Compensation demolition Andalucian home owners in good faith
Last 24 June, the Senate approved an amendment that provides greater protection to third-party homeowners acting in good faith in administrative proceedings. This amendment was approved with the favourable votes of the main political groups and introduces a third paragraph in article 108 of Law 29/1998, of 13 July, which regulates contentious-administrative proceedings in Spain.
This new third paragraph provides that: “The Judge or Court, in the cases where, in addition to declaring the construction of a property to violate regulations, it issues a reasoned order to demolish the works and restore the physical reality altered, shall require, as a condition prior to demolition and unless a situation of imminent danger prevents it, the provision of sufficient guarantees to respond to payment of compensation due to third parties acting in good faith.”
In other words, with this paragraph, it is guaranteed that the judge ordering the demolition of a building in administrative proceedings must ensure, prior to the demolition, that third parties acting in good faith that will be damaged by the demolition of their homes will receive compensation. This means that, what this new subsection regulates is that a home may not be demolished if the homeowner cannot be compensated in advance, as it is understood that the homeowner has no reason to suffer these damages when the party responsible for the unlawful act committed by building the home was someone else.
The approval of this new subsection equates the handling of the enforcement of judgments on buildings, which entail their demolition, in administrative and criminal proceedings since, as we explained in our article from March, the criminal code has also been amended in this sense.
The amendment in the administrative field, which gives greater protection to third parties acting in good faith, is even more logical, from a legal standpoint, than the one in the criminal field and, needless to say, represents the correction of a regulatory mistake that resulted in great injustice.
It should be noted that, in contentious-administrative proceedings, courts examine building licences granted by the City and which have been unlawfully granted due to being contrary to the plan of the municipality.
Before this amendment, when a judgment nullifying a licence of this type was handed down, usually, one of the consequences of this nullification was the obligation to demolish the works completed under the licence declared null, without compensating homeowners acting in good faith at the time of demolition in these proceedings. The only option for these homeowners was to start different judicial proceedings either against the City or against the seller of the property, which could take years to be solved and provided no certainty of recovering the investment made. We can thus prevent cases as regrettable as that of Mr and Mrs Prior.
We can affirm that, in judicial proceedings related to buildings, both in the administrative and criminal fields, thanks to these legislative amendments, homeowners who purchase or will purchase a property in good faith, not being responsible for any unlawful act, will enjoy greater protection of their assets and property rights.
Part of what we denounced and explained in an article published in 2013 has been addressed by these changes, even though there is still some way to go and more legislative changes are expected.
This legislative amendment, as the one introduced in the criminal code in March, has been made possible thanks to the work of several associations of people affected from many different areas in Spain, including: AUAN, AMA and SOHA. The continued and persistent work of these associations, their representatives and the lawyers involved have made it possible for all homeowners in Spain who are third parties acting in good faith to enjoy greater legal certainty.
Yesterday Thursday 26 March, the Lower House of the Spanish Parliament ratified the amendment to article 319 of the Spanish Penal Code, approved by the Senate last 12 March. A paragraph has been added to section 3, which reads: “In any event, the Judges or Courts of Law may issue a reasoned order to demolish the works and restore the physical reality altered at the expense of the principal thereof, without prejudice to the compensations due to third parties in good faith, and, assessing the circumstances and after hearing the competent government body, shall temporarily subject the demolition to the constitution of guarantees that ensure their payment. In any case, the seizure of the earnings from the offence shall be available, regardless of the transformations that these may have undergone”.
This new regulation will be into force next 1st July.
Until now, in proceedings regarding an Offence against Town and Country Planning, the judgment ordered the demolition of what had been built illegally and compensation was set by way of civil liability for the developer, in favour of buyers acting in good faith. The problem is that, in most of these cases, collecting said compensation was very complicated since the developer was either insolvent or had disappeared. However, enforcement of the demolition was not stopped, for which reason we could find ourselves before an unfortunate scenario where a buyer acting in good faith and recognised in a judgment could have his home demolished without being effectively compensated.
From now on, in criminal proceedings for Offences against Town and Country Planning, the judge may stop the demolition of the home until due compensation to the third-party acting in good faith is guaranteed.
From the literal wording of the amendment introduced, it seems that the judge will be the one who, after assessing the specific situation in each case, will stop said demolition, for which reason I understand that it will be an essential requirement to prove that the buyer is really a third party acting in good faith.
Likewise, it seems interesting that, in assessing whether to stop the demolition, it is required for the competent Government Body, which I take to be the City Hall, to be heard in the proceedings. I suppose that, in these cases, the City Hall can provide relevant details leading to stopping the demolition. Also, since the City Hall is the one responsible for executing the demolition, it may argue on the suitability of stopping it until it can ensure compensation for the third party acting in good faith.
