Source: https://www.globallegalinsights.com/practice-areas/real-estate-laws-and-regulations/brazil
Timestamp: 2019-04-19 01:14:30+00:00

Document:
Built to Suit lease agreements have a peculiar nature which makes them very different from traditional lease agreements, since they enable the lessee to ensure the rental of the premises before they are built, and the lessor to secure a long-term rental agreement prior to the completion of relevant investments, through the acquisition of certain real property and construction in accordance with the needs previously agreed with the lessee.
As the name implies, in this type of agreement the lessor provides the lessee with a real property, “built to serve”. In this case, the lessor, holder of funds that allow him to invest in a large enterprise, is contracted by a lessee, who intends to rent a real property under predetermined conditions specific to its activities.
Once the lease agreement has been executed and all the specifications and peculiarities of the undertaking have been obtained from the lessee, the lessor begins the construction or substantial restoration of the real property, as contractually determined. The lessee will begin the use of the real property only after its proper construction. And the lessee must remain in the property until the end of the lease agreement, under penalty of payment of a fine corresponding to the value of the investment made by the lessor.
The revenues from rental agreements received by individuals are subject to income tax levied at progressive rates, ranging from zero to 27.5%, depending on the value received. For legal entities, taxation will essentially depend on the taxation regimen adopted by the company, with the incidence of the following taxes: (i) Corporate Income Tax (IRPJ); (ii) Social Contribution on Net Profit (CSLL); (iii) Contribution to the Social Integration Program (PIS); and (iv) Contribution for Social Security Financing (COFINS).
Under the presumed profit regimen (lucro presumido), the tax basis for IRPJ and CSLL purposes is equivalent to 32% of the rental received. On this amount, called presumed profit (lucro presumido), the IRPJ is charged at a 15% rate, with an additional 10% on the amount that exceeds BRL 20,000.00 in the same month, and CSLL at a 9% rate. In addition, 0.65% for PIS and 3% for COFINS applies over received gross revenue.
The IRPJ and CSLL will be applied at the same rates described above for taxpayers submitted to the “real profit” regimen (lucro real), but the tax basis is the profit effectively earned by the company, also considering the rental revenues and the deduction of expenses set forth in the legislation, including depreciation of the real property itself. PIS and COFINS will be applied at the 1.65% and 7.6% rates, respectively, over the total revenues earned, allowing the discount of credits calculated based on the same rates on certain costs provided by law, which also include accounting depreciation of the real estate.
It is usual to include a clause in the lease agreement establishing that the lessee cannot make any modification, addition, demolition or improvement to the rented real property, even if necessary, without the prior and express authorisation of the lessor and, if admitted, shall be subject to the conditions mentioned in the authorisation and shall be incorporated into the rented real property, and the lessee shall not be entitled to indemnification or retention of the improvements1 made.
The rental of real property in Brazil is regulated by Law No. 8,245 dated October 18, 1991 (“Law 8,245/1991”), also known as the “Tenancy Law”, and the Brazilian Civil Code disciplines only the rental of movable assets. The Tenancy Law gathers, under its aegis, the rental of urban real property, covering both substantive and procedural rules, these latter establishing the way in which the rights it seeks to guarantee shall be exercised. With this purpose, the Tenancy Law has rules typical of the Brazilian Civil Law, but also some regulations of criminal nature. Thus, the legislator sought to concentrate, within a single statute, all matters involving the rental of urban real property, regulating the institution in all its legal and contractual aspects.
The Tenancy Law grants the lessee the right to file the compulsory renewal of the lease agreement for the same term, if it meets the following requirements: (i) the contract to be renewed has been executed in writing; (ii) the minimum term of the agreement to be renewed or the sum of the uninterrupted terms of written agreements is five (5) years; and (iii) the lessee is exploring its business, in the same field, for the minimum and uninterrupted term of three (3) years, pursuant to art. 51 of the Tenancy Law.2 In this way, the lessor will only be entitled to compulsory renewal once these requirements have been fulfilled, in particular, if the lease agreement has been executed in writing and for a minimum term of five (5) years.
