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In brief: real estate acquisitions and leases in Portugal – Lexology

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Acquisitions and leases
Describe the various categories of legal ownership, leasehold or other occupancy interests in real estate customarily used and recognised in your jurisdiction.
Ownership in Portugal comprises the full and exclusive right of use, enjoyment and disposal of the property, although in fiduciary ownership is also accepted the Madeira Free Trade Zone.
Co-ownership of property is admissible and surface rights (rights to build and maintain a construction on land partially or fully owned by third parties) can be settled perpetually or temporarily and may be constituted by contract, will or adverse possession. The usufruct right is also legally allowed and gives its holder the powers of use, enjoyment and administration – during an agreed period or lifetime. The law imposes the sole limitation that the holder retains its form, substance and economic purpose. It is also possible for a building or a set of functionally interconnected buildings to be subjected to ‘horizontal property’ and condominium regulations.
The transfer or constitution of rights in rem is normally completed by a public deed executed before a notary, but it can also be executed by means of a certified private agreement, signed in the presence of a lawyer or a paralegal.
The assignment of use of non-residential properties such as retail, industrial and offices may be agreed by a lease agreement under the Urban Leasing Law. This law gives the parties more flexibility to negotiate the conditions of the lease when compared to residential leases. To assign the use of non-residential properties, services agreement (eg, if services are provided and not only the use of the premises is assigned) or an atypical contract of use of shop agreement (eg, if the premises are in a shopping centre or commercial complex and ancillary services are provided) can also be considered.
What are the typical pre-contractual steps?
Typical pre-contractual steps include memorandums of understanding or heads of terms, and binding or non-binding offers. A reservation agreement to secure the property for a specific period of time could be agreed, to complete the due diligence process (property searches and research into and analysis of any relevant information). As a rule, to reserve a property, the buyer is asked to pay a specific amount. Parties should expressly agree whether the reservation payment is refundable at the end of the reservation period if the transaction does not go ahead or is converted into a deposit and initial part-payment of the price if the Parties agree to go ahead.
The activity of brokers is regulated in Portugal and all real estate agents must be licensed by the Portuguese Real Estate Regulator (IMPIC). By law, real estate agency agreements must be executed in writing and include a minimum set of provisions. A broker cannot be remunerated by both parties for the same transaction and the broker’s commission can be a fixed amount or a percentage of the property sale price.
What are typical provisions in a contract of sale?
Whenever the conditions to complete the transaction are not met, the prospective seller and buyer can sign a promissory contract for sale and purchase in which they undertake to complete the transaction and set the terms and conditions for the transaction, such as conditions precedent to the definitive agreement (eg, completion of works, licensing, financing, due diligence, pre-emption rights to be notified, others). The promissory contract must be in writing and signed by the parties in person or by their legally appointed representatives, and the parties’ signatures must be certified under Portuguese law. It is customary for the buyer to be asked to pay a deposit which – according to market practice – varies between 10 per cent and 20 per cent of the price. This payment is specifically regulated under Portuguese law and works both as an initial payment on account of the price and, in the event of a breach of contract, as a penalty for the defaulting party. If buyers default, they lose their deposit and if sellers default, they must pay double the deposit to the buyer. As a rule, this deposit is paid directly to the seller and not held in escrow by any third party. Representations and warranties are normally based on the outcome of the due diligence exercise. The seller is usually responsible for all expenses relating to the cancellation of any charges over the property, taxes and mandatory contributions relating to a moment prior to the transfer deed of the property. The seller usually also bears the risk of loss until closing.
The definitive contract for sale and purchase is normally completed by a public deed executed before a notary, who will guarantee compliance with the legal requirements for the transaction to take place. Whenever there are any special arrangements desired by the parties or financing arrangements, they are governed in ancillary documents that are annexed to the deed.
Who takes responsibility for a future environmental clean-up? Are clauses regarding long-term environmental liability and indemnity that survive the term of a contract common? What are typical general covenants? What remedies do the seller and buyer have for breach?
