Commercial real estate law and rules in Portugal

In Portugal any “legal person” may acquire and own real estate property. This includes both individuals and any corporations and other legal entities.

There are no restrictions preventing foreign nationals or companies from owning real estate – nevertheless, among other mandatory obligations, non-resident persons must obtain a Portuguese tax number. Investments are subject to normal rules concerning the import of capital for combating money laundering and terrorist financing.

The right of property is the broadest and strongest title over real estate in Portugal – grants the titleholder full and exclusive rights to use, take profits and income and dispose of real estate – and may be held individually, or on a co-ownership basis.

The rights over land recognised in Portugal and itemised in the law are the following: (i) right of property; (ii) right of usufruct; (iii) right of use and habitation; (iv) right of surface; and (vi) easements.

All of the above rights have statutory regulation in law, the parties being able to negotiate within their respective legal frameworks.

Right of usufruct is the right of temporary enjoyment of the property of another, and to draw from the same all the profit, utility and advantage which it may produce, provided it be without altering the substance of the thing.

Right of use (and habitation) is the right to use property and generate and retain income and profits. If the right is related with a home resident, it is called a right of habitation.

Surface Right under Portuguese law is the right to erect and maintain a building on land which is owned by a third party.

Easements, is the obligation (or use) imposed over the property of one owner, in favour of another property of another owner, most frequently between owners of adjoining parcels of land (the most common being rights of way and rights to passage of water).

In Portugal different property interests are commonly held, namely:

• Full ownership (property right) – the right to use and dispose of a real estate property in a full and exclusive manner.
• Residual ownership – the remaining right of the owner of a property over which a right of usufruct has been created in favour a third party.
• Right of superficies – the right to construct and maintain a construction on land belonging to a third party.

Horizontal Property ownership results from the legal division of a property or building into several units subject to separate ownership – confers its titleholder the right to exclusive ownership of one of the units and the right to co-ownership over the common areas of the building – the owner of the individual unit is not allowed to sell his property separately from the common areas, meaning that the individual units are linked with the common areas of the building.

Horizontal Property division is created by formal deed and must be registered at the Land Registry, and can only be executed when the autonomous units, besides constituting independents units, are distinct and isolated from each other, each one with its own exit to a common area of the building or on to a public road.

Other relevant rights relating to property are as follows:

• Lease – a contractual right to use a property for a certain period of time and for a specific purpose, with a corresponding payment payable to the owner.
• Option and Pre-Emption – rights to buy or first refusal respectively. Unless they originate from statutes (e.g. pre-emption right of a tenant), these are not enforceable against third parties and do not entitle the holder of the relevant right to seek revocation of disposals of the property in breach of the option or right of pre‑emption.

According to the Portuguese Law on the transfer of business, when a business (or part of one or establishment) is transferred from one party to another, the work relationships of the employees pertaining to such business or part are also transferred in whole to the new owner of the business.

Thus, the sale of a property may entail the enforcement of the transfer of business’ legal framework if the property transaction is or may be qualified as transfer of a business.

The application of the rules on transfer of a business would entail, among others, the following consequences:

• the buyer takes the position of the former Employer (Seller), assuming responsibility for all employees working in the business transferred, as well as for the payment of any labour related claims/debt already existent at the time of such transfer of business;
• the rights of employees transferred, arising from both their individual and collective employment agreements, would be preserved (e.g. salary level, fringe benefits, notice periods);
• fully accrued rights of the employees towards the seller would be undertaken by the buyer as a consequence of the transfer of a business;
• the seller and the buyer are jointly liable for all the financial obligations of the seller, existing at the time of the transfer, vis à vis the employees, up to the period of one year as of the date of the business transfer and
• information and consultation with unions and/or employee’s committees prior to the transfer may be required, depending on the existence of any employees’ collective representation structure within the company, otherwise consultation must be carried out with the employees themselves;

The transfer of business does not in itself constitute a justified reason for dismissal; the termination of employment is only considered lawful if the reasons are unconnected with the transfer of a business i.e. economic, technical or organisational reasons entailing changes in the workforce.

For a foreign buyer of property in Portugal it is mandatory to have a Portuguese fiscal number – is a simple procedure under which the tax number will be issued immediately.

The seller must verify if any preference rights (legal or contractual) are applicable to the subject property, and if so, must provide to any person or entities with legal preference of buying.

Where the legal preference right is in favour of administrative entities (namely city council) it is possible to publish the details of the proposed deal in a web site called CasaPronta, and so fulfilling the legal duties of the promissory seller, with a deadline of ten days to exercise the pre-emption rights.

