7.1. Applicable Legislation
Brazil’s key real estate legislation covering real estate transactions includes the: (i) 1988 Federal Constitution (Constitution); (ii) Civil Code (Federal Law No. 10,046/2002) (Código Civil); (iii) Urban Land Statute (Federal Law No. 10,257/2001) (Estatuto da Cidade); (iv) Rural Land Statute (Federal Law No. 4,504/1964) (Estatuto da Terra); (v) Public Register Law (Federal Law No. 6,015/1973) (Lei de Registros Públicos); (vi) Real Estate Development Law (Federal Law No. 4,591/1964) (Lei de Incorporações); (vii) Urban Lease Law (Federal Law No. 8,245/1991) (Lei de Locações); (viii) Real Estate Finance System Law (Federal Law No. 9,514/1997) (Lei do Sistema de Financiamento Imobiliário); (xix) Mutual Recission Law (Federal Law No. 13,786/2018); (x) Acts of Concentration in the Real Estate Record Law (Law No. 13,097/2015); (xi) Sharing Property Law (Law No. 13,777/2018); and (xii) Agribusiness Law (Law No. 13.986/2020).
7.2. Real Estate Definition
7.2.1. Right of Title
The main type of in rem right over real estate is the ownership, which represents an absolute title to property, including the right of an individual or entity to use, exploit and dispose of the property and to recover it from any party who may be unlawfully holding it.
Real estate includes, registered in the same title, the soil with its surface, its accessories and surroundings, such as buildings and trees and hanging fruit, and the air and subsoil. Real estate does not include mines, products derived from the subsoil and waterfalls, which are considered to be distinct from the soil for purposes of exploitation.
In exceptional cases, ownership of the land and its accessories can be separate, for example, if trees were planted by a tenant. Also, the concession of surface rights creates two separate ownership rights over the same area (the ownership of the soil, and the ownership of the surface). However, there is no separate registry for the title to the real estate accessories and surroundings.
7.2.2. Surface rights
Brazilian law provides for surface rights, under which the owner of real estate can transfer the ownership of its surface to build and plant over the surface of a determined area for a limited timeframe. The concession of surface rights creates two separate ownership rights over the same area (: the ownership of the soil, and the ownership of the surface), including plantations and constructions. However, there is no separate registry for the title to the real estate accessories and surroundings.7.2.3. Rights of Possession
The right of possession is the right to exercise certain powers of ownership, including the (i) right to claim, to explore, to maintain or to recover the possession of the property,(ii) right to receive its fruits, such as rent and income, and (iii) right to keep possession of the real estate property.
7.3. Limits to the right of title
Third party rights or the public interest may limit the right of title. Examples include:(i) Municipality zoning controls such as limits on building constructions, industrial installations or commercial property, and State environmental zoning controls;(ii) national security and interest controls; (iii) controls against insolvent individuals or bankrupt companies disposing of property; (iv) Government controls such as compulsory purchase orders of private property; (v) the right of use of the property by another; and, (vi) the right of title must be exercised in conformity with its social and economic purposes, preserving fauna, flora, natural beauty, ecological balance and artistic and historic heritage as well as avoiding air and water pollution.
Inconsistencies in the property’s chain of ownership may occur due to registration inconsistencies, mistakes in the dismemberment process and even fraud (i.e., regarding old titles; former RERF). The analysis of former properties registrations (i.e., a larger area that was dismembered) is crucial to better understand the consistency of the ownership chain.
7.4. Extinction of the rights of title
The rights of title shall be extinguished upon: (i) the transfer of title to a third party; (ii) expropriation by the Government, when the expropriating authority transfers a title on private property and pays compensation; (iii) waiver; or, (iv) the property’s destruction or abandonment.
7.5 Real Estate Register
The Brazilian land registration system is based on real estate record files, which are controlled and maintained by a Real Estate Registry Office, each one having jurisdiction over a certain region (either a fraction of a city or several cities, depending on the region).
