Government Says ‘No’ to Extension of Old CRE Rental Agreements

9/12/2014 – Cinco Dias

As usual on January 1st, many matters are bound to change. One of them could have an impact on old, historic city centers across Spain. On the upcoming December 31st, the Urban Letting Law approved in 1994 for 20 years is becoming invalid. The measure has been established to replace a great deal of old commercial property rental agreements signed before May 1985.

Small and medium-sized enterprises (up to 2.500-square meter area) underlie the regulation, as larger premises have been already freed. Moreover, the amendment is directed to the commercial units developing any of the business activities stated in the part number 6 of the Trade Tax (IAE by its acronym in Spanish) document, i.e. retail trading, catering, hotels or vehicle or home appliances workshops, among others.

Basically, the main impact will focus on business premises rental contracts of legal persons – companies which have not relocated in the last 20 years. On the other hand, if the tenant is a natural person – freelancer, the law allows to maintain stated terms and conditions until their retirement or death, the same as in case of the old residential rental system. However, the new regulation considers several exceptions for terms which prolong the agreements for additional five years, until January 1st 2020.

How many small businesses will feel the impact of disappearance of the old system? Although exact estimations are difficult to carry out, appraisal firm Tinsa gives a number ranging from 65.000 to 85.000 properties. The figure should be extended to the premises which will become vacant due to shrinking population.

And even if a tenant enjoys a life-long lease-out, most of them should be now at the verge of retirement as since 1985 almost three decades have passed. Another source of information, the Spanish Confederation of Small and Medium-Sized Enterprises (abbreviated to Copyme by its name in this language) says the number may reach 200.000 trading premises that employ between 300.000 and 500.000 workers. In addition, the Spanish Trading Confederation calculates that one in ten leased properties may fall under the law.

Opposition has proposed several amendments on putting validity of these contracts at least five years forward in favor of overcoming the recession, as well as enhancing regional mediation and arbitrary systems which could quickly resolve possible emerging conflicts between landlords and lessees.

Experts predict that most of the parties will opt for price re-negotiation and adjustment to the current market. Obviously, this is the beneficial option for the lessor. In fact, the businesses paying now 4.500 euros per year may see their rent skyrocketing to 15.000 euros in reference to the regulation. And if the most iconic properties located in Madrid or Barcelona involved, the difference may spread farther out.

Tinsa provided a practical example of the gap between the net revenues (average expenses excluded), inside the old rental regime, posting 43.189 euros and the free-market profits of 187.631 euros in the last 20 years.

In this context, a survey by the Official Association of Real Estate Agents in Spain (Coapi in short) presented by its chairman Jaime Cabrero concludes that 74.20 per cent of the experts reckons the best move is to renovate the expiring agreements. Of the percentage, 48.39 per cent foresees that owners and tenants will rectify their contracts still this year, while 25.81 per cent thinks the lessors will employ the present market price to the renovation agreement.

 

Original story: Cinco Días (by Raquel Díaz Guijarro)

Translation: AURA REE

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