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Spain’s response to Covid-19: emergency measures; gradual relaxation

Uría Menéndez lawyers review the extraordinary measures taken by the Spanish government to protect businesses and citizens

Uría Menéndez lawyers review the extraordinary measures taken by the Spanish government to protect businesses and citizens

As many other countries, Spain has adopted a number of emergency measures to cope with the Covid-19 outbreak, with the main purpose of protecting public health, on the one hand, and mitigate the damages on the Spanish economy, on the other hand. Some of these new laws and regulations are of an extraordinary nature and will be applied only temporarily, while others, such as the foreign investments screening mechanism which Spain has put in place like many of its European peers, have been permanently introduced in our legal system.

After the World Health Organization declared on March 11 2020 that the Covid-19 outbreak had reached the level of a global pandemic and as the rapid escalation of the public health crisis caused by the virus became apparent across the globe, several countries, including Spain, implemented a number of emergency measures with a twofold objective: (i) protect citizens' health and (ii) mitigate the economic consequences of the lockdown measures.

On March 14, Spain declared a state of emergency for an initial period of 15 days, though a number of extensions have followed, and at the time of writing it remains in place. Under the state of emergency, which is a regulated constitutional action that the Spanish government can take in extraordinary circumstances, it has implemented a number of measures to try to contain the spread of Covid-19. Among others, (i) the free movement of people has been limited; (ii) the activity of retail premises and establishments as well as hotels and restaurants has been generally suspended; and (iii) all schools and other in-person educational facilities have been closed.

During the days and weeks following the declaration, Spain has implemented other measures to ease the social and economic damage caused by the lockdown. The measures have three main objectives: (i) to protect families and vulnerable groups (including measures to guarantee home assistance for dependants, ensure the supply of electricity and water and provision of telecommunications services, as well as a moratorium on the payment of mortgage instalments and consumer financing fees for vulnerable groups); (ii) to support workers, employment and production in general (including measures to enhance flexibility and implement systems that allow temporary job adjustment while protecting workers' rights and easing social security costs for employers); and (iii) to provide temporary support to companies with liquidity problems as a result of the drop in or cessation of business (including a scheme of government-backed guarantees and an increase in borrowing capacity of public financing entities, the suspension or relaxation of time periods to pay taxes and a moratorium on the payment of commercial lease rent).

On April 28, the Spanish government approved a plan to regulate the gradual relaxation of lockdown measures in Spain, which is divided into four phases through which the provinces (provincias) will progress depending on a number of indicators, such as contagion and death rates.

Below is a non-exhaustive summary of the most relevant measures that Spain has implemented to address the Covid-19 pandemic and a brief description of the plan to relax the lockdown measures.

Main measures implemented in Spain during the state of emergency

With regard to employment-related matters, temporary layoff schemes (known in Spain as ERTEs) have been created. These procedures allow employment contracts to be suspended temporarily or their working hours reduced. The main consequence for employers is that, while the scheme is in place, they will not have to pay the employees' wages (or only pay them in part if their working hours are reduced). Employees will receive unemployment benefits and companies are still generally obliged to pay their social security contributions. Companies can apply two types of temporary layoff schemes as a result of the Covid-19 pandemic: (i) those based on force majeure (i.e. those that are a direct consequence of the government's decision to suspend or cancel business activity) and (ii) those based on objective grounds (i.e. those caused by the serious but temporary drop in demand caused by the Covid-19 pandemic which has resulting in employers having a disproportional workforce). If the temporaryoff scheme is due to force majeure (which involves a more straightforward and less stringent procedure) employers are obligated to retain their employees for six months as from the moment their business activity resumes.

A number of measures have been implemented to foster the injection of liquidity into distressed companies

As regards financial matters, a three-month moratorium was specifically approved for vulnerable borrowers in connection with mortgage-secured financing granted to acquire specific types of properties. While the moratorium is in place, mortgage debts are suspended, no interest accrues, and the lender is not allowed to exercise acceleration rights. Likewise, a three-month moratorium was approved to suspend the obligations derived from consumer finance agreements for vulnerable debtors.

However, no moratorium has been approved regarding compliance of general obligations arising from the financial arrangements executed by companies and entrepreneurs. Under the current circumstances, in which the activity of many businesses has dropped significantly or stopped completely, a significant number of companies are facing liquidity problems and may find it difficult to fulfil their interest or principal payment obligations. To address this, Spain has implemented a number of measures to address the liquidity stress on the different economic actors. These measures include, among others, (i) a government-backed guarantee scheme through which the Spanish state may grant, until December 31 2020, guarantees up to a maximum of €100 billion ($109.6 billion) to cover both the renewal of loans and new financing granted by financial institutions to eligible companies and self-employed workers in order to meet financing needs arising from the liquidity shortage caused by the disruption of business activity due to the Covid-19 pandemic; and (ii) the increase of the net borrowing capacity of the Official Credit Institute (ICO) by an additional €10 billion to provide liquidity support to companies.

