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Eversheds Global Estate Management

Spain

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - is not limited in time. The freeholder may choose to occupy the property or to lease it by means of a lease agreement. After the lease expires, the right to occupy the property reverts to the owner; It is possible to sell property either vacant or subject to one or more leases.

Leasehold - not applicable.

Common hold/Usufruct - is the right to enjoy a third party's real estate for a certain period of time. The beneficiary can use the real estate property as the owner would, including the exercise of the right to collect interest and to grant leaseholds, provided that the original destination of use is maintained. Once the term of the usufruct expires, full ownership over the property automatically returns to the grantor.

Condominium ownership - not applicable.

Utilisation right (“derecho de uso y habitación”) - Article 523 of the Spanish Civil Code sets the right to use a good or a real estate property for the time strictly necessary to satisfy the user’s and its family’s needs. Utilisation right is quite infrequent in Spain, as compared with leases.

Joint/Co-ownership property may be owned directly by one person or jointly with others. The most common forms of joint ownership are proindiviso (also called "condominio") and the so-called horizontal property system ("propiedad horizontal"). Proindiviso is normally established under a will in order to allocate testamentary rights among the heirs of a deceased person and the beneficiaries of that person's will.

Under the Spanish proindiviso system, all owners have a theoretical share ("cuota ideal") over the stet of the property. Unless the owners agree to keep the co-ownership for a period of time (which can be recorded with the Land Registry for a maximum period of up to 10 years), any co-owner may apply to the court for the co-ownership situation to be terminated. Regarding the horizontal property regime, established by Law 42/1960 (as modified by Law 8/1999), under this system a person has full ownership over its own private area (for instance, a flat) and shares pro rata with the other owners the ownership of the common parts (i.e. façade, corridors, etc.) of the property.

The horizontal property regime may be found both in connection with residential properties (for instance, apartment buildings) and commercial properties (shopping centres). The condominium arising from the horizontal division regime is ruled by the incorporation deed (“título constitutivo”) and the by-laws (“estatutos”), which, inter alia, establish the co-ownership quota of each of the owners over the common elements and the service charges quota corresponding to each privately-owned property, which normally coincides with the co-ownership quota. In addition, some Association of Owners approve additional internal regulations (Reglamento de Régimen Interior) to regulate in detail the conditions of use of the buildings. The percentage of contribution basically depends on the characteristics of the flat (i.e.: floor area of every unit in relation to the total of the property, the inside or the outside location of the flat, etc.).

Registration - every acts and contracts relating to property (either full ownership or “in rem rights”) over real properties may voluntarily be registered by the interested party in the corresponding Land Registry. Registration is highly advisable as provides protection of title vis-à-vis third parties. However, the tax implications of registration of the relevant acts or contracts (which generally attracts Stamp Duty) must be taken into consideration, which means, in practice, that all property acquisitions are recorded with the Land Registry whilst lease agreements are rarely recorded. However, in the recently updated Lease Act it is clearly stated that the full registration of the lease agreement is the only way to provide enough protection to the tenant in the case of transfer.

It´s also important to note that in order to register the property, the relevant sale and purchase agreement shall be granted before a Public Notary, which accrues notarial fees based on a scale provided by the Notarial Rules (“reglamento notarial”).

 

Restrictions on foreign ownership

Restrictions on foreign ownership

Foreign investments in real estate located in Spain are not subject to authorisation or restriction whatsoever. However, foreign investments in real estate are subject to notification after the investment has been made only if the real estate investment is valued at more than €3,005,060.52 or where the investment originates from a tax haven, whatever its amount.

 

Title to real estate

Title to real estate

Investigation of title - the buyer/tenant’s lawyers commonly carry out due diligence mainly on real estate matters, namely the ownership title, the information obtained in public registers, the planning situation of the property and the existence of licences and administrative authorisations on the construction and/or use of the property. Meanwhile, the buyer/tenant may carry out a technical investigation, (which can include an environmental investigation), and a commercial and/or financial investigation of the property and, if relevant, of the lease agreements existing on the dwellings in the property.

Transfer of title - under Spanish law, the transfer of title requires (i) a title (i.e. a contract, which may be either verbal or in a written form) and (ii) delivery of the possession of the property. The transfer of real estate normally takes place by way of the symbolic delivery of possession of the property by means of the execution of a notarial sale and purchase deed ("escritura pública") before a Spanish Notary.

