Commercial real estate law and rules in Spain

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

In Spain any “legal person” may own real estate. This concept of “legal person” includes individuals and corporations as well as other legal entities.

There are no restrictions on the ability of persons to acquire real estate.

There are some requirements under Spanish Law that need to be complied with by foreigners in order to become an owner of real estate located in Spain.

A Foreigner Identification Number (“Número de Identificación de Extranjeros”) is required. This is a personal identification number, unique and exclusive, for carrying out any economic transaction within Spain, such as the acquisition of real estate.

Any transaction by means of which a foreigner acquires real estate also needs to be communicated and declared before the relevant Spanish authority (i.e., as the case may be, Bank of Spain (Banco de España), Ministry of Economy and Competiveness (Ministerio de Economia y Competitividad)).

Ownership

Under Spanish Law, ownership of property may fall within any of the categories below:

  • Public domain assets – those in public ownership for general use or public service (bienes demaniales)
  • Assets of the Crown (Patrimonio Nacional)
  • Private assets of the Public Administration (bienes patrimoniales)
  • Common land (bienes comunales)
  • Private property – private property can belong to a single legal person or to several people

In addition, there are specific regulations governing the ownership of water, mines and certain other categories of property.

Any real estate property can be owned individually or jointly and/or severally with other(s) co-owner(s). The most common type of co-ownership regime is jointly (pro-indiviso). Under this type of ownership the freehold is jointly owned by several people at the same time, without any of the owners holding a specific part of the property, but an aliquot share.

Two further types of co-ownership should be noted in relation housing: (i) condominium (propiedad horizontal), which is very common over the common parts within a building consisting of apartments and (ii) timeshare (aprovechamiento por turno de bienes inmuebles), which is very common in the tourism sector. Both the former and the latter are governed by specific regulations.

2. Interests – What types of interests in real estate are sold?

An investor is not only entitled to acquire plots of lands and/or buildings, but can also use other real property rights as mentioned above, for example:

  • Surface right (derecho de superficie): Offers the investor the right to build on someone else’s land and become the owner of the building for a maximum period of 75 years (when it is granted by a public institution) or 99 years (in other cases). It usually takes the form of a long term lease where the building will ultimately revert to the owner of the land and offers a genuine real property right, which can be mortgaged, sold and transferred
  • Right of projection (derecho de vuelo): offers someone the right to build one or more floors upon a building or a structure under the building itself and become the owner of those buildings/structures. This therefore gives rise to a condominium or horizontal property relationship between the owners of the various interests. This property right can be created in two different ways: (i) selling the whole asset and reserving the right or (ii) granting the right whilst keeping ownership of the building and the land. In either case a real property right is created, which can be mortgaged, sold and transferred
  • Usufruct (usufructo): The usufructuary has possession, but not ownership of the asset
  • Easement (servidumbre): A type of real property right that creates rights over a servient plot or property (predio sirviente) for the use of another dominant adjoining property belonging to another person
  • Lease (arrendamiento): By means of a lease agreement a landlord grants a tenancy of real estate property to a lessee, who pays rent
  • Call option (opción de compra): By means of a call option agreement, the grantor (concedente) grants in favour of the grantee (optante) the exclusive ability to decide whether to enter into a sale and purchase contract during a determined period of time. This right differs from the purchase promise (promesa de compraventa) which enables a party to compel the fulfillment of the call option or the purchase promise. Whilst under the former only the party with the benefit of the option is entitled to compel the call option’s fulfillment, under the purchase promise both parties have this right

3. Employees – What employment issues affect real estate acquisitions?

In order to determine whether a real estate acquisition involves some employment issue, it is necessary to analyse if the real estate transfer also implies the transfer of employment relationships, i.e. if there is an economic activity that is being carried out on the property that will be continued by the buyer.

It is mandatory to determine whether or not the transaction is a “transfer of business” according to Article 44 of the Spanish Statute of Workers. According to this provision, a transfer of business takes place when the transfer involves an economic entity which maintains its identity as a means of carrying on the economic activity.

