When a commercial lease ends, does the tenant have to be compensated for goodwill?

Question

José Manuel Alburquerque · Accepted Answer

Only if the legal requirements are met and, at the same time, the lease has not excluded it. Article 34 of the “Ley de Arrendamientos Urbanos” (LAU), Spain's urban tenancies act, gives a right to compensation to a tenant who has carried on a commercial activity selling to the public in the premises for the last five years, when the lease ends on its expiry date. In addition, the tenant must have offered, four months before the end, to renew for at least five more years at a market rent. Even then, compensation is only paid if, within the following six months, the tenant reopens the same business in the same municipality or someone else opens the same or a similar business in the premises. As that rule only applies where the lease does not say otherwise, the tenant can waive it on signing, which is common with commercial premises. The requirements The courts require all of them to be met: The lease must end on the agreed date. There is no compensation if the tenant leaves early, if the lease ends by mutual agreement or if the landlord terminates it because the tenant has failed to comply. The tenant must have carried on a commercial activity selling to the public in those premises over the last five years. An industrial unit or a warehouse without sales to the public does not give rise to it. Bars and restaurants can give rise to it, as the “Tribunal Supremo”, Spain's Supreme Court, has confirmed, because what counts is that the business builds up a clientele. Four months before the end, the tenant must have told the landlord that he or she wishes to renew for at least five more years at a market rent. The market rent is whatever the parties agree. If they cannot agree, it is set by the arbitrator they appoint. The landlord must not agree to renew. How much is paid It depends on what happens in the six months after the lease ends: If the tenant reopens the same business in the same municipality, the tenant is paid the costs of moving and compensation for the clientele lost because of the change of location, calculated on the basis of the clientele in the first six months at the new premises. If the tenant starts a different business or opens none and the landlord or someone else sets up in the premises the same business or another that can take advantage of the tenant's clientele, the tenant is paid one month's rent for each year the lease has lasted, up to a maximum of eighteen. In a ten-year lease with a rent of 1.502,84 euros a month, for example, the compensation would be ten months' rent, 15.028,40 euros. If neither of these things happens, there is no compensation. If the parties cannot agree on the figure, the law provides for it to be set by an arbitrator appointed by them. If they do not appoint one, the judge decides it. What to do If you are the landlord, check the lease. If it contains a clear waiver of this compensation, in principle you will not have to pay it. If it does not, work out what it could cost you before turning down the offer to renew. If you are the tenant and your lease does not exclude it, make the offer to renew before the final four months of the lease begin, in writing and by a means that records the date, such as a “burofax”, a certified letter with proof of content. If the landlord then does not pay, the law requires an attempt at negotiation before you bring a claim. If what is paid is a sum for the tenant to vacate the premises before the lease ends, that is not goodwill compensation. According to the tax authorities, that payment is subject to VAT, because it rewards the tenant for giving up the use of the premises. How goodwill compensation is taxed is less clear, so it is advisable to take advice before paying it. Premises held under old-style protected tenancies (“renta antigua”), with leases predating 9 May 1985, have a different compensation with its own rules.