SERIES “LEASE AGREEMENTS IN THE CONTEXT OF COVID-19”
TAKE III – Financial Support from IHRU
The third measure approved by the Portuguese Government to support tenants and landlords in the context of Covid-19 consists of the possibility of obtaining an interest-free financing granted by the Institute for Housing and Urban Rehabilitation, I.P. (hereinafter, IHRU, I.P.), which aims to ensure the payment of rents by tenants or to compensate landlords for the loss of income during the of the state of emergency and until the month following its lifting.
Like the right to defer the payment of rents (see Take II of this series of articles), the granting of financial support by the IHRU is not within the reach of all tenants and landlords. As this measure aims order to protect the fundamental right to housing, access is limited to tenants and landlords on lease agreements for housing purposes.
Therefore, to lease agreements for non-housing purposes it is only applicable the suspension of termination effects (see Take I) and the deferral of the duty to pay rent (see Take II).
A) Tenants in lease agreements for housing purposes
The IHRU financing is as an alternative measure to the right of deferral of the rent payment. Therefore, a tenant may choose between deferring the payment of the rents that are due to the landlord until the month following the lifting of the state of emergency, or to maintain the regular payment of those rents and obtain a loan from the IHRU to cover part of the rent. In principle, this is a decision of the tenant.
In order to access the IHRU loan, tenant must demonstrate that the following criteria are met:
- A drop of more than 20% in the overall tenant household’s income in comparison with the previous month or the same period of the previous year(1),
- That tenant household’s effort rate(2) is higher than 35%, and
- Tenant does not benefit from any reduced rental scheme, namely social rents.
In addition to tenants of lease agreements for housing purposes whose permanent residence is at the leased property, financial support from IHRU is also available to those who are guarantors to lease agreements for housing purposes entered into by students with no labour income, and to students that are tenants to lease agreements for housing purposes to attend a college or school located over 50 km away from their households’ permanent residencies.
The financing from IHRU is interest-free (i.e. no compensatory interest is due), and the application is made by the tenant at Portal da Habitação website, by filling in an electronic form along with documentation evidencing the above-mentioned criteria.
IHRU has 8 days to approve or refuse the financing request.
When approved, the financing will be made available on a monthly basis (during the state of emergency and until the month following its lifting), but shall cover only the difference between the monthly rent due by the tenant and the amount resulting from the application of the maximum effort rate of 35% to the tenant’s household income. However, the remainder household’s income can not be less than EUR 438,81 (amount of the IAS)(3) after the rent has been paid.
Taking back the example presented in Take II, by which we’ve rehearsed the reality of a family with a regular monthly income of 3,000.00 Euros reduced to 2,000.00 Euros due to the crisis, and whose monthly rent is of 900.00 Euros:
(Monthly rent of 900 Euros – Effort Rate of 35% of 700 Euros = 200 Euros)
Considering that the maximum effort rate of 35% applicable to the monthly income of this household is 700 Euros, this family will pay 700 Euros. The difference of 200 Euros to make up the total rent amount of 900 Euros will be covered by by IHRU’s loan. Therefore, the loaned amount will be of 200 Euros.
Under the loan agreement with the IHRU borrowers (tenants) are not allowed to use the funds for any purposes other than paying the rents, and they shall send to IHRU the rental receipts within 10 consecutive days after the funds are made available. They must also inform the IHRU if meanwhile they managed to obtain alternative state support for the same purpose (payment of rent), as well as the occurrence of any event that may jeopardize or prevent compliance with their obligations set forth in the loan agreements.
As for the loan repayment conditions, under the Regulation approved by the IHRU(4) a grace period until 31 December 2020(5) is granted. Therefore:
- reimbursement will be due from January 2021 as a rule;
- it shall be paid in monthly, equal and successive capital instalments of 1/12 (one-twelfth) of the monthly rent, except for the last instalment which shall be in the total remainder amount due;
- the first instalment is due on the first working day of the month following the termination of the grace period, and the following instalments on the first working day of each subsequent month;
- early repayments (total or partial) are allowed, without penalties;
B) Landlords in lease agreements for housing purposes
Although in very limited terms landlords of housing leases may also request financing to IHRU to cover the decrease of rental income due to deferral of the duty to pay rent requested by tenants.
