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Spanien
Spain – Gender Equality – New obligations for Companies
27 Juli 2019
- Arbeit
Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, even though it affects and produces effects in many different legal fields, does not include any reference to contracts for leases of real estate, or houses, premises or offices.
The purpose of this note is to analyze the effects of the situation of the State of Alarm regarding those leases of offices or premises that have been forced to close in application of the decree; those others that remain totally or partially open and in operation, although with a reduced or minimal activity, in principle are not subject to the conclusions reached below without prejudice to the fact that there are individualized cases to which, despite the fact that there is not a complete closure, reasonably and logically can be applied to them.
It is not excluded in any way that in the event of an extension of the validity of the State of Alarm, a regulation that affects the leasing contracts could be published, but for the moment this has not happened. If this were to happen, the content of said norm would apply.
Based on the principle of freedom of covenants enshrined in art. 1255 of the Spanish Civil Code, which allows the parties signing the contract to agree (i) what scenarios and situations should be considered as constituting cases of Force Majeure and Act of God and (ii) what the contractual consequences of such scenarios should be, the first exercise that must be done is to check if the contract includes a regulatory clause of Force Majeure and its effects; if so, such clause must be followed and its analysis is left out of this note.
In the absence of express regulation in the contract, the provisions of the Civil Code and specifically article 1105 would apply.
COVID-19 as Force Majeure
COVID-19 is an event that in principle meets the requirements of the Civil Code to be classified as an event of Force Majeure (art. 1105 Civil Code) since:
- It is a foreign act and not attributable to the contractor who is the debtor of the benefit or obligation.
- It is unpredictable, or if it were said to be „predictable“, it is certainly inevitable.
- The event in question, the pandemic, must be a cause and result in the breach of the obligation, that is, there must be a causal link.
Therefore, fulfilling the three requirements, the first conclusion that we reach is that very foreseeably, the Spanish Courts will classify as “Force Majeure” the situation caused by COVID 19 when a judicial dispute is raised in which such matter is discussed between litigants. We will now analyze the consequences of this status.
Consequences of considering COVID-19 as an event of Force Majeure
Most of the doctrine and jurisprudence understand that the effects of classifying a scenario as a case of Force Majeure in principle are:
- Total and definitive impossibility of complying; releasing the debtor from the fulfillment of the obligation.
- Partial inability to comply; the debtor is released only in the part that it is impossible to fulfill, but still bound by the part that can be carried out.
- Temporary inability to comply; the debtor is released from the responsibility for default as long as the exceptional situation persists.
Now, let us analyze how it would affect to considerate the epidemic as Force Majeure in relation to lease agreements for uses other than housing.
Regarding the payment of rent
The question to answer is if the classification of the current pandemic situation as a case of Force Majeure frees the tenant (whose premises have been forced to close by order of the government authority) from the obligation to pay the rent while said closing obligation persists, including in the concept of „release“ different alternatives: total or partial cancellation and / or total or partial postponement.
We are meeting these days with a frequent reaction among some tenants, who, unilaterally have informed their landlords that considering COVID 19 an event of force majeure and having been forced to close the premises / office, they suspend the payment of the rent while said situation remains. They do not terminate the contract, they do not hand over the possession, they remain in it (the premises remain closed and not operational) but they suspend the payment (it is not clear whether suspending in this case means liberating himself from the payment of the rent or postponing its payment for when the Force Majeure scenario ends).
Arguments against liberation
As much as this attitude can be considered “understandable” from the perspective of the lessee, not from the point of view of the lessor, said consideration runs into an obstacle: the interpretation of the Force Majeure made by the Supreme Court regarding pecuniary payment obligations, according to the Civil Sentence of May 19, 2015:
„Not being able to consider, in the case of pecuniary debts, the subjective impossibility – insolvency – nor the objective or formal imposition, the doctrine concludes that it is not possible to imagine that if the impossibility is due to a fortuitous event it could have as effect the extinction of the obligation.
The exoneration of the debtor by fortuitous event is not absolute, it has exceptions, as provided for in article 1105 CC, and one of them, by application of the „genus nunquam perit“ principle, would be in cases of obligations to deliver generic things.
In such circumstances, the pecuniary debtor is obliged to fulfill the main obligation, without the economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic such as money”.
In conclusion: it does not seem that this jurisprudential criterion allows to defend that the fulfillment of the pecuniary obligations is released, extinguished or that its breach is justified in cases of Force Majeure, therefore the pecuniary debtor, in this case the lessee, in application of this criterion and due to the generic condition of the money, would be obliged to fulfill his main obligation not being freed from it by the unforeseen economic adversities on the basis of Force Majeure.
Arguments in favor of liberation: art. 1575 of the Civil Code
Having said the foregoing, reference should be made to an article of the Civil Code that, with certainty, will be profusely cited in the upcoming judicial conflicts.
The art. 1575, dealing with the leasing of rustic estates, recognizes the lessee’s right to the reduction of rent in the event of loss of more than half of the fruits (unless otherwise agreed) in „fortuitous, extraordinary and unforeseen cases … such as fire, war, plague, unusual flood, locust, earthquake or another equally unusual that the contractors have not been able to rationally foresee ”.
Is this article, foreseen for rustic leases, applicable to urban leases?
The art. 4.1 CC allows the analogical application of the rules when (i) they do not contemplate a specific assumption and (ii) they regulate a similar situation in which “identity of reason” may be appreciated.
The Sentence of the Supreme Court from January 15, 2019, that solved a conflict of a lease of a building used as hotel, in which the tenant had sought the reduction of the rent under the clause “rebus sic stantibus” by the crisis of 2008 and had alleged in his favor the application of art. 1575, established:
„The argumentation of the appealed judgment rejecting the claim to lower the agreed price is also not contrary to the legal criterion that follows from art. 1575 CC, which is the rule that allows the reduction of income in the leasing of productive assets that do not derive from risks of the business itself, it also requires that the loss of benefits originates from extraordinary and unforeseen fortuitous cases, something that by its own rarity could not have been foreseen by the parties, and that the loss of fruits is more than half of the fruits. In this particular case, none of these circumstances concur. The decrease in rents comes from market developments, the parties anticipated the possibility that in some years the profitability of the hotel would not be positive for the lessee and the losses alleged by NH in the operation of the Almería hotel are less than fifty per hundred, without taking into account that the overall result of his activity as manager of a hotel chain is, as the Audience considers proven in view of the consolidated management report, positive”.
The Supreme Court does not admit the application of art. 1575, but not because it is considered not applicable to non-rustic leases, but because the Court concludes that the requirements are not fulfilled since the 2008 crisis was neither unpredictable and because the lessee’s losses do not exceed 50%.
But, that interpretation of the Supreme Court together with the wording of art. 4.1 CC would support the claim of the lessee who has no incomes during the State of Alarm to demand a reduction in rental fee that fits the principle of proportionality.
Regarding early termination at the request of the lessee
However, we may find situations in which the lessee considering the current situation, decides to terminate the lease in advance, delivering the premises to the lessor.
They are cases in which the early termination of the contract is intended, without respecting (i) or the mandatory term (ii) or the previous notice, in both cases under the hypothesis that they are thus regulated in the contract.
In these scenarios, we understand that it may be defendable that, due to the situation of force majeure caused by COVID 19 and in application of art. 1105 of the CC, the lessee is exempt from the obligation:
- To respect the mandatory term of the lease
- To give prior notice to the lessor in case of early termination of the contract
In both cases, the contract would be terminated with the delivery of possession of the premises, without prejudice to having to respect the other obligations set forth in the contract for termination and delivery, provided that they are not equally affected by the situation of Force Majeure.
Our opinion is that, also in application of Article 1,105 of the CC, the thesis that the lessee would be released from any obligation to compensate damages to the lessor for said advance resolution or breach of the obligatory duration of the contract could be defendable before the Courts.
Conclusion
In conclusion, when the Courts decide on the effects of the current pandemic (that they will surely classify as Force Majeure), and how this will affect the obligations of leaseholders who have been forced to close their business, our opinion is the following:
- Regarding the obligation to pay the rent, despite the contrary criterion of the sentence from May 19, 2015, we find defendable the analogue application of art. 1575 of the CC, based as well on the Supreme Court Sentence from January 15, 2019, in order to demand a proportional and equitable reduction of the rent.
- Regarding the power of the leaseholder to terminate the contract in advance, in case the leaseholder hands the possession of the property to the lessor, we find defendable to exonerate the leaseholder from complying with the advance notice or mandatory term in case provided in the contract, without the obligation to indemnify the lessor for this reason.
Application of the Rebus Sic Stantibus clause (“RSS” clause)
We will analyze below if the RSS clause can be applicable to the case that we are studying and with which consequences.
Requirements of the RSS clause (Latin aphorism that means “things thus standing”)
The principle RSS operates as an intrinsic clause (that is, implicit, without the need to expressly agree by the parties) in the contractual relationship, which means that the stipulations established in a contract are so in view of the concurrent circumstances at the time, that is, „things thus standing”, so that any substantial and unforeseen alteration of the same could lead to the modification of the contractual content.
The RSS clause is not regulated in any article in our laws; It is a doctrinal construction that the jurisprudence has traditionally admitted (examples among many other Supreme Court Sentences from June 30, 2014, February 24, 2015, January 15, 2019, July 18, 2019), with great caution, only in certain cases, and requiring the following requirements:
- That there has been an extraordinary alteration in the circumstances of the contract, at the time that it must be fulfilled, in relation to those present at the time the parties entered the contract.
- To analyze whether an incident can determine the extraordinary alteration of the circumstances that gave meaning to the contract, we must a) contrast the scope of said alteration regarding the meaning or purpose of the contract and the commutativity or performance balance thereof; and b) the „normal risk“ inherent or derived from the contract must be excluded.
- That there has been an exorbitant disproportion, out of all calculation, between the obligations of the contracting parties, causing an imbalance between them.
- That the above occurs because of radically unpredictable circumstances.
- That there is no other remedy to overcome the situation.
Historically, our courts have been very reluctant to apply RSS, although since the economic crisis of 2008-2012 there has been a certain change in criteria and greater jurisprudential receptivity.
Consequences of the application of RSS
The doctrine establishes that the application of the RSS does not have in principle terminating effects on the contract, but only modifying effects, aimed at compensating the imbalance of obligations between the parties; the doctrine establishes that this only applies to long-term contracts or successive contracts with deferred execution.
In application of the good faith principle, the reaction to an event of fortuitous event, force majeure or, in general, an event that generates a disproportion between the parties, such as that regulated by the RSS clause, should be the amendment of the contract to rebalance the obligations between the parties, and only in the event of material impossibility to comply with the obligations, the resolution of the obligation, in both cases without compensation for non-compliance.
For this reason, in relation to leasing contracts and in case of closure of the premises by mandatory mandate, we understand that the RSS clause may be:
- alleged by the leaseholder to request or urge the lessor to downsize or postpone payment.
- estimated by the judges, when these assumptions are debated before the Courts, when accepting such contractual amendment as equitable and legitimate in order to compensate the imbalance generated by the effects of COVID 19.