Spanish case-law has required, in particular, two elements to constitute a transfer of business. First, the new employer must obtain effective ownership of the undertaking, business or part of the undertaking or business. Secondly, except in some specific cases, there must be a transfer of tangible assets, such as buildings and movable property that are necessary to carry out the activity.

The principal aim of Article 44 is the protection of employees in order to guarantee the maintenance of their employment and their rights after the transfer. Consequently, the new employer is subrogated to the old employer in respect of employment and social security rights and obligations, including pension arrangements. For this reason, a transfer cannot be a ground for a dismissal and the employment contracts are assumed by the transferee which becomes the new employer.

The buyer is obliged to take over the employment contracts entered into between the transferred employees and the previous employer, so maintaining the employees’ working conditions.

According to Article 44.3 of the Spanish Labour Code, in the event of transfers that occur through “inter vivos” acts, the transferee and transferor are jointly and severally liable for a period of three years for unsatisfied labour obligations, which accrued before the transfer.

In relation to the formalities that must be respected if a transfer of business takes place, Article 44 establishes that the transferee and the transferor have the obligation to inform the employees’ representatives, sufficiently in advance, of the date of the transfer, the reasons and possible consequences and measures proposed in relation to the employees. In relevant cases consultation must take place with representatives of the employees.

If there has been no transmission of an organised group of resources in order to carry out a central or ancillary activity, but the transfer has been of a property only, then the transfer would not be bound by article 44 of the Workers Statute.

On the other hand, when the transfer of the property involves the elements needed to continue the business, it could be argued that there is business succession.

This question has to be addressed not only in transfers of property, but also in leases. Spanish Law distinguishes between the lease of a business (which could also include the lease of some premises, as well as all the organised group of resources needed to carry out the business activity) and the lease of premises. The latter is almost always preferable for the owner, in order to avoid a transfer of business at the date of the termination of the contract.

4. Procedure – What are the steps in a sale and purchase transaction?

A sale and purchase transaction of a real estate property is governed by the general rules set out in the Spanish Civil Code (“Código Civil”) or by the applicable law, if any, of the relevant Autonomous Community (for instance, Cataluña).

Before entering into a sale and purchase agreement, the parties usually follow several steps in order to obtain information with regard to the physical, legal, technical, urban-planning and environmental matters relating to the property in order to negotiate an appropriate agreement. The following documents may be used by the parties:

  • A Letter of Intent setting out the main terms and conditions for the relevant sale and purchase agreement
  • A due diligence report, usually ordered by the buyer to obtain information on the above mentioned physical, legal, technical, urban-planning and environmental aspects that may affect the real estate. The conclusions of this report, especially the relevant contingencies detected, will determine the price and whether any guarantees will be required
  • Once the price and/or guarantees and other commercial terms have been determined by the parties, they can enter into either a pre-contract or a definitive sale and purchase agreement. Where a pre-contract is entered by the parties, it can be either a call option or a purchase promise (see section 2). Both the pre-contract and the definitive sale and purchase agreement can be entered into by the parties either before a Notary Public or privately. Should a pre-contract be signed privately, it will usually provide for later completion of the sale and purchase agreement before a Notary Public. Similarly, if the parties enter into a definitive sale and purchase agreement privately they usually undertake to notarise such private agreement at a later date before a Notary Public

Once the definitive sale and purchase agreement is duly entered into before a Notary Public or notarised, the filing of the change of ownership will be registered at the Land Registry to which the real estate corresponds. Otherwise, the transaction will not bind third parties acting in good faith.

5. Contract terms – What provisions does a real estate sale contract contain and what is implied by law?

Form

Under Spanish Law, ownership is transferred by means of what is called “título y modo”, which includes: (i) a transactional contract in which the transmission of the property is agreed (contrato traslativo), plus (ii) delivery of the land (entrega). Therefore, it is possible to acquire real estate by means of a private agreement, if the parties so agree.

Nevertheless, it is advisable to enter into a public deed and to register it at the Land Registry.