Registration - is not a requirement for the validity of the transfer of title, but it is highly recommended in order to be opposable vis-à-vis any third party and solve possible conflict between subsequent buyers of the same asset.

Information on register - not applicable.

Commercial leases - leases of urban property (both in connection with residential properties and commercial premises) are regulated by Law 29/1994. Under this Law, the parties are generally free to agree to the terms of leases whilst the statute only applies in the absence of express agreement.

On a general basis, Law 29/1994 is more flexible (in the sense of allowing the parties to freely agree to the terms and conditions of the contract) in connection with commercial leases than in connection with residential leases, which are subject to certain restrictions (for instance, relating to mandatory extensions of the lease term in favour of the tenant).

Leases may be recorded with the Land Registry in order to attain protection vis-à-vis third parties. However, it is not normal practice, inter alia, due to the tax impact of registration.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - usually it is the seller/landlord (or their agent) and the buyer/tenant (or their agents) who negotiate the commercial terms and conditions of the sale/lease. Lawyers are not normally involved in this phase of the transaction, unless they are required to assist in the drafting of preliminary documents such as heads of terms, MOUs, etc. The agreement of the commercial terms will be passed afterwards to the parties' lawyers to draft of the sale and purchase agreement/lease agreement.

Heads of terms – In general, the head of terms do not bind the parties and only establishes the main terms to be taken into account for future negotiations.

Investigation of title - the buyer/tenant’s lawyers commonly carry out due diligence mainly on real estate matters, namely the ownership title, the information obtained in public registers, the planning situation of the property and the existence of licences and administrative authorisations on the construction and/or use of the property. Meanwhile, the buyer/tenant may carry out a technical investigation, (which can include an environmental investigation), and a commercial and/or financial investigation of the property and, if relevant, of the lease agreements existing on the dwellings in the property.

Purchase deed - it is not mandatory that the purchase and sale of real estate shall be made in writing, as the transfer or real estate would be validly completed upon (i) existence of “title” (i.e. a contract, which may be in a verbal form) and (ii) delivery of possession. However, it is highly recommended to have it in a written contract, to sign it before a Public Notary and to register the relevant deed at the Property Registry.

Contracts - not applicable.

Completion/closing - the transaction is closed or completed when the buyer acquires title to the property. This takes place by way of (i) the execution of a SPA and (ii) the symbolic delivery of possession of the property, which it is normally carried out by way of execution of a notarial sale and purchase deed before a Spanish Notary. The Notary Public may be freely chosen by the parties. Although the transfer of the title over a property may be carried out by means of the execution of a private SPA (and delivery of possession), the registration of title with the Land Registry is only possible if the purchase is formalised in a public deed.

Post completion - in case of sale of a property, the seller normally pays the notary's protocol and local taxes, namely the Tax on Increase of Value of Urban Land ("Impuesto sobre el Incremento del Valor de los Terrenos de Naturaleza Urbana"). The buyer normally pays for copies of the deeds, value added tax (VAT), stamp duty or transfer tax. The buyer also deals with registration of the transfer and register the change of ownership in the cadastral office. Different arrangements can be agreed between the parties. In case of lease, the landlord pays income tax. The tenant pays stamp duty and, if the lease is to be registered (which is quite uncommon), the Land Registry fees.

Leases - not applicable.

Transfer of ownership of leased property (alienation) - unless the parties agree otherwise, within 30 days from receiving the notification of the landlord's intention to sell the property to a third party, the tenant has a preferential right to purchase the leased premises. The tenant does not have this right if the landlord is selling all of the units it owns in the same building or complex or if all the owners are jointly selling all the units forming part of the building or complex. Landlords frequently require the tenant to waive the said right in advance, as it has a direct impact on the landlord's capacity to dispose of the leased property.

Language requirement – Real Estate agreements, in order to be registered at the Land Registry (those pertaining to the asset or property in accordance with its location) must be drafted in Spanish. Notwithstanding the parties may ask for a translation of the agreement for informative purposes.

Private agreements are validly signed in English but a sworn translation will be required for: (i) registration and (ii) filing a claim before the Spanish Court.

