The Spanish Constitutional Court partially annuls Catalan Decree-Law 17/2019 on housing

On 28 January 2021, the Spanish Constitutional Court ruled in favour of the annulment of the most controversial provisions of Decree-Law of the Generalitat of Catalonia 17/2019 of 23 December on housing ("DL 17/2019") (as subsequently amended by Decree-Law 1/2020 of 21 January and afterwards validated by agreement of the Parliament of Catalonia of 4 March 2020).

The judgment full text has been available on the Spanish Constitutional Court's website since the end of last week, but has yet to be published in the Official State Gazette.

We shared with you a newsletter on the approval of DL 17/2019 when it was enacted (see here). In this newsletter we analyse what has been nulled by the ruling of the Constitutional Court (the "Judgment") and the regulation that remains in force.

1. IN BROAD TERMS, WHAT SPECIFIC MEASURES DOES THE JUDGEMENT ANNUL IN DL 17/2019?

The Judgment essentially annuls two groups of measures (which will be discussed in more detail below):

• (a) Those referring to the consideration of holding empty residential units for more than two years as a breach of the social function of property and the consequences that could arise from this (including expropriation).
• (b) Those referring to the extension of the subjective and objective scope of the obligation of certain owners to offer a social lease before filing certain judicial proceedings.

2. HOLDING EMPTY RESIDENTIAL UNITS AS A BREACH OF THE SOCIAL FUNCTION OF PROPERTY AND ITS CONSEQUENCES: WHAT HAS BEEN REPEALED AND WHAT REMAINS?

Holding residential units permanently and unjustifiably unoccupied was considered a breach of the social function of property in Catalonia before the approval of DL 17/2019.
However, DL 17/2019 nourished this reference with content and added potential consequences from this breach. Specifically:

• (a) It clarified that the breach of the social function arose if the residential unit remained vacant for more than two years, even if such unit was occupied without a qualifying title or if ownership was transferred. In the event of transfer of the residential units, the new owner would be subrogated in the position of the previous owner for the purpose of assuming the consequences of the breach regardless of when the vacancy occurred. In addition, the holding of work in progress residential buildings in their final phase (more than 80% of development completed) for more than two years from the date of their expected completion was assimilated to permanent vacancy.
• (b) It pointed out that it was a breach event, not only the lack of destination of subsidized residential units to permanent residence of people (an obligation that already existed) but also to do the same with residential units reserved by urban planning for this type of residence.
• (c) It gave powers to the Public Administration to declare a breach of the social function after unsuccessfully warning the owners to occupy the properties and clarified that such statement could derive in the imposition of coercive measures (including expropriation). In addition, lack of attendance to this warnings was classified as very serious infringement (punishable by fines of up to 900,000 euros).
• (d) In cases of residential units owned by private legal entities, after the prior warning, the Administration was empowered to impose coercive fines of 1,000 euros per residential unit for periods of one month up to 50% of the price of the residential unit and to warn them that, in the event of persistence, it could initiate expropriation proceedings. It was also foreseen that in these cases the Administration could opt, instead of expropriation, to agree on the compulsory transfer of the residential units to the Rental Housing Fund (Fondo de viviendas en alquiler) for social policies.

All these provisions referred to in sections (a) to (d) above have been annulled by the Judgment. As a consequence, it is still considered a breach of the social function and an example of its anomalous use to have permanently and unjustifiably unoccupied residential units, but the definition is again generic and without specific reference to buildings in the final phase of construction. Moreover, no direct consequences are foreseen for this breach beyond a very serious infringement, but applicable only to the extent that the Administration has adopted all the necessary measures to facilitate the incorporation of these residential units into the market.

With regard to expropriation, the regime prior to DL 17/2019 has been restored, so that the Administration, in order to meet the housing needs of vulnerable groups, can only initiate proceedings for expropriation of the right of use (not ownership) and limited in time (up to a maximum of ten years).