To summarize, the RSS clause can be a tool for the leaseholder that has had to close its premises during the State of Alarm, when negotiating with the lessor an amendment of the contract, trying to postpone the rent while the State of Alarm or negotiating a discount.
We should bear in mind:
- That the RSS clause is unavoidably applicable on a casuistic basis, there are no generalizations and it will be necessary to take into account the effect caused by COVID 19 in each specific contractual relationship (Supreme Court Sentence from June 30, 2014 and February 24, 2015) and the real imbalance of benefits produced, and
- That, as we have said, the Courts are generally reluctant to apply this clause, that they only apply in the absence of any other legal tool and in situations in which the maintenance of the contractual status quo reveals a manifest “injustice ”and a evident and resounding imbalance between the performance of the parties.
Does this mean that the leaseholder may impose on the lessor a modification of the economic conditions of the contract under the RSS clause (postponement or total or partial cancellation of the payment)?
We cannot assure this, what we think is that the application of this RSS clause should:
- Justify a reasonable request from the leaseholder to temporarily change the conditions of the contract (postponement or cancellation, total or partially) that the lessor must reasonably meet.
- In case of unreasonable refusal of the lessor, we recommend to document as much as possible leaseholder´s request and the possible negotiations or refusal, in order to substantiate a suspension of the payment of the rent, total or partial, during the State of Alarm aimed, not to extinguish his obligation, but to postpone it.
We will have to wait for the reaction of the Courts when they judge these conflicts, but if we dare to anticipate that it is quite possible that the judicial tendency will be to grant protection to the leaseholder with support in the RSS clause and the principle of business preservation, when it comes to validating certain modifying effects regarding the payment obligations of the leaseholder (total or partial remission of the rent payment during the pandemic crisis, postponement, or partial postponement).
In any case, it will be essential to prove, that the behavior of the leaseholder seeking protection in the RSS clause to amend the contract, has been strictly adjusted to the principle of good faith (Supreme Court Sentence from April 30, 2015).
It will also be important to analyze case by case why the displacement of the risk derived from the “exceptional and unforeseen event” from one contractor to the other is justified (Supreme Court Sentence from January 15, 2015) and could well be defended (Supreme Court Sentence from July 18, 2019) that both contracting parties must divide and assume the consequences between the two of them. The judicial decisions will vary in each specific case.
Conclusions and Recommendations
In conclusion, it seems that the leaseholder would have two instruments in order to try to successfully suspend or postpone the payment of the rents, the RSS clause and the principle of Force Majeure.
In our view, the replacement of the contractual balance altered by the exceptional event, may consist of either an extension of the lease payment terms or the application of a total, or partial cancellation of the rental payment obligation while it lasts the State of Alarm, but we understand that it will be defendable that the delay in the payment may not give rise neither to the termination of the contract under art. 1124 Cc nor to the requirement of damages art. 1105 Cc, therefore, will not empower the lessor to urge eviction.
Therefore, the steps to be followed in each case would be:
- Carry out an examination of the contract to check whether force majeure and acts of God are regulated and if the current situation is in accordance with the contract provisions.
- Should nothing be set forth at the contract, and in case the leaseholder has had to close the premises or office, notify the other party of this circumstance and try to negotiate a novation of the lease requesting:
- Waiver of the payment obligation during the Alarm State.
- The application of a discount on the payment obligations with both parties sharing the effects of the pandemic, in a proportion to be agreed.
- Postponement of payment obligations until the premises or office can be reopened with a payment plan for the deferred debt.
If it is not possible to reach an agreement, it is advisable to try to maintain evidence that the parties have acted in good faith trying to reach a negotiated solution and at the extreme (from the leaseholder´s point of view) announce, without waiting to receive a communication or claim from the Lessor, the suspension of the rental fee payment until reopening of the premises/offices, justifying the same in the Alarm State.
Once the Agency agreement has terminated by the Principal, the Agent usually decides to claim for some indemnities or compensations. These include damages indemnities and goodwill (clientele) compensation.
In order to claim them it is very important to consider the limitation period in which both can be demanded. We have observed that agents usually take too long to decide whether or not claiming for such compensations, they start negotiations with their principals to find a solution to their conflict, sometimes they are re-negotiating their position for a new agreement, area or conditions; or sometimes they simply consider that there is no rush to proceed.
In similar terms as in the EC Directive on Agency Agreements (art. 17.5), the Spanish Agency Act (art. 31) expressly foresees a limitation period of one year from the termination of the agreement in order to claim both the damages indemnity and the goodwill compensation.
This means that after the expiration of such term, no claim will be admitted by our Courts. And in contracts ruled by Spanish law and submitted to arbitral procedures, the agent also risks finding his claim dismissed after that period. This duration cannot be modified by the parties in their agreement, but they can take some actions to extend it.
This limitation has, therefore, important consequences. Of course, there could be an infinite number of situations and we do not intend to cover all of them, but in case the Agency agreement terminates, the following ideas can be useful:
- The one-year period starts from the day the agreement was terminated. This date should also be considered carefully if there was not a formal termination letter.
- One year, according to the Spanish Civil code, implies that the period terminates the exact day one calendar year after (from date to date, for example, May 1 to May 1 next year) or the following day if that day does not exist (for instance, February 29th to March 1 next year).
- In general terms, the starting of this one-year period is the termination day and not the date in which the letter was sent or received or when the Principal urges the Agent to fulfil his obligations. The previous notice period (if any) shall be respected if included in the termination notice.
- In case the letter contains an immediate termination, that day will be the starting date, even if the procedure reveals that the Principal should have given a termination notice.
- Generally, this applies to each agency agreement. This means that in case of successive and not connected agreements (for instance, the first one ends and the second one starts 10 months later), the termination period will be considered for each separate agreement. Nevertheless, linked agency agreements (agreements with a specific duration that work one immediately after the previous one) are usually considered as one agreement.
- Some activities of the Agent can interrupt this one-year period, re-starting a new one. For instance (some have been accepted by the case-law, others are expressly mentioned in different pieces of legislation):
- An extra-judicial claim sent by the Agent or by someone in his behalf claiming for the goodwill indemnity, even if the compensation is incorrectly qualified as employment dismissal instead of commercial agency compensation.
- Claiming the goodwill compensation as a labour indemnity before the labour courts when it was not clear the sort of relationship between the parties.
- Starting a conciliation procedure before a First Instance Court
- Starting a mediation procedure (when done by both parties or by one of them enforcing the mediation clause in the contract) will also interrupt the term during the mediation procedure from the moment in which the request for mediation has been received by the mediator or deposited at the mediation institution.
- The acceptance by the Principal of the debt or the goodwill compensation when asking the clients list.
- Other actions by the Agent could have different results depending on the circumstances and some have not been accepted as valid to interrupt this limitation period:
- A claim started by the Agent before a non-competent court, will depend on the circumstances.
- A criminal prosecution does not interrupt the one-year period
- The starting of the preliminary procedure (diligencias preliminaries) has neither been accepted to interrupt the one-year period.
Therefore, as a conclusion, in the drafting phase of the agreement it seems to be a good idea to consider a mediation clause. This will grant the parties an additional and useful tool to solve their conflicts and a possible way to obtain extra time in case the courts will be called to intervene.
And when an agency agreement terminates (with or without mediation clause), our recommendation for the Agent is immediately submitting the case to a legal local advisor. When the Agent has, for example, received a promise for a new agreement and he is still discussing on it, or he is still negotiating the termination, it is advisable to be careful and to take the necessary actions at least to interrupt the lapse of the one-year period and not to lose the possibility of a future claim. A simple letter carefully drafted could be very useful for the Agent’s interests.
A final remark for Distribution Agreements
Although for some aspects, particularly the goodwill compensation, Spanish Supreme Court has admitted the analogy with Agency agreements, this is not the case for the limitation period of one year to claim it. The distributor claiming for the goodwill indemnity will not be limited to one year after the contract terminated. In cases like these, it is convenient, however, to have precise advice on the type of contract we are facing, since the border between the agency and the distribution is not always clear.
Franchise contracts almost always incorporate post-contractual non-competition clauses.
- The Franchisor intends to prevent that, once the contract is over, the Franchisee takes advantage of the “goodwill” generated by the franchised activity becoming an obvious competitor.
- The Franchisee, on the other hand, intends to have his hands as free as possible in order to devote to any activity, whether or not it competes with the business of its former Franchisor.
The natural vocation of the Franchisor is to build these covenants in the widest possible way, both territorially and temporarily, but that attitude easily collides with the non- competition EU regulations.
In 2013, the EU Court of Justice issued (case La Retoucherie / Manuel C) an order answering a question submitted by a Spanish Court that ruled that such restrictions on post-contractual free competition would only be valid if they were preached only with respect to the “premises” in which the terminated franchise contract had been developed, while the prohibition could not extend its effects to the locality (town or city) or to a larger geographical territory (region or country).
On the other hand, the Franchisor usually requires that the franchise agreement is subject to the legislation and the jurisdiction of the country where its headquarters are located, avoiding the legislation and jurisdiction of the courts of the franchisee’s country.
A few months ago the Superior Court of Justice of Madrid issued an interesting ruling on this issue declaring void an arbitration award by the International Court of Arbitration of the ICC.
- The arbitration award ruled about the contractual relation between a Spanish franchisor and an Argentine franchisee and a post-contractual non-competition clause that prevented the franchisee from performing competitive activities at the end of the contract throughout the territory of Argentina and Uruguay; the contract was subject to Spanish legislation and jurisdiction and, as mentioned above, it was obviously contrary to EU law.
- The arbitration award considered that the aforementioned post-franchise non-competition clause was valid and accordingly ordered the former franchisee to pay the contractually provided penalty.
- The arbitrator’s argument was that the rules of the European treaty on competition are limited to competition in the EU internal market and to trade among the Member States while the conflict judged in the arbitration was a franchise agreement that prohibited post-contract competition on the Argentinian and Uruguayan markets, which are not part of the EU internal market.
- The Superior Court of Justice of Madrid did not share this argument and declared the arbitration decision void; the Judgment argued that Spanish law “ineluctably” incorporates the EU regulations beyond its territorial scope; therefore, if a restrictive agreement is authorized by European law, it must be considered lawful in Spanish domestic law; and vice versa, if the agreement is considered illegal or not authorized by community law, it will not be lawful in our domestic law.
- Consequently, since Spanish law was applicable to the franchise contract in question, the arbitrator should have applied European law, and should have analyzed the non-competition agreement in the light of the European rules no matter if its effects were deployed in non-EU territories.
The relevant conclusion is clear: if the franchise contract is subject to the legislation of an EU country, even if the territory where the franchise deploys its effects is outside the EU, it will be unavoidably subject to the regulations of the EU on competition restrictive agreements.
The European franchisor must then decide if he prefers to submit to the legislation of his country or to the regulations of the country where the franchise is located, perhaps more permissive and less restrictive with respect to these types of agreements.
The object of this post is the analysis of the new obligations that RDL 6/2019 establishes, in terms of Gender Equality, for all types of companies (regardless the number of workers they have) and, specifically, for those companies that have 50 or more workers.
The main novelty we find in this respect lies in the obligation, for companies with 50 or more workers, to implement an Equality in Business Plan (EBP), in accordance with the provisions of articles 45 and related of the LOIEMH.