Provisions of the contract

The clauses and/or elements which are mandatory are the ones regarding (i) the consent of the parties (ii) the object of the contract and (iii) the price to be paid.

These clauses are further regulated to cover the object of the transaction (in this regard the information obtained from the Land Registry will be relevant, especially regarding any possible charges and/or encumbrance the property may have) and the price (the form of payment and the dates, as the case may be, in which the payments obligations will be met).

In addition, other conditions that are usually included in sale and purchase agreements include:

  • Dealing with the conditions to be waived or satisfied prior to completion
  • Covering termination of the agreement in the event of breach of the contractual obligations
  • If it is a private agreement, stating which party will designate the Notary to convert the agreement into a public one
  • Regarding how the parties will bear the relevant taxes and expenses that may arise from the transaction
  • Regarding warranties against dispossession or hidden defects or encumbrances

Terms implied by law

Where the transaction is notarised, there are requirements for the completion of public deeds and for the filing of such deeds at the Land Registry.

As a general rule, the public deed, when it turns a private agreement into a public one, should be drafted to reflect the undertakings and covenants contained in the private agreement.

Any public deed must contain:

  • The names and identification of the parties, which will be checked by the Public Notary before completion of the deed. Should any of the parties be acting by means of powers of attorney, this person’s capacity will also be checked. The deed must state the companies’ or individuals’ names, the name and power of attorney of the individuals who act on behalf of the companies, as well as their legal status, their registered offices and their tax identification numbers. Should the grantor be a foreigner his identification number (see section 1) will also be stated
  • The designation and description of the property and of the rights transferred, including a list (if applicable) of the priority ranking of mortgages, contractual or legal easements, urban planning obligations, co-ownership regulations and rental status. In this regard, an extract from the Land Registry issued not more than two days before the signature of the public deed should be attached
  • The price of the transaction and/or the method for determining it. It must be specified whether the price is paid in the presence of the notary

6. Due diligence – What investigations does the buyer usually make?

In order to have full information before committing to the purchase of a property, the buyer should carry out certain investigations regarding both technical and legal issues concerning the property. It is also possible that instead of the buyer, the seller carries on this due diligence process through the issue of a due diligence report by the seller.

An accurate due diligence report may reveal matters that could lead the buyer to withdraw from acquiring the property or to acquire it only provided certain conditions and requirements are met or guarantees provided.

Regarding the legal aspects to be analysed under this process, the information obtained from the Land Registry and from the Administrative Cadastre (“Catastro”) are essential.

From a legal and technical perspective, the report will cover the following issues:

  • Legal – title, matters burdening or benefiting the property, type of ownership, administrative authorisations, compliance with urban planning regulations, insurance policies, rental position and disputes
  • Technical – structure, soil and geological investigations, regulatory and environmental compliance, building regulations

Generally, an urban planning certificate is obtained at contract stage in order to provide the buyer with information concerning any applicable urban planning restrictions and confirming certain issues, such as the ability to build, rebuild or extend buildings on the land and whether or not any particular zoning regulations apply to it.

7. Registration and Notarisation of real estate – What are the basic requirements?

Notarisation

As referred to in section 5, any agreement whose object is the creation, transmission, modification or extinction of any right over real estate is, in principle, contained in a public instrument (i.e. by means of the completion of a public deed by a Public Notary).

Furthermore, for any transaction to be filed within the Land Registry, it has to be formalised in a public deed. No private documents can be registered at the Land Registry, except for some specific exceptions.

Registration

The aim of the Land Registry is the filing of transactions regarding rights over real estate, as well as of certain court resolutions that may affect the capacity of individuals or legal entities.

The filing of transactions at the Land Registry have the following effect:

  • Register authentication – it will be presumed that any real estate right filed at the Land Registry exists and is held by the owner as determined by the corresponding record entry
  • Inadmissibility of opposition – any title which is filed will not be capable of challenge by a third party acting in good faith without notice
  • Registry certification – a party acquiring title over any real estate right from someone who appears as its owner at the Land Registry will be maintained in its acquisition, once it is registered, even if the transferor’s right to make the disposition was invalid
  • Presumption of accuracy – it will be presumed that the Land’s Registry records correspond to reality unless it can be shown otherwise

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

There are different types of urban licences. It is a complicated subject as these licences are regulated by autonomous communities’ legislation and by local rules passed by the City Councils. Consequently, there is no definitive approach in all cases. The use and occupation of real estate is always governed by the municipal planning rules applicable to the site.

