This country-specific Q&A provides an overview to technology laws and regulations that may occur in Brazil.
It will cover real estate law as well as the author’s view on planned future reforms of the commercial real estate regime.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/technology
In Brazil, a number of sparse formalities and laws (statutes) governs the real estate industry, mainly because any matter in connection with real estate ownership, guarantee on real properties and related rights in general is deemed to be in rem rights. Nevertheless, it is also possible to have legal relations and transactions involving a real property in the scope of obligation law, as opposed to in rem rights, as it occurs with leases and free leases for real property’s use.
In any case, in order to seek for the applicable law and check the formalities that will have to be adopted to validate the transaction, it is always important to take into consideration the kind of transaction intended, as well as the bounds established with such property. This includes the possibility of registering the property in the corresponding real estate record thereof (i.e., a public registration containing the main information and track record of the property, as explained below) with the competent Real Estate Registry Office.
How is ownership of real estate proved?
Each real estate property in Brazil has a number of record, which, in Portuguese, is called and known as “matricula”. This is an enrolment with the competent Real Estate Registry Office, that identifies precisely: (i) the property, (ii) its area, (iii) boundaries, (iv) location, (v) previous and current owners, and (vi) liens and encumbrances, if existent.
The registered owner of a property is presumed to be the lawful owner, but such presumption admits proof to the contrary. Since there is no “title insurance” or similar insurance policy allowed in Brazil, purchasers should always conduct a thorough due diligence exercise before acquiring a real estate property.
Are there any restrictions on who can own real estate?
Brazilian legislation sets out general rules and restrictions affecting the acquisition of rural real estates by foreigners (individuals or legal entities), which depends on the area of the real property and is subject to a specific procedure and prior authorization from the competent authorities. The restrictions also apply to the acquisition by Brazilian companies controlled by foreign entities or individuals. Consequently, the event of change of control of Brazilian companies to foreign companies or individuals should be subject to such restrictions as well.
In addition to rural properties, there are also restrictions established for the acquisition, possession or any in rem rights of properties located within 150 kilometers from Brazil’s international borders by foreigners or any legal entity with participation, by any means, of a foreigner.
What types of proprietary interests in real estate can be created?
The Brazilian Civil Code lists proprietary interests as: (i) ownership; (ii) surface; (iii) easement or servitude; (iv) usufruct; (v) use; (vi) habitation; (vii) the right of the committed buyer of the property; (viii) pledge; (ix) mortgage; (x) antichresis; (xi) granting of special use for housing purposes; (xii) granting of right of use; and (xiii) surface and overhead rights/slab rights (in Portuguese, known as “direito de laje”);
In addition to the proprietary interests expressly described in the Civil Code, we have the right of first refusal of the tenant (in case of sale of the real property during the lease) and the conditional sale as guarantee (chattel mortgage) established in scattered legislation.
Acquisition of property interests on real estate created or transmitted inter-vivos can be accomplished by registering said deeds with the Real Estate Registry Office, except in the cases expressed in the Brazilian Civil Code.
We have listed some of the main property interests:
- Ownership: is the full property right on the real estate. The owner is entitled to use, enjoy and dispose of the real property, and the right to take it back from anyone that unfairly takes possession thereof. Under a practical perspective, leasing real estate to third parties is usually carried out by individuals or legal entities that own said property.
- Usufruct: the partial property right (of use) on a real property that is owned by another party. In the usufruct, the proprietary right is divided between two individuals/entities: the beneficial owner and the usufructuary. The usufructuary holds the rights to use and enjoy the real property and the obligation to preserve it. The beneficial owner, in turn, is the owner of the property without its elementary rights (bare property) and the expectation to have full property rights in the future, which occurs with the consolidation of the property (extinguishment or termination of the usufruct).
- Mortgage: is an in rem guarantee that is levied on the real estate. The debtor grants a right to the creditor on a real estate owned thereby or by a third party (as guarantor), so that such mortgage guarantees the payment of the debt. The ownership and possession of the real property remains with the debtor or the guarantor, who may receive the fruits thereof. Usually, the mortgage creditor has priority in receiving his credit before the other creditors.