Governance of lease signature/administration – If there are any reason that prevents the purchaser from attending to the notary office, it’s possible to provide a special power of attorney to third parties in order to execute these documents on behalf of the purchaser. The power of attorney can be granted before a Spanish Public Notary or at any Spanish Embassy or Consulate abroad or before the public notary of the purchaser´s country being legalized with the Hague Convention apostille. No other administrative additional requirements are necessary.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - in connection with their purpose or use, leases can be classified as residential and non-residential leases (e.g. Commercial leases of retail premises, offices or warehousing).

Alterations/modifications - the parties are entitled to freely agree on this matter. Usually, the parties agree that works to modify the configuration of the premises need prior authorisation from the landlord.

Assignment and sub/under letting – If in the leased property is carried out a commercial activity, the tenant may assign the lease or sublet the premises, unless the lease provides otherwise. In such cases, the landlord has a right to increase the rent by 10% in the case of partial subletting or assignment, and by 20% in the case of subletting or assignment of the whole of the property. Regarding commercial leases, it is common practice that the tenant waives its right to assign the lease and sublet the premises (either totally or partially). The restructuring operations (i.e. mergers, spin off, etc.) are not considered as assignment. Although, the landlord may increase the rent as explained above.

Please note that the sublease or assignment in properties for residential purposes is forbidden without the prior written consent of the landlord.

Destruction/reinstatement - there are no legal provisions on this matter. Usually, in both residential and commercial leases, the landlord is entitled to decide at the end of the lease term if the works carried out by the tenant should be reinstated.

Duration of lease - there is no minimum duration for leases under the Law 29/1994, regardless of the use to which the property may be put. Law 29/1994 states that the parties may agree any term that they deem appropriate for the lease. Notwithstanding, for properties used for residential purposes, the Law states that if the parties agree a lease term that do not exceed 3 years, the agreement is automatically extended on an annual basis, once the 3rd anniversary of the agreement has elapsed. Once 3 years have elapsed and the parties do not give their prior 30 day- written notice to terminate the agreement, this agreement will be automatically extended for 1 additional year. Please note that pursuant to the articles 1566 y 1581 of the Spanish Civil Code, if the parties do not foresee a specific term for the agreement and do not notify they intention of terminate the agreement, the latest will be automatically extended for the same periods as agreed for the payment of the rent by the application of the Tacit Extension (“tácita reconducción”) in those events in which the tenant continues occupying the property and the landlord tacitly accepts this possession.

Forfeiture/irritancy - not applicable.

Insurance - in commercial leases, the tenant is normally required to take out insurance exclusively over the contents of the leased property and in connection with civil liability arising from its activity within the premises. Sometimes the tenant is also required as well to bear the cost of the damages insurance that covers the property ("triple net leases"), which it is normally taken out by the landlord. Regarding residential leases, the tenant is normally required to take out insurance over the contents of the leased premises, but the property itself is insured by the landlord, who bears the cost of the insurance premium.

Rent review - the parties are entitled to freely agree on this matter. Usually, during the first lease period (e.g. five years), the rent is reviewed by reference to the General Price Index (IPC). Additionally, market rent reviews are frequent as from the 5th - 7th anniversary of the lease, but always in connection with commercial leases. The market rent is determined by an independent real estate company / consultant.

Repair/decoration/furnishing - maintenance and conservation works needed to maintain the property in normal working condition are the tenant's responsibility, unless otherwise agreed. Repairs and replacement works are the landlord's responsibility, unless otherwise agreed.

Service charges - not applicable.

Tenant’s duties - the tenant is obliged to comply with the terms and conditions of the lease and the provisions of the relevant regulations. The main obligations of the tenant are (i) to pay the agreed rent and, as the case may be, service charges and to (ii) devote the property to the agreed use.

Termination/break clauses - the landlord's ability to recover rent is limited. Early vacation or termination of the lease agreement will lead to a breach of contract, unless the parties have agreed to include an express right of early termination. In the event of breach, the landlord has a right to terminate the lease and sue for the loss suffered or sustained as a result of the tenant's breach. Even though most commercial leases contain wording to this effect, the courts at present are reluctant to grant damages for an amount equal to the rent payable during the unexpired residue of the lease. Normally, the courts will grant the landlord compensation for the direct damage caused by the tenant's breach.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - the tenant must pay a two month rent deposit for non-residential use and a one month rent deposit for residential use, at the same time as executing the lease agreement. This deposit must be paid in cash as a mandatory requirement. The landlord is obliged, on a general basis, to deposit said amount with the relevant Regional Administration (as an interest-free deposit). Upon termination of the lease, the landlord can recover the amount deposited from the relevant Administration.