Lastly, this amendment refers to stopping the demolition temporarily, i.e., a specific period of time is not established but, in any case, it should not perpetuate over time. However, the concept of “temporarily” is very wide and it may be interpreted as sufficient time to guarantee compensation to buyers acting in good faith.
I can say, with full knowledge, that this amendment of the Penal Code has been possible mainly thanks to the work of two associations in Andalusia that have been working on protecting buyers acting in good faith for several years: SOHA and AUAN, especially noting the great work done by Gerardo Vázquez, a colleague of mine, attorney and legal adviser at AUAN. The efforts of these organisations and their mobilisation have made this amendment possible.
The aforementioned organisations, along with many others that have been created, are justified by the great problem faced in Andalusia, which has 300,000 homes built in non-developable land (NDL). On the Andalusian coast, due to foreign residential tourism, many buyers are foreigners and this has led these owners, facing the legal problems with these homes, to move to defend their interests, to strengthen and to tell authorities about the existing situation.
The main problem, at least in Andalusia, has been the complete inactivity and inefficiency of Urban Planning in Andalusia, which has led to a failure in regulating non-developable land in Andalusia and to the existence of many homes built on non-developable land.
Regulations with very fixed and strict criteria governing construction on non-developable land were approved. However, Autonomic and Local Governments have completely neglected to provide the necessary oversight to enforce these regulations.
From the beginning of the years of the housing bubble, the competent government bodies have shown no predisposition to initiate and solve disciplinary procedures against offenders, with all the legal consequences that this entails, such as demolishing what has been illegally built. The governing party in City Hall should have assumed the “feared” political price that these unpopular measures may have entailed.
Most of these buildings have everything: registered deed, pay IBI (Property Tax), are registered in the Property Register, have electricity and water, and have paid autonomic taxes such as ITP (Tax on Asset Transfer) and AJD (Stamp Duty).
Many of the properties have changed owners, meaning that the person responsible for construction is no longer the owner of the home. When these properties enter legal proceedings, third parties acting in good faith appear, affected by this situation that the Local and Autonomic Governments, with full knowledge, have allowed due to their complete inaction in the field of Urban Planning.
The regulations provided in the Urban Planning Law of Andalusia (LOUA) to govern the very strict use of non-developable land were based on environmental protection and on maintaining the rural value of a large portion of the Andalusian territory so as to preserve this environment and its values.
However, its lack of application due to a lack of real and effective control of what was being done on non-developable land has given rise to the failure of regulations on the use of non-developable land provided in the LOUA.
In reality, this has resulted in large rural areas becoming full of unregulated buildings, achieving the opposite effect, as the lack of protection of the rural environment is clear in these cases.
In practice, a total lack of protection of rural land has occurred in some areas under greater urban pressure, where, without controls or any type of criteria regarding what was being built at the architectural level, construction has been allowed, of palaces, warehouses, terraced houses, one-storey homes, towers and everything in between. There has also been no control of the necessary infrastructure or facilities for these homes to be used: discharge of sewage, illegal wells to obtain water, etc. Furthermore, many of these homes did not pay local building taxes, as the majority were not eligible to obtain a licence under the LOUA.
However, as we explained in a previous post, it should be noted that, in some cases, the licenses for segregation, building and initial occupancy were indeed granted for some of these homes. The fact that the Government is responsible in these cases is more than obvious and the damages suffered by owners, who purchased the homes in good faith, are completely reprehensible.
This situation of deregulation of non-developable land has an undesirable effect on citizens, as there is a feeling that there are citizens who ignore the law and go unpunished and that there are others who are required to comply with it.
If the urban planning disciplinary proceedings had been started quickly and efficiently at the beginning of that frenzied period of real estate development on non-developable land, the message that citizens would have received would have been very clear and many buildings would not have been built. There would still be homes on non-developable land but the magnitude of the problem would be quite different.
Faced with this situation, the legal response to solve this problem should be consistent with the reality that exists and that has been tolerated by the Government itself for so many years. This is why the necessary legislative reforms in this area must be tackled rigorously and without propaganda messages, avoiding a focus on the debate on “amnesty for everyone” or “offenders must pay” because the situation is much more complex.
In the administrative field, the majority of these homes should be regularised as, in many cases, penalties for using land illegally would have expired and many of the developers-builders are not the current owners.
In the future, there should be a debate regarding the effectiveness and efficiency of Urban Planning under current regulations, as well as regarding whether the regulation of non-developable land in the LOUA is adequate for the purpose it intends to fulfil.
Next 1st of January 2015, a new tax reform will come into effect. This reform was approved in August by the Spanish Government and, among other measures, it will affect taxation of capital gains obtained as a result of a property sale in Spain:
1) Tax reduction from 21 % to 20 % for capital gains earned by a sale if the seller is non-tax resident in Spain.
