Buying and leasing a property or business in Spain.

The purchase of a property or business in Spain is a twofold transaction which requires (i) a valid contract or title; and (ii) the effective transfer of the asset to the purchaser, which may or may not take place simultaneously. Although the parties concerned may agree that the assets be transferred at a later stage, the existence of a purchase contract will give the purchaser a legal right to acquire the asset.

The purchase of an operating business is a more complex transaction, since it usually involves the direct acquisition of its assets and liabilities or their indirect acquisition by purchasing the shares of the company that runs and owns the business.

Prior to signing a valid and binding contract, and depending on the complexity of the proposed purchase, it is usual to enter into a preliminary agreement in order to obtain exclusivity in negotiations. This allows the purchaser to review the legal position of the property or the business and to assess whether the property or business is suitable (“Due Diligence”).

Due Diligence of a property usually requires various checks to be undertaken: a Land Registry check on the ownership title and charges, a check on the tenancy status and zoning obligations of the property, and a check whether the property benefits from all the necessary licences required to operate the relevant business. Due Diligence of a business also requires a careful analysis of the level of indebtedness assumed by the current owner and whether he has met his obligations with regard to: labour and social security, Corporate (if a corporation) or Personal (if a businessman) Income Tax, related taxation, corporate structure and intellectual property matters.

While this preliminary stage is ongoing, letters of intent have become the usual method of confirming the undertaking by both the buyer and seller to maintain negotiations and to establish the terms that determine their negotiations. As letters of intent are deemed to be binding undertakings between the parties concerned, it is advisable to confirm exactly which clauses of the letter of intent are binding undertakings and those which are mere commitments to negotiate.

BUYING A PROPERTY

When buying a property, there are other forms of preliminary agreements that have become usual practice in Spain:

Promise to purchase and sell

Both parties may promise each other that they will enter into a contract of sale and purchase regarding the property, if they agree on both the property and the price. The breach of the promise agreement by either of the parties shall not entitle either of them to claim the transfer of the property, but only (i) the execution of a contract of purchase and sale or, alternatively (ii) to terminate the promise agreement, with the right to seek redress from the other party.

Option to purchase

By granting an option to purchase, the seller irrevocably undertakes to sell the property under the agreed terms and conditions, whereas the purchaser is granted the option of demanding enforcement of the contract on any day within a specified term. If the purchaser exercises his option, this, together with the grantor’s irrevocable undertaking to sell, will qualify as a contract.

If the purchaser’s interest in the property is serious, the parties concerned may skip the preliminary stage and enter into a private purchase and sale agreement whereby they agree on both the terms of the purchase and sale and the date when the transfer of the property to the purchaser will take place. This contract may also be conditional on the seller or purchaser meeting certain requirements.

One very common variation of the purchase contract is the “Contrato de Arras Penitenciales” where the purchaser offers a down payment to the seller – a percentage of the purchase price (normally 10%) – and the parties concerned grant each other a right to rescind the purchase. In the event that the purchaser rescinds the contract, he may then lose the amount offered as a down payment, whereas if the seller rescinds the contract, he will be bound to refund the purchaser twice the amount offered as a down payment.

The transaction is then completed by executing a “notarial deed of purchase and sale” (“Escritura Pública de Compraventa”), which also qualifies as a form of effective transfer of the property.

In order to render the purchaser’s title enforceable vis-à-vis third parties, it is then usual and strongly recommended that the notarial deed is registered with the Land Registry.

Regarding the taxes, the purchase of a property directly from a land or building developer (unless the developer has used the property continuously during the last two years) and where they are either a company or a businessperson, is subject to VAT. The standard VAT rate is 16% for commercial property and a reduced 7% rate applies to residential real estate.

Subsequent purchases are VAT exempt but remain subject to Transfer Tax at a rate that currently varies from 6% to 7%, depending on the Autonomous Community where the property is located. However, the seller can waive this exemption, and charge VAT on the sale if the buyer is a businessman or professional (i.e. a taxable person) and is entitled to deduct all the VAT. Transfer Tax is imposed on the purchaser and is not a recoverable tax.

The transfer of properties that are subject to VAT are also subject to Stamp Duty Tax at a rate that varies from 0.5% up to 1.5%, depending on the Autonomous Community where the property is located.

Whenever urban land is transferred, the seller must pay tax on the increase of the value of that urban land. The tax base is calculated as an annual percentage of the cadastral (official) value of the property in question at the time of transfer. The tax rate applicable varies depending on the municipality and ranges between 10% and 30%.

BUYING A BUSINESS

The contents of the business purchase agreement will, of course, depend on whether it is structured as a purchase of the shares of the corporation that runs the business or as the acquisition of all or part of the assets and liabilities that form the business itself.

