Real estate finance law in Spain

A. Mortgages

1. Can security be granted to a foreign lender?

Yes. Generally, there are no restrictions on the ownership of land by foreign parties or in relation to the taking or enforcement of security interests by a foreign party.

2. Can lenders take a mortgage over land and buildings on the land?

Yes. Mortgages can be granted over real estate assets and this security is accessory to the primary obligation.

2.1 The distinction between mortgages on land and buildings on the land?

There is a distinction between an interest in land and an interest in the buildings over the land, however generally, the owner of the land becomes the owner of the buildings on the land under the principle of “superficies solo cedit”. In this sense, buildings on land which is mortgaged are also considered to be mortgaged.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

No. Mortgage certificates do not exist under Spanish law.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Yes. The same property may be burdened by several mortgages. A registered mortgage has priority, as of the date of registration, over any later real estate charges or subsequent registered mortgages, following the Spanish law principle “prior tempore, potior iure”. A second ranking mortgage should be registered in the same way as a first mortgage. There are no special registration requirements for second ranking mortgages. A priority deed is also registered.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

Yes. However, it would be transferred subject to the mortgage (as long as the mortgage is registered in the relevant Land Registry).

2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?

Yes. The Tax Authorities may be a preferred creditor in relation to certain taxes relating to the land/building during a four year period. This means that taxes payable due to the mortgage granted (1% over the secured amount as a general rule) or other taxes related to the land, in case of enforcement of the mortgage, would be paid prior to the secured obligation.

2.6 Can “all monies” mortgages be taken?

No. The total amount of the secured liabilities must be specified in the mortgage at the time it is granted.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes. The right to receive rent can be pledged. The right to receive rent may also be assigned but an assignment would not be considered as a security.

2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

It is possible to take a pledge over the accounts, but that is a different security than the mortgage, as the granting of a mortgage does not entail any restriction to withdrawing funds from the accounts of the mortgagor.

Therefore, a lender can also restrict the borrower’s rights to withdraw funds by means of granting a pledge over the relevant account, but this restriction needs to be agreed in the relevant security document.

3. What are the mechanisms for registering land and for registering and perfecting security?

In general, all Spanish securities must be granted in a public deed before a Spanish Notary. A mortgage must be registered at the Property Registry (to perfect it) by filing the corresponding notarised agreement. Generally there is no need to serve notice of the mortgage on anyone.

3.1 Consequences of failure to register?

Registration is required for the security to be effective and enforceable vis-à-vis third parties.

3.2 Formalities for execution of security and costs?

As explained above, security has to be granted by means of a public deed before a Public Notary. Due to this requirement and money laundering concerns, all parties (excluding EU financial entities and companies listed in EU markets) shall have a beneficial ownership statement deed (acta de titularidad real) and all foreign entities need to have a Spanish Tax Id. Without these a notary will not notarise any deed. Notarial and registry fees are payable and vary depending on the secured amount. Additionally, transfer tax would be payable (1% over the secured amount as a general rule), although some exemptions depending on the type of entity granting the mortgage could apply.

4. Can the lender use a Security Trustee to hold security on trust for creditors?

There is no concept in Spanish law similar to a trust, although the following structure may be used to achieve a similar effect – security documents may be entered into directly by each of the lenders or by a security agent duly empowered by the lenders. Such security agent would accept the granting of security interests in favour and on behalf of the lenders. Always acting in their names and on their behalf. In addition, such an agent can also be empowered to carry out any actions in connection with the loan, its enforcement and the enforcement of the security, exercising the corresponding rights of the lenders but always acting as their representative.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

Upon the occurrence of a change in the lenders, the security agreements are considered to be automatically assigned to the new lender, but it needs to be recorded at the Property Registry by means of filing the relevant assignment agreement duly notarized.