- Chattel mortgage: the debtor, or chattel mortgagee, transfers to creditor, or chattel mortgagor, the fiduciary ownership of the real estate in order to guarantee the compliance with certain obligation (such as payment of debts). The chattel mortgagor holds the fiduciary ownership of the real estate up to full payment of the debt, when the asset will return to the debtor's possession and full ownership.
Is ownership of real estate and the buildings on it separate?
The Brazilian legislation establishes that a real estate includes the soil and all elements incorporated thereto – either naturally or artificially. Legislation further establishes that every building on a plot of land has presumably been made by the owner at his expense, unless evidence demonstrates otherwise.
As long as performed in good faith, if one builds something on somebody else's land, he loses the buildings to the lawful owner, but will be entitled to proper indemnities.
What are common ownership structures for ownership of commercial real estate?
Taxation on the sale and lease of a real property is an important fact to be considered. In the commercial business of realty, taxes on individuals are, mostly, rather greater than taxation on legal entities. At sale, for example, when it is carried out by an individual, the owner may have to pay 15% of income tax on capital gain (difference gained between the sale amount and the acquisition amount). Should the sale be carried out by a legal entity that develops real estate businesses, the taxation may be at 6.73% on the transaction amount. In the case of leases, taxation on the amount received as rents may reach 27.5% for individuals and range from 11.33% to 14.53% for legal entities. The corporate type is more associated to the peculiarities of the transaction structure (title of the real property held by legal entity linked to a certain corporate activity, establishment of investment or governing rules etc.), and do not represent, in principle, any other differences for taxation purposes.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
In order to acquire a commercial real estate safely, buyer must conduct a due diligence to be sure that the acquisition will neither be questioned by any third party nor disregarded by potential allegations of fraudulent conveyance or fraud against creditors. The reason therefore is that the registration of the property in the real estate record is a presumption that admits adverse evidence.
There are no specific and consolidated regulations about the procedure of due diligence concerning purchase and sale of a real estate and its limits. Apart from some innovations under Law No. 13,097 of 2015 (which determines the concentration of all the acts in the real estate record, whose application, however, is still under discussion), there are only sparse provisions and understandings from scholars and Court decisions, which, jointly, establish standard market practice to the minimum cautionary measures to be adopted in the legal due diligence.
Accordingly, at a standard due diligence on commercial realty transactions, it is advisable that the potential buyer, assisted by counsel, check the entire documentation of the property, owner and further – depending on the case – of the previous owners and the companies in which such individuals or legal entities (owners and predecessors) are involved as partners or managers, to check the legal situation. The list of documents and its extension will depend on the nature of transaction, as well as on the risk that the buyer is willing to take.
In summary, the due diligence consists in researching and obtaining certificates that show the result of assessment in the general files during a certain period (which usually ranges from 10 to 20 years, depending on the type of the transaction and the risk undertaken by the buyer). In other words, the certificates will attest whether there are or not any lawsuits, liabilities, debts, restrictions, liens and/or encumbrances.
Considering that such documents are issued by public authorities, there is a cost for their issuance (except for some certificates that can be issued by the internet). However, considering that the public bodies in each location establish their own fees, the amounts vary widely and usually one may have to retain a service renderer to help in the obtainment of documents.
Likewise, the deadlines to obtain the certificates are different from one location to the other, as well as from each public body, so that there is not a determined period of time – as a rule – for the completion of the due diligence. In any case, parties usually establish an average of 30 days to submit the documents and certificates.
As real estate due diligence already involves the analysis of information encompassed in the documents related to the property, preparing a set of questions will only make sense during referred assessment (when and if any inconsistency emerges from the certificates and/or information provided and for which clarifications are necessary).