Regarding the content and the conditions of implementation of the EBP, we find the following novelties:
- The subjects and minimum content that all EBP must have are listed exhaustively.
- An analysis of the female underrepresentation in the Company is introduced, as a matter that the EBP must contain.
- The diagnosis that the Company must make prior to the preparation of the EBP must be negotiated with the legal representative of the workers.
- A Register of EBP for companies is created, in which all the EBP implemented in the Companies must be registered, regardless of the number of workers they have.
On the other hand, RDL 6/2019 gives a new wording to Article 28 of the Workers‘ Statute (WS), which includes the obligation of the Company to comply with the requirement of equal pay for men and women, establishing a series of measures and obligations in charge of the Companies, in order to ensure the effective fulfillment of the salary equality between genders.
In particular, these new measures adopted in article 28 of the WS are:
- What is to be considered as „work of equal value“ is specified, in order to facilitate a single concept and eliminate any doubt in this regard.
- Companies have the obligation to keep a Salary Register, with the average values of salaries, salary supplements and extra-salary perceptions of their workforce, differentiated by sex and distributed by professional groups, professional categories or equal work positions value.
- The Salary Registry must be accessible to the legal representatives of the workers.
- In companies with 50 or more workers in which the average remuneration of workers of one sex is higher than the other by 25% or more, a justification for said difference must be included in the Salary Register, and must be certified that it is due to reasons unrelated to the sex of the workers.
The breach, by the Companies, of the obligations in matters of Gender Equality and, in particular, those related to the EBP and equal payment between men and women, may entail the imposition of important sanctions by the Labor Inspector and the “Tesorería General de la Seguridad Social”.
The Spanish Law of the Agency Contract and the European Directive provide for the agent -except in certain cases-, goodwill compensation (clientele) when the relationship is terminated, based on the remuneration received by the Agent during the life of the contract. It is, then, a burden that in general every Principal will have pending when the contract ends.
The temptation is to try to get rid of that payment and for this clients consult us frequently about strategies or tactics. I will try to summarize some of them indicating the chances of success (or not) that may have, both in the negotiation / drafting phase of the contract, and in the resolution phase.
- Change the name of the contract
The first idea is to make a contract „similar“ to the agency or call it in a different way (services, intermediation, representation contracts…). However, the change of name does not have any incidence since the contracts „are what they are“ and not what the parties call them. So if there is a continued mediation in exchange for remuneration, there is a good chance that a judge will consider it an agency contract, whatever we call it, and with all its consequences.
- Limitation of compensation in the contract
Another temptation in the drafting phase of the contract is to agree compensation less than the maximum legally envisaged, provide for payment in advance for the duration of the contract, or directly eliminate it.
None of these solutions would be valid if they try to reduce the possibility of the Agent to receive the legal maximum, or for reasons not foreseen in the Law or the Directive. The law is imperative.
- Linking different agency contracts
Given that the compensation is calculated according to the remunerations of the last five years and the clientele created, the temptation is to link several shorter contracts to consider only the clients of the last period.
This will not necessarily be a good idea if most of the customers were created last year for instance, but it may also be useless because the Spanish law and the Directive provide that the fixed-term contract that continues to be executed becomes indefinite. The judge may consider all linked contracts as one.
For this strategy to have the possibility of being useful, it would be necessary to liquidate each substituted contract, declare that „nothing has to be claimed by the parties“ and that the successive contracts are sufficiently separated and have different entities, drafting, extension, etc. If the procedure is well thought out, it could be a way to get rid of a greater indemnity by clientele: a well-written pact whereby the agent declares the compensation received, and the following contract does not mimic the content and immediately to the previous one.
- Submitting the agreement to a foreign law
In international contracts the temptation is to submit the contract to a right that is not Spanish, particularly when the Principal has that citizenship.
The idea can be good or bad according to the chosen law and as long as it has some relation with the business. As is known, in the EU the Directive establishes minimum conditions that national laws must respect. But nothing prevents these laws from providing more advantageous conditions for agents. This means that, for example, choosing French law would be, in general, a bad idea for the Principal because compensation in that country is usually higher.
In some cases, the choice of a law outside the European Union that does not provide compensation for clientele when the agent is European has been rejected because that the minimum right recognized in the Directive has not been respected.
- Submit the contract to non-national rules and judges
Another less frequent possibility is to submit the contract to rules not from a country, but to general commercial norms (Lex Mercatoria) and to agree on a lower compensation.
This is very uncommon and may not be very useful depending on who is to interpret the contract and where the agent resides. If, for example, the agent resides in Spain and who is going to interpret the contract is a Spanish judge, he will most likely interpret the contract according to his/her own rules without being bound by what the contract envisages. This clause would have been useless.
- Submit the contract to arbitration
The question will be different if the contract is subject to arbitration. In this case, arbitrators are not necessarily subject to interpreting a contract according to their own national regulations if the contract is subject to different one. In this case, it would be possible that they felt freer to consider the contract exclusively, especially when the agent was not of their nationality, did not know what the law of the agent’s country and was not bound by the guarantees provided for his protection.
- Mediation in the agency contract
Mediation is an alternative dispute resolution system that can also be used in agency contracts. In mediation, the parties resolve the dispute by themselves with the help of a mediator.
In this case, given that the mediator is not deciding, it is possible for the parties to freely reach an agreement whereby the agent agrees to a minor indemnification if, for example, other advantages are conferred upon him, if he comes to the conviction of having less right, difficulty of proof, if he prefers to save other costs, time, energy for your new business, etc.
Mediators ensure the balance of the parties, but nothing prevents them to agree a compensation lower than the legal maximum (after the conclusion of the contract it is possible to negotiate a lower than the legal maximum). To foresee the possibility of mediation in the agency contract is, therefore, a good idea: this will permit the parties to better address and negotiate this compensation. In addition, providing for mediation does not limit the rights of any of the parties to withdraw and continue through the courts demanding the legal maximum.
- Imputing to the agent a previous breach
When the contract ends, this is undoubtedly the cause that is most often attempted: when the contract is to be resolved, the Principal tries to argue that the Agent has previously failed to comply and that this is why the contract is being resolved.
The law and the Directive exempt the payment of goodwill compensation when the agent has breach his obligations. But in that case, the Principal must be able to prove it when the agent discusses it. And it will not always be easy. The Principal must provide clear evidence and for this it will be convenient to collect information and documentation on the breach sufficiently and in advance and of sufficient importance (minor breaches are not usually accepted). Therefore, if the Principal wishes to follow this path it is advisable to prepare the arguments and evidences time before the agreement ends. It is strongly recommend contacting an expert advisor as soon as possible: he will help you to minimize the risks.
The procedure to incorporate a foreign owned company in Spain is, in principle, easy and straight forward, however it is necessary to take into account certain new requirements derived from the tax and the anti-money laundering regulations, which could cause long delays in the incorporation process, even to EU and US companies, if they are not well advised and managed from the beginning of the procedure.
The first step consist in collecting information about the foreign shareholder, in order to be able to prove its legal existence and activities: the foreign shareholder(s) will have to grant before a Notary Public in its country of residence a power of attorney authorising somebody in Spain to obtain its tax identification number (“NIE”), and also represent it before the Spanish notary when signing the deed of incorporation. In case the foreign shareholder is an individual person, the NIE should be applied for before the Spanish police or the Spanish Consulate at the country where the investor lives.
If the shareholder is a corporation, apart from the Power of Attorney, it will have to obtain a certificate from its Companies’ Registry or Chamber of Commerce, stating its legal existence and main characteristics. This document is called “good standing certificate” (in the UK and US), “K-bis” (in France), “KvK” (in the Netherlands) or “visura” (in Italy). These two documents, the Power of Attorney mentioned in the above paragraph and the certificate from the Companies’ Registry, will have to be Apostilled or legalized by the correspondent Ministry, and Sworn translated into Spanish. Please note that we use to draft bilingual powers of attorney in order to avoid its sworn translation.
The foreign shareholder will have to prove that its income is obtained from legal activities in order to be able to open a bank account in the name of the new company. The main document to prove this could be the Corporate or the Personal Income Tax return filed in its country of residence, but there could be other means, especially in case of individual persons.
In case of a corporate shareholder, it will be necessary as well to declare, in principle through a public deed granted in Spain, who are the individual persons who, directly or through other companies, will hold more than a 25% interest in the new company to be incorporated. In case nobody holds more than a 25% (i.e. because there are 5 individual shareholders, holding each of them a 20%), it is declared that the effective control of the new company corresponds to its director.
At this stage, it is also necessary to mention that the person(s) who will be the director(s) of the new company, in case they are foreigners, will also need to obtain their personal “NIE”. The NIE should be applied for before the Spanish police (this could be done by a proxy duly authorised though a Power of Attorney granted by the foreign director) or before the Spanish Consulate nearest to the city where the investor lives. In order to be a director of a Spanish company it is not necessary to be a shareholder, nor to have residence and work permit in Spain (provided the foreign director does not live in Spain).
Meanwhile the necessary documents (Powers of Attorney, Companies’ Registry certificate, etc.) are being prepared by the foreign shareholder, the lawyer in Spain will apply for the new company’s name. It is advisable to point out that generic or usual names are not available quite often, therefore it is necessary to think in original names. Three different names could be applied for simultaneously.
The drafting of the company’s Articles of Association or By Laws could be very quick, except if the company is going to have several shareholders and they wish specific clauses. In this case, it is also advisable to draft a Shareholders Agreement. The Shareholders’ Agreement could just contain some basic rules on dedication, compensation, non-competition, etc. and some more sophisticated rules on the sale of shares (tag along and drag along rights). As regards the By-Laws, they should mention the company’s name, its activity or activities, address in Spain –which cannot be just a P.O. Box-, share capital, number of shares and its face value, and starting date for the fiscal year, among other standard clauses.
The management of the company could be organized through a sole director, two directors who could act jointly or separately, and in case there are more than three directors, they should organize themselves through a Board of Directors, being usual in this case to appoint a C.E.O. In order to be a director it is not necessary to be a shareholder. Under Spanish laws, the director(s) could be held liable for some company’s debts under certain circumstances which are legally defined. For this reason, it is necessary that the directors formally accept their appointment (personally appearing before the Notary or through a Power of Attorney).
Before the incorporation, it will be necessary that either the new company’s director (the person to be appointed) or the representative of the corporate shareholder appears personally before the bank where the company will have its first bank account and signs the correspondent documents (KYC regulation). Once the bank account is opened, the shareholder will have to send a bank transfer for the new company’s share capital. In Spain, the minimum share capital for a limited company (S.L.) is Euros 3.000, while for a “Sociedad Anónima” (S.A.) it is Euros 60.000, but only 25% should be paid off at the incorporation moment. It is interesting to note that contributions to the share capital could be made in cash – which is the most common operation, especially at the incorporation – or in kind, with any type of assets: real estate, machinery, goods, trademarks, etc. The money for the share capital should be sent to the new company’s bank account from an account owned by the shareholder (or from each account owned by each shareholder, should they be several ones), not by any other different person. Once the Spanish bank receives the transfer, it will issue a certificate, which is necessary in order to incorporate the company.