In addition to the compulsory renewal of the leasing agreement, the parties are also entitled to review the rent in order to maintain the contractual balance. If there is a breach of this balance, due to factors unrelated to the lease agreement – such as the valuation or devaluation of the real property, inflation, among others – the lessor and the lessee may attempt an agreement and, if not successful, may resort to judicial proceedings. For this purpose, it is sufficient that the rent to be reviewed, except for contractual adjustments, has been established for at least three (3) years, whether or not the rental is in force for a fixed term, except in the case of a Built to Suit rental, where the revision can be dismissed by the parties.
The preemptive right and the term are two other important issues foreseen in the lease agreement.
The preemptive right consists of a right established by Tenancy Law and, therefore, constitutes a legal obligation, not to be confused with that which comes from the agreement. This is a personal right and gives to its holder a security interest against third parties, if the lease agreement is registered in the real property record (matrícula). Thus, if the lessor intends to dispose of the rented real property, it should first offer it to the lessee, who will have the right to acquire it under the same conditions offered to a third party.
This preemptive right is mandatory and cannot be waived, the contractual clause that, in advance, implies a waiver of the preemptive right being null.
With respect to the term clause, it is a guarantee granted to the lessee that, in case of disposal of the real property, all the terms and conditions set forth in the lease agreement must be respected by the new buyer, provided that such clause is expressly provided in the lease agreement and that it is registered in the real property record, in accordance with art. 8 of the Tenancy Law.3 The term clause in the lease agreement, duly registered at the Real Estate Registry Office, imposes on the leased real property a real encumbrance, since it creates a privilege in favour of a third party, opposable to those who acquire rights over the encumbered thing.
Finally, at the time of execution of the termination term of the lease agreement, the lessee must deliver the rented real property to the lessor free and clear of persons and things, clean and in good condition, with the exception of normal wear and tear. And in the event of a dispute between the parties for any disagreement as to the performance of the obligations agreed upon in the agreement, the court where the real property is located is competent to hear and determine such actions.
The rent is paid monthly and normally may be paid at the beginning of the following month, since the Tenancy Law prohibits the advance charge of the rent, except in a seasonal rental or in the event there is no rental guarantee.
The rent can only be adjusted annually, as determined by the legislation in force, according to the index agreed by the parties in the agreement. Extraordinary increases and/or readjustments before the expiration of the annual period established by law are not allowed.
Unless otherwise provided, in addition to the rent, the lessee is obliged to pay the expenses inherent to the real property, such as tax, fire insurance and ordinary expenses of the condominium. The extraordinary expenses of the condominium are, according to the Tenancy Law, a responsibility of the lessor and, as such, cannot be transferred to the lessee.
The term of the agreement shall be agreed at the parties’ discretion. The term is also agreed according to the type of lease established between the parties, namely residential, non-residential and seasonal.
Regarding the term of the non-residential rental, it is usually agreed for a period of at least five (5) years, in order that the lessee may be entitled to the mandatory renewal of the lease agreement. However, the parties may agree on a different term.
Finally, the term for seasonal rentals is shorter, since it is a rental intended for leisure or other needs. These have a defined time not exceeding ninety (90) days, of residential real property, furnished or not. In this type of rental, the lessor can charge, in advance, for the entire rental, in addition to having any of the normal guarantees (escrow, surety or insurance), to indemnify possible damages or losses.
According to the Tenancy Law, during the term established for the duration of the Tenancy Agreement, the lessor may not recover the rented real property. The lessee may, however, terminate the Rental Agreement and return the rented real property by paying the fine agreed upon, proportional to the period of performance of the agreement or, in its absence, as judicially established.
As a rule, the parties set forth in the agreement that the assignment or subrental of a Rental Agreement is subject to the prior and express consent of the lessor.
All amendments made to the rented real property shall be subject to the prior and express consent of the lessor. Such provision is provided in the Tenancy Law and is commonly inserted by the parties in the Rental Agreement.
The lessee is obliged to make, at its own expense, all repairs and fixing, of any nature, that it needs or the rented real property will need, notably of bad use, in order to keep it permanently in perfect hygienic, clean and secure conditions, and shall return it to the lessor when the rental is terminated in the state in which it was rented, except for deteriorations arising from its normal use.