5. Does the landlord/borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease?

There are two ways to transfer a lease agreement to a new tenant, either by way of a sub-lease or an assignment of the lease agreement to the new tenant.In both cases, if the property is used as housing, the landlord’s consent in writing is required and in the event of sub-leasing it is only possible to do so over part of the property (it is not possible to totally sub-lease the premises).

If the property is used as business premises, the original tenant does not need the landlord’s consent to sublease or assign the lease, unless this has been expressly agreed in the lease (although the landlord needs to be informed about the sublease or assignment within a month term as from the execution of the relevant agreement). The landlord however has the right to increase the rent.

In the event of a sublease, the original tenant is still bound by the original lease agreement. However, if the lease agreement is assigned to a new tenant, the lease no longer binds the original tenant.

6. How can the lender enforce its security?

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Generally, a foreign jurisdiction may be chosen to settle disputes but in relation to real estate issues, regarding rights in rem over Spanish real estate or assets must be dealt with by reference to the rules of the Spanish courts.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Usually yes, although this may depend on any specific treaties applicable in each case.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

There are two ways to enforce security interests over a property:

(a) Judicial enforcement of security interests 
Only deeds and notarised documents are directly enforceable. The enforcement of private contracts is only feasible following judicial proceedings, where the existence and content of the agreement must be evidenced prior to enforcement.

The enforcement of mortgages over properties requires a summons to the debtor in respect of payments owed. The summons can be made either judicially, simultaneously to the enforcement order, or out of court.

(b) Out of court proceedings 
Out of court proceedings to enforce security interests are possible for mortgages over properties.

Such out of court proceedings are feasible only if: (i) the mortgage covers a given amount corresponding to principal, interest accrued in accordance with the provisions of the deed and expenses for the enforcement; and (ii) the deed expressly forsees the extra-judicial sale of the mortgaged asset in an independent provision along with the price of the real estate properties for public auction enforcement purposes and some other formal provisions.

Out of court proceedings are supervised by a public notary in the place where the mortgaged real estate is located. Once proceedings are initiated, payment to the debtor will be required. If payment is not made, the public notary will organise a public auction.

On enforcement, it is not possible to appoint a receiver or a liquidator. Subject to judicial discretion, the Judicial Administrator, who is appointed by the court, will replace the management of the debtor in the case of necessary insolvencies and will have supervisory powers over the debtor’s management in the case of voluntary insolvencies.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

No. The borrower remains responsible.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

In principle under Spanish law, lenders cannot acquire the secured property. A lender may reach an agreement with the borrower to acquire the title to the real estate in satisfaction of the debt (dación en pago), however, this agreement may be declared invalid and ineffective by courts.

7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult?

As explained above a foreign lender will require Spanish Tax Id.

B. Security Over Shares

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

1. Can security be granted to a foreign lender?

Yes.

2. Can second ranking security be taken? If so, how is it registered?

Yes, except if the company is located in Catalonia, where Catalonian law applies and no second ranking pledges are permitted.

There is no public register of pledges over shares. A pledge will only be registered in the shareholding register of each company and in the case of quoted company, in the accounts of the depositary.

3. What are the mechanisms for registering and perfecting security?

Security has to be granted by means of a public document before a public notary and a note of the grant of the pledge must be recorded in the relevant title.

3.1 Consequences of failure to register?

If it is agreed that certain rights (i.e. voting rights) are attached to the pledge, failure to register could result in the company whose shares are pledged not recognising the rights of the pledgee.

3.2 Formalities for execution of security and costs?

Security has to be granted by means of a public document before a Public Notary. Due to these requirements and money laundering concerns, foreign entities require a Spanish Tax Id. The notary could refuse to notarise the deed otherwise. Notarial fees are payable and vary depending on the secured amount.

4. Do the shares need to be transferred into the name of the lender or its nominee?

No. A note of the charge needs to be included in the relevant title.

5. How can the lender enforce its security?

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

Yes. The shares can be sold to a third party by means of a public auction.

