Author: | Published: 3 Apr 2003
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Commercial leasing

1. What legislation and/or regulatory bodies are responsible for regulating the relationship between landlord and tenant in Portugal?
Urban leases are basically governed by Decree-Law No 321-B/90 of October 15 1990, which approved the Urban Lease Law (ULL), as amended, and by the Civil Code.

The ULL divides the lease agreements according to the purpose to which the property is to be used into: (i) residential leases; (ii) commercial or industrial leases; (iii) leases for liberal professionals; and (iv) leases for other purposes.

The ULL contains a set of common provisions applicable to all lease contracts and special provisions applicable to the different categories of contracts mentioned above.

There are no regulatory bodies responsible for regulating the relationship between landlord and tenant. Disputes that are not settled amicably are decided in court. Parties may also agree to resort to arbitration.

2. What is the effect of a tenant's insolvency, and what remedies are available to landlords?
Insolvency or bankruptcy is ruled in Portugal by the Special Procedures for Recovery of Companies and the Bankruptcy Code, approved by Decree-Law No 132/93 of April 23 1993, as amended by, inter alia, Decree-Law No 315/98 of October 20 1998.

The declaration of bankruptcy prevents the bankrupt from administering and disposing of its assets.

As far as lease contracts in which a bankrupt individual or a bankrupt company is a tenant are concerned, the declaration of bankruptcy does not cause the termination of the lease contract.

However the liquidator of the bankrupt estate can terminate the lease contract, in which case the landlord has the right to claim the payment of rents matured and in debt until the termination, as well as the indemnity to which the landlord is entitled under the law, which will be treated as common credits.

If the landlord requests the termination of the contract for lack of payment of rents after the declaration of bankruptcy he will not be entitled to claim any indemnity for the delay in the payment of rents prior to said declaration of bankruptcy.

3. How might changes in accounting standards affect the landlord/tenant relationship?
In Portugal only the International Accounting Standards (IAS) are applicable. The accounting regime applicable to leases, including property lease contracts, is established by Portuguese Accounting Standard No 25. This standard is based on the IAS approach on the accounting treatment of leases and not on US Generally Accepted Accounting Principles (Gaap). In case of doubt or non-regulation of a specific matter the relevant IAS are subsidiarily applicable (and not US Gaap), as set out by Portuguese Accounting Standard No 18.

4. How has recent statutory reform affected (or, how will proposed future statutory reform affect) the landlord/tenant relationship?
The most significant reform in the ULL regime was made in September 1995 (Decree-Law No 257/95 of September 30).

Under this reform, the special regime of the so-called contracts of limited duration, which existed only in respect of residential leases, was extended to commercial and industrial leases. According to this special regime, the landlord has the right to terminate the lease contract at the term of its duration period (this special regime is commonly known as the "new law" regime). The relevance of this modification can only be understood if one bears in mind that the general regime applicable to the termination of the contract by the parties at the term of its duration (usually known as the "old law" regime) provides that only the tenant (but not the landlord) can cause the termination of the contract at its term.

It should be noted that, under the special regime, the lease contract must have an initial duration period of no less than five years (three years for certain types of companies), and that the tenant is entitled to terminate the contract, at any moment, with 90 days prior notice.

5. How does human rights legislation affect the landlord/tenant relationship?
Portugal is a party to several international conventions dealing with human rights and a member of several international organizations active in that area.

In accordance with Article 8 of the Portuguese Constitution, not only the rules and principles of general or customary international law are an integral part of Portuguese law, but also the rules provided for in international conventions duly ratified or approved will apply in national law, as long as they remain binding on the Portuguese state, as well as the rules enacted by the competent bodies of international organizations to which Portugal is a member, provided that the respective constitutive treaty provides for this.

Article 65 of the Portuguese Constitution states that all individuals are entitled to housing accommodation of adequate dimension, in conditions of hygiene and comfort and that preserves personal intimacy and family privacy. It also stipulates that it is the task of the state to define and implement a housing and planning policy with a view to ensuring the said constitutional right to accommodation, as well as to adopt a policy aimed at establishing a system of rents compatible with the family income and access to own freehold housing.

These constitutional principles have subsequently been reflected in the ordinary legislation, namely, in the ULL that foresees special regimes of conditioned rents and subsidised rents, and other Acts.

