The Canary Islands Government has agreed to pay €500 million in compensation to hotel developers, bringing an end to a legal battle dating back 25 years over restrictions imposed on new tourist accommodation.

The agreement relates to the controversial tourism moratorium introduced between 2001 and 2003, which suspended licences for new accommodation developments as the regional government attempted to redirect investment towards renovating older hotels and holiday complexes.

Affected businesses had been pursuing compensation claims totalling around €1 billion, but have now agreed to accept half that amount in return for withdrawing their legal action and bringing the long-running dispute to an end.

According to reports, the first payments under the settlement are already being processed.

€500 million bill for the Canary Islands

Although the agreement cuts the potential €1 billion liability in half, the settlement still represents a substantial cost to the Canary Islands' public finances.

The €500 million payout is equivalent to approximately 4% of the regional government's annual budget.

However, reaching an agreement removes the risk of the full €1 billion claim succeeding in the courts, as well as preventing compensation interest from continuing to increase.

The settlement reportedly has judicial approval and brings an end to dozens of cases that have remained unresolved for years.

Why are the hotel companies being compensated?

The dispute dates back to the tourism moratorium introduced by the Canary Islands Government in the early 2000s. Between 2001 and 2003, licences for new tourist accommodation were suspended, leaving numerous planned hotel developments unable to proceed.

The objective was to slow the construction of new tourist accommodation and encourage investment in the renovation and modernisation of the Canary Islands' ageing hotel stock.

However, developers who had invested in land and planned projects found themselves unable to move forward with them.

A later piece of legislation, the Urgent Territorial Planning Measures Law, which was in force between 2009 and 2013, attempted to provide a solution.

It allowed owners of certain plots designated for tourism development to have their land reclassified as rural land.

However, changing the classification significantly reduced the potential value of the affected plots and meant that owners could claim compensation for the loss of their development rights.

36 cases ended up in the courts

Compensation proceedings were subsequently launched, but delays in resolving the reclassification and payment processes resulted in 36 cases becoming the subject of legal action.

As the disputes continued through the courts, the amount potentially owed continued to rise because of accumulated interest. Eventually, the combined claims exceeded €1 billion.

The newly agreed settlement reduces that figure to €500 million, with the affected companies agreeing to abandon their outstanding legal proceedings in exchange for the certainty of receiving the negotiated compensation.

Could some of the abandoned hotel projects now return?

One question remains unanswered following the agreement: what happens to the original developments that were halted by the moratorium?

Some of the projects affected by the restrictions were planned more than two decades ago, meaning circumstances surrounding the land, planning regulations and tourism development have changed considerably since then.

It remains to be seen whether any could now be revived, or whether the €500 million settlement will finally close the chapter on one of the Canary Islands' longest-running tourism planning disputes.

Either way, the agreement represents a significant moment for the regional government and the hotel industry, ending a legal battle that began at the start of the century while avoiding a potential compensation bill twice the size.