Creditors may request a declaration of bankruptcy of a company in certain cases (and therefore, the appointment of receivers).

Security can be enforced without recourse to the courts and private sales are possible if it is for security in a quoted company and it is expressly foreseen as enforcement method in the relevant security document. If the pledged asset is not qualified as a security (i.e. shares in quoted companies) it has to be sold by auction.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Loans from shareholders are only subordinated if it is expressly agreed in the relevant loan. However, in the framework of bankruptcy proceedings loans from related parties would be subordinated to the repayment of the remaining debts. Subordination needs to be expressly agreed in the relevant agreement. Subordinated loans are not waived or written off contractually unless the relevant debt may be settled against another one held by the borrower against the lender.

C. Leases

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective

1. Lease Structure

1.1 Typical lease length?

The length of the lease is freely determined by the parties.

Notwithstanding the above, typical length for a residential lease could be between one and five years, and for a non-residential lease between ten and fifteen years, without prejudice to the right of any or both parties, as the case may be, to early terminate the lease agreement.

1.2 Maximum/minimum lease length if any?

There is not either a maximum or a minimum lease length for non-residential lease agreements. Regarding residential leases, Act 29/1994, dated 24th November 1994, of Urban Lease Agreements (the “Urban Lease Act”) establishes, in general terms, a minimum length of three years (according to the tenant’s choice); nothing is stated in connection with a maximum lease length.

1.3 Statutory controls and obligations re renewal/termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

For non-residential leases, there are no statutory controls, and the existence of obligations re renewal/termination of leases will depend on the agreements between the landlord and the tenant.

In residential leases, the tenant is authorised by law to terminate the lease agreement at any moment once the first six months of the lease length have elapsed, as long as its intention of terminating the lease agreement is notified to the landlord with, at least, 30 days in advance to the expected date of termination. 
On the other hand, the landlord is authorised by law to terminate the lease agreement at any moment once the first year of the lease length has elapsed, as long as its intention of terminating the lease agreement is notified to the landlord with, at least, two months in advance to the expected date of termination and provided that the landlord or his family needs the dwelling as permanent housing.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

In case of non-residential leases, the parties to the agreement may freely regulate the terms of the agreement and the consequences of its non-fulfilment by the tenant (the most common would be the application of a penalty, for example, equal to the sum of all the monthly instalments until the end of the compulsory length for the tenant, without prejudice of the possibility of a later moderation by the judge, as the case may be). 
For residential leases, the Urban Lease Act provides that, in case of early termination by the tenant – once the first six months of the lease lenght have elapsed – a compensation for the landlord consisting of one month’s rent per each pending year of the length agreed by the parties at the execution of the lease agreement.

In the case of both non-residential and residential leases, if the landlord does not comply with its obligations concerning the term agreed for the lease agreement, the tenant will be entitled to demand its duly fulfilment.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

For example, in respect of residential leases, should the landlord decide to carry out any improvements in the leased dwelling, a prior notification to the tenant with, at least, three months in advance must be done. Then, within a period of one month from said notification, the tenant will be entitled to early terminate the lease agreement except where the works do not affect or hardly affect the dwelling. If that is not the case, the tenant may demand a reduction in rent. 
On the other hand, in case of loss of the landlord’s right on the dwelling or even in case of transfer of its ownership, the lease agreement will be terminated unless it has been previously entered into the Real Estate Registry.

2. Rent/Rent Reviews

2.1 Rental income receivable quarterly/monthly in-advance/in-arrears?

Both the amount of rent and the way of payment are freely determined by the parties.

Nevertheless, for residential leases, unless otherwise agreed, the payment of rent shall be monthly and shall take place within the first seven days of each month.

2.2 Periodicity of reviews?

In non-residential leases, periodicity of reviews is freely determined by the parties.

