Real Estate COVID-19 Help Desk in Spain

Spain’s real estate market first was booming from the mid-1990s until 2007. Afterwards, we suffered a violent setback mainly for two reasons:

• An internal real estate bubble burst.
• At the same time consequences of the global financial crisis.

It took some years until a recovery, but we have enjoyed a nearly continued growth since 2014 with many transactions and investments from out of Spain, attracting increasing interest from both institutional and private investors. This friendly investment environment, driven by the attractive prices and rental prospects available, covered nearly all sectors of the market (e.g., office, retail, hotel and leisure, logistics, as well as the residential market). This even led Spain to a certain lack of availability, most of all in the office sector, bringing back new development projects, an increasing gross domestic product, etc. Especially, Spain’s as a European and worldwide known tourist hub did the rest for this success.

The effects of the current COVID 19 crisis are already being felt noticeably, both nationally and internationally. The medium- and long-term consequences can hardly be estimated at this time, but renowned economic experts agree that the corona virus crisis will cause a deep recession in many countries of the EU and the world, which will definitely have a negative repercussions, at least in the short run, on the Spanish real estate market.

On April 21st, 2020, that is, more than one month after the declaration of the State of Alarm on March 16^th, the Spanish Government approved some legal measures regarding leases of commercial and industrial premises, including the lease of “an industry” (an on-going business).

These measures, however, only refer to a postponement in the payment of the rent during the status of alarm, but in no case for a period longer than four months, and the postponed rents should be paid after the status of alarm is overcome along a maximum period of two years, or the maximum duration of the lease agreement, should it be shorter.

For some landlords, these measures are mandatory (i.e. big owners), while for the rest they are not, but the parties can dispose of the guarantee (a deposit equal to two months’ rent) for the rent payment. Tenants who could apply for these measures are self-employed individuals and small and medium companies (turnover below € 8 million and assets under € 4 million), whose activity is under lockdown, or whose turnover has been decreased in more than 75%, compared to the average monthly turnover during the same quarter last year.

As these measures are not enough to overcome the situation created by the Covid crises, landlords and tenants are reaching wider agreements that include, for example, 50% rent reduction during lockdown, 50% postponement during the next 6 months, or for very expensive premises (high street), 25% reduction until end of 2021.

Leases in Spain are regulated by the Urban Leases Act (L.A.U.) and the Civil Code. The very most -if not all- of the Spanish lease agreements contain a clause according to which the tenant is responsible for obtaining all necessary permits to develop its activity, with full indemnity of the landlord, making therefore very difficult, if not impossible, to cancel, amend or modify the lease agreements based on lockdown or the Covid-crises.

However, there is legal principle, not included in the Spanish Civil Code or in the LAU, but acknowledged by the Supreme Court named “rebus sic stantibus”, which implies that if the circumstances existing at the signature of a lease agreement have changed dramatically, the terms and conditions of such agreement could be amended. This principle was alleged quite often in the past financial crises (2008) and the following real estate market crash, but very seldom accepted the Supreme Court. We expect now there will be a lot of lawsuits from tenants who have not reached an agreement with the landlords requesting the application of this principle and maybe Courts will be more eager to apply it, based on the circumstances of each case (i.e. partial use of the premises by the tenant, online sales, etc.) and how this crises will evolve.

It is necessary to look at the clauses contained in the agreements signed between the parties, which could be mostly of three types:

• Reservation agreement, according to which the buyer pays a small amount (i.e. between € 1.000 and € 5.000) to the broker or the seller meanwhile the parties negotiate the “arras agreement” during a short term (i.e. 15 days). Normally the buyer should be able to obtain back the amount paid in case he wishes to cancel the purchase.
• “Arras agreement”: in this agreement, normally, the buyer pays a 10% of the purchase price, and both parties agree on a maximum term to sign the deed of purchase, among other conditions. We believe that any of the parties could request a postponement in the signature deadline based on “force majeure” (movements of people have been restricted and notaries authorized to sign only urgent matters). As regards a possible cancellation of the transaction, usually “arras” agreements provide that if the buyer wishes the cancel the transaction, the seller can keep the amount paid and in case it is the seller who wishes to cancel the sale, he has to reimburse the buyer twice the amount paid. In case any of the parties does not agree with these consequences, it will depend on the circumstances of each case if it can be requested the application of the “rebus sic stantibus” principle.
• Private sale and purchase agreement: this type of agreement is used normally by developers for properties which are under construction, and usually provide the payment by the buyer of certain amounts on the agreed dates. Some construction companies or developers have already communicated its clients that they will postpone the payment of the next terms, probably considering that maybe they will not be able to deliver the property timely on the agreed deadline. As regards the possibility for the buyers to cancel the agreement (i.e. because of their unemployment situation, or travelling bans), this matter gave rise to a lot of litigation during the 2008 crises, where buyers requested the application of the “rebus sic stantibus” principle (in many cases based on a substantial gap between the agreed price and the downsized market value of the property), but it was very restrictively applied by the Courts.