The acquisition of title to real estate is effective by means of registration of the relevant transfer instrument with the competent Real Estate Registry Office. Appropriate transfer instruments include, for instance: (i) a public deed of purchase and sale of real estate; (ii) a court decision in an expropriation proceeding; and (iii) any other document related to the transfer of a real estate to a new owner, such as the duly filed corporate documents on the paid-in capital of real estate.
Other in rem rights that grant to an individual or entity the possibility to occupy or use real estate are (i) surface rights, (ii) usufruct and (iii) use. Usufruct is a time-limited in rem right detached from the ownership, through which an individual or legal entity has the right to use, exploit and bear the fruits of a third party’s real estate. Use is also a time-limited in rem right detached from the ownership, through which an individual has the right to use a third party’s real estate.
7.6. Information in the Public Register
The real estate record file contains all relevant information regarding the real estate, such as (i) ownership title; (ii) past transactions involving the real estate; (iii) any liens and encumbrances; (iv) built area; and (v) limits and boundaries.
All acts that create, modify, extinguish or transfer rights to real estate must be recorded in the appropriate real estate record file, including any (i) acquisition and award at a public auction; (ii) acquisition by adverse possession (the acquisition of title by continuous and uncontested possession for a period of time established by law); and (iii) creation of rights over real estate (such as mortgages, rights of way and attachments).
7.7 Purchase and Sale of Real Estate
7.7.1. Main Stages and Documents
The process of acquiring real estate is usually divided in three main stages: (i) the pre-contractual stage; (ii) the contractual stage; and (iii) the post-closing stage.
Commercial negotiations usually occur during the pre-contractual stage as the parties start discussing key aspects of the proposed real estate transaction, which are usually governed by the terms and conditions of a non-binding term sheet or letter of intent and/or protected by an exclusivity and/or confidentiality instrument.
The pre-contractual stage is usually governed by a memorandum of understanding. Key issues that are usually agreed at this point are the (i) definition of the real estate subject to the transaction; (ii) terms and conditions for the buyer to perform legal due diligence of the real estate and/or technical due diligence (such as environmental, social or boundary issues); (iii) definition of the base price of the real estate and criteria for future adjustments to it, based, for example, on the due diligence findings; and (iv) conditions for the transaction to bind the parties and the resulting structure for its implementation.
After completion of the pre-contractual stage, the buyer and seller may execute either: (i) a purchase and sale public deed under which the buyer is entitled to acquire ownership of the real estate; or (ii) a purchase and sale commitment as either a public deed or private instrument, under which the buyer will acquire the right to seek ownership of the real estate on satisfaction or waiver of conditions precedent agreed by both parties.
The parties can freely decide at which point in time they will be legally bound to complete a transaction. They may decide, for instance, to become legally bound at the pre-contractual stage on the execution of a binding letter of intent setting forth the parties’ obligation to complete the sale of the real estate. However, the execution of a private or public instrument transferring real estate only establishes rights and obligations between the parties and is not enforceable against third parties not involved in the specific transaction unless duly registered. Until the relevant transfer instrument is effectively recorded, the individual registered on the real estate record files remains the owner of the real estate and is entitled to exercise all the rights related to the title of the property.
Therefore, the relevant document, for example a public deed of purchase and sale, must be taken to be registered with the Real Estate Registry Office on its execution, to transfer title or for the creation of in rem rights over a real estate in an irrevocable and irreversible manner. Within up to 30 days as of the request for registration, the Real Estate Registry Officer must register the change of title or request additional documents or information needed to complete registration.
7.7.2. Adjudication of the Sale and Purchase Commitment
If the buyer or seller refuse to execute the definitive deed of sale and purchase, having signed a valid sale and purchase agreement which is registered in the Real Estate Record File of the property, it is possible to carry out its compulsory adjudication. The purpose of the compulsory adjudication is to compel the promising seller to transfer the property through a judicial sentence or administrative decision of the Real Estate Registry Office, which has the competence to replace the will of the defaulter. This procedure can be carried out through the judicial and extrajudicial channels, directly at the Real Estate Registry Office.
