Yesterday, the Spanish Council of Ministers approved a new package of measures designed to support the tourism, hotel, catering and commercial sectors in the context of the second state of alarm declared after the pandemic by Royal Decree 926/2020 of 25 October (the "Second State of Alarm"). Same as in April, the Government has included a chapter on non-residential and industrial lease agreements.
The regulation we are referring to is Royal Decree-Law 35/2020, of 22 December, on urgent measures to support the tourism, hotel, catering and commercial sectors and on tax matters ("RDL 35/2020"), which was published in the Spanish Official Bulletin this morning (see here).
In practice, the measures relating to non-residential and industrial lease agreements in RDL 35/2020 are very similar to the ones included, regarding the first state of alarm, in Royal Decree-Law 15/2020, of 21 April ("RDL 15/2020"). Please see here our previous newsletter on RDL 15/2020.
We answer below to the main questions raised by this new RDL 35/2020 regarding leases.
1. WHO BENEFIT FROM THE NEW MEASURES
The measures are designed for self-employed workers and SMEs (therefore, both natural and legal persons) who are tenants under an industrial or non-residential lease in accordance with Article 3 of Spanish Law 29/1994 of 24 November on Urban Leases.
As was the case with RDL 15/2020, RDL 35/2020 does not make any reference to contracts for the lease of premises under the pre-1994 regulations.
Individual tenants must be registered and active, on the date of the declaration of the Second State of Alarm, within the Special Social Security Regime for Self-Employed Workers or with the Special Social Security Regime for Sea Workers or, where applicable, with one of the applicable substitute mutual insurance companies.
Tenants which are legal persons shall not exceed the limits established in Article 257.1 of the Spanish Companies Act. This reference, which is identical to that in RDL 15/2020, again raises the question of whether the tenant must remain below the three limits set out in article 257.1 or, as expressly mentioned in Article 257 for commercial purposes, it is sufficient to remain below two of the three limits. In any case, the limits are as follows:
- that the total assets do not exceed EUR 4 million;
- its annual turnover does not exceed EUR 8 million; and
- that the average number of workers employed during the financial year does not exceed 50.
The final condition for benefiting from the measures is that either the tenant's activity has been suspended as a result of the entry into force of the Second State of Alarm (or its implementing regulation), or that, not having the activity been suspended, the tenant's turnover for the calendar month prior to the month in which the measure is requested has been reduced by at least 75% in relation to the average monthly turnover for that quarter of the previous year.
2. WHAT ARE THE NEW MEASURES?
The measures are different depending on whether or not the landlord is a large holder.
The definition of a large holder is the same as under RDL 15/2020. For these purposes, large holders (grandes tenedores) are individuals or legal entities that own more than ten urban properties (excluding garages and storage rooms) or properties with an aggregate built area of more than 1,500 sq.m.
- If the landlord is a public company or entity or a large holder and the parties have not reached an agreement regarding rental discounts or a moratorium on rent payment, the tenant can request by notarial means one of the following measures from the landlord:
(A) A 50% reduction of the rental income during the period of the Second State of Alarm, its extensions and up to four months thereafter.
(B) A moratorium on the payment of the rent to be applied for the duration of the Second State of Alarm, its extensions and up to four months thereafter. The rent will be deferred without any penalty or interest. The payment of the deferred rent may be made from the end of the moratorium, and always within the period during which the lease agreement or any of its extensions continue to be in force. The deferred amounts will be distributed proportionally throughout the period (the tenant will pay on each instalment a fraction of what he did not pay at the time).
The landlord, regardless of which of the two previous options was requested by the tenant, may choose its preferred one and shall inform the tenant about its decision within the next seven business days from the request. In other words, even if the tenant requests a 50% reduction, this request is not binding on the landlord, who may choose to apply the moratorium. This is why we stated in the introductory paragraph of this note that the practical effects of the measures just approved are very similar to the ones passed under RDL 15/2020. Although this is not a requirement under RDL 35/2020, we recommend that landlords send their response to tenants by notarial means as well.
Only in the event of no express reply from the landlord will the measure chosen by the tenant be applied.
- In the case of landlords who are not large holders, the provision now approved is identical to that of RDL 15/2020. Tenants may request temporary and extraordinary deferment of rent payments provided that such deferment (or a reduction in rent) has not been agreed upon by both parties on a voluntary basis. The term and amount of the moratorium is not expressly established in RDL 35/2020. We continue to interpret it as voluntary on the part of the landlord who is not a large holder to accept this request. Furthermore, in this case the legal deposit may be used for the total or partial payment of monthly rental installments (in which case the tenant must return such legal deposit within one year or within the remaining period of the lease agreement if less).
