Highlights of Brazil

Authors: Beat W. Rechsteiner enRodrigo Alves Anaya 

Rechsteiner Sociedade de Advogados

7.1. GENERAL ASPECTS OF REAL ESTATE PROPERTY LAW IN BRAZIL

The Brazilian Federal Constitution expressly assures the right to own property . Such right, however, is required to fulfill a social purpose .

Regarding real estate property, Brazilian law distinguishes between urban and rural property. And for this reason the Federal Constitution repeats and specifies the fundamental principle of the social mission of the property to each of them separately, i.e. the social purpose of the urban real estate property and the social purpose of the rural real estate property .

In general, the principle of the social purpose of the property should be taken as one of the guidelines of the economical and financial system adopted in Brazil .

Referring to the social purpose, the competent authority may use the private property in a case of potential public threat, being assured a subsequent indemnity to the owner if any damages are caused . However, the expropriation of the property requires a demonstration of the need or of the public utility or of the social interest thereof, upon a fair and prior cash indemnification . Thus, the expropriation of urban real estate shall also be implemented upon a prior and fair cash indemnification . The same rule, however, does not apply to the rural real estate that is expropriated for agrarian reform purposes when such property is not being used for its social purpose . Note, however, that the small and mid-sized rural estate properties (provided that the owner does not own another real estate) and also the productive rural estate cannot be expropriated for agrarian reform purposes . The social purpose is attained when the rural property fulfills simultaneously the requirements of rational and adequate use of the land, adequate use of the natural resources available thereon and preservation of the environment, compliance with the provisions that regulate labor relationships and that concern the exploitation that is beneficial to both the owners and the workers .

Also other basic rules of the Brazilian real estate property policy are already incorporated in the Magna Carta, which contains specific chapters related to the urban policy and establishing the basic guidelines of Brazil's rural property policy. It should be quoted that Brazil still has serious social problems that reflect directly over the legal issues related to real estate property. In the larger urban cities they consist in issues related to urban planning, basic sanitation, housing, noise and environmental pollution that require solutions also at the legal scope. In the rural areas, the social problems that stand out relate to the fair distribution of the land, rational use of the land and its natural resources, as well issues related to the infrastructure issues

7.2. ACQUISITION OF REAL ESTATE PROPERTY BY FOREIGNERS

In this regard it is necessary to distinguish between the purchase of urban real estate from rural real estate. Concerning the former, in principle there are no restrictions imposed to foreigners. Thus, for example, a foreigner may purchase an apartment located in a Brazilian coastal town. This is also possible for other investment purposes such as, for example, the purchase of buildings or office space for rental. The situation changes, when a foreigner intends to purchase rural estate property in Brazil. In these cases the Federal Constitution imposes restriction to the purchase or rental of a rural estate property by foreign individuals or legal entities . Furthermore, there exists specific legislation that regulates the acquisition of rural estate by a foreigner in Brazil . There are other restrictions regarding real estate located on the coastline, on the borders or in areas considered as national security areas . Such real estate is designated public property , and includes, among others, river and lagoon islands at the borders with other countries; the seacoast beaches; oceanic and coastal islands .

Often, the foreigner purchases real estate in Brazil to carry out an economical activity such as, for example, a hotel or beach resort, land development, construction of residential or business buildings, industrial hangar and so on. In such events it is indispensable that the foreigner abides by the specific laws that apply to these types of activities. Unfortunately, I have noticed that many foreign investors fail to do so. Consequently, their joint-venture in practical terms is defective and this causes financial losses and wear out that could have been avoided through proper planning and advice. Another aspect that must be considered is the selection of competent and trustworthy administrators in the event the owner itself will not economically explore directly the property that was acquired. The contracts to retain such administrators and staff and also with any tenants, lessors or similar parties who are retained, must be well drafted so that there are no doubts as to the real nature of the contractual relationship between the parties. Not rarely an owner will find himself involved in court disputes in which, to the his surprise, what is being discussed is the ownership right per se. Especially in rural areas where usucaption is a frequent form of acquiring of real estate property and also in the urban areas where the legislator is easing the acquisition of real estate property through usucaption . In this regard Brazilian law is quite different from Swiss law, where the acquisition of real estate property through usucaption is almost inexistent, though this legal institute is also regulated by law in Switzerland.

