Real Estate 2021 Comparisons

Last Updated April 13, 2021

Law and Practice

Authors



Morais Leitão, Galvão Teles, Soares da Silva & Associados is a leading full-service law firm in Portugal, with decades of experience. It is well recognised for its expertise and excellence in several branches and sectors of the law, on a national and international level. The firm combines its unique technical expertise with a distinctive approach and provides cutting-edge solutions that often challenge some of the most conventional practices. With a team of more than 250 lawyers, Morais Leitão is headquartered in Lisbon and has additional offices in Porto and Funchal. Due to its network of associations and alliances with local firms and the creation of the Morais Leitão Legal Circle in 2010, the firm can also offer support through offices in Angola (ALC Advogados) and Mozambique (HRA Advogados).

The main source of real estate law is the Portuguese Civil Code.

Undeniably, the COVID-19 outbreak has had a severe impact on the Portuguese economy. According to some studies, the Portuguese economy contracted by 7.6% in 2020, reflecting a fall of 20.5% in exports, an investment reduction of 10.8% and a drop of 6% in private consumption.

A feeling of uncertainty surrounds investors, but all is not lost. In the first semester of 2020, the transaction volume decreased, but not to the extent expected. The second semester of 2020 witnessed a gradual recovery of interest in investment. 2020 ended with a sense of COVID’s impact but with good prospects; some natural uncertainty remains but optimism and perseverance are predominant.

The area of tourism (hotels and resorts) was brought to a standstill. Delays in construction and the postponement of inaugurations were inevitable as it was not possible to guarantee operation. The impact on tourism was significant to the Portuguese economy, as it represented nearly 25% of the country's Gross Domestic Product. Nevertheless, there is still interest in the industry, fuelled partially by international chains, and the statistics show that hotels in lower density population areas will perform better.

Investor interest in student residences is resilient, although a drop in occupancy is expected, due to the globally imposed travel restrictions.

With regards to residential real estate, Portugal showed a decrease of less than 10% and a similar sale volume in 2019.

The Portuguese real estate market is constantly evolving, notably due to the emergence of new technology tools, with blockchain and artificial intelligence being two of the main technologies that will have a significant influence on the real estate market in the next 12 months and coming years.

In Portugal, proptech has already changed the way transactions are conducted. For instance, Portugal’s land registry website allows market players to promote land registry acts online, to make electronic deposits of documents, to make payments, to make requests and to consult the land registry certificates, or even to notify public entities of the exercise of legal pre-emption rights in the sale of properties.

Machine learning projects capable of automatically reading and analysing data and conducting due diligence exercises have been implemented in Portugal, and artificial intelligence capable of identifying suitable investment targets using algorithms and software to manage conditions precedent in large real estate and financing transactions in real time have also been used.

Smart contracting, through blockchain, is also becoming a reality. Real estate leases executed through a website or financing agreements that can automatically release liens when fully repaid are two of the many examples of the potential of this technology.

The Portuguese government revised its Golden Visa programme in the last quarter of 2020. This new regime will enter into force in July 2021 and will reduce the investment requirements in the metropolitan areas of Lisbon and Porto, with a view to funnelling international investment to the lower density regions of the country. Nevertheless, the pandemic environment has delayed these changes and a transitional period is set until 31 December 2021.

Apart from full ownership or freehold, there are other categories of property rights that can be acquired, such as:

  • surface right (direito de superfície), which is the right to construct or maintain (permanently or temporarily) a building on land owned by another person or entity, or to plant and maintain crops on such land. When surface rights terminate, the owner of the land becomes the owner of the building incorporated in the land; or
  • right of use (usufruto), which is the right to use (temporarily) the profits and the right to use and manage a property for which the title belongs to another entity.

The main legislation concerning real estate is the Civil Code, which is applicable to the transfer of any type of real estate (residential, industrial, offices, retail or hotels).

The purchase and sale of a property must be executed in writing, through either a public deed or a certified private agreement, and registered with the Property Registry in order to produce effects against third parties.

Title insurance is not available in Portugal. As Property Registry certificates are public, there is a legal presumption that the rights definitively registered in the Property Registry are correct, updated and true.

It is usual for buyers to prepare complete checklists with the required documentation, through their legal and technical advisers. From a legal perspective, the main documents requested and reviewed are as follows:

  • the land registry certificate;
  • the tax registry certificate;
  • the licence of use for buildings;
  • the energy efficiency certificate, if applicable;
  • the building specifications certificate, if applicable;
  • proof of the payment of all taxes and charges related to the property;
  • confirmation of non-exercise of pre-emption rights; and
  • planning, zoning and environment documentation in case of land for construction.

Buyers' approach to real estate due diligence has not changed due to the COVID-19 pandemic, despite investors being generally more concerned and cautious.

The typical representations and warranties are related to the following:

  • the capacity of the seller and buyer;
  • ownership of the property;
  • boundaries, charges and encumbrances;
  • third party rights;
  • planning and zoning;
  • authorisations and licences;
  • the rental status of the property;
  • claims;
  • litigation;
  • liabilities;
  • defects and equipment;
  • environment; and
  • asbestos risk.

A time to remedy is usually granted and, if no remedy is possible, an indemnity is paid by the seller to the buyer. Such an indemnity is usually secured by a bank guarantee, a bond or an escrow account for at least four years.

Real estate, urban and planning and tax law are the most important areas for an investor to consider when purchasing real estate.