The purchase and sale of real estate is the agreement by which one of the parties undertakes to transfer the ownership of the real property to another, receiving, in consideration, a certain amount of money or equivalent. Its specific purpose is the disposal of the real property. Thus, in most cases, when an investor has an interest in acquiring a real property, first a Purchase and Sale Commitment (“Commitment”) is entered into, where the owner of the real property transmits to the committed buyer the acquisition right related to the real property object of the agreement and, having paid the price, the seller is required to transfer the domain to the buyer. The Commitment may be executed by private instrument or by public deed (drafted by a notary public).
In fact, in order to ensure the execution of the definitive agreement (“Deed”), as a rule, the parties include in the Commitment an irrevocability and irreversibility clause, thus entitling the buyer to the specific performance of the Commitment, in the event of the seller’s unmotivated refusal to grant the definitive Deed.
Finally, it is important to note that a Commitment executed by a public or private Deed may be registered in the competent Real Estate Registry Office, and its registration will grant the buyer a real right of acquisition.
As for urban real property, whether residential or commercial, there are no restrictions on the acquisition of property by non-resident or foreign investors, which means that they are treated in the same way as nationals or residents of Brazil.
Law No. 5,709, dated October 7, 1971 (“Law 5,709/1971”) states that there is a need for express authorisation from the National Institute for Colonization and Agrarian Reform (“INCRA”) for the acquisition of rural land tracts with an area greater than three (3) Indefinite Exploitation Modules (“MEI”) by a foreigner. On the other hand, acquisition of a rural area equivalent to more than fifty (50) MEI by a foreigner will be conditional upon the authorisation of the Brazilian President.
Likewise, in case of Brazilian companies controlled by foreigners, they will be subject to the limitations imposed by Law 5,709/1971, when the equity interest of foreigners in companies regularly incorporated in Brazil, grants them corporate control.
When buying a real property, the interested party must be certain that no liens and encumbrances, notably mortgage, pledge and/or chattel mortgage (alienação fiduciária) are borne by the real property. And, if there are any liens, the investor must make sure that such encumbrances will be cancelled/cleared before the execution of the Deed of purchase and sale. Another important aspect to be observed when acquiring the real property is whether the preemptive right of the lessee was protected, pursuant to art. 27 of Tenancy Law, in case the property is rented.
Before acquiring a real property, the interested party must carry out a due diligence in order to verify if there are notes in the certificates related to the real property and the owner and predecessors up to 10 years (“Certificates”). In most cases, the owner of the real property and the investor, before issuing the Certificates, enter into the Commitment of Purchase and Sale, as described above, providing for a down payment and the initial payment, as well as the obligation of the parties to execute the Deed, provided that there are no notes in the Certificates to be analysed. Once the due diligence has been satisfactorily completed, the owner transfers the real property to the buyer interested party, by means of a Deed of purchase and sale, after the discharge of the price.
As mentioned above, the Commitment of Purchase and Sale usually establishes an estimated amount to be paid by the buyer as a down payment and initial payment. There is no pre-established amount in the current legislation, but the parties usually agree between 10% and 20% of the price agreed for the sale and purchase of the real property. The form and the term of payment of said value are also freely adjusted by the parties.
In accordance to the Brazilian law, the transfer of real property (title) only operates with the registration of the purchase title in the Real Estate Registrar of the competent real estate district, pursuant to the terms of art. 1,245 of the Brazilian Civil Code.6 Therefore, after the registration of the public Deed of purchase and sale, the buyer will have to apply for registration before the competent Real Estate Registry Office so that the property can be transferred.
When one purchases any real property, the Property Transfer Tax called ITBI must be collected. By virtue of being a municipal tax, its rate varies from city to city. In the cities of Rio de Janeiro and São Paulo, for example, the rate is two per cent (2%) and three per cent (3%), respectively, applied over the “reference value” of the real property – value which is made available by the Municipalities – or the transaction value, whichever is greater, shall be applied.
