Grace period and substitution of tent for works

Written by: Pelayo de Salvador Morell.

30/03/2014 | Management of real estate assets

Analysis of the differences between two different options for setting the rent when a tenant has to carry out works: rent free (a period without paying) or rent substitution for works (payment in kind).

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Grace period and substitution of tent for works

As the lease is defined in Article 1.543 CC, "In the lease of things, one of the parties is obliged to give the other the enjoyment or use of a thing for a specific time and a certain price". Although these two issues are defining elements of the lease contract (temporality and onerousness), it is possible to configure many issues to adapt them to the needs of the parties, making it always advisable to seek professional advice when leasing a property.

In this entry, we will analyse two possible rent regulations that have very different repercussions: rent exemption and the substitution of rent for works.

Grace period

In leasing contracts for offices, commercial premises or industrial buildings, it is common to request, at the beginning of the contract, a period in which the rent is not paid, as the tenant usually has to carry out some works on the property to adapt it to his needs and brand image. This is especially because the tenant will not be able to exploit the property (because he is adapting it to his needs).

During the rent-free period, the lessee is not obliged to pay the lease rent.

Although it is more common in the aforementioned leases, there is no obstacle to also applying it to residential leases, especially when there are certain circumstances that make it difficult for the tenant to enter the property (the utilities need to be connected, the tenant wants to make some modification, paint the property, etc.).

In addition, it is necessary to highlight two key points about the lack of rent:

  1. Although the lack of rent is always justified by the need to do something that prevents the use of the property, it should be noted that it does not oblige the tenant to carry out any work or action to remedy the alleged defect.

  2. As a consequence of the above, the rent-free period is not necessarily linked to the actions that have to be carried out, so that deviations in cost or duration do not serve to justify modifications in the deficiency.

Therefore, the rent deficiency is a period of the rental contract in which the obligation to pay rent does not arise because both parties have so agreed, but this lack of accrual is independent of the actions to be carried out by the tenant and their result.

Substitution of rent for works

Similar to the non-payment of rent in terms of its economic effects (there is no obligation to pay rent in money), but totally opposite in its legal effects, is the substitution of the payment of rent by the obligation to carry out certain works.

Although this regulation was already possible, configuring a complex contract with mixed obligations, as in the case of "ad aedificandum" rental contracts, Law 4/2013, on measures to promote and make the housing rental market more flexible, included a new paragraph 5 in Article 17 LAU, which expressly contemplates this possibility:

"5. In rental contracts it may be freely agreed by the parties that, during a specific period, the obligation to pay rent may be totally or partially replaced by the tenant's commitment to refurbish or rehabilitate the property under the agreed terms and conditions. At the end of the lease, the lessee may in no case request additional compensation for the cost of the work carried out on the property. Failure by the lessee to carry out the works in accordance with the agreed terms and conditions may be cause for termination of the lease and the provisions of Article 23.2 shall be applicable."

In these cases, it is not a matter of not paying rent for a period of time, but of the rent being paid in kind, by carrying out works: we are moving from a "do ut des" configuration - I give (flat) so that you give (rent) - to a "do ut facias" - I give (flat) so that you do (works).

Therefore, the works are the tenant's consideration in the lease. For example, if you want to carry out works valued at €10,000 and the agreed monthly rent is €1,000, the tenant will assume the cost of the works and will compensate the works paid with the rent, not having to pay the landlord for 10 months.

In order to avoid problems that may arise regarding the interpretation of the works, we understand that the contract must include at least the following points:

  • Detailed plans of the result

  • Budget of execution

  • Specifications of the quality of the work

  • Deadline for execution

  • Obtaining the relevant licences

  • Who assumes possible price deviations.

All of the above is necessary to define the obligation correctly. Otherwise, it is very likely that the parties will not be able to agree once the works have been carried out. It should be noted that:

  • The lessee's obligation is, at least with regard to the works, an obligation of result: he has to complete certain works. 

  • At the end of the lease, for whatever reason, the lessee cannot ask for payment of the cost of the works carried out, as he would be asking for the payment of the rent to be returned to him.

  • Finally, and precisely because the carrying out of the works constitutes payment in kind of the rent, non-compliance is grounds for eviction.

As far as taxation is concerned, the landlord, although he does not receive any money for renting the flat, is benefiting from the works carried out by his tenant, so he must pay tax on the rent derived from the replacement: he is receiving income in kind.

Main differences

As a result of the above, we can highlight the following main differences between the two kinds:

Grace period

  1. There is no obligation to pay for a period of time.

  2. Period is usually short (2-3 months at most).

  3.  There is no obligation of result.

  4. It is usually requested by the tenant, because he/she has to adapt the property to his/her needs.

Substitution of rents

  1. The obligation to pay is replaced by the obligation to carry out works.

  2. The period will be the period necessary to compensate the rent with the works.

  3. There is an obligation of result.

  4. It is usually requested by the landlord, who wants an investment to be made in his property.

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