Environmental law is built on a logic of accountability, which determines the assumption, by polluting agents, of the consequences of their actions and omissions on natural resources, this is to say that environmental liability is attributed to the subject that caused the damage. Remediation of environmental damage can be demanded for 30 years. It is possible to use indemnities or other contractual agreements to transfer liability. However, these types of contracts do not bind regulators, which will always consider the party responsible for the activity that harms the environment. The contracts might, however, have an influence on the regulators, especially where the damaging activity continues and it may be difficult to establish when the fact that caused the damage occurred and establish a causal link with an operator.
What are typical representations made by sellers of property regarding existing leases? What are typical covenants made by sellers of property concerning leases between contract date and closing date? Do they cover brokerage agreements and do they survive after property sale is completed? Are estoppel certificates from tenants customarily required as a condition to the obligation of the buyer to close under a contract of sale?
Representations and warranties and conditions precedent may be established (eg, the seller will not execute new leases or terminate or amend existing leases without the consent of buyer; the seller will not execute any brokerage agreements for leases, representations and warranties in respect of rent rolls; list of arrears; and tenant incentives) are also usually included.
Is a lease generally subordinate to a security instrument pursuant to the provisions of the lease? What are the legal consequences of a lease being superior in priority to a security instrument upon foreclosure? Do lenders typically require subordination and non-disturbance agreements from tenants? Are ground (or head) leases treated differently from other commercial leases?
The parties usually agree that if the agreement is unlawfully terminated by the tenant or terminated due to breach by the tenant, the tenant must pay the lender the amount corresponding to the rents that would have been due until the end of the contractual term (or corresponding to the missing prior notice) and the rents corresponding to the rent-free period (if applicable).
To guarantee the timely fulfilment of the tenant’s undertakings in the lease agreement, such as to guarantee payment of rents and expenses, the parties can agree on the provision by the tenant of a bank guarantee on first demand, the payment of a deposit, or the provision by the tenant of a declaration issued by an insurance company attesting the existence and terms of deposit insurance.
Lenders typically require express acceptance by the tenant in the agreement of the obligation to comply with the condominium rules or, in the case of shopping centres, the centre’s regulations.
What steps are taken to ensure delivery of tenant security deposits to a buyer? How common are security deposits under a lease? Do leases customarily have periodic rent resets or reviews?
Leases customarily have annual rent reviews. In transfers of the property by the landlord, the new owner automatically assumes the landlord’s position, with the terms of the lease in force between the tenant and the new owner remaining unchanged (an assignment of the contractual position is not required). Bank guarantees provided by the tenant to the prior owner or landlord remain in force and the new owner should inform the bank of the acquisition by sending an updated land registry certificate.
What due diligence should be conducted before executing a contract? Is any due diligence customarily permitted or conducted after contract but before closing? What is the typical method of title searches and are they customary? How and to what extent may acquirers protect themselves against bad title? Discuss the priority among the various interests in the estate. Is it customary to obtain government confirmation, a zoning report or legal opinion regarding legal use and occupancy?
Buyers are advised to conduct technical, commercial and legal due diligence to evaluate the status of the property, check the ownership title, licences and use permits, pre-emption rights, tax debts and other charges (eg, condominium), covenants and encumbrances (whether or not registered at the Land Registry Office). Representations and warranties and specific indemnities are normally based on the outcome of the due diligence and conditions precedent to the transactions can be agreed (eg, obtaining a licence or insurance, a registry correction or a mortgage cancellation), covering the consequences in case of default. Provisional registration at the Land Registry Office is also common in asset deals to guarantee priority of the acquirer. Depending on the amount of the transaction, warranty and indemnity insurance may also be considered.
Is it customary to arrange an engineering or environmental review? What are the typical requirements of such reviews? Is it customary to get representations or an indemnity? Is environmental insurance available?
A technical engineering or environmental due diligence or inspection may be performed in specific types of developments (eg, commercial and industrial) and can be important to check the quality of the construction and compliance with all applicable legislation and regulations. Depending on the results of the inspection, the parties may agree to a price reduction or partial price retention, and representation or compensation in case of future sanctions of fines may be agreed. Environmental insurance is mandatory for certain activities.
Do lawyers usually review leases or are they reviewed on the business side? What are the lease issues you point out to your clients?