Before a promissory contract, subsequently mentioned, a letter of intention can be signed between the Parties (not mandatory).

After these procedures are complete, a promissory contract is signed between the owner and the buyer. At this point the buyer usually pays part of the global price (deposit) and agrees on a date to complete the purchase. Other conditions may also be specified in the promissory contract, such as completion of any building work or conditions such as building permits to construct, etc. If the buyer fails to complete the purchase it risks losing the deposit, and if the owner fails to complete the sale it must repay twice the amount of the deposit. The parties may also agree to subject the promissory contract to “specific performance” in the event of a default (i.e. obtaining a legal ruling in lieu of the defaulting party’s. The promissory sale and purchase agreement can be registered at the Land and Property Registry Office, publicizing, with the mentioned registration, which is sufficient notice of the promissory contract to third parties.

Completion of Sale (Public Deed) – to complete the sale, the buyer (or the owner) must make an appointment with the Notary (presently it is also possible that the public deed is dealt with by a lawyer or a solicitor) in accordance with the terms of the promissory contract – the buyer must pay any purchase tax (IMT) and stamp duty and must prove such payment prior to the execution of the Public Deed.

All parties involved in the purchase/sale must attend, unless any of the parties grants someone power of attorney to act on its behalf.

Once the public deed is executed, the (new) owners must register the acquisition (definitively, if the promissory contract was signed and registered before) at the Land and Property Registry Office, to ensure the transfer of the ownership and the legal proof of said ownership.

To develop commercial buildings or carry out large construction projects, usually a protocol of agreement between the Town Hall and the developer is required. It is advisable to request a previous confirmation from the Town Hall, in order to ensure the successful implementation of the project.

It is also possible to acquire property indirectly through an equity stake in an investment vehicle owning such property – often done to mitigate tax-consequences.

In Portugal, the acquisition or creation of property rights begins, as general rule, with a promissory contract which must include recognition of the parties in the form of their signatures and certification of the existence of the use or construction licence.

The promissory contract must contain the main following clauses:

• Property Description and a statement that it is free from any onerous restrictions, covenants or encumbrances, or if there are any a description of them;
• Price and conditions of payment: it is common for there to be a deposit, which, besides being an advance on the price, also acts as a guarantee of performance by the buyer and as compensation for the seller in the event of a breach of contract;
• The deadline for completion (closing) of the sale and purchase or other contract: the deadline usually is dependent upon satisfaction of any specific conditions prior to completion (e.g. obtaining finance, any licences, etc.);
• Depending on the amount of the price paid in advance, it can be agreed that the possession of property (or other real estate right) is transferred in favour to the promissory buyer;
• Rights of first refusal: depending on the location or historic relevance, properties may be subject to rights to first refusal, among others, by the municipal council where the property is located – in these situations, prior to the transaction seller must give notice of the terms and conditions of the deal; in some circumstances in a lease contract the tenant also has a right of first refusal;
• Declarations and Guarantees: usually the parties include in this contract certain declarations and guarantees such as the state of the property, as to the absence of legal actions or debts, the other in the event of breach. The party at fault must compensate the other in the event of breach;
• Breach: any breach is normally subject to specific performance meaning the non-defaulting party may obtain a court order to put into effect the legally agreed intention of the parties; or alternatively, breach may give rise to rights to terminate the contract and claim compensation based on the amount of the deposit (in any case, the parties may agree additional penalties);
• Miscellaneous provisions: it is common to include various provisions to protect the parties such as conditions precedent and conditions subsequent, retentions, etc.;
• The Closing: the promissory contract is followed by the signing of the public deed – the definitive contract. This is the moment at which ownership of the property is transferred – must then be registered in favour of the buyer.

The due diligence review is usually carried out before an offer to purchase a property is made or before execution of a preliminary agreement for sale. However, in certain cases, the offer may be made or the preliminary agreement may be executed subject to a condition that such investigations will not reveal any material issue or defects. This is often the case where the buyer is already generally satisfied with the result of a preliminary due diligence and only a few aspects need to be investigated or finalised.

As regards the legal due diligence (the buyer may also carry out technical due diligence), among other issues, Land Registry searches are undertaken to check for any mortgages, charges or encumbrances on the property, tax authorities searches are carried out to confirm that there are not outstanding municipal property taxes on the property, and the existence of municipal use permit for the property is checked (the existence of such permit is a requirement for the use of the property and for the direct transfer or real estate property through an asset deal) – and that any impediments are extinguished before or after the sale (e.g. preference rights or mortgages).