Once the analysis is concluded, if the buyer identifies any relevant liabilities and/or debts that are able to impact the sale, it is possible for the seller to offer some guarantee to comfort the buyer about the status of the sale, in order to ensure that said liability and/or debt will not have adverse effects on the transaction. However, it is important to point out that, in Brazil, there is not any legal provision specifically setting forth such guarantee with the purpose of securing the ownership of propriety.
What legal issues (if any) cannot be covered by usual legal due diligence?
Unfortunately, even if the buyer adopts all the cautionary measures and carries out a conservative due diligence on the real property, legal risks may arise, which were impossible to foresee based on the documents. For instance, an irregular occupation of the property by third parties (which would only be verified upon an in loco inspection). Moreover, because the due diligence of real estate contemplates, in principle, assessment of certificates from judicial district where the property and residence of the owner and predecessors are located, it is possible that some liabilities outside such locations fails to be identified in the due diligence, and depending on its nature and economic content, may have negative effects on the transaction.
What is the usual process for transfer of commercial real estate?
The process for transferring commercial real estate varies in accordance with the characteristics of transaction. In Brazil, the most usual one is the direct purchase of commercial real estate with the purpose of real estate development. As a rule, for such purchase, the process encompasses 3 steps: (i) execution of the purchase and sale commitment or of the exchange of properties agreement (depending on the type of transaction), (ii) real estate due diligence, and (iii) execution of public deed of purchase and sale or exchange of properties (exchange of the plot of land for future commercial units to be developed and built on the property).
In the contracts of purchase and sale or exchange of properties commitment and public deed of purchase and sale or exchange of properties, except for the termination provisions contemplated in Law and in such agreements, all of the terms are binding and must be complied with. This is due to the pacta sunt servanda principle, under which,, once the parties have entered into an agreement, it must be honored and complied with.
In this sense, by market practice, there are terms and conditions that are usually included for the purposes of referred transactions of real estate purchase, such as: (i) representations of the parties, each one stating its lawfulness, the owner party stating that the commercial property is in good standing, as well as the regularity of the deed of property thereof, (ii) description of the property and the way it was acquired by the selling party, especially for effects of registration of the contract in the real estate record, (iii) obligations and responsibilities of the parties, (iv) miscellaneous , amongst others.
The real estate sector is subject to a number of formalities. Accordingly, in order to carry out a valid transfer of commercial properties, the acquisition title must comply with the public format (when the property’s transaction value overcomes 30 minimum wages in force at the time in Brazil), i.e., the transfer must be made by public deed (by any means of acquisition: purchase and sale, exchange, payment in kind etc.) drawn up by the notary public of a Notary Office, in order to have full faith and credit. Furthermore, at the end, the public deed must be registered in the real estate record with the competent Real Estate Registry Office, so that the purchaser finally and formally obtains title of the real estate property.
· Negotiation of sale and purchase commitment agreement with buyer
· Preparation of draft of sale and purchase commitment agreement, or review when draft is provided by buyer
· Negotiation of sale and purchase commitment agreement with seller
· Preparation of draft of sale and purchase commitment agreement, or review when draft is provided by seller
· The sale and purchase commitment agreement demands no prescribed form but market standard terms are usually applied
Signing to Closing
· Satisfaction of any precedent conditions to closing
· Delivery of due diligence documents to buyer
· Due diligence
· Undertake market, environmental and other necessary assessments
· Arrangements and measures related to the purchase price funding (including any third party debt), when applicable
· Satisfaction of any precedent conditions to closing
· A deposit of 10% up to 20% of the purchase price is typically made in advance upon signing the commitment agreement, which will be forfeited if the buyer fails (without cause) to complete the deal
· Payment of any remaining debts and discharge of any liens and encumbrances identified in the legal due diligence process
· Execution of sale and purchase public deed
· Execution of sale and purchase public deed
· Payment of purchase price, “ITBI” taxes (as explained further below) and Notary Office fee
· Not applicable
· Payment of IR tax levied on capital gain
· Registration of transfer before the competent Real Estate Registry Office and payment of registration costs
· Registration fee varies according to the transaction price
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Generally, the transmission of a property is made by means of a public deed, formality that transfers the real property itself to the buyer. However, in certain cases, the sale of a property may occur by means of a transfer (acquisition, consolidation or merger) of the shares of a company which owns a real estate property. Such procedure is common in merger and acquisition transactions and also in wealth and succession planning. However, a special care in the use of corporate transactions with the purpose of transferring a real property is recommended, since the tax authorities may understand that there is a simulated transaction involved therein – especially when absence of a business purpose is verified – solely aiming at avoiding the payment of a real estate transfer tax (ITBI), which is not levied on the sale or transfer of corporate shares.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
In the event of sale of properties that are leased, the owner must at first comply with the tenant’s right of first refusal of the purchase (which is a statutory right) and offer him/it the property. If the tenant refuses it or remains silent, the owner may continue with the sale to a third party and, as soon as said transaction is completed, an amendment to the lease agreement must be executed to contemplate: (i) transfer of the real property, (ii) exclusion of the owner from the lease agreement, and (iii) inclusion of the acquiring third party as the current owner of the property and a party to the lease agreement.