Once all the documents are ready, it is possible within very few days (almost immediately) to make the appointment with the Notary and sign the public deed of incorporation. This can be done at any notary in Spain, not being necessary that the notary practises at the same city where the company will have its corporate address. In order to summarize, the list of the necessary documents is:
- Power(s) of Attorney granted by the foreign shareholder(s), apostilled and sworn translated.
- Certificate regarding the legal existence of the foreign shareholder (only if it is a corporation), apostilled and sworn translated.
- Statement on who are the last individual shareholders holding more than 25% interest in the new company, directly or indirectly (only in case of corporate shareholders).
- NIE of the foreign shareholder(s).
- NIE of the new company’s director(s), should they be a foreigners.
- Certificate for the new company’s name.
- Articles of Association.
- Bank certificate regarding the contribution to the new company’s share capital.
The deed of incorporation is signed by the proxy (or the individual shareholder(s), should they prefer to personally appear before the notary) before the chosen public notary, being also necessary to sign an official form to report the foreign investment to a public registry depending on the Spanish Ministry of Finance.
Once the deed of incorporation is signed, the next steps consist in applying before the tax authorities to obtain the new company’s tax number (NIF / CIF) and filing the deed of incorporation before the Companies’ Registry. Some banks do allow new companies to operate once they have the NIF (which could be 2-3 days after the incorporation), while others request to wait until the deed of incorporation is filed at the Companies’ Registry (2-3 weeks).
An estimation of the necessary time to complete all the procedure is 30-45 days, but of course the main delay is related to speed of the foreign investor in obtaining the necessary documents.
Please note that if you wish to incorporate a foreign owned company in Spain it is always necessary to seek specific professional advice, as each case is different and regulations and the application of such regulations vary from time to time. The above article just explains the main steps and requirements for the incorporation of a company.
Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.
It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.
And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?
The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).
The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:
- A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.
Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.
- In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
- The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
- Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
- Costs are reasonable and known in advance.
- And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.
To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project
Spanish Law on Entrepreneurship (Law 14/2013) has approved new cases where foreigners from non-European Union countries can obtain the residence permit in Spain through the execution of investments:
- Investments in real estate for an amount equal or higher than € 500.000 (Five Hundred Thousand Euros). The investment can be made in one or more properties, but at least € 500.000 should be free of encumbrances (mortgage, i.e.). If the price is higher than € 500.000, the rest of the amount could be paid through mortgage.
- Financial investments for a value equal or higher than 1 million Euros. This type of investment includes listed and non-listed shares, in case of non-listed shares they could be from already operating companies or newly incorporated ones, investment funds, and deposits in Spanish banks.
- Investment in Spanish sovereign debt for an amount equal or higher than 2 million Euros.
- To carry on a business project in Spain that was considered as being of public interest. To this purpose, one of these conditions should be met: creation of jobs, execution of an investment that has a positive impact in the region where it is located, or a relevant contribution to scientific or technological innovation.
The visa granted through the execution of these investments is valid during at least one year, and in order to obtain the residence permit some other requirements should be met:
- to not stay previously in Spain in an illegal situation,
- to have more than 18 years,
- to not have criminal records,
- to have a health insurance (hired from a company operating in Spain)
- to have financial means for the stay in Spain (i.e. a bank deposit, or income from leases or dividends. Payroll does not qualify for this purpose).
If the above requirements are met, a two years residence and work permit could be granted. After this term, the residence permit can be extended for successive five years periods. The investments should be kept during all these periods. This permit does not request the foreigner to live in Spain for more than six months; therefore it will not be cancelled if the foreigner lives in another country.
The residence and work permit is granted to the individual who executes the investment. If he/she is married and/or has children or ancestors who depend on the investor, it is possible to apply for their visa at the same time or later on. It is possible to execute the investment through a company owned by the investor, provided it is not a company domiciled in a tax heaven country.
The Spanish visa allows free movements within the EU countries (Schengen space). The valid travelling document is the passport.
Foreigners who wish to carry on a self-employment project in Spain could obtain the work and residence permit, but through a different procedure than the above mentioned, and these cases the minimum investment amount is lower.
Investment in real estate
The investment in real estate could be in residential, commercial or industrial properties. The property could be leased to third parties before or after the acquisition, or used by the investor. For ambitious investors, there are several possibilities to structure the investment in buildings and apartments and to a higher return of the investment.
There are some costs related to the acquisition of real estate: the acquisition itself is taxed by Transfer Tax at rates ranging from 6 to 10% on the acquisition price, depending on each Spanish region where the property is located, to be paid by the buyer. Besides, the buyer should pay the Notary Public and Property Registrar’s fees, which approximately amount 3% of the acquisition price (the addition of both of them). These amounts are paid once, when the property is acquired.
The annual costs related to the ownership of real estate in Spain are the following ones:
- IBI or local property tax, whose amount is calculated based on the value and location of the property.
- “Community expenses”, that is those expenses related to the maintenance of the common areas of the building where the property is located: cleaning, lighting, etc.
- In some cases, also a small tax for garbage should be paid to the Town Council.
- Owners should file the Spanish Personal Income Tax Return, and pay a percentage between 1,1% and 2% of the property’s “cadastral value” (official value), in case the property is not leased to a third party. If the property is leased, the owner should also file the Personal Income Tax Return based on the amounts obtained from the lease.
Besides, owners should also pay the expenses related to their property: ordinary maintenance expenses, insurance, electricity and water, etc.
In Spain, the property right is considered as a full right, which implies that the owner can use the property by himself, can lease it to third parties, can mortgage or encumber it, can sell or gift it to any third party and can pass it to his heirs through a will.
The only limits to the use of the property by its owner or the persons appointed by him are those established by the civic rules regarding noises, pets, exterior image of the property, etc.
Regarding the lease of the property, in principle it is free, and the rights and obligations of landlord and tenant are those provided by the private lease agreement entered between both parties and the Spanish Urban Leases Law (Ley de Arrendamientos Urbanos). However, nowadays many Spanish cities (and specially Barcelona) have approved strong limits to the so called touristic leases, which are the short term (days or weeks) leases, and request a special license.
It is important to point out that foreigners who become residents in Spain can grant their will according to Spanish inheritance laws (according to EU Regulation 650/2012), which slightly vary depending on each Spanish region. In Catalonia, for example, the testator can freely appoint who will be his heirs.
Financial investment
Financial investments can be executed through different types of targets, being always the minimum amount 1 million Euros:
- Shares of companies listed in the Spanish Stock Market.
- Shares of non-listed companies, which could be already operating companies or newly incorporated ones. In both cases, there are no limits as regards the percentage of shares that can be owned by foreigners, and the activity sectors restricted to non EU foreign investment are very few (gambling, defense, aviation, TV and radio). Foreigners can be appointed Directors of Spanish companies with the only requirement of having previously obtained the so called “N.I.E.”, which is the Spanish identification number for foreigners.
In case of a newly incorporated company, the € 1 million requested as investment would constitute the company’s share capital, and can be used for the startup of the company’s activities: for example, acquisition of goods, payment of salaries and rentals, payment of purveyors and subcontractors, etc.
Spanish companies have access to all European markets and have a privileged position for trading with Latin American countries.
- Investment funds: Spanish financial entities offer a very wide range of investment funds, from very conservative to high risk.
Deposit in a bank
The main advantage of a real estate investment compared to a financial investment is that the requested amount is only € 500.000 for real estate, while for a financial investment is twice this amount. During the past years since the Law on Entrepreneurship became in force, investment in real estate has been the most popular way for obtaining the residence permit in Spain, probably because at that time (2013-2016) real estate market prices were quite low due to the crash in 2008.
However, the process to acquire a property in Spain is not so easy compared to the acquisition of a share in an investment fund or making a bank deposit: the investor has to choose the property, which normally requires one or two visits to Spain, the price and sale conditions have to negotiated and drafted, the purchase deed has to be signed before a Notary Public (by the investor or his proxy), there are taxes and expenses related to the acquisition, and once the property is acquired, it is necessary to pay ongoing expenses and taxes, and maintain the property in good condition.
Compared to this, the investment in funds or making a bank deposit only requires one visit to the bank by the investor, in order to sign the correspondent documents. There are not related taxes or expenses, and the liquidity of the investment is full (that is, the investment can be sold at any moment, quite probably at the same or at a higher price, but this is not guaranteed for real estate investments).
How to open and operate a bank account in Spain
In Spain, banks apply the regulations regarding anti-money laundering, which include the KYC (Know Your Client) rules and the obligation to prove the legal origin of the funds. The KYC rules imply the need for the investor to appear personally before the bank at least once, previously to operating the bank account. The legal origin of the funds can be proved through different means:
- In case of employees, through the payroll splits, or a certificate issued by the employer, or the investor’s personal income tax return.
- In case of self-employed individuals, through their personal income tax return, or another type of documents proving their professional activity.
- In case of company owners, through the company’s financial statements.
- If the investor has obtained the funds necessary for the investment through personal loans, the loan agreements should be provided, plus the documents proving the legal origin of the funds provided by the lenders.
- Other documents, for example, regarding dividends or income from the lease of properties owned by the investor could be provided.
All documents should be legalized by a Notary Public or the Spanish Consulate, and sworn translated into Spanish.
Please note that this article is aimed to provide a general overview on Spanish rules regarding the above matters, but it does not constitute any kind of comprehensive information on them, and in any case specific legal advice should be sought prior to taking any decision.
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Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19, even though it affects and produces effects in many different legal fields, does not include any reference to contracts for leases of real estate, or houses, premises or offices.
The purpose of this note is to analyze the effects of the situation of the State of Alarm regarding those leases of offices or premises that have been forced to close in application of the decree; those others that remain totally or partially open and in operation, although with a reduced or minimal activity, in principle are not subject to the conclusions reached below without prejudice to the fact that there are individualized cases to which, despite the fact that there is not a complete closure, reasonably and logically can be applied to them.
It is not excluded in any way that in the event of an extension of the validity of the State of Alarm, a regulation that affects the leasing contracts could be published, but for the moment this has not happened. If this were to happen, the content of said norm would apply.
Based on the principle of freedom of covenants enshrined in art. 1255 of the Spanish Civil Code, which allows the parties signing the contract to agree (i) what scenarios and situations should be considered as constituting cases of Force Majeure and Act of God and (ii) what the contractual consequences of such scenarios should be, the first exercise that must be done is to check if the contract includes a regulatory clause of Force Majeure and its effects; if so, such clause must be followed and its analysis is left out of this note.
In the absence of express regulation in the contract, the provisions of the Civil Code and specifically article 1105 would apply.
COVID-19 as Force Majeure
COVID-19 is an event that in principle meets the requirements of the Civil Code to be classified as an event of Force Majeure (art. 1105 Civil Code) since:
- It is a foreign act and not attributable to the contractor who is the debtor of the benefit or obligation.
- It is unpredictable, or if it were said to be „predictable“, it is certainly inevitable.
- The event in question, the pandemic, must be a cause and result in the breach of the obligation, that is, there must be a causal link.