7.3. BASIC RULES FOR THE ACQUISITION OF REAL ESTATE

In this work the author limits himself to address the acquisition of real estate property between existing parties (inter vivos) by way of transcription of the deed of transfer of property with the relevant registry of real estate , which is the most important form of acquisition that is practiced, particularly when the acquirer is a foreigner. It should be emphasized that under Brazilian law the acquirer is not considered to be the owner of the real estate , until the deed of transfer of ownership is registered with the Real Estate Registry (Registro de Imóveis) . The deed of transfer states the cause of purchase, e.g. a purchase and sale agreement, which is the most common transactions in deals that involve real estate property .

In Swiss law, the bona fide purchaser may trust the contents of the registration recorded by the Real Estate Registry . In Brazilian law, the situation is quite different. Therefore, it is not advisable to examine solely the certificate of registration issued by the Real Estate Registry related to the property that is intended to be acquired. According to the type of real estate, it is necessary to apply for a considerable number of other documents and certificates, including those concerning the seller's status. Thus, it is advisable that an inexperienced purchaser retains a specialist to review all of the documentation concerning the real estate property that is intended to be purchased in Brazil. Only if the result of the review indicates to the purchaser that the risks are minimal (a risk-free deal is almost impossible), the transaction (e.g. purchase and sale agreement) should the deal be executed. The acquirer should always personally visit the real estate before signing a formal commitment .

Often, the buyer and seller execute beforehand a private instrument of commitment of purchase and sale , prior to executing the final purchase and sale agreement on which occasion the full price of the deal is paid. This type of contract must be in the form of a public deed, which is drafted before a Notary office. In the event the contract does not vest this form it is not valid and cannot be registered with the Real Estate Registry . To secure the real estate property the buyer usually makes a down payment. The seller must then present within a certain period all the documentation required by the buyer. If the documentation is incomplete or otherwise unsatisfactory, the buyer is entitled to receive the full amount of the down payment that it paid and the purchase of the real estate will not materialize.

In case the deal that is intended involves the acquisition of urban or rural real estate, land or allotment, residential, commercial or industrial real estate, new or used real estate, real estate that is being built under an incorporation or condominium system, real estate paid in a lump sum, installments or through third party financing, etc., specific rules apply to the individual case which the foreign buyer usually is not familiar with. Therefore, it is advisable to retain a specialist that is able to assist the foreign buyer in regard to the legal aspects pertaining to the deal.

Often the real estate property is negotiated with a real estate broker . In Brazil the fee (commission) that is paid to the real estate broker is higher than the fee that is paid in Switzerland, depending on the type of real estate that is purchased, i.e. house, apartment, land, rural real estate (ranch, country house, farm), beach house or apartment, industrial hangar and business buildings, etc. The seller usually pays the broker's fee, but the buyer could pay it in the event there is unquestionable proof that the initiative of looking mediation was on behalf of the buyer, i.e. when the buyer retained the broker's services .

7.4. REAL ESTATE FUNDS

The Real Estate Funds are regulated and monitored by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) since it consists in raising public resources for investment . Hence, they characterize capital market instruments.

The quota of a real estate fund is a variable yield security. Its issuance for subscription occurs through a public offer and it may be sold or negotiated in the secondary market, i.e. it is not redeemable since the quota holder must sell it as if it were a share of an open capital company. Its yield is bound to the value of rents and the real estate valuation of the real estate bound to the Real Estate Fund. The foreigner, whether an individual or legal entity, is allowed to invest in Real Estate Funds.

The Real Estate Funds are formed by groups of investors with the purpose of applying resources jointly in real estate joint-venture or in new real estate, usually directed to major investments such as shopping malls, hotels and other high-class commercial buildings. Currently, the investments are concentrated in institutional investors such as pension funds, insurance companies and incorporation companies.

The Real Estate Funds are always administrated by a Financial Institution under the surveillance of the CVM, upon the payment of an administration fee paid by the quota holder.

The Real Estate Funds have an incentivated tax structure, in view of the importance of the real estate sector for Brazil . The Real Estate Funds are exempt of PIS- and COFINS taxes, including income tax. This is levied only on the financial revenues yielded through the allocation of the fund's cash availabilities in the distribution of yelds to the quota holders and over the capital gain that the quota holder obtains in the sale of its quotas. The current tax law establishes a withholding tax of 20% of the distributed yield and of the capital gain .