After it has been accomplished, the rents must be paid by the tenant directly to the acquiring third party. In practice, such procedure is not always complied with, but it is the correct way to avoid the risk of doubts, charges or ungrounded challenges, including under the taxation perspective.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
Eeasement is an in rem right, provided for in the Brazilian legislation, which is established on a real property owned by a third party (servient property) to the benefit of another third party (dominant property). An easement cannot be constituted by presumption, but rather by an express statement of the owners (by way of a public deed), legal order or by will, and a subsequent registration in the applicable real estate record with the competent Real Estate Registry Office.
Regarding the passage of cables and pipes, the real property’s owner is obliged to tolerate the passage, through its property, of cables, pipes and other underground conduits of public utility services, for the benefit of the neighboring owners, which otherwise would be either impossible or excessively expensive.
Regarding the passage of water, the owner of the lower building is obliged to receive the water that naturally flows from the higher building, and works to avoid its flow are forbidden.
Furthermore, the legislation provides right-of-way, case in which the owner of the building, who has no access to a public thoroughfare, for instance, may, upon payment of an indemnity, require the neighbor to give him passage and route will be established in court, if necessary.
The owner of the real property is assured the right to build, provided that the right of the neighbors and administrative regulations are complied with. The neighboring rules and building restrictions must be observed (e.g., the minimum distance between the buildings).
Are split of legal and beneficial ownership of real estate (ie Trust structures) recognised?
As previously mentioned, the Brazilian legislation establishes the usufruct. Such doctrine provides that a person may transfer the beneficial ownership to another person and reserve the usufruct for himself. Accordingly, such person, the usufructuary, may use and enjoy the real property while the beneficial owner holds the title of the real property without the right to use it or to enjoy it.
Example: a common example is the donation of a real property from a father to his son reserving a lifetime usufruct for himself. Accordingly, the son becomes the beneficial owner of the real property and the father (the donator) becomes the usufructuary, so that he can have the usufruct of the real property while he is alive (lifetime nature). After the father’s death, the son will have the real property’s full ownership.
The usufruct must be registered in the real estate record and the sale of the property will depend on the consent of the usufructuary in the act or the previous cancellation of the usufruct with the competent Real Estate Registry Office.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
The main taxes are:
- IPTU (Urban Real Estate Tax) – tax charged from owners of urban properties (residential or commercial). The amount is annually paid to the Local Government of the Municipality where the real property is located;
- ITBI (Real Estate Conveyance Tax) – tax levied on the sale of real properties. It is a local tax and, therefore, its rate, tax base and payment date are defined by the law of the Municipality in which the real property is located. This tax is not levied on the transfer of real properties to legal entities by its shareholders, provided that the core activities of such legal entities are not real estate businesses, that is, only in case of legal entities whose revenues from real estate activities are not in excess of 50% of the total revenues.
