Landlord: Keys to Successful Rental Income

Raymundo Larrain Nesbitt - Lawbird Legal Services
31st of January 2008

Over the last decade we have witnessed an explosive growth in the rental market in Spain. Coastal areas are awash with properties to let by expat landlords. However, many landlords are unaware of the different mechanisms in place to secure such rental income and therefore often fail to implement them in their rental agreements, which leaves them unprotected if the tenant decides to stop paying the rent. Mechanisms such as bank guarantees and rental income insurance enable them to rent out their property safely. In this article we strive to deliver some legal insight by identifying and employing such mechanisms in your own advantage.

The problem with defaulting tenants in Spain

Dafaulting tenants have become a real nuisance for landlords who rent out their Spanish property. The number of tenants who default on their monthly payments is increasing at alarming rates, to such an extent that it is considered the main reason as to why landlords don’t let their properties.

If your tenants stops paying the rent, it is advisable to start an eviction process as soon as possible. An eviction process can take anything ranging from 10 to 18 months. The loss of rental income during this period of time can leave the landlord in bad financial shape, and things may turn uglier if the rental income is partly being used to pay off a mortgage: if the monthly payments are not met, the bank could repossess the property. A horror story that many a landlord can be faced with.

Tips on how you can secure your rental income in Spain

There are different options you can implement either to reduce the risk of not being paid your monthly rental income, or completely eliminating it. The cost varies depending upon the level of protection each option offers, which ranges from ‘free’ for the most simple tenant credit checks, to the most expensive rental income insurance options (which can be up to one month’s rent fee for a one year insurance rental policy)

These options are the following:

1. Know your tenant. A good starting point is to know well your prospective tenant. This is something which is done in the UK although not in Spain, safe in large cities such as Madrid and Barcelona. It would be most advisable to request from your prospective tenant a copy of their last payslips much like in Britain is done. If he has a labour contract (indefinido) he is –generally- more financially reliable than a self-employed (autónomo). Additionally, requesting a letter from their bank manager as to ascertain their financial ability might be a good idea.
   
   These easy steps help to weed out professional squatters who move around the country only paying the first month’s rental or two and then stop paying all together. Unfortunately Spain’s laws are biassed to protect the tenant, not the landlord, and some unscrupulous people take advantage on this fact.
   By law you are entitled to request a month’s rental as a deposit following art. 36 of the Rental law for dwellings which the rental agency normally withholds.
   
   
2. Agree to setting up an Arbitrage mechanism.- May be included in the contract’s clause as an alternative option in lieu of litigation. The ruling by the abitror compels both parties and cannot be appealed. This option is available mainly in large Spanish cities and saves considerable time.
   
   
3. Implement a rental Bank guarantee. Our advice for landlords is to require from a prospective tenant a rental bank guarantee or “aval bancario”. This would ensure the landlord against the tenant defaulting. The landlord may execute said guarantee and the bank would be obliged to pay them immediately as it is an executive title in Spanish law. The bank in turn would claim this amount on the tenant. This bank guarantee should ideally be made to secure the following 5 years even if the tenancy agreement is for short term (eleven months).
   
   However there is a catch, claiming on this rental bank guarantee is no substitution for an eviction procedure, rather a compliment to it. For example, the tenant may default on the second month, the landlord after having sent to the tenant letters claiming the owed rental to no avail, executes the bank guarantee (which secures for example 6 months rental). In despite of this, the tenant will still be living in the property. The landlord would then have to wait until the six months are over to initiate an eviction proceeding at the court.
   
   Ideally rental bank guarantees should be exercised after the eviction ruling, not before. It is common place that tenants on Spanish coastal areas have, naturally, no assets of their own so after an eviction process the landlord is still owed the lost rental income. The bank guarantee could then be claimed on to offset this rental loss. The tenancy contract would also have to be terminated of course for breach of contract according to art. 1124 of the Civil Code. We advise you to hire a lawyer on doing this.
   
   In the current economical context in which -specially in coastal areas- tenants are defaulting increasingly this bank guarantee would act as a safety net for landlords ensuring payment once the eviction process is over helping to take off stress.
   
   Is a rental bank guarantee suitable in all cases?
   
   No it isn’t. It is suitable for long term tenancy’s (eleven months renewable) not for short periods such as summer lets (one month or a couple of weeks).
   