Spain has published a specific rule for those cases in which a consumer has made a reservation, and provided that the service could not be provided as a result of the state of alarm decreed by the Spanish government. In this case, the consumer may terminate the contract within 14 days from the impossible execution of the contract. Upon receipt of such a request for termination, the service provider may try to propose an alternative solution, such as offering a voucher instead of a refund. If after 60 days from the date of the request for termination the parties have not reached a satisfactory agreement, the service provider must refund the price received within a maximum of a further 14 days. From this refund, the costs incurred, duly credited to the consumer, may be deducted.

Contracts that had to be executed before the declaration of the alarm state are governed by the general conditions. The full refund of the amounts paid on account will only be made if the other party proves the existence of force majeure. Although some consumer associations have requested that fear of travelling or following WHO recommendations be considered force majeure, no specific rule has been published in this regard.

As of today, the termination of contracts to be provided after the end of the state of alarm is also possible by applying the general conditions of contract. In any case, since freedom of contract governs contracts for the provision of accommodation services, the parties may reach other arrangements that are satisfactory to both parties and that replace contractual termination.

Spain has not published any specific rules concerning contracts for the execution of works, e.g. constructions projects. The Royal Decree that decreed the state of alarm did not include construction activity as a sector that was obliged to cease activity and enabled people to leave their confinement to go to work. Only in the period between 30 March and 12 April, both included, was the cessation of all non-essential activity ordered. Therefore, to begin with, the state of alarm alone would not justify a delay in the execution of the works contracts of more than 14 days.

However, a ban on work on inhabited buildings has been applied and has been gradually lifted as de-escalation measures have progressed. In this case, therefore, the delay could be considered to have its direct cause in the state of alarm and be considered a case of force majeure.

Most industrial activities have followed the same regime as construction, so that the execution of works contracts has been able to continue, although with limitations on the number of people working or on the supply of materials due to the closure of borders. In the event that such limitations have given rise to any breach of contract, it will be for the courts to declare whether or not they were justified.

As for the legal procedure, the procedure to be followed will vary depending on whether we are dealing with a public or a private contract as well as on the amount of the claim.

The resolution of a dispute related to a public contract corresponds to the contentious-administrative courts. However, before filing a contentious-administrative claim, it is necessary to exhaust the administrative route, i.e. to file an application with the administration itself and, if you do not agree with the resolution issued by the administration, to exhaust all available remedies. Once the administrative procedure has been completed, the individual may file a legal action within two months. The processing of a prior administrative procedure extends the resolution period by about one year, on average.

There are basically two legal procedures that can be followed before the contentious-administrative bodies: an abbreviated procedure – essentially verbal – for claims up to 30,000 euros and an ordinary procedure, essentially in writing, for higher amounts or claims for an undetermined amount.

In the case of claims based on private contracts, the competent bodies are the courts of first instance. There are also two most commonly used declaratory procedures: the oral trial, for claims up to 6,000 euros and the ordinary trial for claims of greater amounts. This type of procedure is more agile as there is no prior administrative body. The usual duration is around a year – although in many cases it depends on the body in question that is responsible for processing it.

At the moment, it is expected that litigation proceedings will be lengthy due to the suspension of all proceedings from 14 March to 4 June 2020 and the need to limit the number of people going to court, which will force the postponement of face-to-face trial hearings.

To alleviate these delays, the Spanish bar associations and arbitration courts are trying to encourage arbitration and mediation, although the use of these tools makes the process more expensive because of the need to pay the fees of the arbitrators and mediators.

A large number of exceptional measures were taken to facilitate financing, especially for SMEs and the self-employed whose businesses had to close down temporarily or were affected by drastic falls in turnover. To summarize roughly, the following aid has been launched:

The Spanish Ministry of Economy and Digital Transformation (“Ministerio de Asuntos Económicos y Transformación Digital”) has promised guarantees of up to EUR 100 billion for lines of credit granted by credit institutions, financial credit institutions, e-money institutions and payment institutions to companies and the self-employed.

The net credit limit of the so-called official credit institution (“Instituto de Crédito Oficial”, or ICO for short) via the ICO’s financing lines has been increased by EUR 10 billion in order to provide additional liquidity to companies, especially SMEs and the self-employed.

The new ICO credit lines will be combined with the specific measures already adopted to support the tourism sector, which is very important for Spain. These include an extension of the so-called Thomas Cook financing line to provide a specific ICO credit line to all companies based in Spain in the tourism sector. However, only those enterprises that are individually listed in the emergency package using the so-called CNAE code (National Classification of Economic Activities, “Clasificación Nacional de Actividades Económicas”, or CNAE for short) are included in this line of credit. It therefore does not concern all areas and companies in this sector, e.g. not pure event agencies.

In the field of SME digitalization, the ICO will finance the purchase and leasing of equipment and services for SME digitalization and home office solutions with more than 200 million euros over the next two years. In the field of science and innovation, it should be possible to apply for state aid under certain conditions without the strict presentation of a guarantee. The creation of an special insurance line of up to EUR 2 billion will be approved to secure working capital loans required for export activities.

In addition, a suspension of the payment of mortgage instalments to the banks was ordered. In order to benefit from this suspension, however, a number of conditions must be met (e.g. only primary residences or headquarters of the business activity; only applies to property owners who are in financial difficulties or in a precarious situation – unemployed, entrepreneurs or freelancers with significant losses in turnover, etc.)