- ITCMD (Estate and Gift Tax) – tax levied on the conveyance of a real property by reason of death of the property’s owner or in case of property’s donation. It is a State tax, and its rate, tax base and payment date are defined by the State law where the real property is located.
- IR (Income Tax) tax levied on the lease of real properties – federal tax levied on the amounts received as rent revenues. The rate may vary according to the value of the rent and, as informed above, according to type of the lease entered into - whether by a legal entity or by an individual.
- IR (Income Tax) levied on capital gain – federal tax levied on the contingent profit obtained with the sale of a real property (difference between the value of the sale of the real property and its acquisition cost). The tax value varies according to the value of the capital gain ascertained (progressive rate according to the tax base increase); our law further provides several variables for the application of discounts (progressively applied according to the time said property has belonged to that owner) and even events where payment exemption occurs (e.g., when the profit with the sale is used for the acquisition of another real property within a 6-month period - such benefit may only be used once every 5 years).
Despite the fact that they do not have the legal nature of taxes, in addition to the abovementioned taxes, two different revenues referred to as “estate revenues” may be charged from owners of properties under the emphiteusis regime (in this specific case, the holder of the right to use and enjoy the property, mainly in cases in which the legal title of properties belong to any Federated Entity – Union, States or Municipalities). The first revenue is the “emphyteutic rent”, which corresponds to the annual remuneration due to the owner of the legal title by the holder of the right to use and enjoy the property. The second is referred to as “laudemium”, which, in its turn, is due to the owner of the legal title only when the transfer of the right to use and enjoy the property occurs.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
Commercial lease agreements contain some peculiarities and requirements that must be complied with and without which the tenant's position may be weakened when trying to invest in a real property to develop its economic activities. Therefore, in order to avoid or mitigate the risk of having the lease agreement challenged in Court (provided that there is no inspection body to this effect) or, if applicable, under arbitration, there are some common clauses and conditions that the parties must adopt in the agreements for their own protection. Accordingly, the main points of attention when preparing a lease agreement for commercial purposes are:
- Written contract: although the Law does not establish a format for lease agreements (they may be verbal or written), considering the commercial purpose and possibility of future renewal, it is important that the agreement be written and executed for a fixed term.
- Rent: a fixed monthly amount is usually set forth (depending on the parties' negotiations and the activity developed in the leased property, it is also possible to establish a variable rent, based on the tenant's profits, for example), subject to monetary adjustment after a term (minimum) of 12 months and revision of the amount in the event of judicial renewal or upon common agreement by the parties. Should it be impossible to reach an agreement, the parties may, after 3 years as of the last adjustment in connection with the monthly lease, file a claim before the courts for the judicial revision). There is no limit for the rent amount agreed. The parties are autonomous to do business and the amount must reflect the conditions and place of the property and the activity to be developed therein.
- Assignment and subleasing: pursuant to Law, assignment and subleasing, in full or in part, depend on the prior written consent of the landlord, unless the parties otherwise expressly set forth in the lease agreement. In this specific aspect, lease agreements usually replicate the restrictions imposed by Law.
- Renovation and termination: regarding the commercial leases, the law grants tenants the right to file a compulsory renewal of the lease agreement, provided that 3 requirements are complied with: (i) the agreement is made in writing and with a fixed term, (ii) the lease provides a minimum term (uninterrupted term) of 5 years, and for this calculation the term renewals by way of amendments may be considered, and (iii) the tenant develops the same commercial activity in the property for a minimum and uninterrupted term of 3 years. Should all requirements be complied with, the lease renewal action must be filed within 6 to 12 months before the term of the agreement; otherwise tenant loses its right to compulsorily renew the lease.
As to termination events, this will depend on what has been provided for in the lease agreement. In any case, law determines that the lack of rent payment and an expropriation of the property are cases that may result in termination of the agreement. Likewise, the law provides specific events in which the landlord may oppose the compulsory renewal of the lease, such as, for instance, the need to carry out works in the property by determination of public authorities and that imply radical transformation therein; or in case the landlord starts using the property for himself or for the installation of a business with a goodwill that exists for more than one year, provided that the majority capital of such company is held by that tenant, his spouse, ascendant or descendant.
