Spanish Government caps rent hikes to 2% in 2022

Raymundo Larraín Nesbitt, April, 1. 2022

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By Raymundo Larraín Nesbitt
Lawyer - abogado
1^st of April 2022

Spain’s National Bureau of Statistics (INE) reported inflation hit 9.8% Year-Over-Year during March 2022. This is the highest figure in over 37 years, since 1985. It is a major source of concern.

There are several factors behind this sharp rise:

The Covid pandemic (that disrupted the global supply chain impacting on prices)
The (irresponsible) quantitative easing policy followed by Monetary Authorities to mitigate the pernicious financial aftermath of the pandemic and the recession that preceded it
The outbreak of war in Europe

All of the above are to blame for the severe spike in inflation.

If this trend continues unchecked, we will soon have a two-digit inflation in our hands. This will have severe repercussions, most of which escape the scope of this article.

The one I am going to focus on today is how it affects landlords and tenants on renewing a rental contract.

By law, a landlord may not increase a rental unless it is expressly worded into a rental contract. Also, by law, the rental increase in Spain must be indexed to the IPC (Spain’s Price Consumer Index). Spain’s Government enacted a law last year that forced landlords to index their contracts only to the IPC. Although at the time this law was enacted with best intentions in mind to protect tenants (read Nanny State), the fact is that in a high inflationary context, this has backfired spectacularly, and landlords cannot lawfully use any other index which forces a steep increase in rental contracts across the board on renewing them.

For example, a long-term rental contract that ran from the 1^st of April 2021 to the 31^st of March 2022, and had a monthly rental of 1,000 euros, upon renewal would be updated by 98 euros a month, making a grand total of 1,098 euros/month. This sharp increase may prove as an unpleasant surprise to unwary tenants who were not expecting such a strong rise, catching them off guard. It also implies tenants will now have less disposable income available every month, which may lead some to struggle to make ends meet.

As a result, our government has approved today to cap the increase in rentals by 2% for corporate landlords over a three-month period starting today 1^st of April, and ending on the 30^th of June. Private individuals will have freedom to negotiate a rental increase. However, if no agreement is reached, the rise will also be capped at 2%. Which in practice will translate into most cases also being capped at 2% over the next 3 months.

Being realistic and planning ahead, inflation is going to be with us for a number of years until it is brought back to heel by the ECB. The ECB needs to drop once and for all its lenient approach and change gears on this matter pronto implementing gradually continued hikes of interest. It must act decisively against this spike in inflation before it gets severely out of control, if it’s not too late already.

Knowing well our government’s paternalistic approach towards tenants, it is almost a given they will approve chaining continued 3-month renewals on this measure going forward. This translates – in a high inflationary context – into landlords being unable to pass on this inflation rise to tenants. Which in turn implies they will be making a significant loss over the next years; in effect, ‘subsidizing’ their tenant’s rental.

Once more, this measure proves the point our government revels in lofty ideals, albeit always at the expense of other people’s private property.

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