In residential leases, rent will be annually reviewed in accordance with the annual variations (reductions or increases) in the Consumer Price Index (PCI) – which is published by the National Statistics Institute –, unless otherwise agreed.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

As already stated in question 2.2 above, the most common basis of review is the annual variation of the Consumer Price Index (CPI), published by the Spanish National Statistics Institute. For non-residential leases, it is common to agree, in addition to the ordinary reviews, extraordinary reviews once five /seven years have elapsed, in order to adjust the rent to the expected market rent.

On the other hand, in residential leases (once the first three years have elapsed) and in non-residential leases (as from the beginning), whether the landlord carried out any improvement works, it would be entitled, unless otherwise agreed, to review the rent in accordance with the amounts disbursed in said works and subject to the proceedings established in the Urban Lease Act.

2.4 Are rents/reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

Rents are not subject to any statutory control under the Urban Lease Act. Regarding reviews, and just for residential leases, the Urban Lease Act states that during the length of the lease agreement, rent may be reviewed just annually.

3. Lease Obligations: Who has responsibility for:

3.1 Internal maintenance, decoration and repair?

In non-residential leases, the parties are free to agree whatever they deem convenient. Otherwise, legal provisions for residential leases will apply.

In residential leases, the following rules will be applicable: the landlord is obliged to keep the leased premises in a condition suitable for its use and maintain it in said condition throughout the period of the lease. 
The tenant shall be responsible for minor repairs that are required as a result of wear and tear from the ordinary use of the premises.

If the landlord decides to carry out improvements in the dwelling, it must notify the tenant of its intention of carrying out said improvements three months in advance. Then, within a period of one month from said notification, the tenant is entitled to terminate the lease agreement except when the works do not affect or hardly affect the housing throughout the duration. In this case, he may demand a reduction of the rent proportionally to the area of the property that the tenant is being deprived from and compensation for expenses incurred as a result.

3.2 External maintenance, decoration and repair?

The landlord is responsible for these costs in residential leases, unless the works are needed because of the tenant’s fault; in non-residential leases, it will depend on the agreement between the parties.

3.3 Structural repairs?

All costs of repairs which are not “small outlays connected with the ordinary use” of the leased premises must be borne by the landlord, provided that the tenant is not involved.

3.4 Insurance?

The Urban Lease Act does not include a regulation on this subject. It will depend on the insurance legislation, both state and regional.

The common practice is that the landlord insures the structure of the premises/asset and the tenant the inside of the premises.

3.5 VAT?

Leases for residential use are VAT exempt. 
Leases for non-residential use are charged at 21% VAT.

3.6 Rates?

Please see 3.5 above.

3.7 Other typical outgoings?

The parties will agree who is responsible for the payment of the general/common expenses, subject to several rules stated in the Urban Lease Act in favour of the tenant.

The common practice is that, at least, expenses deriving from individual supply services will be accounted for by the tenant.

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

It depends on the agreement between the parties and, in any case, subject to several rules stated in the Urban Lease Act in favour of the tenant.

Are there any environmental obligations?

1. The Urban Lease Act prohibits the development of unhealthy, harmful and/or dangerous activities in the premises/dwelling. 
2. The landlord is obliged to deliver a copy of the energy efficiency certificate to the tenant. 
3. The Urban Lease Act does not include a specific regulation on this subject. It will depend on the environmental legislation, both state and regional.

4. Enforceability

4.1 Are terms of leases/contracts recognised and supported by case law in the jurisdiction?

Yes.

5. Valuation and Environmental

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated/qualified party or is an RICS (Royal Institution of Chartered Surveyors) qualified appraisal report accepted and recognised in each jurisdiction?

The appraisal has to be prepared by a qualified appraiser which is recognized as a professional appraiser by the Bank of Spain.

5.2 Is it possible/customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

It is not customary.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

A lender that has the benefit of a mortgage shall not be considered responsible for breach of environmental laws, although liability may arise in the event that it acquires the real estate upon enforcement of the mortgage.