The owner of a polluted property is not liable for such pollution if he was not responsible for the contamination. However, if the owner of the property undertakes certain types of economic activities defined in the law, the competent authority may order the clean-up of the property, regardless of whether or not the owner is responsible for the contamination. In these cases, the owner has the right to claim an indemnity from the entities that were responsible for the pollution.

If the owner of the land is not ordered to carry out clean-up measures, in some situations the licensing of future activities at the property may be conditional upon the decontamination of the property.

The permitted uses of a parcel of real estate shall be assessed through the municipal land use plans, which contain the main regulations concerning the use of the land. There are three types of municipal plans: the municipal director plan (PDM); the urbanisation plan (planos de urbanização); and the detailed plan (planos de pormenor).

The size of a project, the timing for approval and the execution of relevant infrastructure may be subject to an agreement with the relevant municipality.

Several legal regimes establish the possibility of the expropriation/taking of land, and compulsory sale with fair compensation. The legal regimes to take into account vary according to the title and basis on which such expropriation/taking of land or compulsory sale is made.

The procedure for expropriation is set forth under the Expropriations Code. According to such legal regime, the expropriation may be agreed on, or a litigation procedure will follow if an agreement is not reached, which will be conducted through arbitration. Once a decision is issued, the process will be referred to the courts for a judicial phase.

Expropriation gives rise to the payment of fair compensation (justa indemnização) by the expropriating entity to the expropriated parties.

The procedure for a compulsory sale states that the competent authority may sell the property in a public tender. For such purpose, a resolution of promotion of the sale and the terms to follow are set out in the Expropriations Code.

The purchase and sale of real estate is generally subject to both property transfer tax (IMT) and stamp duty (Imposto do Selo), which are payable by the purchaser. IMT is levied at the following progressive rates, applicable to the contract price or the property’s tax value (valor patrimonial tributário – VPT), whichever is higher:

  • between 0% and 7.5% (depending on the contract price/property’s tax value) for urban property meant for housing purposes;
  • 5% for rural property; and
  • 6.5% for other types of property.

Stamp duty is levied at a rate of 0.8% on the same amount.

IMT may apply at an aggravated 10% rate if the acquirer is an entity resident in a blacklisted jurisdiction for tax purposes (as per the list published in Decree No 150/2004 of February 13, as amended), or an entity which is controlled by an entity resident in a blacklisted territory.

IMT may apply to the sale of shares of a company – namely to LDA companies (sociedade por quotas) or SA (sociedade anónima) – only to the extent that the following requirements are fulfilled:

  • the company’s value is derived, directly or indirectly, in more than 50%, from real estate located in Portugal, by reference to the balance sheet value, or, if higher, to the tax value of the real estate;
  • such real estate assets are not allocated to an agricultural, industrial or commercial activity (not consisting of real estate buy and sell); and
  • through that acquisition, by amortisation or any other actions, one of the partners becomes the holder of 75% or more of the share capital of the company, or the number of shareholders is reduced to two members, which are either married to each other or in a registered partnership, and considering that, in both cases, any shares owned by the company (ie, own shares) must be allocated to the shareholders in the proportion of their shareholdings for the purposes of such calculation.

If the above criteria are not fulfilled, IMT should not apply to the sale of shares of a Portuguese resident company.

Under Portuguese law, certain IMT exemptions on the purchase and sale of real estate apply, provided certain conditions are met, such as the acquisition of properties (i) by real estate trading companies for the purpose of resale, (ii) for rehabilitation purposes, and (iii) under company restructuring operations.

There are no restrictions on the ownership of real estate by a non-resident or foreign investor; the treatment is the same. Tourism and activities declared to be of relevance to tourism under the applicable legislation may be granted tax incentives.

A facility agreement secured by a mortgage is the most common financing and security method for real estate projects in Portugal.

There are no specific restrictions regarding the maturity of a financing but the maturity date should be determined.

Loan-to-value, interest-cover and debt-service cover ratio are terms customarily agreed on to set a tighter framework for a credit facility.

Security usually associated with real estate financing includes:

  • mortgage of property;
  • assignment of revenues (consignação de rendimentos);
  • pledge of shares/quotas;
  • book debt/receivables/insurances: a pledge or an assignment by way of security can be granted over receivables;
  • pledge of bank accounts;
  • pledge of intellectual property; and
  • personal guarantee (fiança).

As a general rule, no governmental or other consents are required for the provision of security. There are no restrictions on granting security over real estate to foreign lenders, nor are there any on repayments being made to a foreign lender.

Notarial fees and registration fees are due on the granting of security over real estate.

In general, the utilisation of credit by a Portuguese borrower is subject to stamp duty at variable rates according to the loan term, as follows:

  • 0.04% per month if the loan term is shorter than one year;
  • 0.5% if the loan term is equal or greater than one year and shorter than five years; or
  • 0.6% if the loan term is equal or greater than five years.

Stamp duty should be calculated on the amount of the loan.

Stamp duty should also charged on the granting of security, unless the latter may be considered as simultaneous and materially ancillary to a contract specifically taxed for stamp duty purposes (eg, the financing).

When applicable to security, stamp duty rates are the same as set out above for loans, and are calculated based on the secured amount.

