A new legal dispute has erupted in Spain, potentially reshaping how real estate is managed. The country’s Supreme Court (Tribunal Supremo) has handed down a decision that could impact the strategies of major landlords and investors. Buildings owned by a single proprietor and leased out can no longer be divided into separate cadastral units unless actual sales of premises have begun. This ruling has sparked intense debate among lawyers, tax consultants, and real estate professionals.
The judicial panel reviewed a case in which a major investment company sought to split an office complex into separate cadastral units. Although the premises were leased to different tenants, the judges found no grounds for amending the cadastre. The reason: there had been no actual sale of even part of the building, and therefore only one owner exists.
Legal subtleties
The Supreme Court emphasized that sole ownership means a building cannot be considered a subject of horizontal property. Even if premises are physically divided and leased to different tenants, from a legal perspective it remains a single entity. For a building to be recognized as divided into separate cadastral objects, there must be multiple owners, not just multiple tenants.
The judges recalled that issuing the so-called horizontal property title (título constitutivo de la propiedad horizontal) by a single owner is only a preparatory step. This document may be useful for future sales, but on its own, it does not provide a legal basis for cadastral division. Until there are at least two owners, the building remains a single entity for tax and administrative purposes.
Vertical vs Horizontal Ownership
Spanish law distinguishes two types of property ownership: vertical and horizontal. In the first case, the entire building belongs to one person, even if it is divided into offices or shops. In the second, each owner has their own part, and shared areas are used collectively. It is this second option that allows the property to be divided in the cadastre and taxes paid separately for each unit.
The Supreme Court’s decision essentially establishes that renting is not equivalent to ownership. Even if a building has dozens of tenants, for the cadastre it remains a single whole until individual premises are actually sold. This limits options for tax optimization and complicates planning for large landlords.
Cadastral Register and Taxes
The issue of dividing buildings is directly tied to taxation. If a property is listed in the cadastre as a single unit, the property tax (IBI) is calculated based on the overall value of the building. Splitting it into separate cadastral units would allow owners to pay tax for each section individually, which can sometimes be advantageous. However, this approach is now impossible without creating a formal community of property owners.
Additionally, the inability to divide affects access to certain tax benefits and subsidies that depend on the property’s configuration in the cadastre. For many companies, this means rethinking their financial strategies and abandoning some optimization schemes.
Practical implications
The court’s decision is particularly painful for large investment funds and SOCIMI—companies specializing in real estate management. They often own entire buildings, renting out sections individually. Now these entities will not be able to split their properties into cadastral units until at least one part is actually sold. This complicates transactions involving refinancing, collateral, or the transfer of individual premises.
Many experts believe that the Supreme Court’s decision could reduce the attractiveness of investing in commercial real estate. Some companies have already begun to reconsider their plans for purchasing and managing office and shopping centers. For private owners of smaller properties, the situation is less critical, but they too will face restrictions when trying to divide assets for inheritance or sale.
Law versus reality
At the heart of the dispute is the fifth article of the Ley de Propiedad Horizontal. It allows for the establishment of ownership shares when selling premises, but the Supreme Court clarified that simply preparing a property for sale does not create a legal basis for division. Only the presence of multiple owners triggers the horizontal property framework and enables updates to the land registry.
Therefore, attempts by some companies to use formal procedures to optimize taxes and manage assets have encountered the court’s tough stance. Now, any changes in the land registry must reflect the actual state of affairs, not just the owner’s intentions.
If you didn’t know, SOCIMI are Spanish real estate investment trusts, modeled after American REITs. They play an active role in the commercial property market, managing offices, shopping centers, and hotels. SOCIMI must comply with special tax regimes and are often involved in major real estate transactions in Madrid, Barcelona, and other cities across the country.
