Loan or lease: the thin line between them and fraud under Spanish law

Loan or lease: when the contract's name does not fool the judge

Calling a contract a "loan for use" does not make it one if rent is involved. That is the paradox running through any housing agreement that tries to sidestep Spain's Urban Leasing Act (LAU) under a different label. The legal debate has been open for years, but the conclusion is clear: when a price is paid for the use of a home, the relationship is a lease, even if the paper says "loan for use".

The legal difference between a loan for use and a lease

A loan for use (cesión) is the transfer of a right — in this case, the right to use a home — which may be free of charge or for payment. A lease, on the other hand, is always for payment: there is an economic consideration in exchange for use. The LAU regulates residential leases with mandatory rules protecting the tenant: a minimum term of five years, mandatory extensions, and the landlord's repair obligations. A free loan for use, meanwhile, is governed by the Civil Code and lacks those protections. The problem arises when a loan contract includes a hidden monthly payment: then the real transaction is a lease, and the parties cannot evade the LAU through the contract's name.

Fraud: how to unmask a disguised tenancy

If a tenant pays rent in cash and the owner issues a "free loan contract", this is fraud under the law. Case law is clear: judges are no fools, and faced with signs such as regular payments, witnesses, or the simple logic that nobody lets a stranger live in their home for free, the LAU applies. To prove it, it is advisable to keep receipts, have witnesses to the payments, and if possible send a burofax (a certified fax-style notice) demanding the verbal contract be put in writing. Article 37 of the LAU allows the tenant to demand that the contract be formalised in writing.

The tax agency's watchful eye: free loans and income in kind

Letting someone use a home free of charge has tax implications. The beneficiary must declare the market value as income in kind in their income tax return (IRPF), except in the case of a rental between relatives at below-market price. Spain's tax agency (Hacienda) does not accept free arrangements between non-relatives without justification. The landlord, for their part, is obliged to pay tax on the rental income. An off-the-books tenancy benefits the owner in the short term, but leaves the tenant unprotected: they cannot invoke the LAU without first proving the existence of the lease in court.

What if the loan is made by a public authority?

A particular case arises when a public authority offers a "loan for use" after a five-year rental contract, in order to avoid the mandatory extension. However, if a monthly rent is charged, the nature of the contract is still a lease, and the tenant could demand the application of the LAU. Article 10 of the LAU states that, once the first five years have passed, the contract is extended annually unless either party gives notice. A public authority cannot evade this extension by changing the label.

Conclusion: same substance, different form

A loan for use and a lease are different legal figures, but when a price is involved, reality prevails. A loan contract with rent is a disguised tenancy, and the courts will treat it as such if the right evidence is provided. The question that remains is: to what extent will a judge accept the paper, or will they go to the heart of the matter?

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