The validity of the guarantees provided to secure third party debt (including any group companies) is subject to an assessment of whether or not the grantor of such a guarantee has a justified corporate interest in doing so. Corporate interest may be assumed from the existence of a group relationship between both companies (so long as both are Portuguese resident companies), but some doctrines argue that such an assumption only exists where the guarantee is granted by the holding company to the subsidiary. In the case of upstream guarantees or guarantees to sister companies, the corporate interest should be demonstrated on other grounds (a confirmation of this in the resolution approving the transaction may be considered sufficient, but please note that at the end of the day corporate interest is a factual matter).

To initiate enforcement proceedings, a creditor must hold an enforceable title (título executivo) and file an application against a debtor with the appropriate court competent for enforcement.

A mortgagee does not have the right to take possession of a property in the event of default of payment of the secured obligation, but only the right to a judicial sale of the property and to be paid from the proceeds of such sale.

In a judicial sale, the property will be sold free of any charges and encumbrances.

In relation to mortgages, the normal procedure is the enforcement of the security by means of seizure – ie, the judicial apprehension of an asset given as guarantee of an obligation.

The seizure gives a creditor the right to be paid with the proceeds of the sale of such assets, with preference over other creditors, provided that there is no prior security in rem over the attached assets.

Under Portuguese law, it is possible for existing secured debt to become subordinated to newly created debt if a subordination agreement is made between parties.

The owner of a polluted property is not liable for such pollution if he was not responsible for the contamination. However, if the owner of the property undertakes certain types of economic activities defined in the law, the competent authority may order the clean-up of the property, regardless of whether or not the owner is responsible for the contamination. In these cases, the owner has the right to claim an indemnity from the entities that were responsible for the pollution.

Pursuant to the Portuguese Insolvency Code, certain common transactions can be terminated by an insolvency administrator without any condition and in relation to which evidence in contrary is not even admitted (unconditional termination). The most obvious applicable cases are as follows:

  • the granting of security in rem by an insolvent company (such as the granting of mortgages, the pledge of shares or of bank accounts, etc) to secure pre-existing obligations or other obligations that replace the former, within the period of six months preceding the commencement of insolvency proceedings;
  • personal guarantees granted by the insolvent, within the six months before the commencement of insolvency proceedings, in respect of businesses that are not of interest to the insolvent company;
  • the granting of security in rem simultaneously with the creation of secured obligations, within the period of 60 days before the commencement of insolvency proceedings;
  • payments or other acts aiming to discharge debts by the insolvent company whose due date would fall after the date of the commencement of insolvency proceedings, if the act is performed within the six months before the commencement of the insolvency proceedings (or after the commencement of the insolvency proceedings but before the due date); or
  • reimbursement of shareholders’ loans within the period of one year immediately preceding the commencement of insolvency proceedings.

The key consequence to borrowers is the uncertainty regarding the applicable index after 2021. In any case, it will mostly depend on whether the agreement already includes fall-back provisions in that regards, or if the new benchmark rate that is being developed will be applicable to the agreement. The main mechanism that is being adopted to manage that risk is the inclusion of fall-back provisions in the agreement being entered into force.

The permitted uses of a parcel of real estate shall be assessed through the municipal land use plans, which contain the main regulations concerning the use of the land. There are three types of municipal plans: the municipal director plan (PDM); the urbanisation plan (planos de urbanização); and the detailed plan (planos de pormenor).

The size of a project, the timing for approval and the execution of relevant infrastructure may be subject to an agreement with the relevant municipality.

The Legal Regime for Construction and Land Development is the basic legislation for the construction of new buildings or other works in existing buildings, such as rehabilitation.

This legal regime provides for several controls: prior information; licence; prior communication; and use authorisation.

The prior information corresponds to a preliminary analysis of the feasibility of a given construction work. If the prior information is approved by the municipality, which is the competent authority to allow construction works, then a new procedure for construction must follow. Bear in mind that the prior information binds the municipality to approve the construction licence if that request is presented within one year of the approval of the prior information.

The licence is required as the type of control by default for the construction of buildings or refurbishment works.

The prior communication is a statement presented to the municipality by the promoter of the construction works, and is applicable to situations in which the urban parameters for construction are already set out and all of the required opinions have been issued.

The use authorisation is a permit for the use of buildings or their parts, and for changes to that use. After construction work takes place, the authorisation for use is the permit that attests that the construction was carried out according to the licensed project or according to the project contained in the prior communication.

Regulation of the development and use of plots of land is carried out by the municipalities in the urban and planning control proceedings. Therefore, municipalities are the competent authorities to conduct the procedure and issue the relevant titles.

During proceedings, municipalities may consult other entities that have legal competence over the matter or location involved.

Applicable legislation includes the Legal Regime for Construction and Land Development and the territorial management instruments – ie, the municipal director plan (PDM); the urbanisation plan (planos de urbanização); and the detailed plan (planos de pormenor).

The Portuguese government recently introduced a new provisional regime with the goal of simplifying administrative procedures, including licensing procedures. Law No 72/2020 of 16 November 2020 approved a legal regime simplifying the administrative procedures concerning the approval of developments/projects promoted by private individuals, which imply the issuing of several opinions by different public entities. This simplification is translated in the creation of a mandatory procedural and deliberative conference encompassing all administrative entities that are required to issue the documents mentioned above. This provisional regime will be in force until 30 June 2021.

The process for obtaining entitlements (licences or prior communications) to complete a refurbishment of a building depends on the specific location of the property.

The process to obtain an entitlement generally involves assessment of the project, at first, which may be followed by public consultation if a project is regarded as having a relevant impact, and then final decision.

