has not yet elapsed, or 7 years, when the lessor is a company (art. 13 LAU). Irrespective the lease is registered in the Land Registry.

In the case of a voluntary sale of commercial premises, the purchaser is subrogated in the position of lessor (art. 29 LAU). But what happens to the lease when we are facing the forced sale (foreclosure) of commercial premises?

In this post we are going to solve the previous question following the Supreme Court Judgment (STS) 783/2021, of November 15 (ECLI:ES:TS:2021:4141).

The controversy resolved by the Supreme Court (TS): how the foreclosure of a commercial premise impact on a lease contract existing before the foreclosing, but not registered at the Property Registry (99.99% of times leases are not registered).

The TS rejects the analogical application of art. 13 LAU (referring to the transfer of housing), since this article refers only to housing leases, and the legislator wanted to establish a clear distinction between the regulation of housing leases and all other leases, given the protective nature of the regulation of the former and the preponderance of the free will of the parties in the latter.

Nor does the TS consider applicable art. 29 LAU (referring to voluntary disposal of commercial premises), since it considers that this is only applicable in the case of voluntary disposals, and not in the case of coercive disposals derived from foreclosures or court rulings, as in the case in question. When it is the landlord himself who voluntarily transfers the property (for example, sells it, or donates it), the law protects the tenant by applying the principle of conservation of contracts through the mechanism of subrogation.

However, the same does not happen when the landlord’s right is extinguished due to the exercise of third-party rights (e.g. foreclosure), and as long as the lease was not registered in the Land Registry, or said registration is after the registration of the right of the third party (mortgage loan, for instance).

In other words, when the lease was not registered in the Land Registry at the time of registering the right of the third party (in this case, the mortgage guarantee), the right of the latter will prevail over the right of the tenant and the lease agreement may be terminated.

Consequently, in the absence of a specific solution in the LAU and in the absence of an inter parties agreement, it is necessary to seek the solution within the common regime of the Civil Code (“CC”), specifically arts. 1,571.1 and 1,549 regarding the effectiveness of unregistered leases against third parties.

According to the first (1,571.1 CC), “The buyer of a leased property has the right to terminate the current lease upon verification of the sale, unless otherwise agreed and as provided in the Mortgage Law.” This precept must be analyzed systematically together with the second (1,549 CC), according to which “In relation to third parties, real estate leases that are not duly registered in the Property Registry will not take effect.”

Thus, in the cases of leases not subject to the LAU, or with respect to leases for use other than housing (commercial premises) when the CC is applicable, in the absence of an agreement to the contrary and registration of the lease in the Property Registry, the third party purchaser of the leased property (in this case the winner in the auction) cannot be harmed by the lease.

The foregoing does not imply the automatic termination of the lease, but rather that the successful bidder of the property has the power to terminate the lease. And only in the event that he does not ask for it to be resolved, will his subrogation take place in the position of the previous owner or lessor.

Conclusion in a less formal legal language: if someone wins an auction on a property other than housing that is rented, and does not want the tenant to continue, what they should do is sue the tenant so that the judge resolves the rental agreement and call him out, based on 1,571.1 of the CC.

Marketing techniques for the production of sales materials can create commercial supports (virtual reality, hyper-realistic renderings…) of such vividness that it is difficult to distinguish it from reality.

These advertising materials are almost always accompanied by disclaimers, the length and detail of which depends on the series of American lawsuits that the lawyer writing them has seen, or on the Anglo-Saxon websites that the company’s Community Manager has copied.

Today we wonder to what extent that advertising is binding. What if the reality and the ad are “too” different?

A ruling from the Guadalajara Provincial Court has led us to reflect on this. The sentence is dated June 9, 2021. The defendant is an important development company, HERCESA. The plaintiffs were buyers of a flat in a resort on the Costa del Sol. The marketing materials said that there would be a lot of elements at the complex, such as a 5-star hotel, leisure and commercial areas, shops of all kinds…. All that was in the advertising brochure. The litigation is about marketing in its analogical form.

Since none of those elements eventually showed up at the complex, the buyers sued the developer.

The judgment places special emphasis on the fact that the basis of the obligation to compensate does not lay on the obligation to guarantee the construction of the complex facilities (which is not the property of the developer), but the loss of expectations of the purchasers that were described in the marketing materials to raise and trigger interest in the acquisition of the properties.

The basis of the ruling is not the breach of the obligation to deliver the home with the qualities and terms offered, but rather it lies in the fact that the sale was encouraged with expectations that, even depending on third parties, were included in the advertising and that influenced the decision to purchase the property.

In this sense, the ruling cites art. 61 of the General Law for the Defense of Consumers and Users, according to which “The content of the offer, promotion or advertising, the benefits of each good or service, the legal or economic conditions and guarantees offered will be required by consumers and users, even when they do not expressly appear in the contract”. It also cites jurisprudence of the Supreme Court on contractual advertising, etc.