3. WHAT KIND OF AGREEMENT EXCLUDES THE APPLICATION OF THIS RDL 35/2020?
Although other interpretations are possible, in our opinion any agreement signed between the parties before the entry into force of this RDL 35/2020 that provides for a temporary reduction in rental income or a moratorium on payment, excludes the application of the measures mentioned in the previous section. We are not of the opinion that the tenant who reached an agreement with the landlord can now unilaterally terminate it in order to benefit from the measures of RDL 35/2020.
However, in the case of public entities and large holders, if the voluntary agreement reached covers a period shorter than the measures set out by RDL 35/2020 (i.e. the duration of the Second State of Alarm, its extensions and up to four more months), the tenants may request the RDL 35/2020 measures for the period of time not covered by their previous agreement.
4. WHEN CAN THE NEW MEASURES BE REQUESTED? WHEN DO THEY START TO BE IMPLEMENTED?
Tenants can apply to their landlords for the new measures, in the terms we have seen, from tomorrow (when the RDL comes into force) until 30 January 2021 (because RDL 35/2020 says that applications must be made before 31 January 2021).
As regards the time at which they will start to be applied, RDL 35/2020 only contains mandatory rules concerning the application of moratoriums by public companies and large holders. The moratorium in these cases will start to apply from the next installment after the end of the seven-day period that the landlord has to reply to the tenant's request.
5. DO THE MEASURES COVER OTHER COSTS?
In accordance with RDL 35/2020, if the lease agreement provides for the payment, in addition to the rental income, of other expenses derived from maintenance or other services, and from which the tenant benefits, these common expenses will be excluded from the measures and, therefore, the tenant will be obliged to pay them under the terms provided for in the relevant lease agreement.
6. HOW MUST THE TENANT PROVE THAT THE REQUIREMENTS OF THIS RDL 35/2020 ARE MET?
RDL 35/2020 only expressly regulates this issue regarding the requirement of the suspension of the tenant's activity or the reduction of the tenant's turnover.
The reduction of the tenant's turnover will initially be demonstrated by the submission of a responsible declaration. However, if so requested by the landlord, the tenant will have to show his accounting books.
The suspension of activity will be accredited by means of a certificate issued by the Spanish Tax Administration Agency or by the relevant authority regarding the process for the cessation of activity.
7. WHAT IF THE TENANT BENEFITS FROM THE MEASURE WITHOUT REALLY MEETING THE REQUIREMENTS?
Those tenants who have benefited from the measures without meeting the requirements will be responsible for any damages that may have occurred, as well as for all expenses generated by the application of these exceptional measures (without prejudice to any other liabilities).
8. WHAT IF LANDLORDS ARE ALSO UNDER A VERY DIFFICULT FINANCIAL SITUATION AS A RESULT OF THE PANDEMIC? DO THE MEASURES OF THE RDL 35/2020 STILL APPLY TO THEM?
Large holders may reject the application of any type of measure under this RDL 35/2020 if they can prove that they are under insolvency proceedings or that, if they were to apply such measures, they would be in a situation of probable insolvency or in imminent or current insolvency in accordance with the provisions of the Spanish Recast Insolvency Act. This reference is rather ambiguous, especially in relation to the probability of insolvency which is not foreseen under Spanish insolvency regulations, which will undoubtedly complicate its effectiveness.
9. ARE THERE ANY AIDS AVAILABLE TO LANDLORDS WHO ARE FORCED TO ENDURE THE MEASURES PROVIDED FOR BY RDL 35/2020?
For most landlords this question has a negative answer. However, there is a tax incentive envisaged.
Without prejudice to other criticisms that may be made of the wording of RDL 35/2020 in this regard, it should be understood that the incentive is only foreseen for individuals who are not considered to be large holders and this limits to a large extent the effective impact of the tax incentive. Thus, individuals who rent a property that is intended by the tenant for the development of an economic activity classified in Division 6 or in groups 755, 969, 972 and 973 of the first section of the rates of the Business Activities Tax (Impuesto sobre Actividades Económicas) will be able to register in 2021, and when calculating the real estate income to be declared in their Personal Income Tax return, a deductible expense for an amount equivalent to the reduction in rental payments voluntarily agreed with the tenant as from 14 March 2020 and corresponding to the monthly payments accrued in the months of January, February and March 2021.
The landlord will have to report in his Personal Income Tax return about the amount of the deductible expense referred to in the previous paragraph, also stating the tax identification number of the tenant whose income has been reduced.
The abovementioned deduction shall not be applicable when the reduction in rental income is subsequently compensated by the tenant by means of increases in subsequent periods or other benefits or when the tenants are related to the landlord within the meaning of Article 18 of the Corporate Income Tax Act (Ley del Impuesto sobre Sociedades) or related with the landlord by family ties (including the spouse), in a direct or collateral line, by blood or by affinity up to and including the second degree.