Third parties have the right to participate, as follows:

  • for the prior information procedure, consultations may be carried out and opinions may be requested from external entities, such as the Commission for Co-ordination and Regional Development (Comissão de Coordenação e Desenvolvimento Region – CCDR);
  • for the licensing procedure, municipalities may open public consultations in which third parties may participate; and
  • for the prior communication procedure, an investor must submit a prior communication with all of the opinions issued by the competent external entities. Please see 4.3 Regulatory Authorities regarding the provisional legal regime for the simplification of procedures.

Private third parties may also intervene in the procedure since it is considered public information.

If an application for permission to develop or carry on a designated use is rejected, an applicant may submit an administrative complaint, asking the author of the decision to review it, or submit a hierarchical appeal, asking the supervisor to review the decision. Alternatively, they can file a lawsuit challenging the legality of the decision and ask the courts to condemn the administration to adopt a lawful administrative decision. It is also possible to file an injunction in order to seek a preliminary remedy.

The Legal Regime for Construction and Land Development provides for several types of contracts to facilitate the development of a certain project. Typical agreements include concession agreements, urban development agreements and planning agreements.

Major refurbishment operations carried out by municipalities may also be conducted through partnerships with private entities. In this case, rehabilitation concession agreements and urban refurbishment agreements may be executed.

It is possible for a municipality to carry out coercive works in a property if the owner fails to comply with the municipality’s instructions and deadlines for such works.

The municipality may also carry out inspections and supervision actions in relation to the works performed.

Also, if urban planning operations are carried out irregularly, the municipality may implement the following measures:

  • embargo of works or refurbishment of land;
  • administrative suspension of the licence or authorisation;
  • an order to perform corrections or changes to the works or legalisation of urban operations;
  • order the demolition of works;
  • re-establishment of the land in the conditions prior to the works; and/or
  • order to terminate the use of the building in question.

The main vehicles used to invest in real estate assets are private limited companies (LDA), public limited companies (SA) and Collective Investment Real Estate Undertakings (OIC) (investment funds or investment companies).

Commercial Companies

SA companies

The SA is a company limited by shares, meaning that its capital is divided into shares and that the shareholders’ liability for the company’s debts is limited to the amount of their investment.

The share capital may result from contributions in cash or in kind (labour and the provision of services are not allowed). Shares may be represented by share certificates or kept in book-entry form, having a minimum nominal value of EUR1.

Shares in an SA are freely transferable, except when the company’s articles of association provide for restrictions on their transferability. These restrictions may consist of a pre-emption right in favour of the remaining shareholders. The shares are transferred by the owner’s written declaration addressed to the keeper of the SA’s share registry.

As a general rule, an SA must be incorporated by a minimum of five shareholders, although it is possible to incorporate an SA with a single shareholder when such single shareholder is a company.

LDA companies

The LDA is a company limited by quotas, meaning that its share capital is divided into equity participations (quotas) that cannot be represented by transferable certificates nor kept in book-entry form. Quota holders are jointly and severally liable for paying up the company’s entire quota capital. The share capital may result from contributions in cash or in kind (labour and the provision of services are not allowed). The transfer of quotas is subject to the LDA’s express consent, unless the prospective transferee is another quota holder, or the transferor’s spouse or next of kin. An LDA may be incorporated either by a minimum of two equity holders or by a single equity holder (either an individual or a company).

Collective Investment Real Estate Undertakings

Real estate funds (REFs)

REFs can be open, closed or special. Open-ended funds are incorporated by public subscription, while close-ended funds are incorporated by private subscription. The funds are represented by participation units with the same nominal value and held by the participants. The incorporation of the funds requires the consent of the Securities Commission. The funds have no legal capacity and need to be represented by a managing company. The incorporation of the managing companies requires the authorisation of the Bank of Portugal and the Securities Commission. The participation unities must be deposited with a financial institution with a head office or branch in Portugal.

Real Estate Companies

Real estate companies need to be public limited companies (SA), and can have a fixed share capital (SICAFI) or variable share capital (SICAVI). Real estate companies can be self-managed or managed by a management company or any other financial institution. The incorporation of a real estate company is subject to the authorisation of the Securities Commission.

Real estate investment and management companies (SIGIs)

SIGIs shall be incorporated as a public limited company, with or without public subscription, and adopt the supervisory model corresponding to a supervisory board and a statutory auditor.

An SA must be incorporated with a minimum share capital of EUR50,000.

LDA companies do not have a minimum amount of capital (the quota holders may freely stipulate the amount of an LDA share capital, with the minimum nominal value of each quota being equal to EUR1).

SIGIs shall have a minimum paid-up share capital of EUR5 million.

SA Companies

The most common management and supervisory structure of SA companies includes a board of directors and an internal auditing board or an internal single auditor.

Two other structures are also admissible:

  • a supervisory board and an executive board of directors (and a certified chartered accountant); or
  • a board of directors comprising an audit commission and a certified chartered accountant.

The management of an SA may be delegated to a single manager if the company’s capital stock is equal to or less than EUR200,000.

Directors are not legally required to be shareholders. Corporate shareholders can be appointed directors, but must appoint an individual to perform such duties. At least one of the members of the internal auditing board or the internal auditor (as applicable) must be a certified chartered accountant. A secretary and a deputy secretary may be appointed in SAs.