These authorisations, whose names differ according to different local rules, comprise in general terms the following:

  • Opening or activity licence – required for all industrial, leisure and commercial businesses. In some cases, no licence is needed (e.g. see Act 2/2012 of the Autonomous Community of Madrid). Some additional special licences are required for malls and other specific assets
  • Works licence – should be applied for before initiating works, and the object of this local authorisation granted by the City Council is to check that the project presented to the town hall does not infringe the urban planning and zoning rules applicable to real estate. See Act 2/2012 of the Autonomous Community of Madrid for a list of activities for which no licence is needed in Madrid, provided that some requisites are met
  • First occupation licence – should be granted once construction of a commercial building is finished. It will be granted if the building works have been done according to the project presented and authorised by the works licence
  • Habitation certificate – will be granted to housing developments, once the municipality has investigated that the building work complies with the applicable legislation (safety, hygiene, health, environment, noise, etc.)
  • Classified activity licence – will only have to be obtained if the activity developed on the site is considered a “classified” activity. Spanish legislation considers classified activities to be those that may be considered inconvenient, unhealthy, harmful or dangerous (housing is not considered as such). The object of this licence is to check that the installations and the activity developed on the site do not infringe the urban, environmental and security legislation

In general, the buildings cannot be used until the last licence has been granted. Licences are valid as long as no modification is made in the building and as long as the activity authorised in that building is operated under the conditions stated in the licence. The validity of the licence is conditional upon the observance of its conditions. The licence may expire if the activity is not initiated after a period of time, if it is suspended for a number of months, if the activity does not comply with the licence conditions, or if the activity does not comply with the urban, environmental and security rules. For these purposes, the General Services of Inspection of the City Council have the ability to inspect the building and the activity carried on in the building at any time.

These licences are not personal and most of them are transferred with the land or business. Usually, notification of the transmission of the licence should be made to the Public Administration which granted it.

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

Insurance policies are usually the owner’s responsibility. Should the property be encumbered with a mortgage, the granting bank usually requires the owner to enter into insurance policies covering (i) any damage the property may suffer and/or (ii) life insurance or insurances covering the lack of payment of the mortgage.

Under a condominium regime (regimen de propiedad horizontal), the community of owners normally takes out an insurance policy covering both the structure and fixtures and fittings of the property against any damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire, water damage, etc.

Where a property is covered by a policy, this policy is assigned when the property is transferred, unless otherwise agreed by the parties or the policy terms do not authorise it.

There is also a legal obligation for a developer of housing to take out an insurance policy which covers the risks associated with construction works. In this regard, Section 19 of the the Law on Building Ordinances (Ley de Ordenación de la Edificación) envisages a guarantee regime for construction work under which the developer, as policyholder, enters into the following policies:

  • ten year insurance policy covering all the responsibilities derived from material damage caused by defective construction relating to the foundations, structure and associated elements of the building
  • three year insurance policy covering compensation arising from damage caused by defective construction relating to construction elements or installation which make the property unsuitable for occupation

Likewise, under this regime, the contractor is required to take out a one year insurance policy covering material damage arising from defective construction relating to the completed elements of the building. This annual insurance is sometimes substituted by the buyer through the retention of an amount equivalent to 5% of the total cost of the construction.

10. Environmental – What are the common environmental issues?

Both State and Autonomous Communities’ environmental legislation needs to be complied with. Consequently, there are differing rules according to the location of the property.

The issues are different if what is to be acquired is (i) a Company with real estate assets or (ii) such real estate assets.