And in the end, the court agrees with the plaintiffs. The issue of the amount of compensation is also very interesting. What it is about here is to know the “price” of those expectations of having a 5-star and luxury business in the complex. The expert of the disappointed clients values ​​this damage at 20% of the purchase price (compensation of €44,000). We would love to see that expert report, as it must be really good one. So much so that the Court “buys” it entirely from the expert, and gives the claimants everything they ask for: 44,000 €

To our developer clients: truth will out.

Judgment 37/2022 of the Constitutional Court on the Catalan law 11/2020

The Law 11/2020 of September 18 of the Parliament of Catalonia, on urgent measures regarding the containment of rents in housing lease contracts, implied that homes located in an area of ​​”housing tension” would see the rents capped and limited.

In practice, this meant that a large part of the houses that were rented in Catalonia saw their rental price limited to values ​set up by the administration. They could be previously consulted online, and that were largely lower than those that were agreed upon before the new legislation came into force.

In Judgment 37/2022, of March 10, the Constitutional Court (TC) (ECLI:ES:TC:2022:37) set up a partial unconstitutionality of the law.

What practical effects does this ruling have? Do I have to change a contract already signed in application of Law 11/2020? Can the parties freely agree on the price for the leases signed from now on? All these questions are what we will try to answer in today’s article.

The rental price was limited by art. 6 of the law. In its ruling, the TC declares that article null. But it does not do so because of the rental limit itself, but rather declares it null for a purely competence issue. The TC considers that Catalonia has exceeded the limits in the exercise of its powers, and therefore, art. 6 of the law, among others less relevant, must be declared unconstitutional.

However, it should be noted that the same TC does not close the door so that, in order to ensure the right to housing (art. 47 Spanish Constitution “CE”) and the social function of private property (art. 33.2 CE), the state legislator can approve a norm with the same content that in principle could be constitutional. In fact, that is the main debate undergoing in Madrid Parliament now.

What happens to contracts already signed? And with those signed from now on?

The effects of the sentence are, in any case, for the new rental contracts that are agreed from the publication in the Official Gazette (“BOE”) of said sentence: April 8, 2022.

This means that, in any case, the contracts signed in accordance with Law 11/2020 (which entered into force on September 21, 2020 with the publication in the DOGC) and until April 8, 2022 (publication in the BOE of the STC), continue to be governed by the law of limitation. Whereas the new contracts that are signed from that moment on can now freely set the rent of housing rentals. It is undoubtedly an issue that is going to generate tons of pieces of legal essays and litigation. It will be necessary to see what the Courts of First Instance and Second Instance of Catalonia decide first, and the Supreme Court afterwards. There are solid arguments for both views.

Tense housing market areas are still in force, but in practice, this does not limit rents in contracts between individuals.

We will discuss on other post what happens with the rental contracts signed before April 8, 2022 and that included the so-called “Berlin clause”, or a double rent: one while the limitation lasted, and another for when the rule was declared unconstitutional. That will also spill liters of ink and litigation.

In summary, the ruling of unconstitutionality implies that in the new rental contracts concluded in Catalonia, the price can be freely set by the parties. But on the other hand, nothing prevents the Cortes Generales in Madrid from passing a law with similar content at the time.

Our recommendation is that whether you are going to be a landlord or a tenant, consult us before signing the contract, since contrary to what you may think, rental contracts can be much more complex than they seem.

The case that we are analyzing today is common. The tenant stops paying the rent and, once he leaves the apartment, the damage and flaws in the apartment have a repair cost much higher than the deposit. In addition, when the time comes to file the tax returns, the owner have to pay taxes on rents that have not even been collected.

Is there a way to mitigate the tax burden? This is the essential question that we are going to answer below through binding Tax Ruling V0458-22, of March 10, 2022.

In principle, the income obtained from the rental, when they are unrelated to a professional activity (it is understood that they are the result of the professional activity when we have at least one person hired dedicated to the management of the properties), must be included as income from real estate (articles 22.1 and 27.2 Tax Act “LIRPF”). And the same happens if we withhold the deposit from the former tenant precisely to make the repairs.

However, the law itself provides (art. 23.1 to LIRPF) the deduction of expenses necessary to maintain the habitability of the home. For example, painting, replacing an element such as the elevator, heating, etc., always, of course, with the limit of what has been collected from the lease. The expenses incurred for the improvement and enlargement are not deductible for this concept (yes for the concept of amortization).

The problem is that these deductible expenses, while there is income and are being collected, can be deducted without any problem. But in our case study, the expenses are made once there is no rent, because the lease has ended, and we still have rents due from the last year.

What about these deductible expenses? At this point we must pay attention to two things.

First, we must say that the unpaid rents must be included in the taxable real estate income, taking into account that, if from the time any collection procedure has been carried out (for example, serving a call for payment via burofax) until the end of the tax period ( December 31) more than 3 months have passed, unpaid rent may not be included as income for tax purposes. Once they are collected they must be allocated to the tax period in which the collection is made effective. Therefore, it is advisable to serve a formal call for payment, even if only for tax purposes, and to avoid paying income tax for what has not been cashed.

Secondly, regarding repair expenses, if there has been real rental income in the same year in which the expenses have been made, they can be deducted from this income without any problem. But if the expenses are higher than the real income, this excess can be carried forward 4 years.