- Expenses and charges: tenants are usually liable for taxes and consumption expenses (water, energy, sewage etc.) related to the property, as well as for the cost of maintenance and conservation (painting, locks, water faucets, insurance, among others). However, landlord is responsible for bearing the cost and expenses related to the property’s structure and safety.
- Effectiveness clause: such clause expressly provides that the lease will remain in force in case the property is sold to a third party. If the agreement does not encompass this clause, in the event the property is sold during the lease term (after having observed tenant’s right of first refusal), buyer is not obliged to perform the lease agreement and may even unilaterally terminate the agreement, case in which tenant will have 90 days to vacate the property. Nevertheless, if the lease agreement (i) provides such clause referred to as “effectiveness clause”, and (ii) it is registered in the real estate record, the third party who bought the property must comply with the agreement until its final term (being also subject to the rules that assure tenant the right to file a compulsory lease renewal action).
- Licenses: in the commercial leases, both the landlord (in the capacity of owner) and tenant are responsible for obtaining and maintaining certain licenses that regulate the occupation and development of activities in those properties. Accordingly, it is very important to check how the obligations for obtaining and maintaining the licenses have been ascribed.
As a rule, construction licenses and those issued by the Fire Department are incumbent upon the owner, since they certify the real property’s conditions for a regular occupation, while the licenses for use and operation (also referred to as “ALUF”) are incumbent upon the tenant, since they strictly entail the permission for activities that will be developed in that property. Furthermore, in order for the tenant to obtain the ALUF, the owner must previously obtain the construction license and those issued by the Fire Department.
How are use, planning and zoning restrictions on real estate regulated?
The Brazilian legislation provides a series of rules concerning urban policies with the purpose to better organize urban space.
The Federal Constitution establishes that Municipalities with more than twenty thousand inhabitants must have its Directive Plan approved by the City Council. Such Directive Plan is a basic guidance of the urban policy for the development and expansion of the city.
The so-called City Statute regulates the provisions of the Federal Constitution and establishes the general guidelines for urban policy.
The Directive Plan, in its turns, establishes the rules for the physical development of the city. It aims at directing its growth, avoiding social conflicts, planning its housing, commercial and industrial development.
Aligned with the Directive Plan, the Urban Zoning Law, i.e., the rules of land use and occupation are created for each city. Zoning is a concept conceived by the urbanism field and means to divide a city into zones, that is, to separate a city by specific zones according to the activities developed in each one of them. The main occupation zones are for residential, commercial, mixed (mainly residential and commercial) and industrial uses.
Who can be liable for environmental contamination on real estate?
The liability for environmental damage may be ascribed to the polluter (individual/entity directly or indirectly liable for the action that caused the environmental degradation) and to the real property’s owner, who is equally responsible for solving the existing environmental liability. In addition to civil environmental liability, the law also provides criminal liability of the legal entity or individual which/who is charged liable for the damaging conduct to the environment.
Is expropriation of real estate possible?
There are several types of possible expropriation made by the Government: (i) direct expropriation – it is the expropriation made to meet the public interest and public and social need. The indemnity for the expropriation must, in thesis, be previous, fair and in cash, but it is very common to have the parties (former owner and the Government) discussing on the indemnity amount for several years in Brazilian Courts; (ii) inverse expropriation – it occurs when the Government takes possession of private properties, without complying with the requirements of previous notification and indemnity. In this case, the individual is supposed to claim, within five (5) years as of the expropriation act, his right to indemnity; (iii) expropriation as a sanction – it occurs when the property does not comply with its social function (urban or rural); and (iv) confiscatory condemnation or expropriation – in case of expropriation of land used for the cultivation of psychotropic or non-authorized plants.
Is it possible to create mortgages over real estate and how are these protected and enforced?