In addition to ITBI, the payment of the laudemium shall also be payable regarding the transfer of useful title (domínio útil) of the real property. The laudemium is the value paid by the owner of the useful title to the owner of the direct (or full) title whenever an onerous transaction of the real property is carried out. Laudemium shall not be considered a tax or tribute. It becomes payable, for example, upon the sale of real properties that originally belong to the Federal Government or Municipality. The disposal of emphyteutic real property of the Federal Government or the Municipality of Rio de Janeiro, for instance, will be payable 5% and 2.5% over the property’s assessed value, respectively. The responsibility for the payment of the laudemium, unlike the ITBI, is not the buyer’s, but the seller’s.
Usually, a down payment and initial payment value shall be paid by the buyer (see “Requirement for cash transfer” above).
In the Commitment of Purchase and Sale, the parties normally provide the term expected for the execution of the definitive Deed. If all documentation is in good order, the parties may directly enter into the final Deed of purchase and sale within approximately ten (10) days, the time necessary for the issuance of all certificates necessary for the registration of the Deed of purchase and sale.
Employees who work in the real property are bound to the owner and not to the real property. Thus, in case of sale or disposal of the real property, the buyer has no responsibility for the labour and social security charges of any employees who have worked on the real property.
Pursuant to the Brazilian civil law, the builder is responsible for any construction defects of the real property during a period of five (5) years from delivery of the real property to the buyer, pursuant to art. 618 of the Brazilian Civil Code. In turnkey (contrato de empreitada) agreements, the contractor shall be responsible, during a non-negotiable period of five (5) years, for the soundness of the construction, safety of the work, including materials such as soil.
As a rule, any tax or financial benefits shall not be transferred upon the acquisition of a real property. However, exceptionally, there is the possibility of such a transfer, as for example in the case of real properties certified as a historic structure (imóveis tombados), where the benefit related to the “Property and Urban Territorial Tax” – IPTU, by virtue of being inherent to the real property and not to the owner, remains upon the disposal of the real property.
Real estate properties shall be registered at the competent Real Estate Registry Office. Thus, all information relating to the real property, notably its owner, may be verified with the competent Real Estate Registry Office.
With regard to the sale of the property, owners are not obliged to sell their properties to third parties; however, in cases of public interest, expropriation by the Public Authority may occur.
The interested party must agree with the owner on the terms and conditions for the acquisition of the property, including price and term for the registration of the public Deed of purchase and sale. The conditions of purchase and sale are freely agreed by the parties.
In addition to the taxes mentioned in “Taxes and payable fees”, those who have an interest in developing an enterprise on the land must pay the expenses of project approvals before the Municipality, as well as obtain environmental licences and carry out the environmental assessments necessary for project approval.
The price is freely agreed by the parties. The price is usually agreed according to the location and the constructive potential of the land.
As well as the price, the form of payment is also freely agreed upon by the parties, seller and buyer. The public Deed of purchase and sale is usually granted against the last payment of the price. However, nothing prevents the release of the price to be made after the purchase and sale Deed is granted if guarantees are offered to the seller, such as personal or bank surety, mortgage and property chattel mortgage.
In Brazil, it is common for the buyer to obtain a real property credit facility with a financial institution for the acquisition of the land. The financial institution grants the buyer the loan for the acquisition of the property and as a collateral for the payment of the loan; the real property is subject to fiduciary lien (chattel mortgage) in favour of the creditor financial institution.
As indicated in the item “Taxes and payable fees” above, upon the acquisition of land, the Property Transfer Tax – (ITBI) must also be collected, whose rate varies from city to city according to municipal jurisdiction.
The execution of a real property credit facility agreement with property chattel mortgage as collateral is the most common and safe way to grant loans for the development of real estate projects in Brazil. The loans are usually granted by a financial institution, and the value is on average 70% of the value of the property offered as collateral, so-called Loan to Value.
For the granting of a loan for the acquisition of real estate properties, financial institutions usually require, in addition to the fiduciary lien (chattel mortgage) of the real property, additional guarantees described above, when it comes to corporate real properties, such as: (a) personal guarantee, e.g. surety and endorsement; and (b) other security interest, including other real properties owned by the debtor.
Upon the granting of the security interest, the real property is separated from the debtor’s equity to ensure fulfilment of the obligation. Thus, the owner or third-party guarantor can grant real properties as collateral, but the owner must have free disposition of the property (art. 1,420 of the Brazilian Civil Code).