7.7.3 Seller’s Liability
The seller must act in good faith in all aspects of a real estate transaction. This means that the seller must provide any document or disclose any information that the buyer may reasonably request in the course of its investigation of the seller’s title or other relevant aspects of a real estate transaction.
The Brazilian Civil Code establishes that unless otherwise provided contractually, the seller must indemnify any losses suffered by the buyer in the event ownership is lost by the buyer by virtue of a bad title.
7.7.4. Due Diligence
The buyer usually performs legal due diligence covering: (i) ownership of the real estate, by analyzing the real estate record files covering all registered transactions relating to the property; (ii) circumstances that could characterize the sale of a real estate as a fraud against creditors (Fraude Contra Credores) or foreclosure fraud (Fraude à Execução); (iii) title deeds of real estate donated by public entities, to search for any restrictions imposed on the exercise of the owner’s rights over the real estate; (iv) liens and encumbrances indicated in the real estate record file of the real estate; (v) risks or issues related to lease agreements and any other forms of occupancy; (vi) existence and adequacy of operational licenses in relation to real estate; (vii) enrollment records of the real estate with the applicable municipality (in the case of urban properties) or with the National Institute for Settlement and Agrarian Reform (INCRA) (in the case of rural properties); (viii) possible environmental liabilities and a ground survey to detect underground contamination. Given that the provisions of Law No. 13.097/2015 (acts of concentration in the real estate record file) are not regularly applied in such transactions, as well as there is a discussion regarding the validity of such provisions since the new Civil Procedure Code was enacted, the due diligence is still a recommended practice for the avoidance of characterization of foreclosure fraud.
7.7.5. Sellers’ Warranties
The seller usually gives to buyer warranties on: (i) ownership and possession; (ii) liens and encumbrances; (iii) occupancy; (iv) judicial and administrative lawsuits; (v) existence and adequacy of operational licenses; and (vi) compliance with environmental regulations.
7.7.6. Buyer’s Liability
In certain cases, the buyer can inherit liability for matters that occurred before it bought or occupied the real estate.
After the acquisition of the real estate, the buyer inherits liability related to the real estate itself (such as liens and encumbrances and condominium expenses) and liability related to any real estate unpaid taxes. Additionally, environmental civil liability related to a real estate is considered propter rem, meaning that on transfer of ownership of a real estate the new owner would be liable for its pending environmental liability.
7.7.7. Buyer and Seller Costs
The buyer usually pays the costs associated with: (i) its own lawyer, a real estate broker and other professionals involved in the real estate due diligence; (ii) the execution and registration of public deeds; (iii) taxes levied on the transfer of title to the real estate; and (iv) taxes levied on the real estate after the transfer of title.
The seller usually pays the costs associated with: (i) its own lawyer’s fees; (ii) the preparation of documents and information for the due diligence; and (iii) tax levied on the real estate before the transfer of ownership.
7.8. Condominium
One or more people may own a fixed asset. Although title is an absolute and exclusive right, several people may exercise the right over the same fixed asset, forming a civil condominium. Under this condominium, each co-owner has legal title to a certain percentage of the real estate, and each co-owner pays all charges related to the property according to that share.
Furthermore, co-owners have the right of first refusal to buy each other’s portion of the real estate. If one co-owner sells its portion of the real estate without the other co-
owners’ prior consent, a co-owner may initiate legal action aimed at holding the sale null and void within six months of the sale. The order would allow the co-owner to buy
that portion by depositing the price in court.
7.9. Mutual Rescission
Law No. 13,786/2018 established the applicable rules for mutual rescission in the context of real estate acquisitions during the development or land division. It also establishes the grace period of 180 days; and the amount and hypothesis of penalties in which each party will be entitled to.
