The 2% limit on rent increases, everything you need to know

If you have a rental property or are a tenant, you will be interested in knowing the news about the 2% rent cap. This is the latest measure from the Government regarding housing that affects the annual rent adjustment.

This measure of the rent adjustment cap, also known as the 2% rent ceiling or rent increase limitation (CPI rent 2022-2024), is part of the policies to control the rental price index in Spain. Its objective is to moderate the impact of the CPI on rents and the competitiveness guarantee index (IGC), especially in high-pressure areas like Barcelona, where the rental market has experienced strong price tensions in recent years.

What is known so far is that during the next 3 months, rental contracts for housing that are subject to the LAU (Law 29/1994, of November 24, on Urban Leases) and are due for an annual review, will have to limit the rent increase to 2%.

2% Rent Cap

This 2% rent adjustment cap is understood as an exceptional mechanism for containing the CPI applied to housing rents. In practice, it replaces the usual adjustment linked to the Consumer Price Index (CPI) or the Competitiveness Guarantee Index, directly affecting the calculation of rent in lease contracts regulated by the LAU, both in annual reviews and in renewals within the current regulatory period.

When is the rent updated?

Article 18 of the Urban Leases Law (LAU) states that during the term of the contract (before March 2019 it was 3 years and since then it is 5 years), the rent can only be updated on the date that marks each year of the contract’s validity and as agreed by the parties.

Will the increase affect all rents?

No. For the rent increase to be applied, it must be indicated in the contract. If nothing is mentioned in the contract, the rent adjustment will not be applied. But if it does appear, it will only be updated according to the annual variation of the Competitiveness Guarantee Index (IGC), which as mentioned is capped at 2%.

Let us remember that the Competitiveness Guarantee Index (IGC) is the corrected figure of the Consumer Price Index (CPI) of the Eurozone. To calculate it, the average CPI in the Eurozone countries is taken into account, which stands at 2.02% after its latest publication in March.

In the current context of the real estate market, this index serves as a key reference for the calculation of rent in Spain, especially when discussing rent updates or comparisons with the 2022 rental CPI Spain, avoiding sharp increases in annual rent and providing greater stability for both tenants and landlords.

What happens then with rents? Typically, they are updated each year according to the CPI. However, Article 18 of the LAU confirms that the limit would be 2%, so it would only be necessary to adhere to that increase regardless of whether the CPI is 7% or 10%.

Does it affect small landlords or large holders?

This measure also affects small landlords, but only if there is an agreement between the parties, as they can agree on this rent increase when there is a review. But they can also agree not to raise the rent. In the case of not reaching an agreement, the limit of the increase will be 2%.

When did the measure to limit the rent increase come into effect?

It came into effect on the Royal Decree-Law 6/2022 of March 29 and was published in the Official State Gazette (BOE) on Wednesday, March 30, 2022. Considering that it is deemed to come into effect the day after its publication, the start date is March 31, 2022. It is also contemplated until June 30, 2022.

What happens if the rent of the property is updated before or after the cap?

As we move from March to June, it is normal for landlords and tenants to wonder what will happen to the rent if it coincides with a review period before or after the cap. While it is true that the tenant can request that the 2% be applied, it would need to be negotiated.

How many rentals does the measure affect?

According to the INE (National Institute of Statistics Household Survey), there are more than 3.5 million rentals in Spain. The Government has estimated that it would apply to 1/4 of them, which amounts to about 875,000 contracts.

Let us remember that it will affect contracts that need to update the rent during this specific period, between March 31 and June 30. The others will be exempt.

Does it represent a loss of liquidity for owners?

Yes. If we take into account the data from the Idealista portal, using as a reference that it will affect about 875,000 rental contracts, this could have a economic loss for owners of 560 million euros in the next 3 months.

Does it only affect homes?

Yes. Commercial premises or garages are exempt from the 2% limit. That is to say, it is a measure that only affects homeowners, so they will not have to face a possible loss of liquidity in the case of other types of rented properties.

What will happen starting July 1?

All eyes are on what will happen from that day. Let’s say that, on one hand, it is expected that everything will return to the situation we had before this new measure came into effect on March 31. However, the general director of the Rental Negotiation Agency states that we will see the measure extended beyond June 30. So we can only wait to confirm it.

Does it have retroactivity?

In the BOE there is no reference to possible retroactivity regarding the measure. It mainly states that it will affect rental contracts whose rents need to be updated within the period from March 31 to June 30, 2022. Therefore, it will only affect the rentals that are due for review at that time.

Those that are updated outside will do so under different conditions. For example, if the review is in March, it will be updated with the variation of the CPI. Starting in July, we will see if this measure disappears and everything returns to normal or if it remains in effect and under what conditions.

What happens if the owner forgets to apply this increase?

It is another common question and it should be noted that the update in the price takes effect from the communication and can be done at any time after the year of the contract has been fulfilled. If the owner forgets and demands it 3 months later, the new price will take effect in the fourth month and the tenant cannot be asked to pay the arrears.

Do you have any other questions about the 2% limit on the update of rental prices? At our real estate agency in Barcelona, we will be happy to help you resolve all your doubts. We look forward to seeing you.