The main effect of the security interest is to separate a property from the debtor’s or third party’s equity to bind it to the priority payment of a particular obligation.
The real interest required by the creditor are the mortgage and the chattel mortgage.
Mortgage: Mortgage is an in rem right, of ancillary character, because it accompanies the mortgaged thing, since it does not exist in isolation, but originated in another contract, whose main obligation is to guarantee, and on whose existence it depends. Its main characteristic is to keep the property under the owner’s possession. The Brazilian Civil Code, in its art. 1,473, provides for the assets that may be mortgaged, namely: (i) real properties and its accessories, together with them; (ii) the direct full title; (iii) the useful ownership; (iv) the railways; (v) natural resources such as deposits, mines and other mineral resources, hydraulic energy potentials, archaeological monuments and other goods referred to by special laws (article 1,230), regardless of the soil where they are found; (vi) ships; (vii) aircraft; (viii) the right to special use for housing purposes; (ix) the in rem right of use; and (x) the surface property.
The mortgage is created by contract (conventional mortgage) or by force of law (legal or judicial mortgage). In any of these cases, there will be a document of creation: in a legal mortgage, the title is the sentence of specialisation; and in a judicial mortgage, the title will be a writ of execution or court order, providing the indication of the asset, or assets, recorded with the guaranteed debt.
The mortgage shall only be valid after the submission (or registration, under the terms of Law 6,015, of December 31, 1973, art. 167, item I, No. 2). The registration, or submission, will be done at the Real Estate Registry Office in which the real property subject to the guarantee is enrolled. The order number of the record determines the priority of the mortgage. If the debtor gives the same real property in mortgage to different creditors, the one who registers it in the first place shall bear preference.
It is possible to have more than one mortgage for the same real property. The Brazilian Civil Code considers that it is the responsibility of the interested parties to request the registration of the mortgage in the competent Real Estate Registry Office.
Real property chattel mortgage: The chattel mortgage as guarantee of real properties is regulated by Law No. 9,514, of November 20, 1997 (“Law 9,514/1997”), constituting a legal arrangement by which the debtor, fiduciary agent, for the purpose of guaranteeing fulfilment of an obligation, contracts the transfer to the creditor, or fiduciary, of the resolvable property and indirect ownership of the real property, the fiduciary agent remaining with direct ownership.
Thus, by means of the chattel mortgage agreement, the designated fiduciary lien is created, which is nothing more than a resolvable property over the property given as collateral.
If the debt (instalment, or parcel of the debt) is due and not paid, in full or in part, the fiduciary agent is considered in breach, and the ownership of the real property is consolidated, pursuant to art. 26 of the Law 9,514/1997, in the name of the fiduciary.
The fiduciary agent (debtor) in breach will be summoned, at the request of the fiduciary, by the Real Estate Registry Office, or the Titles and Documents Notarial Office, to pay, within 15 days, the instalment due and those due by the date of the payment, contractual interest, legal charges, including taxes, condominium contributions attributable to the real property, in addition to collection and summons expenses. Upon cure of the breach, the chattel mortgage agreement shall convalesce. If there is cure of breach, the Real Estate Registrar shall certify the fact and then, in view of payment by the fiduciary of the inter vivos transfer tax, the registration in the real property record, consolidating the property in the name of the fiduciary.
In this last hypothesis, the fiduciary, once the property its consolidated in its name, shall promote a public auction, within 30 days of the date of consolidation, for the disposal of the property. If, on second auction, the minimum value sufficient to settle the debt, as well as the charges and expenses, is not reached, the creditor shall remain with the real property object of the guarantee and must grant release to the debtor, exempting the debtor from any differences. Once the property is sold by auction, the fiduciary shall give the debtor the remaining sum, considering the value of the indemnification of the improvements, after deducting the values of the debt, expenses and charges. It is important to note that the debtor may preferably acquire the property up to the date of the second auction.
Before any credit facility is granted, it is common for the creditor to perform the due diligence of the real property, in order to verify if there are notes/liabilities related to the real property that will be given as collateral, as well as to the debtor, as is done in the acquisition of the real property (see item, “Key aspects in the acquisition process” above).