The board of directors of an SA is legally required to meet at least once a month, unless the company’s by-laws establish a different period for their meetings. Meetings may take place anywhere that the directors find most convenient, or via electronic means or by video conference. Minutes of board meetings must be recorded in a book of minutes and signed by all those present.

The annual accounts must be approved by the shareholders at the annual general meeting, and an electronic declaration for tax purposes must be submitted.

LDA Companies

An LDA may be managed either by a single manager or by a managers’ board. The managers must be individuals and are not legally required to be quota holders. An LDA must appoint either an internal auditor or an internal auditing board if it surpasses at least two of the following three thresholds during two consecutive fiscal years:

  • the total amount of the LDA’s assets exceeds EUR1.5 million;
  • the total amount of the LDA’s net sales exceeds EUR3 million; and/or
  • the average number of the LDA’s employees exceeds 50.

At least one of the members of the internal auditing board or the internal auditor (as applicable) must be a certified chartered accountant.

The annual accounts must be approved by the quota holders at the annual general meeting. The submission of an electronic declaration for tax purposes is also required.

Real Estate Funds and Real Estate Companies

Except for self-managed companies, REFs and real estate companies do not have legal capacity and are managed by management companies.

There are no significant annual maintenance and accounting compliance costs for commercial companies, other than the fees due to a company’s accountant and auditor (as agreed between the parties) and the fees charged for the submission of the annual approval of accounts (roughly EUR85). REFs and companies pay fees to:

  • the Securities Commission for incorporation;
  • the management company (except self-managed investment companies);
  • the depositary bank; and
  • advisers.

Lease agreements, contracts for the use of shops in commercial centres, retail parks or outlets and commodatum agreements (ie, a lease agreement free of charge) are agreements that allow a person, company or other organisation to occupy and use real estate for a limited period of time without buying the property.

Commercial lease agreements can be for commercial purposes, for industrial or professional purposes (namely, for offices), or for logistics purposes.

Rents and some of the lease regimes for commercial leases are freely regulated between the parties. Conversely, there is a mandatory regime for lease agreements for residential purposes.

On account of COVID-19, the Portuguese government enacted legislation that determined the suspension of effects of the termination, revocation, opposition to renewal and expiration of residential and non-residential lease agreements by landlords. The effects of the execution of primary housing mortgages have also been suspended.

This measure was put in place by Law No 1-A/2020, of 19 March, and has since been extended multiple times; it is currently predicted that it will remain in effect until 30 June 2021.

In order to benefit from this suspension, tenants must have been making regular monthly rent payments, unless they are beneficiaries of the rent moratoriums established in Law No 4-C/2020 of 6 April 2020 (as amended). Please see 6.14 Specific Regulations.

According to Decree-Law No 2-B/2020, of 3 April 2020, non-essential establishments were obliged to close their doors at the beginning of the COVID-19 outbreak. Establishments that remained closed until 1 January 2021 can enjoy an extension of their lease term, for a period equal to the duration of the closure.

The typical terms of commercial leases are generally stipulated between the parties.

Length of Lease Term

A lease can have a fixed term or a non-fixed term. The usual choice is a lease agreement with a fixed term of between one and five years (the legal minimum limit is one year and the legal maximum limit is 30 years).

Maintenance and Repair

Regarding the maintenance and repair of occupied real estate, a tenant is entitled to keep a leased area in good condition and make any ordinary repairs. Structural work costs should be borne by the landlord.

Rent Payments

Rent is usually paid monthly and is due on the first working day of the preceding month.

Coronavirus and Force Majeure

The parties to a lease agreement are free to define which events constitute force majeure, so no single or unique definition can be provided. However, force majeure can be classified as any unforeseeable or unavoidable situation, the effects of which arise independently of the parties’ will or personal circumstances, such as acts of war or subversion, epidemics or pandemics, cyclones, earthquakes, fire, lightning, floods, general or sectoral strikes, or other unavoidable circumstances, in accordance with criteria of reasonability.

The inclusion of COVID-19 provisions has been prominent in large-scale real estate transactions, but less common in lease agreements.

Parties to a lease agreement can freely agree on how rent will be increased for as long as a lease agreement lasts.

Generally, rent is subject to annual increases by the application of a coefficient established every year by the government.

Generally, lease agreements are exempt from VAT, but this VAT exemption may be waived if the necessary conditions are met.

At the beginning of a lease agreement, one monthly rent payment is required, and parties may agree on the payment of up to three monthly rents in advance as a security deposit.

The maintenance and repair of areas used by several tenants – eg, parking lots or gardens (condominium costs) – are generally agreed upon between the parties. Generally, the costs are borne by each tenant in proportion to the area occupied by each of them. Service charges are generally based on the area of the property leased to each tenant in proportion to the area of the whole building. If no provision is made by the parties, the landlord must bear these costs.

Generally, utility bills and telecommunications are borne by each tenant in proportion to the area they occupy. These types of matters are stipulated between the parties.

Only properties that are subject to the horizontal property regime must be covered by a mandatory insurance policy covering the risk of fire. There is no legal provision imposing the costs of any insurance obligation on any of the parties. However, in this type of insurance, the insurance premium is usually paid by a tenant due to contractual undertaking. In a commercial lease agreement, landlords usually impose that the insurance policy to be undertaken by the tenant must cover damages caused by natural and human causes. Whenever the value of the real estate so justifies, the landlord may request further insurance coverage, such as for damage caused by terrorism or sabotage.