In relation to real estate matters, Spain has approved a number of measures to protect, on the one hand, families and vulnerable persons in connection with their residential leases and, on the other hand, self-employed workers and small and medium-sized enterprises (SMEs) in connection with their commercial leases. The measures implemented in connection with residential leases include, among others, (i) a temporary moratorium on rent payment for residential leases where the lessee is a vulnerable person and the lessor is a large property owner; (ii) a rent renegotiation mechanism for residential leases of vulnerable persons where the lessor is a small property owner; (iii) a stay of evictions for families who have no alternative housing; and (iv) exceptional six-month extensions for residential leases which expire while the declaration of the state of emergency is in force or within two months after it is lifted. The measures implemented in connection with non-residential leases include, among others: (i) a moratorium on the payment of rent on commercial or industrial leases for self-employed workers and SMEs that meet certain requirements where the lessor is a large property owner or a public housing entity; and (ii) a rent renegotiation mechanism for other non-residential leases where the lessor is a small property owner.

In connection with insolvency-related measures, in addition to the general stay of terms and judicial proceedings established in Spain during the state of emergency and in line with what other countries have done, insolvent debtors will not be obliged to file insolvency petitions until December 31 2020. Likewise, requests filed by creditors to initiate insolvency proceedings against a debtor will not be admissible until such date (and requests filed by debtors will be given priority, even if they are filed after the creditors' requests). This measure is designed to give companies time to restructure their debt and secure cash, and to avoid viable companies from having to file for insolvency.

In addition, a number of measures have been implemented to foster the injection of liquidity into distressed companies, whether by sponsors or third parties, including the following: (i) a temporary exception to the rule of general subordination of financing provided by entities especially related to the debtor (e.g. shareholders with a minimum stake or group companies), which, if granted after the declaration of the state of emergency, will now rank as ordinary claims in the event of a declaration of insolvency within two years following the state of emergency; (ii) a temporary relaxation of the consequences of a debtor breaching a previous court-approved refinancing agreement; and (iii) a stay of the obligation to request the liquidation of the company if complying with the in-court creditors' agreement becomes impossible.

Finally, as to foreign investment matters and in the same way as other European countries, Spain has introduced a stricter screening mechanism for certain investments by non-EU and non-EFTA residents. The screening mechanism applies to investors (a) who reside outside the EU or the EFTA or who, although reside in those areas, their beneficial owners do not; (b) who through their investments acquire a minimum stake of 10% in the share capital of a Spanish company or the right to partake in its management or gain control over it, and (c) who are either targeting Spanish companies that operate in protected sectors (such as critical infrastructure or technology) or are controlled by foreign governments, have already made investments that affect national security or public order or health in another EU member state or are involved in litigation in another EU member state for taking part in illegal or criminal activities.

Gradual relaxation of the lockdown measures

On April 28, the Spanish government approved a plan to lift the lockdown in Spain. The measures will be lifted gradually (there will be a progressive return to how things were before the pandemic) and differently throughout Spain (measures and phases will apply and be assessed at a provincial level and each province will go through the relaxation measures at its own pace in accordance with the established parameters). In this regard, citizens will not be allowed to leave their province of residence until after the last phase (phase three). Provinces will progress into the next phase based on a number of indicators, such as (i) the availability of hospital and ICU beds, (ii) Covid-19 contagion and death rates; and (iii) compliance with protection measures at workplaces, businesses and public transportation.

Spain has introduced a stricter screening mechanism for certain investments by non-EU and non-EFTA residents

Each phase of Spain's relaxation of the lockdown measures provides a tentative date and each province will only proceed to the next phase if the objective requirements related to the health situation in that province are fulfilled. Each phase lasts for a minimum of two weeks. As progress is made towards the last phase, the social and economic restrictions in each province will be gradually relaxed, although the authorities will continue to closely monitor the pandemic and will ask citizens to keep complying with basic personal hygiene and social distancing measures until a vaccine is available.

For example, during phase one, which some provinces in Spain have been in since May 11, businesses can open to the general public but will have to comply with strict security measures (the number of clients at the premises should not exceed 30% capacity and social distancing measures will still need to be respected), restaurants will be able to open their outdoor terraces to 30% capacity, and hotels and tourist accommodations can reopen subject to certain restrictions (common areas must remain closed). Indoor and outdoor cultural events during this phase are also allowed subject to reduced capacity and social distancing rules. Phase two, which – if all goes well – will start to apply two weeks after phase one, will allow restaurants and cafés to open their interior areas for table service only and to one-third of their usual capacity, hotels to open their common areas to one-third of their usual capacity, cinemas, theatres and museums to open subject to capacity restrictions and citizens to travel to their second homes within the same province. Phase three will allow free movement within the same province, business and restaurants will be able to open to 50% capacity, and beaches will reopen subject to social distancing and specific safety measures.

Jaime Pereda
Uría Menéndez, Madrid
Leonor de Osma
Uría Menéndez, Madrid

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