Generally, it will depend on the outcome of both the Due Diligence process and the financial undertakings and conditions imposed by the bank to finance the purchase. Usually, these will help the purchaser draw up a list of things that need to be done by both the seller and purchaser prior to completion, and establish any representations and warranties that should be sought from the seller.

It is worth noting that when the purchase consists of the acquisition of the assets and liabilities that form the business, Section 72 of the General Tax Act stipulates that the purchaser of a business takes on the tax debts of the former owner of the acquired business. Likewise, Section 44 of the Workers’ Statute stipulates that the seller and purchaser will be jointly and severally liable for past labour and social security obligations for a term of three years.

What happens next can vary. Usually, the parties concerned then agree on a private purchase agreement whereby they outline conditions (for each of the parties concerned) prior to completion. They also agree on both the specific assets and liabilities to be transferred and the representations and warranties to be made by the seller, plus the relevant indemnification procedures in case of misrepresentation. Moreover, it is worth noting that the making of loans and the provision of security by the target company in order to finance the acquisition of its shares by a third party is prohibited under Spanish law .

The parties concerned will then complete the transaction by executing a public notarial deed of the transfer of shares of the corporation or of its assets and liabilities.

It is worth noting that (i) the purchase of shares is tax exempt unless the value of the corporation’s real estate assets is more than 50% of the overall asset value. In such a case, transfer will be taxed at a rate ranging from 6% to 7% over the purchase price (Transfer Tax), whereas (ii) the purchase of the entire business itself would be taxed under VAT (at the rate of 16%) and Stamp Duty Tax (at a rate varying from 0.5% to 1%), unless the purchaser intends to continue operating the business without excluding any of the assets attached to the business, in which case it would be taxed under Transfer Tax, at the rates mentioned above.

LEASING A BUSINESS PREMISES

The leasing of a property for business or commercial purposes is referred to under Spanish law as “leases for use other than dwelling”. Spanish law sets out a legal structure for commercial leases, which applies if there is no specific agreement between the two parties concerned. However, it is usual practice to avoid these provisions by specifically agreeing on the terms and provisions of the lease.

The provisions that apply if a specific agreement between the parties is not in place are:

(i) the Landlord’s obligation to maintain the premises fit for their use and the Tenants’ obligation to perform on-going maintenance of the premises.

(ii) the banning of the tenant from carrying out works in the premises.

(iii) the freedom to assign and sublet, subject to an increase in rent.

(iv) the tenant’s right of first refusal to purchase the premises.

(v) the retailer’s right to be indemnified at the end of his tenancy for the goodwill acquired, if any, by either the landlord or the next tenant.

The lease term may be freely agreed upon by the parties concerned. The usual lease terms in Spain vary depending on the type of business to be conducted in the premises, and they range between 5 to 10-15 years (ie bars and small restaurants) or 15 to 25 years (ie big restaurants and hotels).

The parties concerned may also freely agree on the rent. They usually agree that this will be annually adjusted in line with the Consumer Price Index (Índice de Precios al Consumo, IPC), as published by the relevant government body.

Depending on the term’s length and the type of business, the lease agreement may also provide that the rent is reviewed after a certain period, in order to update it to the open market rate at the time.

Also, the parties may agree that the Tenant pays the Real Estate Tax, whereas payment of Business Tax levied on the Tenant’s activity rests with the Tenant.

Property and damage insurance are also usually included in lease agreements.

It is worth noting that, whereas the parties may freely agree on any guarantee relating to the rental payments, in commercial leases the tenant is required to pay the landlord a legal deposit equivalent to two (2) months’ rent. The landlord then has to deposit this, by law, with the appropriate regional authorities.

Commercial leases are subject to VAT at a rate of 16%.

LEASING OF A BUSINESS

As well as leasing a property in which to operate a business, it is also possible under Spanish law to lease the business itself, the so called “arrendamiento de industria”.

This form of lease is governed by the general civil provisions on leases and by the parties’ freewill.

Usually, business leases lead to a very customised contract that focuses its attention on the specific nature of the business and, particularly, on the revenues and operating expenses relating to that business.

This is common practice in the hotel industry, where the hotel owner usually leases the business to the operator and establishes a rent which combines both a fixed part and a variable part, depending on the performance of the business.

Business leases are subject to VAT at a rate of 16%.

During the process of buying a business, prospective purchasers are advised to seek timely advice from appropriate professionals and specialists (eg accountants, solicitors, valuers, surveyors, business agents, business finance brokers, stocktakers, etc). Reading this section of the website in no way obviates the need to seek such advice or find out the latest information.

Christie + Co accepts no responsibility or liability for any loses incurred in any business venture or other investment conducted by the reader whatsoever.

Contact us with your enquiries about buying a business in Spain