A landlord may impose some rules and restrictions on the use of a leased property, such as restrictions concerning alterations made to the property, the assignment or sublease of the property, and the type of use of the leased property. The law foresees that the tenant must use the property by respecting its licence of use.

Generally, the parties agree on the conditions under which the tenant may alter or improve real estate – primarily, it is established that the tenant shall not carry out any works on the leased property without the prior written consent of the landlord. Repair works mean all ordinary repairs, maintenance and works and, in general, any reconditioning or replacements necessary to repair and maintain the property in good conservation status. The tenant is responsible for the execution of the repair work, directly or through third parties, and for the planning, procurement and management thereof. It is common for all works performed by the tenant to become an integral part of the property or, upon a landlord request, to be removed and the property returned in the same condition as it was on the delivery date, save for deterioration caused by normal wear and tear.

The urban lease regime is established in the Portuguese Civil Code in accordance with the provisions approved by Law No 6/2006, of 27 February 2006 (as amended), and applies to both lease agreements for residential purposes and lease agreements for non-residential purposes.

The exceptional rent moratorium regime introduced by Law No 4-C/2020 of 6 April 2020 applies different solutions, based on the type of lease agreement at stake.

Residential Lease Agreements

In order to benefit from this moratorium, tenants of residential lease agreements must fulfil one of two conditions:

  • the rent must represent a household effort rate higher than 30%; or
  • the tenant must have suffered a shortfall of 20% of his household income in relation to the income of the previous month or the same period of the last year.

Non-residential Lease Agreements

With regard to non-residential leases, the following rents may be subject to deferral:

  • rents due during the state of emergency and the month thereinafter;
  • rents due during the months where the establishments were forced to close under legal or administrative measures; and
  • rents due in the three months following the imposition of the closure of the establishments or the suspension of its activity being lifted.

The repayment period of these rents begins on 1 January 2021 and lasts until 31 December 2022. Repayment is to be made in 24 successive instalments, paid together with the rent of the month at the time.

Closed Establishments

A special regime was enacted by reference to the tenants whose establishments were closed in March 2020 and remained closed until 1 January 2022. In these cases, the period for settlement of the rents due in 2020 will start on 1 January 2022 and continue until 31 December 2023. Rents due in 2021 could also have been deferred if requested by the tenant, until 20 January 2021.

Use of Shop Agreements in Shopping Centres

The fixed or minimum monthly rent due by the tenants is lowered in proportion to the reduction in monthly invoicing, up to 50% of the value of the monthly turnover, when those establishments have a drop in monthly sales volume compared to the sales volume of the same month in 2019 or, in its absence, to the average sales volume of the last six months prior to the enactment of Presidential Decree No 14-A/2020, of 18 March, which declared the first emergency state in Portugal, or a shorter period, if applicable.

Lease agreements (in which the insolvent party is the tenant) are not suspended upon an insolvency declaration. The insolvency administrator may terminate a lease agreement at any time, provided that 60 days' notice is given. Nevertheless, a landlord cannot request termination of a lease agreement after an insolvency declaration based on a delay in the payment of rent related to the period before the insolvency declaration, or for the economic deterioration of the tenant.

A landlord can protect himself against a tenant's failure to meet its obligations by requesting some securities, such as rent deposit, bank guarantee or a guarantor (fiador).

A tenant is not entitled to occupy a property after the expiration or termination of a commercial lease. In order to prevent default, the landlord may foresee a contractual clause in which a fine is applicable for each day of delay until the delivery of the property. If the tenant continues to occupy the property, the landlord can proceed with an eviction procedure.

Both the assignment of the leasehold interest and the sublease of all or a portion of the leased premises by the tenant are subject to the authorisation of the landlord.

The events that typically give a landlord and tenant the right to terminate a lease agreement are related to the default of the other party, such as the non-payment of rent or costs and expenses for more than three months, or late payment of more than eight days, more than four times in a row, or four times in a period of 12 months.

In general, lease agreements do not need to follow any particular execution formalities and do not have to be recorded in the Land Record.

Only lease agreements entered into for a period longer than six years must be recorded in the Land Record, in which case a fee of approximately EUR250 is due from the tenant.

In the event of default prior to the date originally agreed, a tenant can be forced to leave (ie, be evicted). There is a special eviction proceeding with the aim of expediting the eviction of a tenant of a leased property, which may be used in cases where the lease agreement can be terminated by judicial means, as long as the stamp tax has been paid. This procedure takes place on the Balcão Nacional do Arrendamento. Through this proceeding, in addition to requiring the vacation of the leased property, the landlord may also request the payment of cumulative rents, costs and expenses that are deemed the responsibility of the tenant. This process has been reported as being quicker than the judicial process, although several delays have still been verified. The estimated duration of the process is two years.

According to Law No 1-A/2020 of 19 March 2020 (as amended), all eviction actions, special eviction proceedings and return of leased property procedures are suspended when the tenant, in light of a final judicial decision to be delivered, would be placed in a situation of fragility due to lack of own housing. This suspension lasts throughout the validity of all COVID-19-related prevention, containment and mitigation measures.

If a tenant is opposed to urgent works (namely remodelling or restoration) required by any public authority from the landlord, the law foresees the possibility of the landlord terminating the lease agreement. Within six months, the tenant still has the possibility to cease any opposition by accepting the works, in which case the termination of the lease agreement is no longer valid.