The creditor does not have the right to take possession over a real property in case of default in the payment of the guaranteed obligation, but only the right to foreclose the guarantee, so that the real property may be sold at public auction, and may claim possession after the realisation of the auction.
The duration of the loan will be agreed between the parties (creditor and debtor), there being no specific restrictions for the maturity of the credit facility, but the maturity date must be determined. Upon the acquisition of residential real properties, the terms can be up to thirty-five (35) years, and in credit facility agreements for corporate real property, the terms are shorter, and may reach ten (10) years.
The interest is agreed by the parties, but usually, in a housing credit facility, the maximum interest rate of 12% per annum is applied, plus the Referential Rate (TR). With regard to corporate real properties, rates are freely agreed upon, and interest rates may oscillate from 12% to 18% per annum, plus monetary restatement calculated by the IGPM – General Market Price Index, published by Getúlio Vargas Foundation (FGV) or the IPCA ­– Nationwide Consumer Price Index, published by the Brazilian Institute of Geography and Statistics (IBGE).
Expenses related to the maintenance of the real property, if not carried out by the debtor, as well as the performance of the guarantee, shall be reimbursed to the creditor, such as: (i) water, electricity and gas expenses of the real property given as collateral; (ii) IPTU, forum and other taxes or contributions, if any; (iii) any other social contribution or tax incurred on any payment made by the creditor as a result of the summons, procedural expenses, the disposal at Public Auction, auctioneer’s commission, attorney’s fees, etc.; and (iv) in the case of chattel mortgage of the real property, transfer tax paid by the creditor as a result of the consolidation of the full ownership of the property.
Improvement is every work done by man in the structure of a thing for the purpose of preserving, enhancing, or beautifying it. Pursuant to art. 96 and art. 97 of the Brazilian Civil Code of 2002, improvements may be amenity, useful or necessary. ‘Amenity’ are those of mere delight or recreation, which do not increase the customary usage of the asset, even if they make it more enjoyable or of high value; ‘Useful’ increases or facilitates the use of the asset; and ‘Necessary’ are those which have the purpose of preserving the asset or preventing it from deteriorating (roof and electrical system repairs, etc.), and enhancements or additions to the property without the intervention of the owner, holder or bearer are not considered to be improvements.
Art. 51. In the rental of corporate real property, the lessee shall be entitled to renewal of the agreement, for an equal period, provided that, cumulatively: I – the agreement to be renewed has been concluded in writing and with a fixed term; II – the minimum term of the agreement to be renewed or the sum of the uninterrupted terms of written agreements is five years; or III – the lessee is exploring its business, in the same branch, for a minimum and uninterrupted term of three years.
Art. 8. If the real property is disposed during the rental, the acquirer may denounce the agreement, with a term of 90 days for the vacancy, unless the rental is executed for a fixed term and the agreement contains a term in case of disposal and is registered with the real property record.
Art. 47. When adjusted verbally or in writing and for a term of less than 30 months after the established term, the rental is automatically extended, for an indefinite term, only if the real property can be resumed: I – In the cases of art. 9; II – as a result of the termination of the employment agreement, if the occupation of the real property by the lessee is related to his employment; III – if it is requested for personal use, their spouse or partner, or for residential use of ascendant or descendant that does not have, as well as their spouse or partner, personal residential real property; IV – if it is requested to demolish and build licensed or to carry out works approved by the Government, that increase the built area by at least 20% or, if the real property is intended for hotel or pension operation, by 50%; or V – if the uninterrupted term of the rental exceeds five years.
Art. 108 of the Civil Code: If the law does not provide to the contrary, a public Deed is essential to the validity of legal businesses that aim at the constitution, transfer, modification or waiver of property rights over real estate properties worth more than 30 times the highest minimum wage in force in the country.
Art. 1,245. The property is transferred between living natural persons upon the registration of the transferring title at the Real Estate Registry.

References: art. 51
 art. 8
 art. 27
 art. 1
 art. 618
 art. 1
 art. 167
 art. 26
 art. 96
 art. 97

Art. 51

Art. 8

Art. 47
 art. 9

Art. 108

Art. 1