In order to benefit from IHRU’s financial support, the landlord shall demonstrate that:
- landlord household’s income has fallen by more than 20% in comparison to the previous month or to the same period in the previous year, resulting on a household’s disposable income lower than 438,81 Euros (IAS);
- the abrupt drop in income results from non-payment of rents due and unpaid by tenants,
- tenants have requested the deferral of their duty to pay rents and communicated their intention to the landlord.
The landlords of housing leases who intend to obtain this financing shall submit their application through Portal da Habitação website. The maximum amount loaned by IHRU corresponds to the monthly amount of rents due and unpaid by the tenants.
Concerning the repayment, it is due in equal and successive instalments, of one-twelfth (1/12) of the overall loaned amount, being the first instalment due on the first day of the month following the last payment by IHRU and the following instalments on the first day of each subsequent month, although each instalment may be repaid without penalty until the eighth day of the same month.
It shall be noted that no grace period has been granted for landlords and therefore the repayment of the borrowed amount is due from the month subsequent to the last payment from IHRY (i.e. from the month following the termination of the tenants’ right to defer the duty to pay rents).
C) Restrained application of the measure: Deferral vs. Financing?
In general, the tenant has two alternative solutions that are quite distinct in what concerns bureaucracy, liquidity and risk distribution.
Regarding the bureaucracy, while the approval of financial support requires the submission of an application, acceptance by IHRU and the signing of a loan agreement, the deferral of the duty to pay rent requires only a communication addressed to the landlord, who can neither oppose nor require the tenant to ask for the financing if the legal requirements of tenant’s right to defer are met.
As for the liquidity, the right of deferral allows the tenant to delay the full payment of rents but there is no grace period – repayment will start shortly after the termination of the state of emergency. Under the loan granted by IHRU the tenant must pay part of the rent up to the limit of the effort rate of 35% during the state of emergency and until the month following its termination – IHRU’s support covers the remaining value of the rent but its repayment is only due, as a rule, from January 2021.
Therefore, on the deferral of the duty to pay the rent, the risks of non-compliance and lack of liquidity fall entirely on the landlord who, unlike the tenants, will only be able to request financing support to IHRU if his household’s income drop to extremely low levels (438,81 Euros). If the tenant asks for the IHRU’s financial support, the rents will continue to be paid in full and the risk of default of repayment of the borrowed amounts falls on the Institute – and ultimately on the State.
In summary, the disparity between the solutions available for tenants and landlords is evident and therefore it seems that many tenants will choose to defer the rents’ payment instead of asking for IHRU’s financial support. With this in view, we believe that this support will surely have a limited or restrained application.
This is not an exhaustive analysis and the advantages of one or another measure are necessarily connected to the reality of each household, thus a case-by-case review is indispensable.
(1) To demonstrate the drop of income it is required: a) for income from dependent work, the respective gross value; b) for income from independent work (category B of the Portuguese IRS), the amounts excluded of VAT; c) for pension income, the respective monthly gross value; d) for rental income, the amount of the rents received; e) for social benefits and habitation supports, the respective monthly amount received; f) for other regularly or periodically types of income, the respective amount.
The income shall be proved by pay slips (dependent work), invoices or receipts (independent work), and documents issued by the paying entities or others that demonstrate the current income.
When it is not possible to present any documents, considering the types of the income (pensions, rents, habitation supports or other regular or periodic income), the tenant must present an honour statement.
(2) Calculated as the percentage of the overall household’s income allocated to the payment of the rent.
(3) For each tranche, a stamp duty of 0.04% on the loaned amount is due. This amount is withhold by IHRU and deducted from the funds made available to the borrower.
(4) Available for consultation here.
(5) Which, in any case, cannot be of less than 6 months.
Joana Neto Mestre | Jéssica Ramos