Therefore, fulfilling the three requirements, the first conclusion that we reach is that very foreseeably, the Spanish Courts will classify as “Force Majeure” the situation caused by COVID 19 when a judicial dispute is raised in which such matter is discussed between litigants. We will now analyze the consequences of this status.
Consequences of considering COVID-19 as an event of Force Majeure
Most of the doctrine and jurisprudence understand that the effects of classifying a scenario as a case of Force Majeure in principle are:
- Total and definitive impossibility of complying; releasing the debtor from the fulfillment of the obligation.
- Partial inability to comply; the debtor is released only in the part that it is impossible to fulfill, but still bound by the part that can be carried out.
- Temporary inability to comply; the debtor is released from the responsibility for default as long as the exceptional situation persists.
Now, let us analyze how it would affect to considerate the epidemic as Force Majeure in relation to lease agreements for uses other than housing.
Regarding the payment of rent
The question to answer is if the classification of the current pandemic situation as a case of Force Majeure frees the tenant (whose premises have been forced to close by order of the government authority) from the obligation to pay the rent while said closing obligation persists, including in the concept of „release“ different alternatives: total or partial cancellation and / or total or partial postponement.
We are meeting these days with a frequent reaction among some tenants, who, unilaterally have informed their landlords that considering COVID 19 an event of force majeure and having been forced to close the premises / office, they suspend the payment of the rent while said situation remains. They do not terminate the contract, they do not hand over the possession, they remain in it (the premises remain closed and not operational) but they suspend the payment (it is not clear whether suspending in this case means liberating himself from the payment of the rent or postponing its payment for when the Force Majeure scenario ends).
Arguments against liberation
As much as this attitude can be considered “understandable” from the perspective of the lessee, not from the point of view of the lessor, said consideration runs into an obstacle: the interpretation of the Force Majeure made by the Supreme Court regarding pecuniary payment obligations, according to the Civil Sentence of May 19, 2015:
„Not being able to consider, in the case of pecuniary debts, the subjective impossibility – insolvency – nor the objective or formal imposition, the doctrine concludes that it is not possible to imagine that if the impossibility is due to a fortuitous event it could have as effect the extinction of the obligation.
The exoneration of the debtor by fortuitous event is not absolute, it has exceptions, as provided for in article 1105 CC, and one of them, by application of the „genus nunquam perit“ principle, would be in cases of obligations to deliver generic things.
In such circumstances, the pecuniary debtor is obliged to fulfill the main obligation, without the economic adversities freeing him from it, since what is owed is not something individualized that has perished, but something generic such as money”.
In conclusion: it does not seem that this jurisprudential criterion allows to defend that the fulfillment of the pecuniary obligations is released, extinguished or that its breach is justified in cases of Force Majeure, therefore the pecuniary debtor, in this case the lessee, in application of this criterion and due to the generic condition of the money, would be obliged to fulfill his main obligation not being freed from it by the unforeseen economic adversities on the basis of Force Majeure.
Arguments in favor of liberation: art. 1575 of the Civil Code
Having said the foregoing, reference should be made to an article of the Civil Code that, with certainty, will be profusely cited in the upcoming judicial conflicts.
The art. 1575, dealing with the leasing of rustic estates, recognizes the lessee’s right to the reduction of rent in the event of loss of more than half of the fruits (unless otherwise agreed) in „fortuitous, extraordinary and unforeseen cases … such as fire, war, plague, unusual flood, locust, earthquake or another equally unusual that the contractors have not been able to rationally foresee ”.
Is this article, foreseen for rustic leases, applicable to urban leases?
The art. 4.1 CC allows the analogical application of the rules when (i) they do not contemplate a specific assumption and (ii) they regulate a similar situation in which “identity of reason” may be appreciated.
The Sentence of the Supreme Court from January 15, 2019, that solved a conflict of a lease of a building used as hotel, in which the tenant had sought the reduction of the rent under the clause “rebus sic stantibus” by the crisis of 2008 and had alleged in his favor the application of art. 1575, established:
„The argumentation of the appealed judgment rejecting the claim to lower the agreed price is also not contrary to the legal criterion that follows from art. 1575 CC, which is the rule that allows the reduction of income in the leasing of productive assets that do not derive from risks of the business itself, it also requires that the loss of benefits originates from extraordinary and unforeseen fortuitous cases, something that by its own rarity could not have been foreseen by the parties, and that the loss of fruits is more than half of the fruits. In this particular case, none of these circumstances concur. The decrease in rents comes from market developments, the parties anticipated the possibility that in some years the profitability of the hotel would not be positive for the lessee and the losses alleged by NH in the operation of the Almería hotel are less than fifty per hundred, without taking into account that the overall result of his activity as manager of a hotel chain is, as the Audience considers proven in view of the consolidated management report, positive”.
The Supreme Court does not admit the application of art. 1575, but not because it is considered not applicable to non-rustic leases, but because the Court concludes that the requirements are not fulfilled since the 2008 crisis was neither unpredictable and because the lessee’s losses do not exceed 50%.
But, that interpretation of the Supreme Court together with the wording of art. 4.1 CC would support the claim of the lessee who has no incomes during the State of Alarm to demand a reduction in rental fee that fits the principle of proportionality.
Regarding early termination at the request of the lessee
However, we may find situations in which the lessee considering the current situation, decides to terminate the lease in advance, delivering the premises to the lessor.
They are cases in which the early termination of the contract is intended, without respecting (i) or the mandatory term (ii) or the previous notice, in both cases under the hypothesis that they are thus regulated in the contract.
In these scenarios, we understand that it may be defendable that, due to the situation of force majeure caused by COVID 19 and in application of art. 1105 of the CC, the lessee is exempt from the obligation:
- To respect the mandatory term of the lease
- To give prior notice to the lessor in case of early termination of the contract
In both cases, the contract would be terminated with the delivery of possession of the premises, without prejudice to having to respect the other obligations set forth in the contract for termination and delivery, provided that they are not equally affected by the situation of Force Majeure.
Our opinion is that, also in application of Article 1,105 of the CC, the thesis that the lessee would be released from any obligation to compensate damages to the lessor for said advance resolution or breach of the obligatory duration of the contract could be defendable before the Courts.
Conclusion
In conclusion, when the Courts decide on the effects of the current pandemic (that they will surely classify as Force Majeure), and how this will affect the obligations of leaseholders who have been forced to close their business, our opinion is the following:
- Regarding the obligation to pay the rent, despite the contrary criterion of the sentence from May 19, 2015, we find defendable the analogue application of art. 1575 of the CC, based as well on the Supreme Court Sentence from January 15, 2019, in order to demand a proportional and equitable reduction of the rent.
- Regarding the power of the leaseholder to terminate the contract in advance, in case the leaseholder hands the possession of the property to the lessor, we find defendable to exonerate the leaseholder from complying with the advance notice or mandatory term in case provided in the contract, without the obligation to indemnify the lessor for this reason.
Application of the Rebus Sic Stantibus clause (“RSS” clause)
We will analyze below if the RSS clause can be applicable to the case that we are studying and with which consequences.
Requirements of the RSS clause (Latin aphorism that means “things thus standing”)
The principle RSS operates as an intrinsic clause (that is, implicit, without the need to expressly agree by the parties) in the contractual relationship, which means that the stipulations established in a contract are so in view of the concurrent circumstances at the time, that is, „things thus standing”, so that any substantial and unforeseen alteration of the same could lead to the modification of the contractual content.
The RSS clause is not regulated in any article in our laws; It is a doctrinal construction that the jurisprudence has traditionally admitted (examples among many other Supreme Court Sentences from June 30, 2014, February 24, 2015, January 15, 2019, July 18, 2019), with great caution, only in certain cases, and requiring the following requirements:
- That there has been an extraordinary alteration in the circumstances of the contract, at the time that it must be fulfilled, in relation to those present at the time the parties entered the contract.
- To analyze whether an incident can determine the extraordinary alteration of the circumstances that gave meaning to the contract, we must a) contrast the scope of said alteration regarding the meaning or purpose of the contract and the commutativity or performance balance thereof; and b) the „normal risk“ inherent or derived from the contract must be excluded.
- That there has been an exorbitant disproportion, out of all calculation, between the obligations of the contracting parties, causing an imbalance between them.
- That the above occurs because of radically unpredictable circumstances.
- That there is no other remedy to overcome the situation.
Historically, our courts have been very reluctant to apply RSS, although since the economic crisis of 2008-2012 there has been a certain change in criteria and greater jurisprudential receptivity.
Consequences of the application of RSS
The doctrine establishes that the application of the RSS does not have in principle terminating effects on the contract, but only modifying effects, aimed at compensating the imbalance of obligations between the parties; the doctrine establishes that this only applies to long-term contracts or successive contracts with deferred execution.
In application of the good faith principle, the reaction to an event of fortuitous event, force majeure or, in general, an event that generates a disproportion between the parties, such as that regulated by the RSS clause, should be the amendment of the contract to rebalance the obligations between the parties, and only in the event of material impossibility to comply with the obligations, the resolution of the obligation, in both cases without compensation for non-compliance.
For this reason, in relation to leasing contracts and in case of closure of the premises by mandatory mandate, we understand that the RSS clause may be:
- alleged by the leaseholder to request or urge the lessor to downsize or postpone payment.
- estimated by the judges, when these assumptions are debated before the Courts, when accepting such contractual amendment as equitable and legitimate in order to compensate the imbalance generated by the effects of COVID 19.
To summarize, the RSS clause can be a tool for the leaseholder that has had to close its premises during the State of Alarm, when negotiating with the lessor an amendment of the contract, trying to postpone the rent while the State of Alarm or negotiating a discount.
We should bear in mind:
- That the RSS clause is unavoidably applicable on a casuistic basis, there are no generalizations and it will be necessary to take into account the effect caused by COVID 19 in each specific contractual relationship (Supreme Court Sentence from June 30, 2014 and February 24, 2015) and the real imbalance of benefits produced, and
- That, as we have said, the Courts are generally reluctant to apply this clause, that they only apply in the absence of any other legal tool and in situations in which the maintenance of the contractual status quo reveals a manifest “injustice ”and a evident and resounding imbalance between the performance of the parties.
Does this mean that the leaseholder may impose on the lessor a modification of the economic conditions of the contract under the RSS clause (postponement or total or partial cancellation of the payment)?
We cannot assure this, what we think is that the application of this RSS clause should:
- Justify a reasonable request from the leaseholder to temporarily change the conditions of the contract (postponement or cancellation, total or partially) that the lessor must reasonably meet.
- In case of unreasonable refusal of the lessor, we recommend to document as much as possible leaseholder´s request and the possible negotiations or refusal, in order to substantiate a suspension of the payment of the rent, total or partial, during the State of Alarm aimed, not to extinguish his obligation, but to postpone it.
We will have to wait for the reaction of the Courts when they judge these conflicts, but if we dare to anticipate that it is quite possible that the judicial tendency will be to grant protection to the leaseholder with support in the RSS clause and the principle of business preservation, when it comes to validating certain modifying effects regarding the payment obligations of the leaseholder (total or partial remission of the rent payment during the pandemic crisis, postponement, or partial postponement).