2) Tax reduction from 21 %-27 % to 20 %-24 % for capital gains earned by a sale if the seller is a taxresident in Spain.
In these terms, it may seem that, from the 1st of January 2015, taxes for capital gains earned by a property sale will be reduced. However, you should be careful with this reform, since from the 1st of January 2015 sellers of a property may not be enable to apply reducing and updating coefficients of the purchase value when the property was bought.
You may wonder what it means; and it means that heretofore if you bought a property and then you sold it, when calculating the capital gain from the sale, you could update the price paid when you bought the property a few years ago, however, from 2015, this purchase value will not be allowed to be updated. For example:
You bought a property by public deed for 150,000 Euros in 2003 and now it is on sale for 200,000 Euros.
1 ) IF YOU ARE NON-TAX RESIDENT IN SPAIN
– if you sell your property in 2014: the updated purchase value would be 177,540.00 Euros and 4,716.60 Euros should be paid for taxes as a result of a capital gain of 22,460.00 Euros taxed at 21 % rate.
– If you sell your property in 2015: the purchase value would be 150,000 Euros (no update is allowed) and 10,000 Euros should be paid for taxes as a result of the capital gain of 50,000 Euros taxed at 20 % rate.
2) IF YOU ARE TAX RESIDENT IN SPAIN
– If you sell your property in 2014: the updated purchase value would be 177,540.00 Euros and 5,375.00 Euros should be paid for taxes as a result of the capital gain of 22,460.00 Euros obtained.
– If you sell your property in 2015: the purchase value would be 150.000 Euros (no update is allowed) and 10,880.95 Euros should be paid for taxes as a result of the capital gain of 50,000 Euros.
As shown by these examples, tax savings when selling your property in 2014 or from the 1st of January 2015 may be worthy of consideration.
Other examples of updated values with the same prices above: if you bought the property in 1995, the updated value in 2014 would be 210,750.00 Euros; then, you should not pay taxes for capital gain if it is sold in 2014 and you should pay 10,000 Euros for taxes if it is sold in 2015.
If you bought the property in 2013, the updated value in 2014 would be 154,454.00 Euros, then if you sell it in 2015, you would pay less taxes than selling it in 2014; however, this a small saving between 400-700 Euros according to whether the seller is a non-tax resident or tax resident in Spain.
In these examples, neither deductible expenditures (taxes, notary, registry and estate agent fees, etc.) have been taken into account, nor other possible deductions to which fiscal residents may be entitled.
CONCLUSION: if you are thinking about selling your property in Spain, you will probably be interested in doing itbefore the end of 2014, you will avoid paying more taxes for the profit obtained on the sale.
If you have recently bought a property or the sale price is very similar to the purchase price, you may be interested in selling it from 2015, as there is not a great difference regarding taxation. If you are selling at a loss, that is, you obtain no profit, it makes no difference whether selling it this year or the following.
Nevertheless, the most coherent decision is to make your own tax estimation for your particular case in order to know whether it is more convenient to sell this year 2014 or not, so you will have a clear idea of your possible tax savings.
The cadastre is a compulsory administrative register which depends on the Ministry of Finance. It keeps the description of rural and urban properties as well as properties with special features. This register has nothing to do with the Land Register, where registrations are voluntary and legally prevails over the Cadastre.
Cadastral registration by property owners is compulsory, as provided by Article 11 of Spanish cadastral law Ley del Catastro Inmobiliario; that is, title holders to the properties shall declare before the Cadastre Office any variation or modification as for example: conveyance, new constructions, land partitions and additions and any other necessary information so that cadastral descriptions of properties are in accordance with the facts.
Consequently, owners’ obligation to adapting the physical reality of the property to the cadastral facts is clear.
Articles 70 and 71 of the Spanish law Ley del Catastro set out the rules on infringements and penalties, so that “failing to submit declarations, submit them after deadlines or submitting false, incomplete or incorrect declarations” may be considered an infringement punishable by a fine from 60 to 6,000 Euros. To date, we have no evidence that the Cadastral Register is penalizing owners for failing to submit the necessary declarations, although these are not submitted.
The problem that we have noted is that the Cadastral Government Office in Malaga refuses to accept modifications on properties built on non-developable lands and requested by owners or their legal representatives, despite it is deemed that the documents legally required has been submitted for these proceedings. We reiterate that the Cadastre is a compulsory register and as a result it is important to be taken into account.
As far as we understand, the Cadastre systematically refuses some variations and modification on non-developable lands; consequently, it is requested additional documentation which we consider to be unnecessary and should not be demanded according to Spanish law. In view of this situation, which we understand that is not applicable to law, our law firm has filed complaint actions against different administrative proceedings, which are pending to be resolved by the Economic Administrative Court of Malaga.
