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The 2% rental limit will distinguish between large and small owners | Economy

View of a real estate agency in Madrid.
View of a real estate agency in Madrid.Fernando Alvarado (EFE)

The Government announced this Monday a millionaire aid program to combat the crisis caused by the Russian invasion of Ukraine. However, one of its star initiatives will not cost the State coffers a single euro. Among the measures to be approved by the Council of Ministers, the president, Pedro Sánchez, has cited the limitation of rent increases to 2%. It will be a temporary measure, in principle valid until June, and will differentiate, as in the latest legislation on leases, between large and small owners. Although the practical consequences, says the Ministry of Transport, Mobility and Urban Agenda, will be practically the same for all tenants.

Since the decree enters into force (which is expected for this week) and until June 30, all those tenants who face an update of the monthly rent will be able to take advantage of the measure. The rent update, as stated in the Urban Leasing Law, is an increase that can be made once a year (that is, when one year, two years, and so on, have been fulfilled since the signing of the contract) and that is limited to the percentage rise of the last CPI published. In periods when inflation has not been important, it was hardly a problem. But since last summer this indicator began to rise uncontrollably, which has caused problems for many tenants.

In February, for example, the CPI rose 7.6%, according to the INE. This means that if a rent of 1,000 euros was signed a year ago, now the landlord could demand (provided that the contract so specifies) an increase of 7.6%. With that limit, in the following 12 months the rent would cost 1,076 euros. But with the new limitation, this increase cannot be more than 2% and the monthly rent cannot exceed 1,020 euros. That is, the increase would be 20 euros, instead of 76.

For this, the Government will not change the LAU, but a temporary exception will be applied, such as those that have been made with the social shield during the pandemic, explains a source from the Ministry of Transport, which has been the one that has outlined the measure along with Economics. The result will be slightly different from what Social Rights initially proposed, which called for a rent freeze, because in the department headed by Raquel Sánchez they justify that this would greatly harm small owners who need the lease to live and with a total freeze they would not be able to revalue what they receive, while the cost of living has risen. Thus, if the LAU currently sets the CPI as the maximum limit for the increase, the new decree will establish that limit in the Competitiveness Guarantee Index (IGC). This index, in fact, is preferred by the law to update rents since the reform made by the Rajoy Government. However, the practice of most contracts is traditionally indexed to the IPC.

What is the IGC? This is a price revision rate that the INE has published since 2015 and that takes into account the evolution of prices, but also the evolution of Spain’s competitiveness in relation to its European partners. In its last published value, that of January 2022, it was 2.02%. But the IGC has another peculiarity: in its application the law establishes that it will always be between 0% and 2%. In other words, neither when it is negative nor when it exceeds that limit can it go outside those values. Hence, that 2% is now going to become the maximum that a rent can be raised when updating the rent. It must also be borne in mind that this will not apply to new contracts or other assumptions, which in the future rental law want to be regulated, but which still allow free price fixing today.

According to the aforementioned Transport sources, the decree will also contemplate two situations: that the landlord is a large owner (defined in all the pandemic legislation as the one with more than 10 urban properties, excluding garages and storage rooms) or a small owner. In the case of the first, the limit of 2% will be a legal imperative and in the second case there will be the possibility of an agreement to the contrary between the parties. However, in the absence of that agreement, the same limit will apply, with which in practice the same result is expected, because it is unlikely that a tenant will accept a higher increase knowing that, if he objects, that limit will be legally applied. There will also be, as always, the possibility of agreeing to a rise of less than 2% or even not raising it at all, something that often happens because it must be the owner who has the initiative to claim the rise and, if not, the rent will be it remains as it was.

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As expected, the tenants’ unions have received the announcement well, while in the real estate sector it has been worse. “The Government reloads on private owners what is the responsibility of the Administration”, has summed up Francisco Iñarreta, spokesman for the Idealista portal, who has added in a note sent to the media that “the announcement represents a new setback for landlords , who once again see how the rules change in the middle of the game”. In ASVAL, an association of owners that includes some large companies with thousands of flats, they consider that “the 2% increase limit is artificial” and point out that it would be more logical to link it to underlying inflation (which excludes from the CPI the prices of energy and fresh food, which is currently around 3%). “We ask the Government that this measure be a really established tool for a limited period,” says an ASVAL statement.

The government sources consulted indicate, however, that “it is too soon to venture” if, on June 30, the limit for the application of the measure, the current conditions of inflation will persist. But in any case, the measure is extendable, as has happened with many rules of the social shield (such as rental moratoriums or mandatory extension), which were lengthened many times from quarter to quarter. The absence of public records makes it impossible to know how many tenants the new provision affects. But based on the fact that there are some 3.5 million tenants in Spain, if the contracts were evenly distributed in all the months of the year (which in reality does not happen, because there are months in which the market is more active) that would mean that a quarter of them should update their rent from April to June. In other words, the contracts in which the new limitation would potentially apply would be close to 900,000.

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