In any case, it will be essential to prove, that the behavior of the leaseholder seeking protection in the RSS clause to amend the contract, has been strictly adjusted to the principle of good faith (Supreme Court Sentence from April 30, 2015).
It will also be important to analyze case by case why the displacement of the risk derived from the “exceptional and unforeseen event” from one contractor to the other is justified (Supreme Court Sentence from January 15, 2015) and could well be defended (Supreme Court Sentence from July 18, 2019) that both contracting parties must divide and assume the consequences between the two of them. The judicial decisions will vary in each specific case.
Conclusions and Recommendations
In conclusion, it seems that the leaseholder would have two instruments in order to try to successfully suspend or postpone the payment of the rents, the RSS clause and the principle of Force Majeure.
In our view, the replacement of the contractual balance altered by the exceptional event, may consist of either an extension of the lease payment terms or the application of a total, or partial cancellation of the rental payment obligation while it lasts the State of Alarm, but we understand that it will be defendable that the delay in the payment may not give rise neither to the termination of the contract under art. 1124 Cc nor to the requirement of damages art. 1105 Cc, therefore, will not empower the lessor to urge eviction.
Therefore, the steps to be followed in each case would be:
- Carry out an examination of the contract to check whether force majeure and acts of God are regulated and if the current situation is in accordance with the contract provisions.
- Should nothing be set forth at the contract, and in case the leaseholder has had to close the premises or office, notify the other party of this circumstance and try to negotiate a novation of the lease requesting:
- Waiver of the payment obligation during the Alarm State.
- The application of a discount on the payment obligations with both parties sharing the effects of the pandemic, in a proportion to be agreed.
- Postponement of payment obligations until the premises or office can be reopened with a payment plan for the deferred debt.
If it is not possible to reach an agreement, it is advisable to try to maintain evidence that the parties have acted in good faith trying to reach a negotiated solution and at the extreme (from the leaseholder´s point of view) announce, without waiting to receive a communication or claim from the Lessor, the suspension of the rental fee payment until reopening of the premises/offices, justifying the same in the Alarm State.
Once the Agency agreement has terminated by the Principal, the Agent usually decides to claim for some indemnities or compensations. These include damages indemnities and goodwill (clientele) compensation.
In order to claim them it is very important to consider the limitation period in which both can be demanded. We have observed that agents usually take too long to decide whether or not claiming for such compensations, they start negotiations with their principals to find a solution to their conflict, sometimes they are re-negotiating their position for a new agreement, area or conditions; or sometimes they simply consider that there is no rush to proceed.
In similar terms as in the EC Directive on Agency Agreements (art. 17.5), the Spanish Agency Act (art. 31) expressly foresees a limitation period of one year from the termination of the agreement in order to claim both the damages indemnity and the goodwill compensation.
This means that after the expiration of such term, no claim will be admitted by our Courts. And in contracts ruled by Spanish law and submitted to arbitral procedures, the agent also risks finding his claim dismissed after that period. This duration cannot be modified by the parties in their agreement, but they can take some actions to extend it.
This limitation has, therefore, important consequences. Of course, there could be an infinite number of situations and we do not intend to cover all of them, but in case the Agency agreement terminates, the following ideas can be useful:
- The one-year period starts from the day the agreement was terminated. This date should also be considered carefully if there was not a formal termination letter.
- One year, according to the Spanish Civil code, implies that the period terminates the exact day one calendar year after (from date to date, for example, May 1 to May 1 next year) or the following day if that day does not exist (for instance, February 29th to March 1 next year).
- In general terms, the starting of this one-year period is the termination day and not the date in which the letter was sent or received or when the Principal urges the Agent to fulfil his obligations. The previous notice period (if any) shall be respected if included in the termination notice.
- In case the letter contains an immediate termination, that day will be the starting date, even if the procedure reveals that the Principal should have given a termination notice.
- Generally, this applies to each agency agreement. This means that in case of successive and not connected agreements (for instance, the first one ends and the second one starts 10 months later), the termination period will be considered for each separate agreement. Nevertheless, linked agency agreements (agreements with a specific duration that work one immediately after the previous one) are usually considered as one agreement.
- Some activities of the Agent can interrupt this one-year period, re-starting a new one. For instance (some have been accepted by the case-law, others are expressly mentioned in different pieces of legislation):
- An extra-judicial claim sent by the Agent or by someone in his behalf claiming for the goodwill indemnity, even if the compensation is incorrectly qualified as employment dismissal instead of commercial agency compensation.
- Claiming the goodwill compensation as a labour indemnity before the labour courts when it was not clear the sort of relationship between the parties.
- Starting a conciliation procedure before a First Instance Court
- Starting a mediation procedure (when done by both parties or by one of them enforcing the mediation clause in the contract) will also interrupt the term during the mediation procedure from the moment in which the request for mediation has been received by the mediator or deposited at the mediation institution.
- The acceptance by the Principal of the debt or the goodwill compensation when asking the clients list.
- Other actions by the Agent could have different results depending on the circumstances and some have not been accepted as valid to interrupt this limitation period:
- A claim started by the Agent before a non-competent court, will depend on the circumstances.
- A criminal prosecution does not interrupt the one-year period
- The starting of the preliminary procedure (diligencias preliminaries) has neither been accepted to interrupt the one-year period.
Therefore, as a conclusion, in the drafting phase of the agreement it seems to be a good idea to consider a mediation clause. This will grant the parties an additional and useful tool to solve their conflicts and a possible way to obtain extra time in case the courts will be called to intervene.
And when an agency agreement terminates (with or without mediation clause), our recommendation for the Agent is immediately submitting the case to a legal local advisor. When the Agent has, for example, received a promise for a new agreement and he is still discussing on it, or he is still negotiating the termination, it is advisable to be careful and to take the necessary actions at least to interrupt the lapse of the one-year period and not to lose the possibility of a future claim. A simple letter carefully drafted could be very useful for the Agent’s interests.
A final remark for Distribution Agreements
Although for some aspects, particularly the goodwill compensation, Spanish Supreme Court has admitted the analogy with Agency agreements, this is not the case for the limitation period of one year to claim it. The distributor claiming for the goodwill indemnity will not be limited to one year after the contract terminated. In cases like these, it is convenient, however, to have precise advice on the type of contract we are facing, since the border between the agency and the distribution is not always clear.
Franchise contracts almost always incorporate post-contractual non-competition clauses.
- The Franchisor intends to prevent that, once the contract is over, the Franchisee takes advantage of the “goodwill” generated by the franchised activity becoming an obvious competitor.
- The Franchisee, on the other hand, intends to have his hands as free as possible in order to devote to any activity, whether or not it competes with the business of its former Franchisor.
The natural vocation of the Franchisor is to build these covenants in the widest possible way, both territorially and temporarily, but that attitude easily collides with the non- competition EU regulations.
In 2013, the EU Court of Justice issued (case La Retoucherie / Manuel C) an order answering a question submitted by a Spanish Court that ruled that such restrictions on post-contractual free competition would only be valid if they were preached only with respect to the “premises” in which the terminated franchise contract had been developed, while the prohibition could not extend its effects to the locality (town or city) or to a larger geographical territory (region or country).
On the other hand, the Franchisor usually requires that the franchise agreement is subject to the legislation and the jurisdiction of the country where its headquarters are located, avoiding the legislation and jurisdiction of the courts of the franchisee’s country.
A few months ago the Superior Court of Justice of Madrid issued an interesting ruling on this issue declaring void an arbitration award by the International Court of Arbitration of the ICC.
- The arbitration award ruled about the contractual relation between a Spanish franchisor and an Argentine franchisee and a post-contractual non-competition clause that prevented the franchisee from performing competitive activities at the end of the contract throughout the territory of Argentina and Uruguay; the contract was subject to Spanish legislation and jurisdiction and, as mentioned above, it was obviously contrary to EU law.
- The arbitration award considered that the aforementioned post-franchise non-competition clause was valid and accordingly ordered the former franchisee to pay the contractually provided penalty.
- The arbitrator’s argument was that the rules of the European treaty on competition are limited to competition in the EU internal market and to trade among the Member States while the conflict judged in the arbitration was a franchise agreement that prohibited post-contract competition on the Argentinian and Uruguayan markets, which are not part of the EU internal market.
- The Superior Court of Justice of Madrid did not share this argument and declared the arbitration decision void; the Judgment argued that Spanish law “ineluctably” incorporates the EU regulations beyond its territorial scope; therefore, if a restrictive agreement is authorized by European law, it must be considered lawful in Spanish domestic law; and vice versa, if the agreement is considered illegal or not authorized by community law, it will not be lawful in our domestic law.
- Consequently, since Spanish law was applicable to the franchise contract in question, the arbitrator should have applied European law, and should have analyzed the non-competition agreement in the light of the European rules no matter if its effects were deployed in non-EU territories.
The relevant conclusion is clear: if the franchise contract is subject to the legislation of an EU country, even if the territory where the franchise deploys its effects is outside the EU, it will be unavoidably subject to the regulations of the EU on competition restrictive agreements.
The European franchisor must then decide if he prefers to submit to the legislation of his country or to the regulations of the country where the franchise is located, perhaps more permissive and less restrictive with respect to these types of agreements.
The object of this post is the analysis of the new obligations that RDL 6/2019 establishes, in terms of Gender Equality, for all types of companies (regardless the number of workers they have) and, specifically, for those companies that have 50 or more workers.
The main novelty we find in this respect lies in the obligation, for companies with 50 or more workers, to implement an Equality in Business Plan (EBP), in accordance with the provisions of articles 45 and related of the LOIEMH.
Regarding the content and the conditions of implementation of the EBP, we find the following novelties:
- The subjects and minimum content that all EBP must have are listed exhaustively.
- An analysis of the female underrepresentation in the Company is introduced, as a matter that the EBP must contain.
- The diagnosis that the Company must make prior to the preparation of the EBP must be negotiated with the legal representative of the workers.
- A Register of EBP for companies is created, in which all the EBP implemented in the Companies must be registered, regardless of the number of workers they have.
On the other hand, RDL 6/2019 gives a new wording to Article 28 of the Workers‘ Statute (WS), which includes the obligation of the Company to comply with the requirement of equal pay for men and women, establishing a series of measures and obligations in charge of the Companies, in order to ensure the effective fulfillment of the salary equality between genders.
In particular, these new measures adopted in article 28 of the WS are:
- What is to be considered as „work of equal value“ is specified, in order to facilitate a single concept and eliminate any doubt in this regard.
- Companies have the obligation to keep a Salary Register, with the average values of salaries, salary supplements and extra-salary perceptions of their workforce, differentiated by sex and distributed by professional groups, professional categories or equal work positions value.
- The Salary Registry must be accessible to the legal representatives of the workers.
- In companies with 50 or more workers in which the average remuneration of workers of one sex is higher than the other by 25% or more, a justification for said difference must be included in the Salary Register, and must be certified that it is due to reasons unrelated to the sex of the workers.
The breach, by the Companies, of the obligations in matters of Gender Equality and, in particular, those related to the EBP and equal payment between men and women, may entail the imposition of important sanctions by the Labor Inspector and the “Tesorería General de la Seguridad Social”.