If owners are obliged to declare their property modifications or variations before the Cadastral Register Office and their legal documents are provided, what is their responsibility if the Cadastre denies their request or asks for further documentation that owners do not have?
From our point of view, the fact of requesting the cadastral variation or modification providing the necessary documentation should exempt owners from any infringement imposed by the Cadastral Register, since they did their best to adapt the physical reality of their property to the cadastral facts.
On the other hand, the Minister of Finance approved last year the cadastral regularization procedure 2013-2016, by which the Real Estate Cadastre intents to incorporate ex-officio urban and rural properties with constructions, as well as any variations of their features, so that these properties are recorded in the Cadastral Register and the Spanish property tax IBI may be collected.
In Malaga, just a few municipalities has acceded to this procedure, by which owners are requested the payment of a 60 Euros fee to carry out this regularization, although it is probable that other municipalities also accede to this procedure in the following years.
To sum up, and despite the existing difficulties to register in the Cadastre some modifications or variations, we advise owners to check if their property is correctly registered in the Cadastre, so that they may request before this register office the necessary modifications and variations to adapt the physical reality of their property to the cadastral facts. As a result of this action, they will avert potential problems.
Spanish Plusvalia tax with decreased value property
Currently, as a result of the existing conditions of real estate market, the sale price of a real estate property may be below the purchase price or slightly above it.
As regards of these situations and in connection to taxes to be paid when selling a property in Spain, it is necessary to clarify that the increase in urban land values is the first element of the taxable event of the local tax on the increase in urban land values (Spanish acronym I.I.V.T.N.U.), commonly called PLUSVALÍA. Thus, in the event of no increase, no tax may be applied, despite the content of the objective rules for the calculation of the tax provided by Article 107 of Spanish law regulating local taxation (L.H.L.), since no tax liability may arise when an essential element of the taxable event is missing.
The legal liquidation system does not preclude that the taxpayer proves in the specific case that the application of the calculation methods by the Tax Administration leads to unrealistic results. On the other hand, regarding the formula of Article 107 L.H.L., the Supreme Court ruling dated 22nd of October 1994 was conclusive when maintaining that this article was subsidiary, defending and safeguarding taxpayers. According to this Judgment “legal regulations only provide a rebuttable presumption, which is subject to be distorted in each particular case by appropriate and sufficient evidence in the above terms for the taxpayers and in conformance with the provisions of Article 385 of the Spanish Civil Procedural Law. This reasoning, in regards of the actual increase in value(plusvalía) from property sales leading to non-taxation, was also highlighted by the Supreme Court in the Judgment dated 29th of April 1996 and the Judgment dated 22nd of September 2001.
However, a recent Judgment from the High Court of Justice of Catalonia dated 18th of July 2013 also pronounces undoubtedly the fact that town councils cannot charge the plusvalía tax in the event that it does not exist, since the Judge states that when an essential element of the taxable event is missing –as for example obtaining a profit from a property sale—no tax liability to pay plusvalía tax may arise.
Recently, it is being confirmed an increase of court rulings admitting taxpayers’ appeals against tax liability in the event of loss of assets. In the words of Pablo Chico de la Camara, Professor of Financial and Taxation Law: “the caselaw of the Constitutional Court confirms the impossibility to tax a nonexistent taxable wealth by the local authorities”. This situation may occur when the transferor may certify the loss of assets on the occasion of a land conveyance. It is clear for the Supreme Court that the nonexistence of increase in land values precludes the application of the Plusvalía tax.
To sum up, the objective absence of increase of land value may lead to non-taxation, as a result of the nonexistence of the taxable event, since the legal contradiction cannot and should not be resolved in favour of the “calculation method” and to the detriment of the economic reality. Consequently, it would mean the ignorance of the principles of equity, justice and economic capacity.
These same conclusions shall be applied when an increase of the value occurs and the amount of this increase is proved to be lower than the result of applying this calculation method, being the same principles infringed.
These conclusions, which are already supported by several doctrinal criteria and caselaw, shall be considered as unquestionable at present, in view of the aforementioned economic reality.
In SHORT: when it is certified and proved in a specific case that there has not been an economic and actual capital gain from a property sale, the payment of the Plusvalia tax (I.I.V.T.N.U.) shall NOT be required by town councils.
But the reality is that Town Councils are still requiring the payment of this tax despite properties are sold at a loss, so that the judicial procedure is the only chance in this case for taxpayers to “tackle” the payment of this tax. However, when the resulting plusvalía tax payment is relatively low, it is not worth taking legal actions, due to legal costs.
For those who decide to claim, we understand that there are sufficient legal and solid arguments to obtain a favourable judgment.
Author: Francisco Delgado Montilla, C&D Solicitors (lawyers)
Torrox-Costa (Malaga/Costa del Sol/Andalucia)
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