Rented property

FOUR TIPS TO CONSIDER WHEN SELLING A RENTED PROPERTY

 

 

This post is a translation into English of an article which original article you can find here in Spanish.

The economic crisis forced many homeowners to put their property on the market to sell, although many were unsuccessful due to not finding a buyer or because the amount they owed on their mortgage was higher than the asking price. While waiting for a buyer to appear, many owners decided to rent out their property in the meantime. Now that the property market has recovered, they are more likely to be able to sell their property even though it is being rented out to tenants, so long as the following points are taken into consideration.

Purchasing a Rented Out Property – Four Points to Consider

The economic crisis forced many homeowners to put their property on the market to sell, although many were unsuccessful due to not finding a buyer or because the amount they owed on their mortgage was higher than the asking price. While waiting for a buyer to appear, many owners decided to rent out their property in the meantime. Now that the property market has recovered, they are more likely to be able to sell their property even though it is being rented out to tenants, so long as the following points are taken into consideration.

Does the tenant have the first right of refusal on the property?

Spanish legislation recognises that the tenant has a preferential right of acquisition on the property that he is renting in the case that the owner wants to sell it.

He can therefore exercise his right of first refusal on the property if it goes up for sale. This right would allow the tenant to buy the property for the same price as the third buyer. The tenant has 30 calendar days to exercise his right, with this period beginning on the same day that the landlord-seller notifies him of his decision to sell.

In the case that the landlord has already found another buyer, the tenant has another right that he can exercise: the right to retract, which means that he could take the place of the third buyer, under the same conditions, as it would be his right to do so.

These rights do not apply in certain circumstances. For example, if both parties had agreed when signing the rental contract that the tenant would waive his right of preferential acquisition, which is actually quite common. However, it is worth considering that for all rental contracts made before 6/06/2013, this right waiving stipulation would only be valid if the rental agreement was for more than five years.

Is it necessary to notify the tenant that the property has been put on the market to sell if he waivered his right of first refusal?

The sale of a rented property can only be registered with the Property Registry office if there is valid evidence that the landlord has notified the tenant of his intention to sell, and that all the legal requisites have been fulfilled. However, is this communication required when the tenant has expressly waived his right of first refusal?

The 4/2013 Law, which was a modification of the Urban Letting Act (LAU), was made in order to reinforce the principles of freedom of choice and contract freedom, thus allowing both parties to agree to if the tenant chose to waive his right to have first refusal on the property without any type of limitation. In any case, according to the aforementioned law, the landlord must communicate his intention to sell the property to the tenant within a period of 30 days of the sale going through.

However, this communication or notification is not meant to serve as the date from which the time limit is calculated during which the tenant can exercise his right of first refusal or his right to retract, which is contractually lacking, but rather as an obligation that the landlord-seller must carry out, thus protecting the tenant, for the payment in good faith of the rental income to the person who was no longer their landlord, or to avoid other losses, as established in the resolution of 11-01-16 by the General Directorate of Registries and Notaries. Therefore, the sale transaction can be registered with the mere manifestation by the seller showing that the tenant had waived his right to preferential acquisition.

Is the buyer obliged to honour the rental contract or would he be able to terminate it?

According to Spanish law, all urban land rental agreements and contracts must be registered with the Land Registry so that they are effective against any third party. The buyer of a property that was being rented out would only be subrogated in the rights and obligations of the landlord if the rental contract was registered at the Land Registry prior to the sale of the property, in which case he would have to respect the rental agreement in place. If the rental contract was not registered with the Property Registry office, the clause in the first paragraph of the 1571 article of the Civil Code will be applied, which says that the buyer has the right to terminate the rental agreement unless there is an agreement to the contrary. In this case, the tenant can demand that the new landlord allows him to stay in the property for three months from the date on which he was notified that the rental agreement would be terminated, and the tenant can demand the seller-lessor compensation for the damages and losses caused.

The buyer of a property that is being rented out for purposes other than living in, according to Spanish law, will be subrogated in the rights and obligations of the landlord-purchaser, unless the buyer purchased the property in good faith not knowing that it was being rented out, which would then give him the power or right, in that case, to terminate the rental contract. If the rental contract had been registered with the Property Registry office, this would stop the new buyer from being able to terminate the contract as he would not be able to claim that he did not know anything about it.

Is there a different rule regarding taxation as the property is being rented out?

One of the deductible expenses from the rental income earned by the landlord that he can claim on his income tax declaration is the repayment of 3% of the value of the construction while the rental agreement is in force. This repayment is, in short, the loss in value of the building with the passing of time.

When the rented property is sold, the minimum repayment amount that should have been applied during the time that the property was rented out should be discounted from the acquisition value of the property, so that the capital gain can be calculated correctly for the income tax declaration. And that, even though the seller-landlord hadn’t included this deduction in his previous income tax returns, he will be able to apply for the reimbursement from all the non-statute-barred years.

The fact is that the profit gained by the seller-landlord from all the deductions given before the sale of the rented property is compensated with the increase in capital gain obtained at the time of selling, which must be declared on the income tax return and which is made as a result of reducing the acquisition value. Or in other words, he will come out even in the end.

Thank you

Thank you for your time and attention and I hope this information is of use. You are very welcome to share if you liked it.

Warning

Please, note that this is general information. This is not specific legal advice. It is advisable to seek legal advice for any specific legal issue.