6. What is the effect of conditions restricting tenants wishing to divest themselves of surplus properties ('alienation'), and how can those restrictions be satisfied or circumvented?
The situation will be different depending on whether the tenant wishes to release only part of the rented area or the whole area. In the first case, there will be a reduction of the object of the lease contract, which can only be achieved with the agreement of the landlord. In the second case, there will be a termination of the contract and the regime will vary according to the existing contract: if it is a contract under the general regime, the tenant can only terminate it lawfully at the term of its duration period. If it is a "new law" contract, that is, under the special regime of contracts of limited duration, then the tenant is entitled to terminate it, at any moment, with a prior notice of 90 days (see above).

Securitization of real estate assets

1. How significant is the real estate securitization market in Portugal?
Unlike the relatively recent enactment of the Securitization Act, as far we know, no real estate securitization transaction has been made to date in Portugal. Securitization transactions have until now related mostly to receivables generated by mortgage loans, consumer loans, long-term lease contracts and financial lease contracts. Receivables generated by long-term lease and financial lease contracts related to vehicles and other equipment, not including [financial] lease or other occupation of real estate.

2. To what degree of detail (if at all) are the parties obliged to disclose the lease terms on a formal registry (eg the land registry)?
Lease agreements exceeding six years - excluding renewals (automatic or not) of lease agreements entered into for an initial term of less than six years - and financial lease agreements are subject to registration with the real estate registry. In such cases, the public land registry must mention the number and date of the relevant annotation, the type of contract, the complete identification of the parties (landlord and tenant), the term and the commencement date.

3. To what extent can insured risks or potential legislation leading to rent reviews affect the sanctity of the receivable?
The Portuguese Securitization Act prohibits contractual arrangements under which the originator guarantees, or assumes responsibility for, payments to be made under the receivables. Therefore, insured risks and legislation leading to rent reviews may affect the proceeds under the receivable to the extent that the purchaser of the receivables has not hedged/secured the risks arising under those transactions or the parties have not agreed on alternative solutions to circumvent that issue.

4. How important a role do the rating agencies play in securitization transactions?
As far as transactions made under the Portuguese Securitization Act (which does not necessarily govern all transactions relating to receivables generated by Portuguese entities) are concerned, one should consider the existence of two potential securitization vehicles: (i) securitization funds (fundos de titularização de créditos), which finance the acquisition of the receivables through the issue of securitization units (unidades de titularização); and (ii) securitization companies (sociedades de titularização de créditos), which finance the acquisition of the receivables through the issue of asset-backed bonds (obrigações titularizadas).

In respect of securitization units and asset-backed bonds placed through a public offering, the Portuguese Securitization Act requires that the relevant prospectus reproduces certain parts of a report, which should be prepared by a rating agency registered with the Securities Commission, covering such matters as: (i) an assessment of the quality of the receivables acquired by the securitization vehicles; (ii) confirmation of the assumptions and the consistency of the prospects made in respect of the evolution of the financial situation based on which the transaction has been prepared; (iii) the adequacy of the transaction structure; (iv) the nature and adequacy of the guarantees; and (v) insolvency.

The rating report contemplating these matters should also be enclosed by the managing company to the application requesting the authorization of the Securities Commission for the creation of a securitization fund should the respective units be intended to be placed through a public offering.

Property outsourcing

1. How prevalent is property outsourcing in Portugal?
In the last decade, property outsourcing has often been a solution used by companies to raise capital to fund and develop their core business. However, as a result of the decrease of the interest rate in recent years, property outsourcing has become less attractive.

This being said, property outsourcing is still an option used by many companies. The ways to achieve this depend on the long-term strategy of the company: in some cases, the company sells the property to an institutional investor, such as a real estate fund or a pensions fund, of which it remains as a lessee. In other cases, the company enters into capital leases for a delay of usually no less than seven and no more than 10 to 15 years, after which it is entitled to repurchase the property for a residual amount.

2. What are the relative benefits of private finance initiatives (PFIs) and public-private partnerships (PPPs)?
PPPs represent a unique and flexible solution to implement infrastructure projects. PPPs can embrace a range of structures and concepts, which involve the sharing of risks and responsibilities between public and private sectors. The intervention by the private sector can reduce inefficiency and respond effectively to user demands. Governments can acquire extra resources by PPPs, as the released resources can be used for other purposes.