7.10. Real Estate Leases
7.10.1. Negotiation and Execution of Leases
The lease of urban real estate in Brazil is governed, mainly, by Federal Law No. 8,245/91 (Urban Lease Law). The Urban Lease Law sets out the general rules of the landlord and tenant relationship during the lease term.
Leases can be written or oral, public or private. Market practice sets forth the written form for lease agreements, once it provides better standards to both parties
and, on the tenant side, ensures certain rights, for instance, the right of commercial lease renewal, which depends on the existence of a written contract.
Besides the standard leases, there might be other types of leases that require a more sophisticated type of engagement, due to investments, term and complexity of the core business to be developed.
Although registration of the lease agreement with the competent Real Estate Registry Office is not mandatory, some rights are only enforceable against third parties after the lease registration, including the tenant’s right: (i) of first refusal; and (ii) to have the lease agreement effective through the end of its term in the event of the sale of the leased property by the landlord (“Effectiveness Clause”).
7.10.2. Rent Reviews
After three years from the execution of a lease agreement, if the rent amount is unsatisfactory for any of the parties, the unsatisfied party can request the court for an adjustment based on market prices.
Indexation of the rent is legal under Brazilian Law and common practice in Brazil. It must be based on a legally accepted index and currently can only be made on an annual basis.
7.10.3. Lease Term
Neither the Urban Lease Law nor the Civil Code provides the minimum or maximum terms of lease agreements. Any non-residential written lease agreement that has a term or amounts to a term of at least five years can be renewed for an equal period of time at the discretion of the tenant, if the tenant: (i) is not in default; (ii) has performed the same activity in the leased property for at least three years; and (iii) files a lawsuit with the court between one year and six months before the expiration of the term of the lease. Therefore, the term of non-residential leases is usually at least five years.
The terms and conditions of the lease must be maintained and complied with by a new owner if a transfer of the ownership of the real estate occurs, provided the lease agreement includes the Effectiveness Clausue, and it is registered in the real estate record file with the competent Real Estate Registry Office.
7.10.4. Assignment and Sub-Lease
Unless otherwise provided in the lease agreement, all total or partial assignments of the lease or sub-lease of the real estate require the landlord’s prior written consent. In addition, for non-residential leases the parties can agree that tenant change of control will be subject to prior approval by the landlord.
7.10.5. Maintenance of Leased Real Estate
The landlord must perform any required repair or construction related to the building structure of the leased premises.
The tenant is responsible for the maintenance, at its cost and expense, of the leased premises in at least as good repair, order and condition as at the start of the lease, excepting ordinary wear and tear.
7.10.6. Termination of the Lease
The landlord cannot terminate a lease agreement in force for a determined term1, except for the following events: (i) breach of contract by the tenant; (ii) the tenant not complying with the landlord’s right to enter the leased premises in order to make emergency repairs; (iii) when the lease agreement has an undetermined term; and (iv) mutual agreement.
The tenant can terminate the agreement with or without cause at any time during the lease term. The lease agreement can provide for the payment of a penalty for early termination without cause (normally equivalent to three monthly rents). This penalty is paid in proportion to the time elapsed between the initial date of the lease and the termination date. This penalty is not due: (i) when a lease agreement has an undetermined term; and (ii) if emergency repairs that are of the responsibility of the landlord take more than 30 days.
7.11. Restrictions to Ownership or Possession of Real Estate by Foreigners
There are no restrictions to ownership or possession of urban real estate by foreigners in Brazil.
In relation to the ownership and possession of rural real estate, there are two kinds of restrictions: (i) acquisition and lease of rural real estate by foreign individuals or entities (Federal Law No. 5,709/71 and Federal Law No. 8,629/93); and (ii) acquisition of the possession, ownership or any other in rem right over rural properties located within 150km of the Brazilian boundaries by foreign individuals or entities or by Brazilian entities with the majority of their capital held by foreigners (Federal Law No. 6,634/79).