In Brazil, a very common form of guarantee is mortgage on real properties. A regular mortgage must follow the solemnities of public deed and registration in the corresponding real estate record with the competent Real Estate Registry Office. The registry of a mortgage is extremely important for its preservation, as well as to fully produce its effects, since, without complying with such requirement, the guarantee remains in the field of obligation rights and it is not typified as an in rem right.
The mortgage on a real property also includes its accessories, i.e., the soil and its natural accessions (trees and stones) and the artificial ones (constructions and plantations). Moreover, except for the case of a first-priority mortgage (i.e., in case there is no early termination clause restricting other mortgages), it is possible to take out more than one mortgage on the same real property, which must observe the order of priority according to the chronology of its registries. In the event of default by the mortgage debtor, since the agreements secured by a mortgage are deemed as extrajudicial execution instruments, creditor may promote the foreclosure on the real property by executing such enforceable instrument in the courts. The debtor must be summoned in order to pay the debt within de deadline established or offer properties to be levied upon. Should debtor fail to pay or fail to validly offer properties to be levied upon, the marshall may promote the levy, preferably, of the property offered as a mortgage. There is a possibility to extending it to other properties if it is necessary to assure the full payment of the debt. In order to satisfy the credit, the real property may be adjudicated, sold to a private individual or in court (each modality has its own procedure). If the credit amount exceeds the value of the real property, the execution on the remaining balance will continue.
As a rule, foreclosure on a mortgage debt is more direct than a process of common execution (mainly taking into account the nature of a security interest). Nevertheless, it is still bureaucratic. For this reason, it is difficult to make any practical estimates, because the process depends on the Judicial Court, which is usually slow in Brazil.
In this respect, it is worth noting that an alternative to a mortgage would be chattel mortgage. In this type of guarantee, there is the transfer from the debtor to the creditor of the fiduciary ownership and indirect possession on the real property, as a guarantee of the debt. Upon payment of the secured debt, the guarantee is extinguished and buyer consolidates both, the property and the possession, in such capacity.
Are there material costs associated with the creation of mortgages over real estate?
A mortgage to be perfect and valid and to produce all its effects depends on being executed in a public deed (except for legal and applicable mortgages) duly registered in the corresponding real estate record with the competent real estate registry office (as previously mentioned). Accordingly, creating a mortgage necessarily implies costs related to registry offices, such as: costs to draw up a deed and the registration of referred deed in the real estate record. Such costs are variable, since they are calculated based on the value ascertained to the credit, in addition to levy of local and state taxes.
Is it possible to create a trust structure for mortgage security over real estate?
The Brazilian legal system does not provide the creation of mortgages to the benefit of a security trustee, acting on behalf of a group of creditors. Moreover, since a mortgage is an in rem right, there is a strong strictness as to the need to meet the solemnities required thereby. As referred in the beginning, the real estate industry is governed by a series of sparse formalities and laws.
Therefore, many times such strict formalism ends up hindering the acceptance by the Notary Office and by the Real Estate Registry Office (the officers may feel uncomfortable to take out a security interest for lack of a legal provision thereupon) of a security trustee.
In this respect, depending on the understanding of the registry offices (Notary Office and Real Estate Registry Office), it is possible to create a structure with a fund for real estate transactions with mortgages and that are constituted to the benefit of a trustee, provided that they do not conflict with the legally established requirements for the mortgage and/or any other mandatory provision of the Brazilian legal system.
What is the main legislation relating to commercial real estate ownership?
The main laws applicable to the real estate industry are: The Federal Constitution of 1988, which establishes the fundamental principles, rights and guarantees; the Brazilian Civil Code (Law 10,406/2002), which brings the general provisions concerning in rem rights, obligation and contractual rights; the Lease Law of Urban Real Property (Law 8,245/1991), which establishes the rules on the lease of urban real properties and the procedures inherent thereto; Law 9,514/1997, which introduced the chattel mortgage; Law 6,015/1973, which provides the rules on public registries; Law 4,591/1964, which establishes the rules on the condominiums and real estate developments; and Law 6,766/1979, which provides the rules on urban land subdivision.