Upon notice being given to the tenant, the landlord is obliged to pay the tenant compensation in an amount corresponding to one year’s rent or, alternatively, to ensure a house is available to the tenant in the same municipality or in a surrounding municipality, in similar conditions of location, rent and expenses.

This process may take approximately six months to one year.

The most common structure used to price construction projects is fixed price, according to which an owner/employer agrees with a contractor on a total and fixed price for the entire project. A detailed description of the works is set forth in the agreement, and any required preparatory and accessory works are deemed to be included in the scope of work. Since the price is fixed and non-revisable, it cannot change due to increases in costs of workforce, materials, equipment or inflation in general. Any additional works and respective costs must be expressly approved by the owner/employer.

Typically, a constructor is liable towards an employer for any defects of the construction. In fact, it is common to include a guarantee of "fitness for purpose" in the construction agreement, meaning that the contractor will be strictly liable towards the employer for any defect. However, the responsibility of the contractor will be excluded if he is able to prove that the defects are due to an error of design. In this case, the constructor may then request to be reimbursed by the designer for the costs he bore correcting such defects. Pursuant to Portuguese law, the request for the licensing of construction works shall include a declaration from designers stating that they complied with all technical and construction rules in force.

Construction risks on a project may be managed through clauses on limitation of liability. However, it should be noted that liability cannot be completely excluded by parties. In fact, pursuant to Portuguese law, clauses whereby a creditor waives in advance its rights to compensation by reason of default or late performance by a debtor are deemed null and void. Also, in general, contractual clauses directly or indirectly excluding liability in cases of serious default or willful misconduct are seen as abusive. Under their contractual autonomy, private parties are allowed to negotiate remedies for breach of contractual obligation, notably through limitation of liability clauses or liquidated damages clauses.

As regards warranty for defects, under the Portuguese Civil Code construction works pertaining to immovable property intended for long-term use are covered by a statutory five-year warranty period. Nevertheless, the Civil Code allows the parties to agree to extend the five-year warranty period based on the principle of freedom of contract, pursuant to which entities are free to agree on the terms of the contracts they enter into. Conversely, it is disputable whether the parties may agree to reduce the statutory five-year warranty period based on their contractual freedom.

Usually, parties agree on a schedule for completing construction works, which includes a final date for completion of the entire project as well as monthly milestones for the completion of each construction stage. The payment of an instalment of the price is linked to each construction milestone, meaning that the employer may withhold the respective payment (or part of it, proportionally to the portion of the works not completed) and/or be entitled to monetary compensation for each day/week of delay if such a milestone is not achieved within the agreed completion date.

For such a purpose, the contractor should prepare monthly progress reports and submit them to the owner. The owner should then inspect the works and, if acceptable, proceed with making the corresponding payment to the contractor.

It is common for owners to seek several forms of security from a contractor, such as contractors’ parent companies guarantees and comfort letters, letters of credit, and bank guarantees on first demand. Additionally, owners require contractors to have works insurance and insurance against injury to persons and damage to property.

Contractors and/or designers are not permitted to lien or otherwise encumber a property in the event of non-payment. In cases of non-payment, they may execute the guarantees put in place (ie, bank guarantees) or resort to asking the courts for compensation for their damages.

In general, buildings are subject to a municipal licence known as a licence of use (licença de utilização). Without this licence, no property may be sold (except in specific cases provided for by law under which such properties are exempt from the requirement for a licence of use).

In general, the sale of real estate located in Portugal is subject to property transfer tax and stamp duty, and exempt from VAT, unless the vendor waives the exemption (provided certain requirements are met). If VAT applies to the sale of real estate property, stamp duty should not apply.

Normally, large real estate portfolios may be structured as share deals to mitigate the application of property transfer tax.

Since 1 January 2021, the transfer of more than 75% of the equity of a Portuguese company may trigger IMT. An IMT exemption may apply, depending on the characteristics of the real estate portfolio and its weight on the company’s balance sheet, and depending also on the number of buyers, to be analysed on a case-by-case basis.

Likewise, the acquisition of participation units in privately placed, closed-ended real estate investment funds is subject to IMT, regardless of the location of the management company, and the redemption of participation units, increase or reduction of the share capital or other, as a result of which one of the holders, or two holders who are married or in a registered partnership, hold at least 75% of the participation units representative of the investment fund’s patrimony.

Generally, collective investment undertakings are subject to corporate income tax but they benefit from an advantageous regime. Investment income, capital gains and rental income are not included in their taxable income, except when such income is derived from offshore entities. Additionally, such entities are exempt from state and municipal surcharges (derrama estadual and derrama municipal).

Furthermore, collective investment undertakings are subject to stamp duty at a 0.0125% rate on their net asset value, payable quarterly.

Municipal property tax is levied annually on the patrimonial value of both urban and rural immovable property, payable by the respective owner or person entitled to the use or fruition on 31 December of any given year. Municipal property tax is usually payable in three instalments, in May, August and November.

The general tax rates vary between 0.3% and 0.45% of the tax value for urban immovable property and are set at 0.8% for rural immovable property. If the taxable person is resident in a blacklisted jurisdiction for tax purposes (as per the list published in Decree No 150/2004 of February 13, as amended), or is an entity that is controlled by an entity resident in a blacklisted territory, an aggravated 7.5% tax rate should apply.

Moreover, individuals, companies and structures or collective bodies without autonomous legal personality and undivided inheritances may be liable to Additional Municipal Property Tax (AIMI) if they are owners or usufructuaries or have the surface right over urban properties located in Portugal.