Nor should we forget that all repair and conservation expenses will be deductible as long as they are for the purpose of leasing the property, even when in the year in which they are made we are unable to obtain any rental income, in which case, as before , these expenses can be carried forward 4 years. But beware, because if the house is not rented, and the owner uses it for his personal use, he would lose the right to that deduction.

Finally, a piece of advice: any expense must have document evidence. Invoices and proof of payment, which must be by bank transfer if it is over €1,000 (VAT included), don’t forget. And, if possible, a contract or written instruction for the work, repair, etc., so that it is clear why the work was done and where. The burden of proof of any tax-deductible item is always on the taxpayer’s side.

Do you have doubts about the declaration of income derived from rentals? Has your tenant stopped paying and you don’t know how to recover all the money? We are at your disposal to advise you on all these issues and to collect the rent due with the best possible strategy.

Architecture is rooted to any real estate process. The real estate activities entail rigorous obligations in terms of money laundering (PBC).

The case study that we will analyse is that of an architect who, directly or through a professional company, is hired to carry out a project. We refer to the architect who was only hired to carry out the work project, what the Building Regulation Law (“LOE”) defines as the “project designer”. Specifically, the obligations under Law 10/2010, of April 28, on the Prevention of Money Laundering and the Financing of Terrorism (LPBCF) and its Regulations approved by Royal Decree 304/2014, of May 5^th.

The art. 2 of Law 10/2010 describes who must carry out a money laundering prevention control. In section 1, letter I, it clearly indicates that real estate developers, and those who carry out brokerage in the sale or lease of real estate, are obliged to control PBC. If the architect-designer is, simultaneously, the developer of the project (he himself draws up the project, builds and sells the building or the flats) then, yes, it will be obliged to carry out the due diligence provided for in the Law.

What if he just drafts and direct the Project? The LPBCF does not foresee anything regarding this situation and, therefore, making a literal interpretation, we must determine that the architect who only drafts the project of the works, will never be obliged to carry out a money laundering control. That is the same interpretation that the PBC whatchdog (“SEPBLAC”) has issued to us a query made by our office.

Do not hesitate to contact us to resolve any questions on this subject.

If in recent years you have tried to buy a property or rent it, or if you are doing so right now, you will surely have been asked for various very private documents, such as the tax income statement, pay slips and others, depending on the case, to comply with the Prevention of Money Laundering (PBC). Particularly, if you buy it from a developer or from a bank servicer, who have compliance departments dedicated to these matters. No one likes to air their financial privacy. That is why we have often been asked on it.

What are the documents that truly must be provided? Am I obliged to request certain documents if I want to rent or sell my house or flat? Surely these are questions that we have all asked ourselves.

In today’s article we will try to answer all these questions based on Law 10/2010, of April 28, on the prevention of money laundering and the financing of terrorism and its regulatory development of RD 304/2014.

Let’s begin with identifying those subjects that are bound by the law: art. 2 and specifically for the real estate case in Section l.

The only obliged in the real estate field are (1) real estate developers; (2) those who professionally carry out brokerage in sale of assets; or (3) those who professionally carry out leasing activities for rents higuer than €120,000 per year, or €10,000 per month.

Thus, as buyers of a property (whether we are a company or an individual) we will be obliged to provide certain documentation if we buy the property from an owner who is professionally dedicated to that, or if we acquire it through a real estate acting as an intermediary. The same thing will happen to us if we want to lease a property worth more than €10,000 per month as tenants from someone who is professionally dedicated to leasing.

However, we will not have to provide any documentation related to the PBC when we buy from a natural or legal person whose activity is not the sale of real estate (for example, a company that simply wants to sell a property that it owns), nor if we lease a property from a natural or legal person whose activity is not the leasing of real estate. But beware: if a real estate agency is involved in the purchase or lease operation (if it is greater than €10,000), as is usually happen with non-residents, it will be mandatory to comply with certain obligations.

If we are private sellers or lessors, we should not worry about anything related to the formal obligations to prevent money laundering.

What are the documents that can be required of me, or that must be required, to comply with the money laundering prevention law?

The truth is that neither the law, nor the regulations, clearly specify the level of diligence required, and it will depend a lot on the risk that the professional perceives, being able to establish different degrees of diligence in their entire judgment, role of the client and its internal procedures.

Strictly speaking, the only thing required by law is the identification of the client (art. 3 of the law, by ID, passport, or CIF card for companies), the identification of the nature of the professional activity of the client, the purpose of the operation (art. 5), and the monitoring of the business relationship, in order to ensure that there are no relevant changes in the client’s condition (art. 6).

Thus, neither the law nor the regulations at any time clearly indicate to us which documents are to be requested, and which are not, which in practice means that professionals end up requesting many more documents than are really necessary in order to have a solid defence file in case of the money laundering watchdog audits them.

Finally, we must not forget that art. 26 of the law requires having client admission policies in writing. And of course, comply with all privacy and data protection requirements.

Do you have doubts about money laundering? We are at your disposal.