Pacta sunt servanda?
For a change, we will now focus on a rental crisis- a dispute between the owner and the tenant which may be initiated by both parties: the owner and the tenant.
Any investor should have in mind that disputes related to lease agreements are not unheard of in Spain. Property owners often complain that legal procedures are long and unsatisfactory. Occupants are also not free of worries due to the current housing situation. Spain, as opposed to other European countries, doesn’t offer a social housing system.
The Spanish Constitution of 1978 recognizes as a general principle the right to decent housing; but it is not one of the fundamental rights that can be enforced in court. It is a declaration of intentions, not a tangible right. The public authorities have no means, or no will to find them taking advantage of the situation when establishing the SAREB at the beginning of this decade (Spanish: Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria – English: Company for the Management of Assets proceeding from Restructuring of the Banking System) to respond to that legitimate social demand. This causes a visible and notorious clash of interests between occupants and property owners, especially in large cities.
The rent price is now the biggest problem in many districts of Madrid, Barcelona and their influential areas. During the last 3 years, the rent price has gone up by 10% per year, while the average income of families in the same period has remained the same or has been lowered.
Every long-term investor should acknowledge this fact, which requires a very careful analysis. The problem does not seem to be interim or temporary and soon it will be the first improvement in the agenda of the municipal political parties if it’s not already. Planning a long-term investment based on questionable economic fundamentals (the average rent constitutes 50% or 60% of the family income) is quite risky. And whoever buys a flat for rent should be aware that the tenant who signs a contract with these economic parameters, may become insolvent. This is the issue that we would like to outline here.
The tenant may take a case to court if the rented property doesn’t meet their expectations (if there are faults or defects) or in cases when the owner doesn’t comply with the lease terms (fails to perform works, repairs). However, it is the owners who seek justice in court more often. Especially on the market where those who possess set up the rules.
The owners, in turn, usually file a court case due to improper or other than agreed use of the rented property by the tenant (for example renting an office for residential purposes); subletting rooms without the owner’s consent); but above all due to non-payment of the rent. Tenant insolvency is the queen of all causes for which the owners go to court in Spain.
In the next post, we will explain what happens when the tenant fails to pay the rent.