There is a national debate regarding the application of the restrictions set forth by Federal Law 5,709/71 to Brazilian entities held by foreigners because, in the view of many lawyers and scholars, it would not be compatible with the Brazilian Federal Constitution of 1988.
The National Board of Justice (CNJ) published a recommendation, dated of July 13, 2010, for the real estate registry officers to observe the provisions of Federal Law No. 5,709/71. The Brazilian Federal Attorney General (AGU) published a legal opinion on August 23, 2010, in order to reestablish the restrictions for the acquisition of rural real estate in Brazil by Brazilian entities held by foreigners.
Recently, AGU and the National Institute of Rural Settlement and Agrarian Reform (INCRA) filed a lawsuit in the Brazilian Supreme Court challenging a decision from the Court of Appeals of the State of São Paulo that considered the legal opinion issued by AGU in 2010 unconstitutional.
The lawsuit filed by AGU and INCRA on June 25th, 2014 seeks an injunction to suspend and an award ultimately annulling Opinion n. 461-12-E issued by the Administrative Branch of the Court of Appeals of the State of São Paulo on December 3rd, 2012.
Opinion n. 461-12-E exempts the notaries and Real Estate Offices of the State of São Paulo from following the provisions of Federal Law n. 5709/71 and, in practice, authorizes unrestricted acquisitions of rural land in the State of São Paulo by Brazilian companies with the majority of their capital held by foreign companies or individuals.
The final decision to be rendered by the Brazilian Supreme Court will likely become the most important precedent about this controversial matter. Since 2010, when AGU issued Opinion n. 1, this topic has been intensely debated due to its adverse effects to the development of the Brazilian agro-industrial sector and reflects some of the most important political debates occurring nowadays.
In addition, Law no. 13,986/2020 brought an amendment to Law no. 5,709/71, allowing the transmission of rural property through the consolidation of fiduciary property or by settlement of a transaction with a legal entity to a foreign legal entity. The transmission of property may be effected upon the realization of the real guarantee established on the rural property, payment in kind (‘dação em pagamento’) or any other form.
7.11. Real Estate Investment Funds
The formation, operation and management of REIFs in Brazil are regulated by Law8.668/93, Instruction No.472/2008 as amended (“Instruction CVM 472”), of the Brazilian Securities Commission (“CVM”), which regulates the organization and operation of REIFs and the requirements for their registration and incorporation.
The REIF must be incorporated as a closely held condominium and shall not, therefore, be considered a corporate entity, thus differing from the U.S. real estate investment trusts. The capital of a REIF is divided into “quotas” (i.e. a security, as per the provisions of Law 6.385/76 – Capital Markets Law), which are normally sold to investors, mainly pension funds and other large institutional investors.
Notwithstanding, there is no legal limitation regarding the public to whom the quotas should be sold, and this matter may be freely described in the charter of the REIF and
the offer may be structured so as to meet the type of investors to be reached.
The REIF may be established for either a definite or an indefinite term of validity. The formation of a REIF is subject to prior authorization by CVM, which is also responsible for supervising all REIF´s operations. REIF´s resources, raised among either Brazilian or foreign investors through the system of distribution of securities, shall be primarily invested in real estate ventures, which may comprise (i) in rem rights upon real estate
assets, (ii) shares, debentures and other securities whose issuers have as main activities those permitted for REIFs, and, among others, (iii) shares or quotas of real estate
companies).
1 Except for residential leases with less than 30 months.
Authors: Vladimir Miranda Abreu, Pablo Meira Queiroz, Anelio Junqueira Lopes Borges and Gabriela Nunes Machado.
TozziniFreire Advogados
Rua Borges Lagoa, 1.328 – Vila Clementino
04038-904 São Paulo – SP
Tel.: (11) 5086 5000
E-mail: [email protected]
Internet:www.tozzinifreire.com.br
Escritórios também em Brasília, Porto Alegre, Campinas e Nova York.