The Spanish Law of the Agency Contract and the European Directive provide for the agent -except in certain cases-, goodwill compensation (clientele) when the relationship is terminated, based on the remuneration received by the Agent during the life of the contract. It is, then, a burden that in general every Principal will have pending when the contract ends.
The temptation is to try to get rid of that payment and for this clients consult us frequently about strategies or tactics. I will try to summarize some of them indicating the chances of success (or not) that may have, both in the negotiation / drafting phase of the contract, and in the resolution phase.
- Change the name of the contract
The first idea is to make a contract „similar“ to the agency or call it in a different way (services, intermediation, representation contracts…). However, the change of name does not have any incidence since the contracts „are what they are“ and not what the parties call them. So if there is a continued mediation in exchange for remuneration, there is a good chance that a judge will consider it an agency contract, whatever we call it, and with all its consequences.
- Limitation of compensation in the contract
Another temptation in the drafting phase of the contract is to agree compensation less than the maximum legally envisaged, provide for payment in advance for the duration of the contract, or directly eliminate it.
None of these solutions would be valid if they try to reduce the possibility of the Agent to receive the legal maximum, or for reasons not foreseen in the Law or the Directive. The law is imperative.
- Linking different agency contracts
Given that the compensation is calculated according to the remunerations of the last five years and the clientele created, the temptation is to link several shorter contracts to consider only the clients of the last period.
This will not necessarily be a good idea if most of the customers were created last year for instance, but it may also be useless because the Spanish law and the Directive provide that the fixed-term contract that continues to be executed becomes indefinite. The judge may consider all linked contracts as one.
For this strategy to have the possibility of being useful, it would be necessary to liquidate each substituted contract, declare that „nothing has to be claimed by the parties“ and that the successive contracts are sufficiently separated and have different entities, drafting, extension, etc. If the procedure is well thought out, it could be a way to get rid of a greater indemnity by clientele: a well-written pact whereby the agent declares the compensation received, and the following contract does not mimic the content and immediately to the previous one.
- Submitting the agreement to a foreign law
In international contracts the temptation is to submit the contract to a right that is not Spanish, particularly when the Principal has that citizenship.
The idea can be good or bad according to the chosen law and as long as it has some relation with the business. As is known, in the EU the Directive establishes minimum conditions that national laws must respect. But nothing prevents these laws from providing more advantageous conditions for agents. This means that, for example, choosing French law would be, in general, a bad idea for the Principal because compensation in that country is usually higher.
In some cases, the choice of a law outside the European Union that does not provide compensation for clientele when the agent is European has been rejected because that the minimum right recognized in the Directive has not been respected.
- Submit the contract to non-national rules and judges
Another less frequent possibility is to submit the contract to rules not from a country, but to general commercial norms (Lex Mercatoria) and to agree on a lower compensation.
This is very uncommon and may not be very useful depending on who is to interpret the contract and where the agent resides. If, for example, the agent resides in Spain and who is going to interpret the contract is a Spanish judge, he will most likely interpret the contract according to his/her own rules without being bound by what the contract envisages. This clause would have been useless.
- Submit the contract to arbitration
The question will be different if the contract is subject to arbitration. In this case, arbitrators are not necessarily subject to interpreting a contract according to their own national regulations if the contract is subject to different one. In this case, it would be possible that they felt freer to consider the contract exclusively, especially when the agent was not of their nationality, did not know what the law of the agent’s country and was not bound by the guarantees provided for his protection.
- Mediation in the agency contract
Mediation is an alternative dispute resolution system that can also be used in agency contracts. In mediation, the parties resolve the dispute by themselves with the help of a mediator.
In this case, given that the mediator is not deciding, it is possible for the parties to freely reach an agreement whereby the agent agrees to a minor indemnification if, for example, other advantages are conferred upon him, if he comes to the conviction of having less right, difficulty of proof, if he prefers to save other costs, time, energy for your new business, etc.
Mediators ensure the balance of the parties, but nothing prevents them to agree a compensation lower than the legal maximum (after the conclusion of the contract it is possible to negotiate a lower than the legal maximum). To foresee the possibility of mediation in the agency contract is, therefore, a good idea: this will permit the parties to better address and negotiate this compensation. In addition, providing for mediation does not limit the rights of any of the parties to withdraw and continue through the courts demanding the legal maximum.
- Imputing to the agent a previous breach
When the contract ends, this is undoubtedly the cause that is most often attempted: when the contract is to be resolved, the Principal tries to argue that the Agent has previously failed to comply and that this is why the contract is being resolved.
The law and the Directive exempt the payment of goodwill compensation when the agent has breach his obligations. But in that case, the Principal must be able to prove it when the agent discusses it. And it will not always be easy. The Principal must provide clear evidence and for this it will be convenient to collect information and documentation on the breach sufficiently and in advance and of sufficient importance (minor breaches are not usually accepted). Therefore, if the Principal wishes to follow this path it is advisable to prepare the arguments and evidences time before the agreement ends. It is strongly recommend contacting an expert advisor as soon as possible: he will help you to minimize the risks.
The procedure to incorporate a foreign owned company in Spain is, in principle, easy and straight forward, however it is necessary to take into account certain new requirements derived from the tax and the anti-money laundering regulations, which could cause long delays in the incorporation process, even to EU and US companies, if they are not well advised and managed from the beginning of the procedure.
The first step consist in collecting information about the foreign shareholder, in order to be able to prove its legal existence and activities: the foreign shareholder(s) will have to grant before a Notary Public in its country of residence a power of attorney authorising somebody in Spain to obtain its tax identification number (“NIE”), and also represent it before the Spanish notary when signing the deed of incorporation. In case the foreign shareholder is an individual person, the NIE should be applied for before the Spanish police or the Spanish Consulate at the country where the investor lives.
If the shareholder is a corporation, apart from the Power of Attorney, it will have to obtain a certificate from its Companies’ Registry or Chamber of Commerce, stating its legal existence and main characteristics. This document is called “good standing certificate” (in the UK and US), “K-bis” (in France), “KvK” (in the Netherlands) or “visura” (in Italy). These two documents, the Power of Attorney mentioned in the above paragraph and the certificate from the Companies’ Registry, will have to be Apostilled or legalized by the correspondent Ministry, and Sworn translated into Spanish. Please note that we use to draft bilingual powers of attorney in order to avoid its sworn translation.
The foreign shareholder will have to prove that its income is obtained from legal activities in order to be able to open a bank account in the name of the new company. The main document to prove this could be the Corporate or the Personal Income Tax return filed in its country of residence, but there could be other means, especially in case of individual persons.
In case of a corporate shareholder, it will be necessary as well to declare, in principle through a public deed granted in Spain, who are the individual persons who, directly or through other companies, will hold more than a 25% interest in the new company to be incorporated. In case nobody holds more than a 25% (i.e. because there are 5 individual shareholders, holding each of them a 20%), it is declared that the effective control of the new company corresponds to its director.
At this stage, it is also necessary to mention that the person(s) who will be the director(s) of the new company, in case they are foreigners, will also need to obtain their personal “NIE”. The NIE should be applied for before the Spanish police (this could be done by a proxy duly authorised though a Power of Attorney granted by the foreign director) or before the Spanish Consulate nearest to the city where the investor lives. In order to be a director of a Spanish company it is not necessary to be a shareholder, nor to have residence and work permit in Spain (provided the foreign director does not live in Spain).
Meanwhile the necessary documents (Powers of Attorney, Companies’ Registry certificate, etc.) are being prepared by the foreign shareholder, the lawyer in Spain will apply for the new company’s name. It is advisable to point out that generic or usual names are not available quite often, therefore it is necessary to think in original names. Three different names could be applied for simultaneously.
The drafting of the company’s Articles of Association or By Laws could be very quick, except if the company is going to have several shareholders and they wish specific clauses. In this case, it is also advisable to draft a Shareholders Agreement. The Shareholders’ Agreement could just contain some basic rules on dedication, compensation, non-competition, etc. and some more sophisticated rules on the sale of shares (tag along and drag along rights). As regards the By-Laws, they should mention the company’s name, its activity or activities, address in Spain –which cannot be just a P.O. Box-, share capital, number of shares and its face value, and starting date for the fiscal year, among other standard clauses.
The management of the company could be organized through a sole director, two directors who could act jointly or separately, and in case there are more than three directors, they should organize themselves through a Board of Directors, being usual in this case to appoint a C.E.O. In order to be a director it is not necessary to be a shareholder. Under Spanish laws, the director(s) could be held liable for some company’s debts under certain circumstances which are legally defined. For this reason, it is necessary that the directors formally accept their appointment (personally appearing before the Notary or through a Power of Attorney).
Before the incorporation, it will be necessary that either the new company’s director (the person to be appointed) or the representative of the corporate shareholder appears personally before the bank where the company will have its first bank account and signs the correspondent documents (KYC regulation). Once the bank account is opened, the shareholder will have to send a bank transfer for the new company’s share capital. In Spain, the minimum share capital for a limited company (S.L.) is Euros 3.000, while for a “Sociedad Anónima” (S.A.) it is Euros 60.000, but only 25% should be paid off at the incorporation moment. It is interesting to note that contributions to the share capital could be made in cash – which is the most common operation, especially at the incorporation – or in kind, with any type of assets: real estate, machinery, goods, trademarks, etc. The money for the share capital should be sent to the new company’s bank account from an account owned by the shareholder (or from each account owned by each shareholder, should they be several ones), not by any other different person. Once the Spanish bank receives the transfer, it will issue a certificate, which is necessary in order to incorporate the company.
Once all the documents are ready, it is possible within very few days (almost immediately) to make the appointment with the Notary and sign the public deed of incorporation. This can be done at any notary in Spain, not being necessary that the notary practises at the same city where the company will have its corporate address. In order to summarize, the list of the necessary documents is:
- Power(s) of Attorney granted by the foreign shareholder(s), apostilled and sworn translated.
- Certificate regarding the legal existence of the foreign shareholder (only if it is a corporation), apostilled and sworn translated.
- Statement on who are the last individual shareholders holding more than 25% interest in the new company, directly or indirectly (only in case of corporate shareholders).
- NIE of the foreign shareholder(s).
- NIE of the new company’s director(s), should they be a foreigners.
- Certificate for the new company’s name.
- Articles of Association.
- Bank certificate regarding the contribution to the new company’s share capital.
The deed of incorporation is signed by the proxy (or the individual shareholder(s), should they prefer to personally appear before the notary) before the chosen public notary, being also necessary to sign an official form to report the foreign investment to a public registry depending on the Spanish Ministry of Finance.
Once the deed of incorporation is signed, the next steps consist in applying before the tax authorities to obtain the new company’s tax number (NIF / CIF) and filing the deed of incorporation before the Companies’ Registry. Some banks do allow new companies to operate once they have the NIF (which could be 2-3 days after the incorporation), while others request to wait until the deed of incorporation is filed at the Companies’ Registry (2-3 weeks).
An estimation of the necessary time to complete all the procedure is 30-45 days, but of course the main delay is related to speed of the foreign investor in obtaining the necessary documents.
Please note that if you wish to incorporate a foreign owned company in Spain it is always necessary to seek specific professional advice, as each case is different and regulations and the application of such regulations vary from time to time. The above article just explains the main steps and requirements for the incorporation of a company.