Surety - not applicable.

Warranty - not applicable.

Rent deposit/bank guarantee - landlords (both in connection with residential or commercial leases) often require an "on-demand" bank guarantee from tenants, whenever their review of the tenant's financial solvency shows that the tenant may not be a strong financial covenant. In practice, the wording of these guarantees, their duration and the conditions of their reinforcement and cancellation are subject to negotiation.

Corporate guarantee / comfort letter - landlords in Spain usually require a commitment from the tenant’s parent company to guarantee proper fulfillment of the contract, or, at least, due payment of the rent. This commitment can be made in the lease itself or in a separate agreement, normally in the form of a side letter / comfort letter. In many instances, this arrangement makes it acceptable for the tenant not to provide a bank guarantee, thereby avoiding the associated costs.

 

Security of tenure

Security of tenure

Law 29/1994, of Urban Leases (“Ley de Arrendamientos Urbanos”) has removed every existing security of tenure or protection for tenants. The general rule is that, unless the parties agree otherwise, leases of retail premises, offices, warehousing and other commercial uses will terminate upon expiry of the agreed term.

As an exception, Law 29/1994 grants the tenant of retail premises a right to compensation where a lease which lasted more than five years expires and the landlord refuses to grant a new lease to the tenant even though the tenant is willing to continue to lease the property at a market lease. This said right is frequently waived by the tenant.

 

Taxes

Taxes

On sale/acquisition of real estate - not applicable.

Immovable property tax - not applicable.

Income tax - not applicable.

Municipal Real Estate tax or “IBI”: The rate of this tax depends on the town council corresponding to the location of the property (this tax is annually payable and the rate is between 0.3% or 0.4% of the cadastral value for the relevant property).

Lease tax - in the event that the lease is carried out in a public deed, the only tax payable is stamp duty, at one per cent on the total rent for the duration of the lease. Rental income obtained from leases is subject to 18% VAT if the property is used for commercial use. Otherwise, it will be exempt.

Local tax - not applicable.

Mortgage - provided that a mortgage must be formalised in a public deed, it is subject to Stamp Duty. Stamp Duty is calculated taking into consideration the maximum mortgage liability.

Other taxes - Real Estate Transfer

Asset deals: Transfer of plots or land qualifying for construction purposes and transfer of land that has already been urbanised or is being urbanised, as long as the seller is the developer of the urbanisation process, are subject to VAT (“Impuesto sobre el Valor Añadido”).For the first transfer of the construction the relevant IVA shall be applicable for a percentage as of 21% of the total value of the construction, for these events when the transferor is the developer being in this case a percentage of 10% applicable. For subsequence transmission the Transfer Tax/Stump Duty Tax (ITP/AJD) is applicable

Transfer of rural land and of land that has not qualified for construction purposes is exempt from VAT, but subject to transfer tax between 6% and 7% (depending on the Region (“Comunidad Autónoma”); where the property is located).

First transfer of buildings, second and subsequent transfers of buildings if the building is going to be demolished and rebuilt by the buyer and transfers resulting from the exercise of a call option by the lessee in a financial lease contract are subject to VAT. Second and subsequent transfers of buildings and first transfer of buildings that have been continuously used for a period of over two years (i.e. under a lease agreement), except where the buyer is the same person who has been using the building, are exempt from VAT and subject to Transfer Tax, unless the purchaser is a taxable person for VAT purposes entitled to a full deduction of the input VAT on the relevant acquisition, in which case the transferor may waive the above-mentioned exemption. In such event (waiver of the exemption), the Stamp Duty rate is frequently increased (depending on the Region where the property is located) Land and building transactions which are exempt from VAT become subject to Transfer. Contrary to VAT, Transfer Tax becomes an additional cost for the purchaser, which can be avoided if the VAT exemption is waived.

Notwithstanding the foregoing, the above-mentioned transactions are subject to Transfer Tax instead of VAT where the transferor is not a taxable person for VAT purposes.

Property lease tax - not applicable.

Value added tax - see "other taxes" above.