With the latest housing reform approved, landlords will be able to raise rents by a maximum of 2% in 2023. The law in charge of regulating any issue related to rent in Spain is the LAU (urban leasing law). However, it does not specify what type of index should be used to update the rent. If nothing is specified in the contract, the Competitiveness Guarantee Index must be used, but when it comes down to it, it is the famous CPI that is used.
As this can generate some confusion, today we will explain exactly what this index consists of and why it is the one that is applied to the rent. We will also discuss the issue of price increases and what is achieved with this change in the law.
What is the CPI?
The consumer price index or consumer price index is an economic scale whose objective is to generate a statistical measure to observe how the prices of goods and services consumed by the population living in family homes in Spain evolve.
The CPI indicates the way in which the prices of products move in general during a period of time and in a specific place. With it we can know if the cost of living increases or decreases and take the necessary measures to solve any problems, if they exist. Without it, we might not know if, in general, it is ‘costing’ us too much to live. There are 2 types of CPI:
Underlying CPI. It does not take into account the prices of food and energy products that are not processed. This index is responsible for monitoring the evolution of prices of more ‘volatile’ components, such as fresh food, in the short term and in a specific country.
Harmonized CPI. This is the index that the EU uses to compare the CPI of different member countries. They use a common basket basis across the 27 states.
To calculate the consumer price index a mathematical formula is needed in which new prices are multiplied by the quantities consumed and divided by the same, but with the previous year’s data:
CPI = (new prices times new quantities) / (old prices times old quantities) multiplied by 100.
In Spain it is calculated on the basis of some 210,000 prices and with information from 29,000 establishments. All this information can be obtained by sending an official to each establishment, making phone calls and/or sending mail. Nowadays, and thanks to technology, it is possible to use automations to extract the necessary information through websites with software programs suitable for their function.
It may not seem like a big deal, but the data provided by the CPI are of great relevance. With them we can obtain an estimate of the consumption and quality of life of the entire Spanish population and evaluate how prices are varying. We can also find out which areas of the country are more expensive and where the cost of living is more expensive.
Among its functions are also that of wage clauses or updating rent and rental prices, a point that we will expand on below.
The fact that a country has a positive CPI means, therefore, that the cost of living is higher, which means that the shopping basket and the most basic foodstuffs will cost more. With this data, the State and companies should, in theory, adjust workers’ salaries or pensions so that the rise and fall of prices is adjusted to profits.
Updating the CPI rent
As we have commented, the CPI in Spain is the index used to regulate the rent increase, although it is not mandatory to use it. If a landlord uses it to update a rent, this process must be carried out every time the contract reaches 1 year. The value that was published 2 months before must be applied, so if that value is positive, the rent will increase and if it is negative, it will go down.
If you want to update the CPI rent it will be necessary to go to the INE web page and consult the value of this index to apply the corresponding increase or decrease, with the stipulated 2 months in advance, to the contract. When you have the figure, tell it to the tenant/s with whom you have the contract with 1 month in advance to the day in which it is due to pay the month.
With the new housing law, any rental contract that is in force and that is updated between April 1, 2022 and December 31, 2023 will have to be made with the limit imposed by the Government of 2% maximum. The purpose of this extraordinary measure is to reduce the effect of the CPI increase on leases. Let us take an explanatory example:
A family owns a house that rents for €1,000/month and its contract will be 1 year old on February 1. The increase of the monthly payment will have to be communicated to the tenants 1 month before (January 1st) and the increase will have to be calculated with the CPI of December 15th.
A family owns a house that they rent for €1,000/month and their contract expires 1 year on February 1. The increase of the monthly payment will have to be communicated to the tenants 1 month before (January 1) and the increase will have to be calculated with the CPI of December 15.
As the last published CPI (April) is applied, the rental cost will have to be increased by 3.30%. The rent will be €1,033 for 1 year. From that moment on, the same procedure will be repeated until the contract ends. It will be fundamental that in this one there is a clause in which it is specified that the rent of the apartment is increased according to the CPI. If not, the increase cannot be applied.
The housing reform and the recently approved change in the price of rents is due to the escalation of inflation, hence the increases in housing have been limited to 2% until December of this year.
The conclusions that can be drawn from this new reform are as follows:
- The rent update will have to be agreed between tenant and landlord, otherwise there will be no right to update the rental price until the end of the lease.
- It is bidirectional, which means that the rent cap can favor both the landlord and the tenant. However, it is our duty to communicate that, in most cases, it will favor the property.
- It is not automatic: you must expressly request it, as stated in article 18 of the Urban Lease Law.
- It is necessary to agree on the updating mechanism because if it is not indexed, the competitiveness guarantee index (IGC) in force in the month in which the contract is 1 year old will be used.
Is the CPI retroactive?
This is a matter of concern for many people who live in rented properties. According to the INE (National Institute of Statistics) the owner of a property can raise the accumulated CPI of the last 5 years. Tenants, therefore, would be obliged to pay whatever the landlord asks them to pay.
However, and this is the key, he will not be able to claim the arrears that have not been collected during the years in which the CPI increase has not been applied annually, for whatever reason. That is why it is said to be cumulative but not retroactive.
How can the updating of the rental price be requested?
Article 18 of the LAU specifies that this update must be notified in writing, indicating the percentage variation to be applied. This must contain:
- The index applied.
- The percentage variation.
- The final rent.
- The date of application.
The notice may be added to the receipt of the last rent payment prior to the upgrade but at this time nothing is known about the timing of the notice or how far in advance of the upgrade the notice will be given. It is usual for a notice to be agreed from one party to the other on the 1 year anniversary of the lease or in the preceding month.
What happens if the lease is terminated?
In this case, the tenant may negotiate with the landlord to increase the rent:
If the lessor has more than 10 urban properties for residential use (large tenant), the increase may never exceed 2%, but may be agreed between both parties.
If the landlord is not a large tenant, the rent increase may exceed 2% if both parties so agree. If there is no agreement, the increase can never be higher than the result of the application of the annual variation of the GICC (with a maximum of 2%).
It is also necessary to take into account that the contracts ending between December 28, 2022 and June 30, 2023 will be extended, if the tenant so decides, for 6 more months from the date on which they ended, with exactly the same conditions that had been in place up to that date. This extension will not apply, of course, if the landlord needs the house on a permanent basis (and if this has been encouraged in the contract):
- For him/herself.
- For relatives in first degree of consanguinity.
- By adoption.
- For the spouse (in case of separation or divorce).
We always recommend to be aware of any change or reform in this or any other area, especially if we have a business (as a boss or as self-employed) or own homes. If you need help with this type of management or simply do not want to be constantly worried, at Blegal we have more than 30 professionals at your disposal, both online and in person.
Whatever legal, tax or labor problem you have, you can count on us. We have a portfolio of services that includes property management and insurance brokerage. You can contact us if you have a specific question or need more information.
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