In the first case, a company or person causing environmental damage will be liable for such damage. Depending on the nature of the environmental damage caused (e.g. soil contamination, waste water, groundwater contamination, chemical and hazardous materials storage, etc.), the applicable law may vary. In all cases, the general law (Act 26/2007, of 23 October, on Environmental Liability, which transposes EU Directive 2004/35, of 21 April) applies.

When an asset is acquired, investigations should be made of soil contamination and asbestos. The owner and the possessor of contaminated soil are subsidiarily liable for the decontamination costs (Act 22/2011, of 28 July , of Residues and Contaminated Soils). The use of different types of asbestos is forbidden under Spanish legislation by virtue of a Ministerial Order dated 7 December 2001, enforceable since June, 2002. Nevertheless, products containing asbestos installed or functioning before that date may continue to be used until they need to be replaced.

An environmental audit of environmental risks is highly recommended and environmental liability regulated by representations and warranties in the purchase contract.

11. Pricing/Valuation – What sets the price/valuation of real estate?

The purpose of the valuation is to determine market value of the relevant property. The market value is the average price that can be obtained for the sale of a property, at the date of the valuation.

In Spain, the parties which have an interest in the transaction usually hire the services of a valuation expert (tasador). Hiring a valuation expert is not compulsory under Spanish Law and the parties may appoint an independent third party who is not so qualified.

Valuation fees of experts are mainly based on the amount of time estimated to carry out the valuation works and not on a scale according to the value of the property to be valued. Each valuation is performed after inspecting the relevant property to be evaluated.

When pricing a property, the professional will take into consideration several factors such as the location of the property, the type of property and the condition, surface area and date of construction. In addition the legal and tax situation, applicable urban planning regulations, the occupation of the property and comparison with similar properties will be taken into account.

The relevant valuation report will contain a description of any works carried out, the location and surroundings of the property, its legal and urban planning status, the market sector, comparison points used, an estimated value and the conclusions.

The property expert may use several methods to carry out a property valuation, such as the comparison or analogy method or the revenue method or a mixture of them.

The most common method of valuation in Spain is the comparative or analogy method. The professional analyses similar transactions made in the same area in respect of buildings with similar characteristics.

The income method is also commonly used and is based on the actual annual income received on which a particular yield is applied depending upon the location and characteristics of the property. The analysis of the lease enables a determination of the potential income and the detailed provisions of the contract (such as duration, guarantee of payment, etc.), which are also taken into consideration.

With regard to the valuation of real estate from an urban planning point of view, Royal Legislative Decree 2/20 June 2008 sets out special rules which are applicable for this purpose and notwithstanding that local town halls are in charge of urban planning, these valuation rules are applicable throughout all of Spain.

12. Taxes and Costs – What are they and who pays them?

Costs associated with a contract for the purchase of real estate and registering title are currently:

  • Taxes on Price:                                                                                                                                                                                                                                                                                                                                       On first transfer of new buildings:
    • VAT: 21% non-residential buildings, 10% residential buildings and 4% housing partly financed by government
    • Transfer Duty: none, but Stamp Duty is applicable at 1% (but it will depend on the Autonomous Region where the Property is located)
  • On second and subsequent transfer of buildings:
    • VAT: Exempt (but election for VAT may be made)
    • Transfer Duty: 7% (this tax rate can range from 6% to 10%, depending on the Autonomous Region where the Property is located). Stamp Duty is not applicable (if an election for VAT is made, Transfer Duty will not be applicable, and Stamp Duty will be applicable – in this case if the exemption is waived, the amount of Stamp Duty may increase)
  • Land Registry registration fees:
    • Fees depend on value. For an amount exceeding EUR 601,012.10: 0.20 per 1,000. Maximum: EUR 2,181.67.
    • VAT: 21%.
  • Notary Fees.
    • Fees depend on value. From EUR 601,012.10 to 6,010,121.04: 0.3 per 1,000.
    • For an amount exceeding EUR 6,010,121.04 the Notary receives an amount agreed by the parties.
    • VAT: 21%.
  • Legal Fees.
    • Negotiable.
    • VAT: 21%.