Lease agreements are usually reviewed by lawyers to check the title of the landlord to assign the use of the premises and to ensure compliance with all the mandatory issues (eg, use permits and energy certificates) and to review the provisions agreed between the parties regarding the duration, termination, renewal, insurances, guarantees, obligations concerning costs and works, and its conformity with the applicable law. Duty of care agreements are usually requested by the financing banks.
What other agreements does a lawyer customarily review?
A lawyer customarily reviews the past acquisition deeds and all the agreements relating to a property, such as brokerage, property management, development, construction, architectural, services, maintenance, and loan agreements, as well as easements, restrictive covenants, supply agreements, and guarantees associated with any of the above.
How does a lawyer customarily prepare for a closing of an acquisition, leasing or financing?
The usual timing between the contract and closing is between two to three months. Normally, a closing checklist is organised by a lawyer to list all steps and documents required, identifying the party responsible for obtaining them, which helps the parties monitor the closing deliverables. A typical list of deliverables contains all the documents pertaining to the building such as licences, plans, certificates, original agreements and bank guarantees, pre-emption right notices, payment receipts, etc).
Is the closing of the transfer, leasing or financing done in person with all parties present? Is it necessary for any agency or representative of the government or specially licensed agent to be in attendance to approve or verify and confirm the transaction?
A contract for sale and purchase (asset deal) and is normally completed by means of a public deed executed before a notary, who will guarantee compliance with the legal requirements for the transaction to take place, these being title to the property (land registry certificate), a tax certificate, a use permit, an energy certificate, an official document with the technical characteristics of the unit (if applicable), and tax payment receipts (stamp duty and IMT). Nonetheless, the law provides that the definitive agreement can also be executed as a certified private agreement, signed in the presence of a lawyer or a paralegal. As the deed is always executed in Portuguese, non-Portuguese speaking parties should appoint an independent translator. Whenever there are any special arrangements agreed by the parties or financing arrangements, they are governed in ancillary documents that are annexed to the deed. A lease contract with a duration longer than six months must be made in writing and identify the parties, premises, purpose (residential or non-residential), the rent, and the use permit. A lease for a purpose different to the authorised use under the use permit is null and void.
In a share deal, the shares can be transferred by private agreement between the parties. In certain cases, the acquisition of shares in public limited liability companies must be notified to the company. It should also be notified to the tax authorities and regulatory bodies. Acquisitions of quotas in private limited liability companies must be registered at the Commercial Registry.
What are the remedies for breach of a contract to sell or finance real estate?
Specific performance is a legal mechanism that allows a non-defaulting party to enforce the completion of a promised sale in court. The mechanism can be used when all the conditions for closing are met but the other party refuses to complete the transaction or breaches the promissory agreement. If the court orders specific performance, it will have the same effect as a deed of sale and purchase and the registration at the Land Registry will be made on the basis of the court order.
The deposit (down payment) is specifically regulated under Portuguese law and works both as an initial payment on account of the price and, in the event of a breach of contract, as a penalty for the defaulting party. If a buyer defaults, it loses its deposit and if the seller defaults, and must pay double the deposit to the buyer. In contrast to many other jurisdictions, as a rule, this deposit is paid directly to the seller and not held in escrow by any third party. Despite this general rule, the parties may agree on specific solutions to secure the reimbursement of the deposit if the transaction is not completed, either due to a breach of contract or for any other external reason, such as the exercise of any applicable pre-emption rights.
What remedies are available to tenants and landlords for breach of the terms of the lease? Is there a customary procedure to evict a defaulting tenant and can a tenant claim damages from a landlord? Do general contract or special real estate rules apply? Are the remedies available to landlords different for commercial and residential leases?
Either party may terminate the lease agreement whenever there is a ‘breach which, due to its gravity or consequences, renders the subsistence of the lease non-demandable of the other party’.
In addition, the applicable Portuguese lease regulations establish a list of cases of default justifying a landlord’s decision to terminate the lease contract. The landlord’s termination must be declared judicially except when based on the tenant’s opposition to works ordered by public authorities or on a delay of more than three months in the payment of the rent, charges, costs or expenses.
In the case of the landlord’s failure to perform works (if landlord is obliged to do these works) and if the omission compromises the habitability of the leased premises and, in general, the suitability of the leased premises for the use provided for in the contract, constitutes a breach that gives the tenant the right of termination.
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