The Portuguese legal system, under the auspices of public services or public works concession, is quite flexible to receive the characteristic wide range of forms used on PFIs, such as design construct maintain and finance (DCMFs), build own operate transfer (BOOTs) or design build finance operate (DBFOs).

The PFI's relative benefits are not only seen as an alternative to government budgetary constraints. They are also the means to improve the quality and delivery of both public services and private companies, due to the introduction of the concepts of risk transfer and value for money and the public sector comparator, which is calculated by costing what the public sector would have had to pay to procure the construction of the relevant schemes and the operation and maintenance of the project by traditional means.

3. What lessons have been learnt from both private sector and public sector property outsourcing schemes in terms of performance, service provisions, financial benefits, problems?
In Portugal, property outsourcing has primarily been envisaged as a financial operation, a way to release capital to fund the company's activity, rather than as a property deal with the advantages attached to it, namely, the transfer of management and property services to outsourcing specialists who would be in a better position to provide said services with improved quality and desirably at lower cost. In many cases, the vendor, having stayed in the property as a lessee, remained liable for the operation of the estate and the provision of property services, such as cleaning, maintenance and security.

As the financial environment is more likely to change in the short- and medium-term than the conditions of the property market and the needs of a sound and professional property management, companies should assess very carefully the advantages and disadvantages of property outsourcing on a long-term basis in order to avoid regretting decisions driven by short-term financial reasons.

4. To what extent should the service provider extend services to cover back office systems such as IT and human resources (HR)?
The experience in Portugal is that it is not common in property outsourcing that the service provider extends its services to cover areas such as IT and HR.

5. What has been the effect of Enron and the accounting scandals on corporates considering off-balance sheet property outsourcing?
Enron has not had much effect on these areas in Portugal.

6. What is the future of property outsourcing for the private sector?
This will depend to a large extent on the long-term strategy to be adopted by companies, a higher or lower availability of financing and the way the companies and shareholders will deal with the emotional attachment to direct property ownership.

In any case, property outsourcing can have many advantages, such as:

  • concentration on core business;
  • releasing balance sheet value;
  • enhancing shareholder value;
  • reducing property costs;
  • improving the quality and efficiency of the property portfolio;
  • transferring property risks and liabilities; and
  • improving flexibility in accommodation coupled with price certainty, and finding a one-stop shop for all property requirements.

The future is therefore likely to bring about an increase in property outsourcing, especially with smaller mid-sized corporate occupiers, to the extent that they may come to realise that the traditional method of owning properties is not necessarily the best way of occupying premises.

Financing of real estate transactions

1. What are the most common methods by which purchasers finance high value real estate transactions in your jurisdiction?
Loans, credit facilities (including limited resource project finance depending on the type of real estate transactions) and financial lease agreements.

2. To what extent does stamp duty (or the equivalent) affect the method and cost of financing real estate transactions?
The amounts borrowed to finance real estate transactions (and other transactions) are subject to stamp duty at a rate varying between 0.04% (for credit granted for a period of less than one year, per month or fraction), 0.5% (for credit granted for a period of more than one year) and 0.6% (for credit granted for a period of more than five years or for a non-determined period of time).

Mortgages or pledges securing obligations undertaken under a finance agreement must be created simultaneously with the secured obligation. Otherwise, stamp duty will be autonomously levied on the provision of such security at a rate varying under the terms above (depending on the term of the security) and calculated over the amounts secured.

Stamp duty levied on the above operations is borne by the borrower/mortgagor.

Without prejudice to the above, it should be noted that transfer of ownership over real estate is also subject to stamp duty at a rate of 0.8% calculated over the value of the relevant property.

3. To what degree of detail are the parties obliged to disclose the terms of financing on a formal registry (eg the land registry)?
In respect of financial lease agreements, please see above ("Securitization", section 3). In respect of the extending of loans and credit facilities, terms of the financing might to be disclosed in the land registry to the extent that payment of the amounts under such financial agreements is secured by a mortgage (created over the property financed or over another property of the borrower or a third party). In such a case, the information to be disclosed is as follows: (i) the number and date of the relevant annotation; (ii) full identification of the mortgagor and the financing entity in its capacity as beneficiary of the mortgage; (iii) the financing agreement, the amount of the credit granted, interest rates and other payment obligations and the maximum amount secured (including interests accruing during a period not exceeding three years).

