The rental income update has nothing to do with the price that is signed at the beginning of the contract or with other variable costs that the owner can pass on to the tenants. However, for those who live in a rented house, it can become the main factor in increasing housing prices, as long as the owner demands said increase. Since the new decree of special measures for the energy crisis enters into force and until June 30, the increase may not exceed 2%. Mari Luz Rodríguez, a lawyer for Legálitas, predicts that “there will be more and less, because the landlord will want to maintain the CPI [el tope que se aplicaba hasta ahora], which interests him because he is taller”. In the legal advice company they have been noticing an increase in calls for this issue for months, “since inflation began to rise.” Here are seven questions to understand how the rent review mechanism works.
What is the rent update?
When an owner and a tenant sign a rental contract, the price is set freely, as established by the Urban Leasing Law (LAU). Only Catalonia, since the regional rent regulation law that was approved in September 2020, deviated from that rule and set legal rent caps in some municipalities. But the Constitutional Court overturned that regulation recently. In other words, right now in all of Spain the two parties that sign a lease can set whatever price it is. However, once they sign, the tenant has the right to stay in the house for at least five years (and seven years when the landlord is a company).
The price is agreed for the entire duration of the contract, but article 18 of the LAU regulates the possibility of increasing it so that the landlord does not lose purchasing power. “The rent can only be updated by the landlord or the tenant on the date that each year of the contract is fulfilled,” says the rule. In other words, the update is a price adjustment that can be made at the end of each contract annuity and under certain conditions.
What are those conditions?
From the outset, the way to update the rents must be expressed in the lease. “In the absence of an express agreement, it will not be applied,” says the law. And it does not take effect automatically either, but “it will be payable to the tenant from the month following that in which the interested party notifies it”. Rodríguez, the lawyer for Legálitas, points out that “the correct thing is to communicate it in writing”, explaining the method used and the new amounts. In very old contracts, signed before March 31, 2015, the landlord has the right to request the annual increase even if it does not appear expressly in the contract, because that is how article 18 of the LAU was written before, which has been one of those that more have suffered from the political turmoil of recent years: since 2013 it has been modified five times.
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How is the rent updated?
Legally, as established in the contract. This makes it difficult to know how it is translated into practice because the leases are private agreements, many times they are not registered and, in addition, many landlords are not aware that each annuity is fulfilled to claim the increase. In any case, it is clear that those who do use the Consumer Price Index (CPI) for the most part. This inflation indicator began to skyrocket last fall as a result of the rebound in economic activity after the first blows of the pandemic. And when everyone expected it to begin to loosen, the war in Ukraine has caused it to continue growing, driven by international energy prices.
The CPI is also the indicator that was taken as the maximum reference in the last legal change of the norm, which was made in March 2019 when inflation did not seem to be a problem in the short or medium term. For the update, it is normal to take the latest interannual variation reference published by the INE. For this April, for example, that of February would be taken (with the variation in prices between March 2021 and February 2022), because the statistical institute will not give the data for this month until the middle of the next (although this Wednesday it gives the figure late March, is not yet definitive).
How will the new cap be calculated?
The Government’s idea to solve this problem has been to temporarily link the top of the rise not with the CPI (which is skyrocketing), but with the Competitiveness Guarantee Index (IGC). This is another indicator that the INE also publishes to measure the variation in prices. But it does not do it directly (the CPI compares the same basket of products at two times and calculates the difference in what they cost) but it subtracts the competitiveness that the Spanish economy has lost with respect to the eurozone since 1999. IGC was created precisely to guarantee the competitiveness of the Spanish economy and for this reason it has another characteristic: legally it is always applied in values between 0% and 2% (even if it is negative or exceeds that percentage). That is what makes the income update temporarily capped at 2%, since it is currently above it (2.02%) and it is foreseeable that it will not go down.
Can you raise my rent more than 2%?
If the landlord is an individual, and as the Government has explained, it could. The royal decree-law, as almost all rental legislation has done in recent years, will differentiate between small and large owners. Among the latter, individuals or companies that own more than 10 urban properties, or an area equivalent to 1,500 square meters, excluding garages and storage rooms, will be considered. For small landlords, the rule provides for any possibility in agreement with the tenant, although it says that if there are discrepancies, the IGC is applied as a limit. That is why the Government believes that increases above 2% will not be accepted. For large owners, who are supposed to have a superior ability to negotiate and pressure the tenant, it is established that the agreement can never exceed the new legal limit.
What happens if my rent is updated before or after the new limit?
The new legislation, in the absence of seeing the final text in the BOE, is not retroactive. If the contract was updated in March and has been made in accordance with the CPI, the tenant cannot request that the 2% cap be applied now. However, this situation has been dragging on for months and has often been resolved through agreements between individuals. The Rent Negotiating Agency, a private company that brokers leases, calculates that in the last quarter “around 85% of lessors have not applied the total increase in the CPI.” And of them, 27% (which represents a total of approximately one in five owners) have given up raising any amount.
The new legislation is proposed from April to June. Therefore, as of July 1, it will return, in theory, to the situation that existed until now. But nothing prevents the rule from being extended as has happened with others during the pandemic. Bumping the rent update with the IGC is a demand of the tenant unions, who want it to be set in the LAU definitively. And José Ramón Zurdo, general director of the Rental Negotiating Agency, believes that we will see the measure extended beyond June 30: “I have no doubt that it will be extended, which runs the risk of it becoming another form of to intervene the price.
Another thing to keep in mind is that the update takes effect from the communication, which can be done at any time after one year of the contract. In other words, if the landlord has forgotten it and demands it after three months, the new price will begin to be paid from the fourth month, but the tenant cannot claim payment of arrears.
How many people does the measure affect and how much money does it involve?
It’s hard to know. The Ministry of Transport calculates that in Spain there are some 3.5 million rental contracts in force. As the rule will initially apply for one quarter, it would affect a quarter of those contracts (875,000) on the basis that the same number had been signed in the 12 months of the year. However, in practice there are times (September, the change of year…) when the market is more active. The Government has not provided an overall impact figure either, but it is easy to calculate the cost in a standard contract.
According to the latest data from the Idealista portal, the median price of a two-bedroom apartment in Spain is 695 euros per month. If the rent were now revised with the 7.6% increase in the CPI for February (the last one published), the tenant would pay 747.83 euros, which means paying almost 53 euros more per month and 634 euros more per year . If the new 2% cap were applied to the increase, the monthly increase would be 13.9 euros (708.9 euros of income), which when multiplied by 12 months amounts to an extra cost of 167 euros. But be careful, because when it comes to percentages, in the most expensive cities those amounts are also higher.