Arbitration is a well-known system for dispute resolutions, and works as an alternative to judicial procedures. Parties are free to choose this system and to submit their conflicts to specific arbitrators or institutions.
It is usually considered that arbitration is a good way to solve conflicts but preferable to those arisen between big corporations or involving important amounts of money. Although this assumption is generally accepted, there is an alternative for distribution disputes suitable for smaller companies and cases with lower amounts claimed.
And here is the essential question: why a manufacturer/franchisor or a distributor/agent/franchisee should choose a specialized arbitration for their agreements instead of a more general one or, even, a judicial procedure? The answer seems clear: an arbitrator with knowledge not only in procedural questions but in substantive matters will be able to better understand the conflict between the parties and, therefore, to grant a better award. Take into account that, for instance in my Country, Spain, a Judge of First instance can deal in the same day with a distribution contract, a construction case, a conflict between heirs, and a discussion in a community of owners. All of this requires the analysis of different facts and completely different legislations and it is true that specific commercial problems do not usually have judges experts in international trading. But, how to choose a good specialized arbitrator? And, how to choose the arbitral procedure and the institution in terms of organization, neutrality, costs and time?
The IDArb was created in 2016 by the International Distribution Institute (www.idiproject.com) in collaboration with the Chambre de Commerce d’Industries et de Services de Genève (CCIG www.ccig.ch) and the Swiss Chambers’ Arbitration Institution (SCAI www.swissarbitration.org) and offers to the distribution sector (distribution, agency, franchising, selective distribution) a specialized, expedited and affordable arbitration procedure, not only for big international corporations but also for smaller cases. In fact, the expedited procedure is particularly foreseen for amounts below one million CHF (approx. 880.000 €).
The objectives and main characteristics of IDArb which make it suitable for all the distribution disputes are:
- A list of specialized arbitrators experts in this particular field is available for ad hoc or institutional arbitration and IDArb is able to assist the parties to choose one of them.
Specialized arbitrators from different countries and legal cultures have been appointed by a Selecting Committee reviewing their experience in one or more fields of distribution law. Therefore, parties can trust that the arbitrator will have concrete skills in the business with an in-depth understanding of the disputed issues. This is not a general knowledge on commercial law, but a concrete one on distribution, expressly verified by the Committee. Parties can even examine some examples of cases in which every arbitrator has been involved in.
- In order to maintain its high quality, the IDArb organizes training seminars for its appointed arbitrators. In these seminars, they are able to discuss about the general management of the arbitration, the procedural aspects and how to solve possible incidents in collaboration with the Institutions and their Rules. This will make all the proceedings more manageable and the possible difficulties more easily solved. Last seminar took place in Geneva in November 8, 2018 and participants have discussed, amongst other subjects, on evidences, witnesses and document production.
- The expedited arbitration procedure permits the parties to have a tailored procedure managed by SCAI under the Swiss Rules of International Arbitration, specially adapted for small disputes in the field of distribution.
- Time is also an essential element: the award in the expedited procedure will be issued in a maximum term of six months (only exceptional circumstances permit the Court to extend such time-limit), and, if parties agree, it can be decided only on documentary evidence.
- Costs are reasonable and known in advance.
- And, as final but important remark, IDArb has also adopted some recommendations where, upon request of the parties, mediation is favoured, the arbitrator my consider giving a preliminary non-binding and provisional assessment of the dispute and should have a pro-active position in order to facilitate an amicable settlement.
To have further information about the clause to use in the contracts, the list of specialized arbitrators, their skills, experience and complete CV, and the recommendations for expedited arbitration, you can follow the link: https://www.idiproject.com/content/idarb-idi-arbitration-project
Spanish Law on Entrepreneurship (Law 14/2013) has approved new cases where foreigners from non-European Union countries can obtain the residence permit in Spain through the execution of investments:
- Investments in real estate for an amount equal or higher than € 500.000 (Five Hundred Thousand Euros). The investment can be made in one or more properties, but at least € 500.000 should be free of encumbrances (mortgage, i.e.). If the price is higher than € 500.000, the rest of the amount could be paid through mortgage.
- Financial investments for a value equal or higher than 1 million Euros. This type of investment includes listed and non-listed shares, in case of non-listed shares they could be from already operating companies or newly incorporated ones, investment funds, and deposits in Spanish banks.
- Investment in Spanish sovereign debt for an amount equal or higher than 2 million Euros.
- To carry on a business project in Spain that was considered as being of public interest. To this purpose, one of these conditions should be met: creation of jobs, execution of an investment that has a positive impact in the region where it is located, or a relevant contribution to scientific or technological innovation.
The visa granted through the execution of these investments is valid during at least one year, and in order to obtain the residence permit some other requirements should be met:
- to not stay previously in Spain in an illegal situation,
- to have more than 18 years,
- to not have criminal records,
- to have a health insurance (hired from a company operating in Spain)
- to have financial means for the stay in Spain (i.e. a bank deposit, or income from leases or dividends. Payroll does not qualify for this purpose).
If the above requirements are met, a two years residence and work permit could be granted. After this term, the residence permit can be extended for successive five years periods. The investments should be kept during all these periods. This permit does not request the foreigner to live in Spain for more than six months; therefore it will not be cancelled if the foreigner lives in another country.
The residence and work permit is granted to the individual who executes the investment. If he/she is married and/or has children or ancestors who depend on the investor, it is possible to apply for their visa at the same time or later on. It is possible to execute the investment through a company owned by the investor, provided it is not a company domiciled in a tax heaven country.
The Spanish visa allows free movements within the EU countries (Schengen space). The valid travelling document is the passport.
Foreigners who wish to carry on a self-employment project in Spain could obtain the work and residence permit, but through a different procedure than the above mentioned, and these cases the minimum investment amount is lower.
Investment in real estate
The investment in real estate could be in residential, commercial or industrial properties. The property could be leased to third parties before or after the acquisition, or used by the investor. For ambitious investors, there are several possibilities to structure the investment in buildings and apartments and to a higher return of the investment.
There are some costs related to the acquisition of real estate: the acquisition itself is taxed by Transfer Tax at rates ranging from 6 to 10% on the acquisition price, depending on each Spanish region where the property is located, to be paid by the buyer. Besides, the buyer should pay the Notary Public and Property Registrar’s fees, which approximately amount 3% of the acquisition price (the addition of both of them). These amounts are paid once, when the property is acquired.
The annual costs related to the ownership of real estate in Spain are the following ones:
- IBI or local property tax, whose amount is calculated based on the value and location of the property.
- “Community expenses”, that is those expenses related to the maintenance of the common areas of the building where the property is located: cleaning, lighting, etc.
- In some cases, also a small tax for garbage should be paid to the Town Council.
- Owners should file the Spanish Personal Income Tax Return, and pay a percentage between 1,1% and 2% of the property’s “cadastral value” (official value), in case the property is not leased to a third party. If the property is leased, the owner should also file the Personal Income Tax Return based on the amounts obtained from the lease.
Besides, owners should also pay the expenses related to their property: ordinary maintenance expenses, insurance, electricity and water, etc.
In Spain, the property right is considered as a full right, which implies that the owner can use the property by himself, can lease it to third parties, can mortgage or encumber it, can sell or gift it to any third party and can pass it to his heirs through a will.
The only limits to the use of the property by its owner or the persons appointed by him are those established by the civic rules regarding noises, pets, exterior image of the property, etc.
Regarding the lease of the property, in principle it is free, and the rights and obligations of landlord and tenant are those provided by the private lease agreement entered between both parties and the Spanish Urban Leases Law (Ley de Arrendamientos Urbanos). However, nowadays many Spanish cities (and specially Barcelona) have approved strong limits to the so called touristic leases, which are the short term (days or weeks) leases, and request a special license.
It is important to point out that foreigners who become residents in Spain can grant their will according to Spanish inheritance laws (according to EU Regulation 650/2012), which slightly vary depending on each Spanish region. In Catalonia, for example, the testator can freely appoint who will be his heirs.
Financial investment
Financial investments can be executed through different types of targets, being always the minimum amount 1 million Euros:
- Shares of companies listed in the Spanish Stock Market.
- Shares of non-listed companies, which could be already operating companies or newly incorporated ones. In both cases, there are no limits as regards the percentage of shares that can be owned by foreigners, and the activity sectors restricted to non EU foreign investment are very few (gambling, defense, aviation, TV and radio). Foreigners can be appointed Directors of Spanish companies with the only requirement of having previously obtained the so called “N.I.E.”, which is the Spanish identification number for foreigners.
In case of a newly incorporated company, the € 1 million requested as investment would constitute the company’s share capital, and can be used for the startup of the company’s activities: for example, acquisition of goods, payment of salaries and rentals, payment of purveyors and subcontractors, etc.
Spanish companies have access to all European markets and have a privileged position for trading with Latin American countries.
- Investment funds: Spanish financial entities offer a very wide range of investment funds, from very conservative to high risk.
Deposit in a bank
The main advantage of a real estate investment compared to a financial investment is that the requested amount is only € 500.000 for real estate, while for a financial investment is twice this amount. During the past years since the Law on Entrepreneurship became in force, investment in real estate has been the most popular way for obtaining the residence permit in Spain, probably because at that time (2013-2016) real estate market prices were quite low due to the crash in 2008.
However, the process to acquire a property in Spain is not so easy compared to the acquisition of a share in an investment fund or making a bank deposit: the investor has to choose the property, which normally requires one or two visits to Spain, the price and sale conditions have to negotiated and drafted, the purchase deed has to be signed before a Notary Public (by the investor or his proxy), there are taxes and expenses related to the acquisition, and once the property is acquired, it is necessary to pay ongoing expenses and taxes, and maintain the property in good condition.
Compared to this, the investment in funds or making a bank deposit only requires one visit to the bank by the investor, in order to sign the correspondent documents. There are not related taxes or expenses, and the liquidity of the investment is full (that is, the investment can be sold at any moment, quite probably at the same or at a higher price, but this is not guaranteed for real estate investments).
How to open and operate a bank account in Spain
In Spain, banks apply the regulations regarding anti-money laundering, which include the KYC (Know Your Client) rules and the obligation to prove the legal origin of the funds. The KYC rules imply the need for the investor to appear personally before the bank at least once, previously to operating the bank account. The legal origin of the funds can be proved through different means:
- In case of employees, through the payroll splits, or a certificate issued by the employer, or the investor’s personal income tax return.
- In case of self-employed individuals, through their personal income tax return, or another type of documents proving their professional activity.
- In case of company owners, through the company’s financial statements.
- If the investor has obtained the funds necessary for the investment through personal loans, the loan agreements should be provided, plus the documents proving the legal origin of the funds provided by the lenders.
- Other documents, for example, regarding dividends or income from the lease of properties owned by the investor could be provided.
All documents should be legalized by a Notary Public or the Spanish Consulate, and sworn translated into Spanish.
Please note that this article is aimed to provide a general overview on Spanish rules regarding the above matters, but it does not constitute any kind of comprehensive information on them, and in any case specific legal advice should be sought prior to taking any decision.