The Judgment maintains, on the other hand, the validity of the definition of vacant unit introduced by DL 17/2019 as a residential unit that remains permanently unoccupied, without justified cause, for a period of more than two years and regardless the fact that it is occupied without a qualifying title.

3. OBLIGATION OF CERTAIN OWNERS TO OFFER A SOCIAL LEASE BEFORE FILING SOME CLAIMS: WHAT HAS BEEN REPEALED AND WHAT REMAINS?

Before DL 17/2019, some owners already had this obligation. The Catalan regulation (specifically, Law 24/2015 on urgent measures to address the housing emergency and energy poverty, the "Law 24/2015") imposed on certain owners (in particular, legal entities that had the status of large holders or that had acquired housing after 1 April 2008 from foreclosures) the obligation to offer a social lease to those in risk of residential exclusion before filing a judicial foreclosure or eviction action for non-payment of rent.

However, DL 17/2019 extended the cases in which it was compulsory to offer a social lease before filing claims and changed its conditions. In particular:

• (a) The obligation to offer a social lease was extended to eviction actions derived from the termination of a lease agreement, any kind of enforcement (not only mortgage foreclosure) or occupation without qualifying title (provided that the occupation had occurred at least six months before the entry into force of DL 17/2019).
• (b) Venture capital funds, securisation funds and natural persons owning more than 15 units were included in the large holders definition.
• (c) The minimum term of the mandatory social lease was prolonged in line with what set out in the Spanish Urban Leases Act (seven years if the landlord was a legal entity or five years if the landlord was an individual) and a compulsory renewal (only for one occasion) was established in favour of those still qualifying as people under residential exclusion.

In theory, all these changes are annulled by the Judgment.

However, the large holders definition included in Law 24/2015 by DL 17/2019 was confirmed after DL 17/2019 by Law 5/2020 of 29 April which has not been annulled. Therefore, for the purposes of those cases in which, after the Judgement, it is still compulsory to offer a social lease before filing actions, i.e. those prior to DL 17/2019 (foreclosure proceedings and eviction for non-payment of rent) we considered that all the following should be regarded as large holders:

• (a) financial entities, their real estate subsidiaries, investment funds, asset management entities;
• (b) legal persons which, directly or through its corporate group, hold more than 15 properties within Spain (with the exception of social property developers or when 15 per cent or more of the living area is for social housing for lease);
• (c) venture capital funds or securisation funds; or
• (d) natural persons which own more than 15 units within Spain or are co-owners if their participation quota represents more than 1,500 square meters of residential land (with the same exceptions as are applicable to legal persons).

The same applies to the term of these social leases. The submission to the general rules on urban leases was confirmed after DL 17/2019 by Law 5/2020, which we understand is still in force. However, the mandatory extension is annulled by the Judgment because it is not contemplated in Law 5/2020.

To sum up, in our opinion, the regulation of mandatory social leasing returns to the situation prior to DL 17/2019, although the subjective extension is maintained in accordance with the new concept of large holders included in Law 5/2020 and the term of the leases is extended in accordance with the minimum term now established in the legislation on urban leases.

4. WHAT ABOUT THE REMAINING MATTERS FORESEEN IN DL 17/2019?

The Constitutional Court only annuls in the Judgment what we have referred to in the previous sections, the rest of DL 17/2019 remains in force (including the novelties introduced in relation to the Administration's rights of first refusal, the Register of empty residential units and town urban planning).

5. AND WHEN DO ALL THESE ANNULMENTS BECOME EFFECTIVE?

In theory, the annulments will become effective the day after the Judgment is published in the Official State Gazette. However, the Judgment has already been notified to the parties and, as mentioned at the beginning of this newsletter, it has already been posted on the Constitutional Court's website, so it is not foreseeable that the Catalan Administration will now initiate proceedings based on the repealed rules.

In relation to ongoing proceedings, the Judgment may also have important effects which should be analysed on a case-by-case basis depending on the state of the proceedings and the moment of initiation.