The individual shareholders are exempt of the payment of income tax on distributions received, provided that the beneficiary shareholder has less than 10% of the shares of the Fund and that the Fund has, at least, 50 (fifty) shareholders, and the shares Fund have to be traded exclusively on the stock exchange or on the organized over-the-counter-market. The foreign shareholder is penalized by the IOF (Tax on Financial Operations) if he intents to return his investment to the country of origin in less than a year .

The number of funds registered with the CVM is growing and so ares their assets . In 2009, the Real State Funds operating in Brazil already had assets estimated at $ 4.6 billion in 2010, and the projections are positives. The total of share flotations that are being checked by CVM exceed $ 2 billion now .

7.5. TAXATION OF REAL ESTATE PROPERTY

Both the rural and urban real estate property are taxed in Brazil. Currently, the rural real estate property tax (ITR) is charged by the Federal Government . The tax rates of this tax are established in a manner to discourage the maintaining of unproductive properties and it is not levied on small rural properties provided that the owner exploits it, per se or with his family and the owner does not own other real estate property . The urban real estate property tax (IPTU) is charged by the Municipality . It is controversial to what extent this tax may be progressive based on the real estate's nominal value (valor venal) and the different tax rates according to the place where it is located and its intended use . If the urban real estate does not fulfill its social purpose for lack of fulfillment of the basic requirements of order of the city established in the directive program, its taxation will be stricter . Note that the Federal Government has the authority to tax large fortunes . Up to this date, however, this has not yet been regulated.

Under Brazilian law, in addition to the taxation of property, real estate transferred through an inter vivos deal, (ITBI), for any bond, chargeable, real state properties, naturally or by physical accession, and ownership rights over real estate, except guarantees, as well as the assignment of acquisition rights, are subject to the tax. This tax is levied by the Municipality that has jurisdiction over the place where the real estate is located . However, this tax is not levied over the transfer of property or rights that are incorporated to the patrimony of a legal entities through capital realization, or in the transfer of property or rights pursuant to an merger, incorporation, split-off or extinction of a legal entity, unless in these cases, the main business of the buyer consists in the purchase and sale of such property or rights, real estate rental or leasing .

Another tax, which applies in the causa mortis transfer and donation of any property or rights (abbreviated ITCMD tax), is levied by the States and the Federal District . In regard to real estate and the corresponding rights, the State that has jurisdiction over the place where the real estate is located or the Federal District, if it is located there, shall be the competent authority . The maximum tax rate allowed is eight percent . In the State of São Paulo, for example, Law No. 10.705 of December 28, 2000, with the amendment of Law no. 10.992, December, 21st, 2001, that provides on the levying of the Causa Mortis Transfer of Real Estate Property Tax and Donation of Any Type of Property or Rights (ITCMD) current applies to this matter, which law is regulated by Decree No. 46.655, April, 01st, 2002.

Finally, it should be emphasized that not only individuals that reside and are domiciled in Brazil but also those who reside abroad and own property and rights located in Brazil and that are subject to public registration, particularly real estate, must be enrolled with the Taxpayers Registry (Cadastro de Pessoas Físicas - CPF) of the Federal Revenue (SRF) . Likewise, both legal entities that are established in Brazil and those that are established abroad are required to be enrolled with the Corporate Taxpayers Registry (Cadastro Nacional da Pessoa Jurídica - CNPJ) of the Federal Revenue (SRF) upon the acquisition of real estate in Brazil .

7.6. REAL ESTATE LEASE

Brazilian law distinguishes the lease of urban real estate and the contracts that are addressed for agricultural or agrarian exploitation, such as rural leases and the agricultural partnership . Thus, the urban lease covers all the real estate property that is intended for residential, trade, industry, educational, health, leisure, cultural, amusement, and sport purposes, regardless of where it is located, when it is not intended for agricultural or agrarian exploitation purposes . Specific rules, however, apply to the real estate owned by the Federal Government, the States and the Municipalities, as well as the autarchies and public foundation thereof ; to the independent garage parking spaces or car parking spaces ; to the space intended for publicity ; to the flat hotels, residence hotels or the like, being considered as such those that supply regular services to the user and that are authorized to operate as such ; to any type of leasing operation . Hereupon follow comments solely on some of the basic rules of urban leases of interest to the foreign investor.

A single law - Law No. 8.245 of October 18, 1991, with the amendments of Law no. 12.112/2009, through its Article 2nd, of Dec. 09, 2009., which provides on the lease of urban real estate and the related procedures, basically regulates the urban lease .