4. Is there any debate as to who holds the legal title of the mortgaged property?
No. The mortgagor remains the owner of the mortgaged property.

Conveyance issues

1. What are the various forms of proprietary ownership in Portugal?
Under Portuguese law, only real rights (rights in rem) pre-established in the law are allowed. From among the main types of rights in rem, the following are the most common:

Absolute ownership: The amplest of the rights, it grants the owner the universality of powers that can be attached to the property, such as the right to possess, use, enjoy, encumber and dispose of it subject to the compliance of the law or any rights of third parties. It may be acquired by contract (purchase and sale or donation), inheritance, adverse possession, occupancy and accession.

Joint ownership: Two or more persons can hold property in common, with an undivided interest. The two co-owners may freely use the property provided that it is not used for a purpose different from the intended one and that they do not prevent other co-owners from using it. Co-owners have equal powers to administer the property. If one of the co-owners wishes to sell his share, the others have the pre-emption right to buy it. Except for this, each co-owner may freely encumber and dispose of his share.

Condominium: This is a system of absolute ownership of individual units (eg apartment) in a multiunit structure combining common ownership (such as soil, structure, roof, stairs etc) established either by contract, adverse possession or judicial decision. The respective title must specify the composition of each individual unit and its value. The use of common elements and each individual unit are subject to the conditions set forth in the title that set up the condominium.

Other rights in rem of a more limited content and with some practical relevance are:

Usufruct: The right to use, enjoy and manage the property which ownership is vested in another person.

Surface right: The right to build or maintain indefinitely or temporarily an improvement on or under land belonging to another person.

Servitude/easement: The encumbrance imposed on real estate for the exclusive benefit of another property, pertaining to a different owner, of which the main feature is the fact that the servitude is attached to the property regardless of its owner.

2. Other than the general principles of contract law governing agreements between vendor and purchaser, what other statutory governance, regulations, or guidelines exist to protect the parties to a property transaction?
Apart from the general principles of contract law, real estate transactions, depending on the contractual model adopted, may also fall under the scope of the regime of the general contractual clauses (adherence agreements), approved by Decree-Law No 446/85 of October 25 1985 and the Consumers Law, approved by Law No 24/96 of July 31 1996.

3. Is the practice of the vendor to take advantage of the development uplift? How do lawyers usually achieve this?
Uplift is not a very common practice, although not unknown to the Portuguese market. The most frequent cases are those where the owner of a plot of land sells it for a price which consists, totally or partially, of a certain area of the building that will be constructed on said plot of land (which usually entails the need to submit the building to a condominium regime, allowing for the subsequent transfer of the individual units that compose said building to the vendor) or those where the price of the property that has been sold is determined on the basis of the construction area to be approved for that property, be it an entirely new building or simply the reconstruction or enlargement of a pre-existing building. In other cases, the price to be paid to the vendor of a property consists of a given percentage of the sales price of the project that the purchaser will develop in said property.

The ways to achieve and implement the solutions mentioned above depend on the solution adopted in each case. It can take the form of an exchange deed of an existing property for a future property or properties (the units in the new building to be constructed) or it can consist of the registration of an interest of the vendor over the property, in the Real Estate Registry. This creates a mechanism of control by the vendor in the transfer of any units of the new development or in deferring the transfer of title to the property to the purchaser to only a very late stage of the construction and marketing of the new development etc.

4. How significant is e-conveyancing? What rules and regulations govern the e-conveyancing process?
There are no rules directly applicable to e-conveyancing in Portugal. Legislation that applies indirectly is Decree-Law No 290-D/99, of August 2 1999, which governs the validity of electronic documents. The general rule is that electronic documents are valid and enforceable and that an electronic document satisfies the legal requirement of "in writing".

In what regards the transfer of real property, a notarial deed is required, so it is not possible to enter into this type of contract electronically.

5. How has recent case law addressed the issue of adverse possession?
Adverse possession is regulated by Article 1287 of the Civil Code. In recent years no significant or relevant decisions have been taken on this matter, although two decisions by the Supreme Court can be mentioned: one dated February 1994 ruled that the right to a lease cannot be acquired by adverse possession, since the law treats the right of the lease as an obligational right and not as a right in rem. Another, dated February 1998, ruled that public estate, understood as an estate in the direct and immediate use of the public cannot be acquired by adverse possession.

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