COVID-19: Approval of measures in relation to non-residential leases
Spain Corporate Alert
The Official State Bulletin of December 23, 2020 carried notice of Royal Decree-Law 35/2020, of December 22, 2020, on urgent measures to support the tourism and hotel industries and trade and in relation to tax matters (RDL 35/2020), articles 1 through 6 of which include certain measures affecting non-residential lease agreements.
According to the Preamble of RDL 35/2020, the measures are needed because the provisions of the Urban Lease Law and the Civil Code fall short of addressing the current situation and because “due to the exceptional measures adopted by Royal Decree 926/2020, of October 25, 2020, many economic activities have had to stop completely or else be drastically reduced”.
The RDL takes effect on December 24, 2020.
1) Lessees that can benefit from the measures set out in RDL 35/2020
Under article 3 of RDL 35/2020, lessees who are either self-employed individuals or small and medium-sized companies may benefit from the measures it contains, provided the following requirements are met:
A) Common requirements:
The leases must be for properties used in the lessee’s economic activity
In relation to the lessee’s activity:
The activity must have been suspended as a result of the entry into force of Royal Decree 926/2020 or as a result of orders issued by the competent authority or other authorities authorized under that royal decree (substantiated with a certificate issued by the State Tax Agency or the entity competent to process the extraordinary cessation of activity regulated in article 17 of Royal Decree-Law 8/2020, of March 17, 2020, on the basis of the declaration of cessation of activity made by the interested party); or
If the activity has not been directly suspended as described above, evidence must be provided of at least a 75% reduction in revenues in the calendar month preceding the month in which the deferral or reduction is requested, with respect to the average monthly revenues in the corresponding quarter of the previous year. This reduction must first be supported by a solemn declaration filed by the lessee, although the lessee will have to show its accounting records to the lessor if the lessor so requests.
B) Specific requirements:
Lessees who are self-employed must, on the date of the declaration of the state of emergency under Royal Decree 926/2020, be members of, and registered for making contributions with, the Special Social Security System for Self-Employed Workers (RETA) or the Special Social Security System for Seafaring Workers, or, if applicable, any of the mutual insurance companies substituting the RETA.
Lessees that are small and medium-sized companies must not exceed the thresholds determined in article 257.1 of the Capital Companies Law. Those thresholds are:
Total assets of €4 million or lower.
Net revenues of €8 million or lower.
An average of 50 or fewer employees in the fiscal year.
2) Measures established in RDL 35/2020
The specific measures depend on the type of lessor:
A) Company or public entity or large owners (more than 10 urban properties, excluding storage facilities and garages, or a built area measuring over 1,500 m2)
In this case, article 1 of RDL 35/2020 determines that, in the absence of an agreement between the parties, the lessee may request, before January 31, 2021, either (i) a 50% reduction in rent; or (ii) a moratorium on rent payments, without any penalties or interest.
The lessor must expressly communicate its decision to the lessee through duly authenticated means, within seven business days from the lessee’s request. The measure chosen shall automatically apply starting in the following monthly rental payment (in the absence of a reply from the lessor, the measure requested by the lessee shall take effect).
The measure chosen (reduction or moratorium) shall apply while the state of emergency declared under Royal Decree 926/2020, of October 25, 2020, and its extensions remains in effect, and may be extended through up to the next four monthly payments. In any case, the measures (reduction or moratorium) shall not affect the lessee’s obligation to continue paying common expenses.
If the moratorium is chosen, the deferred rent may be paid (proportionally) during the two years following the end of the moratorium, and always within the lease term or any of its extensions.
Lastly, the RDL establishes that these measures may be applied even if the parties have already reached a reduction or moratorium agreement, if such agreement falls short of covering the period of the state of emergency declared under Royal Decree 926/2020 plus its extensions and an additional four months, although the possible reduction envisaged in RDL 35/2020 would only apply to the part of the period not covered by the parties’ agreement.
B) Other lessors
Pursuant to article 2 of RDL 35/2020, in the absence of an agreement between the parties, the lessee may request, before January 31, 2021, a temporary and extraordinary deferral of rent payments.
For these purposes, the parties will be free to use the lessee’s security deposit to pay all or part of one or more months’ rent. If all or part of the security deposit is used, the lessee will have to replenish the used portion within the shorter of one year from conclusion of the agreement or the remaining lease term.
C) Exclusion of insolvent lessors
According to article 6 of RDL 35/2020, the measures established (reduction or moratorium) shall not apply where the lessor is undergoing insolvency proceedings, where application of such measures would likely cause the lessor to become insolvent, or in the case of imminent or current insolvency, all in keeping with the provisions of the Insolvency Law.