In regard to the urban lease, there is extensive jurisprudence in Brazil, most already consolidated. For this reason, it may be affirmed that in this matter the legal protection is significant. Less satisfactory is the length of time that elapses until the suits are ruled, particularly eviction suits based on the non-payment of rent and charges of the lease, which are the most common, in which the landlord claims the termination of the lease against the tenant agreement, coupled with a claim for collection of the unpaid rents and charges of lease that are in arrears. However, the Judiciary's slow pace is not limited only to lawsuits involving urban lease

Brazilian law distinguishes the residential lease from the non-residential lease . It also establishes the temporary lease which is intended for the tenant's temporary residence, for leisure purposes, for holding courses, health treatment, construction work in the owner's property and other events that have a temporary nature and contracted for a period not longer than ninety (90) days, whether the real estate has furniture or not . In the temporary lease the law does not require certain guarantees in favor of the tenant that are generally established for leases, since the contractual relationship between the landlord and the tenant is short and predetermined.

In regard to the lease for residential purposes, there are differences between the lease for a certain period and for an indefinite period. In the latter, the tenant may terminate the lease upon written notice to the landlord at least thirty (30) days in advance . The same term applies in regard to the landlord . In the lease for a certain period, which is the rule, in principle the landlord cannot repossess the leased property . In the written lease agreements that have a term equal or longer than thirty (30) months, the agreement terminates upon the expiration of the term, without need of notification or notice . Since the landlord is free to do so, residential leases that have a 30-month term are common. Without prejudice to such contractual term, the lease agreement may always be terminated by mutual agreement , in the event of statutory or contractual breach pursuing from non-payment of rent and/or the other charges accruing thereon and in the event of need of urgent repair . In addition to these cases, the current law foresees other cases, allowing, exceptionally, the landlord to repossess the real estate leased by the landlord . The tenant, on the other hand, also in the term set forth in the contract, may at any time return the leased property to the landlord, paying the fine established by the law .

The lease that does not have the features of the residential lease is considered a non-residential lease, but the lease is also considered to be a non-residential lease when the tenant is a legal entity and the real estate is intended for use by the company's owners, directors, partners, managers, executive or employees .

In the non-residential leases, as a general rule, the lease that has a predetermined term lawfully terminates upon the expiration of the term, without need of notification or notice . On the other hand, the lease for an undetermined period may be terminated by the landlord, upon written notice, granting to the tenant a thirty (30) days period to leave the property . Special rules apply to the leases of real estate property used by hospitals, officials sanity unit, asylums, authorized health and school centers controlled by the Judicial Branch, and also by duly registered religious organizations, in regard to which the lease agreement is subject to further restrictions . Furthermore, in the lease of real estate intended for trade activities, and in the leases executed by industries and civil law, profit-purpose companies, the tenant has the right to renew the agreement in the cases established in the law . Finally, Brazilian law establishes specific rules that apply to the relationships between storeowners and shopping mall entrepreneurs .

In practice, the landlord may require to the tenant, off the record, upon the execution of the corresponding lease agreement, in addition to the monthly rent, a certain amount in cash; or, further, the tenant may receive from the person to whom it is transferring its lease agreement a certain cash amount . This consists in the charge of key money in the commercial lease which, according to the current legislation, in principle is forbidden, except in the lease of space in shopping malls and in the cases in which the tenant charges key money to the person to whom it transfers its lease agreement, which in this case characterizes a commercial lease .

Under Brazilian law, in principle the rent is freely convened between the parties, abiding by the raise provided foreseen in the specific legislation. It is not allowed, however, to establish a rent in foreign currency and bind the rent amount to exchange variation or to the minimum monthly wage . Except in the cases of temporary lease, the landlord, in principle, cannot require advance payment of the rent . On the other hand, the law establishes the lease guarantees that the landlord may require from the tenant . In the event the tenant is contractually obligated to also pay the taxes, charges and common expenses incurred by the condominium, which is common in most of the lease agreements, the landlord may charge such amounts jointly with the rent of the month in which they accrued .

The law regulates among other matters the tenant's right of first refusal to purchase the leased property in the event of its sale , indemnity for improvements that the tenant introduced in the course of the lease and the tenant's legal status in the case of the sale of the leased real estate in the course of the lease agreement .