   A bank guarantee is expensive and requires the tenant to deposit lump sum an amount of money at their own bank, typically 12 months rental, which is left in custody. On top of this, banks normally charge 1% of the amount, notary fees, opening interest and a quarterly interest. Not all tenants find themselves in a comfortable financial position to provide this bank guarantee either because they simply do not have the money or, even if they do, are unwilling to have it tied-up until the guarantee elapses which could be as long as 5 years.
   
   Does the bank guarantee ensure the tenant’s financial ability?
   
   No. The bank at no time carries out a due diligence on the tenant’s assets and financial ability. It only guarantees that the tenant deposited an amount of funds equivalent to say twelve months rental which you can claim on default. The tenant cannot dispose of said funds until the bank guarantee elapses. Notwithstanding banks include clauses that might hinder the execution of the guarantee which is why we recommend you to hire a lawyer to help arrange these guarantees and avoid abusive clauses which render the guarantee virtually unclaimable.
   
   At what stage is this bank guarantee handed over to the landlord?
   
   This guarantee is handed over by the tenant at the time of signing the rental agreement, never after. The landlord will hold it and deliver it back once the tenancy is terminated satisfactorily with no pending amounts owed.
   
   
   
4. Arrange a Rental Insurance. In Spain there are companies that offer relatively inexpensive tenancy insurance charging only a one-time annual fee equivalent to 60%-100% of a monthly rental. This insures the landlord against the tenant defaulting, and covers lawyers’ fees during the eviction process (up to around 2,100 €). They also insure different scenarios such as the tenant destroying furniture during the eviction process up to a pre-agreed capped amount (normally 3.000 €).
   
   These insurance companies do evaluate the credit risk of the prospective tenant unlike banks with rental bank guarantees.
   
   i.e. A typical monthly rental of 900 € would mean you would have to pay one annual payment of 900 €.

Duration of Spanish Rental Contracts

In Spain short term lets (typically 11 months) have been devised to waive the Rental Act (LAU). The LAU stipulates that any tenant staying longer than a year in a property without the landlord’s opposition is entitled legally to stay in it for the next 4 years making a total of 5 years (long term let). That is why a bank guarantee should last ideally 5 years even if the tenancy is for a short term let (eleven months).

Having signed a short term let is no guarantee as in case of default it might transform itself into a long term let if the landlord doesn’t act fast enough. That is why an eviction process becomes a necessity in case of unpaid rental. Landlords in general cannot afford to have someone occupying their property for the next five years. This is where a lawyer is needed.

Conclusion

Finding a tenant to let your property is no major feat albeit evicting one takes its toll both in time and money.
That is why it is most advisable to hire the services of a lawyer from the on start, before you even begin searching for a tenant. A good independent lawyer will draft a rental contract covering diverse issues such as bank guarantees and rental insurance protecting your interests even if the tenant defaults.

Besides, there is also a cost of opportunity in which your property will be occupied by the tenant during the eviction procedure for the next 10-18 months in which you will be both losing rental income and still be obliged to face mortgage repayments.

Hiring a lawyer may well mean the difference in saving yourself thousands of pounds in legal fees and expenses as well as removing all the associated stress of a defaulting tenant.

Are you Renting out your property?

We advise you to hire the services of a lawyer to ensure you are fully protected if your tenant should stop paying the rent. Lawbird Legal Services offers the Drawing up of a Rental Contract service, which includes options such as implementing rental bank guarantees or setting up rental income insurance policies. If you are interested in this service, please contact info07@lawbird.com

Discuss this Article

• ozjlthfo Says:

  Mon, Apr 27th 2009, 23:35

• Anne Bopst Says:

  Tue, Jul 28th 2009, 20:25

  My Dutch tenant has stopped paying rent he has no contract with me in Spain. He has a contract in Holland with the agent that gave me this rental. His contract in Holland is for 10 months ending on december 31 2009. Can I change the locks and evict him? I am English. Thank you for any advice

• Lawbird Lawyer Says:

  Thu, Jul 30th 2009, 14:41

  Dear Madam, You have a whole section of this website devoted to landlords and tenants in Spain:Landlord / Tenant Issues I strongly suggest you read my article on the matter: How to Evict a Tenant who is not Paying the Rent - 17th December 2007 Regardless if the tenancy is short or long term one, you will need to have them legally evicted. I take for granted your tenancy agreement had no arbitration clause. In which case you would have to hire a litigation lawyer to initiate the formal eviction procedure. You cannot evict them on your own or shut off the utilities else they could file a report against you before the Spanish police which could lead to you being sentenced to prison. We can offer you our Tenant Eviction for a Spanish Property: Who is it intended for: This service is provided to landlords that have a non-paying tenant in their Spanish property (either a dwelling or commercial premises). What does the service include? • Analysis of the case and legal advice. • Preparing and filing your suit. • Dealing with court proceedings. • Attending judicial hearings and submitting evidence. • Claiming unpaid rents before the Spanish Courts. • What are the steps? We will first try to reach an amicable agreement. If this fails, we resort to taking legal action. It generally takes less than a year on average to have the tenant evicted. If you are interested in hiring this legal service, please email us. We act nationwide. Yours faithfully, Raymundo Larraín Nesbitt

• Nubia Cabrera Ortega Says:

  Tue, Aug 18th 2009, 02:24

  I have tenants in the Canaries from an inheritance which pay 90 Euros a a month because they have been in the building for a long time and the contracts are very old. What are my rights as a landlord. My email is :nubia_c_ortega@hotmail.com

• Angela McMahon Says:

  Mon, Sep 28th 2009, 14:47

  Hi, firstly thanks a million for all your invaluable advice and guidance on your web pages. I have a typical case on my hands of a tenant not paying rent. Now I am out of pocket for 4 months rent plus services (11 month lease). At this stage I have lost my job & my husband's work is cut to a 2 day week. So I cannot actually afford to pay both mortgage and services for the apartment without rent coming in. Surely I am entitled to avoid going into serious financial debt because of someone else defaulting on monies they owe to me.? Regards, Angela my email is: paddy.macky@gmail.com

• Lawbird Lawyer Says:

  Mon, Sep 28th 2009, 15:50

  Dear Ms McMahon, Thank you for your kind words. I'm afraid so; you will be held liable because of soemeone elses' lack of compliance. I'll e-mail you to advise on your case. Yours faithfully, Raymunmdo Larraín Nesbitt

• Donna Says:

  Mon, Apr 12th 2010, 21:18

  My contract is up to end of Oct but I have to leave the apartment because I lost my job. I adviced him o fthe scenario more than a month ago and he agreed. Few days before the schedule of termination, the landlord said he will take the aval bancario because I was unable to complete the contract. He never said this before, he just said its ok if I will leave, he''ll find another tenant. Can you advice me on this. Thanks in advance.

• Lawbird Lawyer Says:

  Tue, Apr 13th 2010, 11:45

  Dear Madam, I have already replied to the query you've posted in the other thread you've started: http://www.marbella-lawyers.com/forums/showthread.php?t=1115 Yours faithfully, Raymundo Larraín Nesbitt

• Sunni Mirza Says:

  Sat, Jul 3rd 2010, 12:18

  Hi. I have an apartment in Puerto Banus that I let out for holiday lets ranging normally from 1-2 weeks over summer. Please can you advise if these very short term let renters could potentially remain and squat. And if so, what actions can be taken to prevent this happening? Kindest Regards Sunni sunnilondon@hotmail.com

• Lawbird Lawyer Says:

  Mon, Jul 5th 2010, 10:20

  Hi Sunni, In short, yes they can "squat" or remain in it. If they do remain in the property over time, you are going to have to appoint a lawyer to evict them formally through the law courts. If you try to evict them on your own they can report you to the Police and you may find yourself being taken into custody and sleeping in a Spanish jail. You may want to read my article on common mistakes to avoid on renting property in Spain: Renting Property in Spain: Common Mistakes to Avoid (Part I) - 12th May 2010 Levante Lifesyle Magazine Renting Property in Spain: Common Mistakes to Avoid (Part II) - 16th June 2010 Levante Lifesyle Magazine Regarding your query on ways to mitigate the exposure to non-paying tenants you may want to read my blog post on the matter as well as my article: Expat Legal-Gossip Gathering Pace (Part 1) - 27th February 2010 Non-Paying Tenants? No Longer an Issue -23rd October 2009 Common Misconceptions about Spanish Rental Contracts - 21st November 2008 Landlord: Keys to Successful Rental Income - 31st January 2008 The only fire proof action is not to rent in Spain until there's a decisive change of the current laws which are tenant-friendly for historical reasons that need to be addressed asap. But this option may be a tad too radical. Yours sincerely, Raymundo Larraín Nesbitt

• Paul Vallance Says:

  Sat, Jul 10th 2010, 01:58

  Hello. I rented out my apartment in Fuerteventura on 27th April on a six month 'temporada' contract. The tenant paid a one month deposit then paid the rent the following month and then stopped. The eviction process takes so long is it better to just wait till the end of te contract in three months time? Does the tenant have to leave the property at the end of the contract or can he stay there without paying? Kind Regards, Paul. email vallo@tinyworld.co.uk

• Lawbird Lawyer Says:

  Mon, Jul 26th 2010, 12:18

  Dear Mr Vallance A non-paying tenant can stay for as long as he likes in your property legally unless you have him formally evicted retaining a lawyer. I strongly advise you to read my articles on the matter: 10 Common Mistakes to Avoid on Renting Property in Spain - 22nd April 2010 Rent-to-Buy Or How To Profit From Spain's Market Downturn – 5th November 2009 Express Eviction Law Passed by Congress – 30th October 2009 Non-Paying Tenants? No Longer an Issue – 23rd October 2009 New Express Eviction Law: Much Ado About Nothing -13th July 2009 Paying the Rent Late Twice will be Cause of Eviction – 4th June 2009 Spanish Express Eviction Law Pre-Approved – 24th December 2008 Landlords Afraid of Non-Paying Tenants Take Pre-emptive Measures -16th September 2008 Landlord: Keys to Successful Rental Income – 31st January 2008 How to Evict Non-Paying Tenants – 17th December 2007 Regardless if the tenancy is short or long-term one, you will need to have them legally evicted. I take for granted your tenancy agreement had no arbitration clause. You can browse our forum on similar cases: Landlord / Tenant Issues In which case you would have to hire a litigation lawyer to initiate a formal eviction procedure. You cannot evict them on your own or else they could file a report against you before the Spanish police which could lead to you being sentenced to prison. You cannot change the locks or shut-off the utilities; you may be reported to the Police as it’s a criminal act. Please read my article above. We can offer you our Tenant Eviction for a Spanish Property: Who is it intended for? This service is provided to landlords that have a non-paying tenant in their Spanish property (either a dwelling or commercial premises). What does the service include? • Analysis of the case and legal advice. • Preparing and filing your suit. • Dealing with court proceedings. • Attending judicial hearings and submitting evidence. • Claiming unpaid rents before the Spanish Courts. • What are the steps? How much does it cost? i) Non-luxury rental: • €1,300 plus 18% VAT in legal fees • Plus a further €700 for the court agent’s fees. ii) Luxury rental (>€3,500 p/m): • €1,300 plus 18% VAT in legal fees • Plus a further €700 for the court agent’s fees. • 10% on all the recovered amounts (i.e. rental arrears). We will first try to reach an amicable agreement. If this fails, we resort to taking legal action. It generally takes less than a year on average to have the tenant evicted. If you are interested in hiring this legal service, please e-mail us. We act nationwide. If you have further legal queries on this matter just post them here. Yours sincerely Raymundo Larraín Nesbitt

• Loopy Says:

  Sun, Aug 15th 2010, 17:59

  We are looking to evict tenants in Spain who have not paid rent for 18 months. My father agreed to pay the tenants a 6% comission in the event of a sale for their assitance in showing and marketing the property. Now a buyer has expressed interest to exhange contracts but the tenants have begun to claim extras & phoney expenses yet fail to communicate or send documentation for these expenses when requested. Buyer has agreed to purchase with the understanding that the tenant will leave once he has received the comission monies + extra money he believes is owing to him. It amounts to extortion with his demands escalating and he is determined not to leave until his demands are met. We will proceed with eviction court notification if he does not take generous offer made to him. We want to take out landlord insurance in case of malicious damage to property in the event of his eviction. I have done an extensive search for insurance companies who can provide this but have not found any. Is there anyone who can recommend?

• Lawbird Lawyer Says:

  Wed, Aug 18th 2010, 10:29

  Dear Sir or Madam As it stands to logic no insurance company will agree to insure you if your tenant already stopped paying over 18 months ago. How can a sale go through if the non-paying tenant is still inside? Is your buyer aware your tenant is not paying? I suggest you retain a lawyer and have him evicted and make sure the sale goes through. Depending on where your property is located in Spain evictions are taking between 4-12 months. We can offer you this legal service, please read my above posts which detail our legal fees. Sincerely Raymundo Larraín Nesbitt