What to do if your tenants have filed for bankruptcy or if they occupy your property illegally
We are going to deal with two special cases which any real estate investor should be prepared for: renting a property to a company which has undergone bankruptcy and the “squat” phenomenon.
The first of them refers to a situation when the company has been declared insolvent (“concurso de acreedores” in Spanish law) within the meaning of the European Regulation 2015/848 on bankruptcy proceedings. This exceptional situation has direct consequences on the owner of the offices or an industrial warehouse where that company has performed its activities.
Let’s start with the financial consequences as the owner will probably stop paying the rent (if it hasn’t already done it). Debts due to the non-payment will enter the “ordinary basket” of debts of the company and will not be the first to collect since the owner is not a privileged creditor such as for example the Tax Office, the Public Treasury or banks with mortgage guarantees. Statistically, in this situation, the possibilities of collecting the debt are very low.
Second, and this is possibly more serious, the lease agreement can’t expire due to the tenant’s non-payment. The Spanish insolvency law doesn’t allow (neither the owner nor the tenant) to terminate the contract simply by declaring insolvency of the tenant. It can only happen on request of the insolvency administrator who will apply to the court to rescind the contract only if the administrator considers that breaking the contract is beneficial to gather the maximum number of creditors. On the other hand, if the bankruptcy administrator decides that the rented office, business or industrial warehouse is essential to guarantee the continuity of the company’s activity during the proceeding, the owner will have to comply with such ordinance.
In such a case, if the contract continues to be valid, there are two situations which must be taken into consideration: the amount due to the rent payment calculated before the bankruptcy declaration is allocated to the group of debts which are paid last (scarce possibilities of their collection); the monthly payments calculated during the insolvency are included in the group of credits that have the highest preference (higher collection possibilities).
The second problem is the “squat” phenomenon. Definitely, it is not a minor matter. The causes are very diverse and shouldn’t be ignored by any investor who must take the appropriate measures in advance to avoid encountering illegal occupants in their property. If it happens, the law basically allows three approaches. We already warn you that none of them is perfect or fully satisfactory.
The first way is initiating a civil procedure to retrieve the property. The owner of a property inscribed in the registry should request the court to cease the proceeding against their property. Depending on the city, the procedure may last between 3 to 6 months. The court will impose a deposit on the occupants, order them to show their occupation title which will be then confronted with the owner’s and specify a date by which the occupant should leave the property.
The second way will be to go to a verbal eviction trial for precarious where the occupant is given the opportunity to oppose the claim and prove the possession of the occupation title (in this case no deposit is required) in order to finish the proceeding and get the judicial order.
The third way is initiating a criminal procedure due to usurpation. If the court convicts the occupant for that crime, they would also replenish the owner by possession if necessary. The procedure, again depending on the city, lasts between 6 months and 2 years, and is generally avoided due to a large number of files and complicated procedures (the usurpation only occurs when the property is occupied and used by their owner).