For AIMI purposes, the tax is calculated on the sum of urban properties that are not classified as “commercial, industrial or for services” or as “others”, with reference to 1 January of each year, multiplied by the applicable rate, as follows:

  • individuals and undivided inheritances: 0.7%;
  • companies: 0.4%; and
  • legal entities resident in a blacklisted jurisdiction: 7.5%.

In the case of individuals, a tax rate of 1% should apply to the taxable amount between EUR1 million and EUR2 million, and a tax rate of 1.5% should apply to the taxable amount that exceeds EUR2 million.

Moreover, as a general rule, individuals and undivided inheritances may benefit from a deduction of EUR600,000 of their taxable base. Taxpayers who are married or in a registered partnership and opt to be jointly taxed for AIMI purposes have the right to a joint deduction amounting to EUR1.2 million, which is applicable to the sum of the VPT of all their qualifying urban properties. Additionally, in this scenario, the brackets to which the increased marginal rates of 1% and 1.5% are applied are doubled.

Rental Income: Non-Residents

Foreign investors, either resident or non-resident, are subject to withholding tax on rental income at a rate of 25% if the lessee is a legal entity or an individual that has organised accounting obligations.

Final taxation of non-resident investors shall apply at a rate of 25% of corporate income tax for legal entities, and at an autonomous rate of 28% for individuals.

Rental Income: Residents

In the case of resident individual taxpayers, tax withheld at a rate of 28% is to be considered as a payment on account of the final tax due (when such income is not taxable according to the rules applicable to individual business income, in which case different rules apply). Certain long-term rental contracts may benefit from reduced tax rates (up to 10% reduced tax rate in the case of rental contracts with a term equal or greater to 20 years).

Resident individuals may choose to aggregate the aforementioned rental income in their taxable income, in which case such income will be subject to tax at progressive rates of up to 48%. Moreover, a solidarity surtax may apply at a rate of 2.5% on the taxable income exceeding EUR80,000 and at 5% on taxable income exceeding EUR250,000.

As for legal entities subject to corporate income tax, tax should be withheld on rental income at a 25% tax rate, on account of final tax due.

The general corporate income tax rate amounts to 21%. A municipal surcharge of up to 1.5% may apply. A state surcharge may also apply, at a rate of 3% on taxable profit between EUR1.5 million and EUR7.5 million, at a rate of 5% on taxable profits between EUR7.5 million and EUR35 million, and at a rate of 9% on taxable profits in excess of EUR35 million.

Capital Gains: Non-residents

Generally, capital gains realised by non-resident legal entities on the sale of real estate are subject to corporate income tax at a rate of 25%, and non-resident individuals are subject to tax at a rate of 28%. Tax is assessed upon the submission of an annual tax return.

Capital gains realised by non-resident legal entities on the sale of shares of Portuguese companies may be exempt from tax under domestic law, provided that the assets held by the company whose shares are being sold are not composed, by more than 50%, of real estate located in Portugal, or that such entity does not hold, as a controlling entity (as defined in Portuguese corporate law), participations in the share capital of controlled entities whose assets are composed, by more than 50%, of real estate located therein. Certain exemptions may apply in the terms set forth by double tax treaties, if applicable.

Capital Gains: Residents

Capital gains obtained by resident individuals on the sale of real estate are only taxed on 50% of the gain, and subject to the progressive rates mentioned above. Exemptions are available in the case of proceeds derived from the sale of family housing when reinvested for family housing purposes.

Capital gains realised on the sale of real estate by resident entities subject to corporate income tax should be taxed at the general rates and subject to municipal surcharges and state surcharges, in the terms described above. If the capital gain is reinvested in tangible fixed assets, intangible assets or non-consumable biological assets, only 50% of its value is taxed if the reinvestment is made before the end of the second year after the sale.

Capital gains realised by a resident entity on the sale of shares of Portuguese subsidiaries may be exempt from corporate income tax under the participation exemption regime, provided that, namely, the shares have been held for a minimum period of one year before disposal, and that the value of real estate located in Portugal does not represent, directly or indirectly, more than 50% of the company’s assets, unless such assets are allocated to an agricultural, industrial or commercial activity that does not consist of the purchase and sale of real estate.

The ownership of real estate by legal entities allows the recognition of tax-deductible depreciation according to the assets' expected useful life. The acceptable depreciation rates, for corporate income tax purposes, are limited by the applicable tax law.

Several tax benefits are available under IMT and municipal property tax legislation, to be analysed on a case-by-case basis.

Morais Leitão, Galvão Teles, Soares da Silva & Associados

Rua Castilho, 165
1070-050 Lisboa
Portugal

+351 213 817 400

+351 213 817 499

mlgtslisboa@mlgts.pt www.mlgts.pt
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Law and Practice in Portugal

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Morais Leitão, Galvão Teles, Soares da Silva & Associados is a leading full-service law firm in Portugal, with decades of experience. It is well recognised for its expertise and excellence in several branches and sectors of the law, on a national and international level. The firm combines its unique technical expertise with a distinctive approach and provides cutting-edge solutions that often challenge some of the most conventional practices. With a team of more than 250 lawyers, Morais Leitão is headquartered in Lisbon and has additional offices in Porto and Funchal. Due to its network of associations and alliances with local firms and the creation of the Morais Leitão Legal Circle in 2010, the firm can also offer support through offices in Angola (ALC Advogados) and Mozambique (HRA Advogados).