It is very important that, at least, the following documents are checked/obtained before the public deed:

• Use License, if the property was constructed after 1951, a certificate attesting such fact shall be obtained if the property was built prior to 1951;
• Land Registry Certificate (“Certidão de Teor Predial”), issued by the Land Registry Office;
• Tax Registry Certificate (“Certidão de Teor Matricial”) issued by the Tax Office;
• Technical Habitation Certificate (“Ficha Técnica de Habitação”), which is a mandatory document regarding properties intended for residential purposes and completed after March 2004;
• Energy certificate, which certifies the performance and energy use characteristics of a building and is mandatory.

Acquisition of real estate in Portugal is executed by means of (i) a public deed, which is the most common, or (ii) a private document certified by a Notary, lawyer or solicitor. The transfer of the real estate rights must be registered at the Land Registry within 60 days of the transaction Registration is mandatory.

The purpose of the Land Registry is to provide information on a property’s legal status, guaranteeing the lawfulness of the property transaction and confirming the presumption of the existence of a right to the property. Based on these principles, the regulations currently in force in Portugal require any facts determining the constitution, recognition, purchase or changes of rights over property to be filed with the Land Registry, including a lease granted for a term of more than six years.

Portugal has a central land register managed by the State. The Land Registry is run through regional district Land Registries which are responsible for specific areas of the country. However, territorial competence of the Land Registry is no longer applicable, meaning that one can obtain information on and register any property, irrespective of its location, in any Land Registry. Some areas of land still remain unregistered, although an application for voluntary registration may be made by an owner at any time.

Facts requiring an entry in the register, even if not registered, may be cited between the parties or their heirs, with the exception of the establishment of a mortgage. The effectiveness of a mortgage depends on an entry being registered.

To protect a promissory buyer, it is possible to (i) submit a provisional registration of the property or (ii) register the promissory purchase agreement, meaning in both cases that the property is provisionally registered in favour of the promissory buyer. This registration will retain priority after their conversion into a definitive record of entry. Pursuant to the principle of the priority of registration, the first recorded right is effective vis-à-vis third parties and takes precedence over the other incompatible rights of third parties even if such rights have been established prior to the date of registration. The title register for a particular property comprises (i) the property register, which gives a description of the property, its area and composition, (ii) the proprietorship register, which gives details of the registered owner of the property and (iii) charges register, which lists all registrable matters that encumber the property, such as easements, mortgages or registrable leases.

In addition to paper copies of certificates, one can obtain information and copies of registers on any property online.

In Portugal two online services are available in relation to the land registers: Predial Online and Casa Pronta.

On Predial Online, by means of an electronic certificate, one can access up-to-date information on the legal position of a property and on pending applications for registration. Access is based on a half-yearly subscription plan and costs EUR 15. The application must be made on the basis of the property’s description number or its tax number. Following payment, a certification code provides access to the information. On this site, privately owned authenticated documents evidencing legal acts and mortgage cancellation documents may be uploaded. Notices about the transfer of properties to entities with a legal right of preference (revealing their intention to exercise such rights or not) are also accepted. It is also possible to check notifications published in respect of buildings under special procedures for justification and correction.

The Casa Pronta service provides an one-stop service, making it possible to carry out all the necessary formalities relating to the purchase and sale, donation, exchange, dation in payment (“dação pagamento”), of urban, mixed or rural buildings, with or without a bank credit, to the transfer of a home purchase bank loan from one bank to another or to the taking out of a loan against the mortgage on a house. It is also possible to use the Casa Pronta service to establish an autonomous fraction regime (“propriedade horizontal”). The first step of the procedures are with the Land Registry or a bank which has secure access to the website. The website offers any individual the opportunity to give notice of the transfer of a building, so that entities with legal rights of preference can announce their intention to exercise these.

The municipalities are responsible for the preliminary control of urban planning projects, including construction and use of buildings, and allotment of land. This does not preclude the need for the involvement of other entities whose opinion may, in many cases, be binding in terms of project licensing. Municipalities are competent to approve municipal urban planning and building regulations, in addition to regulations on the payment of taxes/charges on the performance of urban operations.

The execution of urban planning operations must generally be examined in advance and may require (i) licensing (“licenciamento”), (ii) advance notice (“comunicação prévia”) or (iii) use permits (“autorização de utilização”).

Urban planning operations for which advance notice must be provided are usually either less relevant in urban planning terms than those which require licensing or are performed in areas covered by an allotment operation or by a detailed plan (“plano de pormenor”). Advance notice procedures are simpler and faster than licensing procedures.

Licences (“licenças”) or acceptances of advance notice generally expire if implementation has not been secured within the period established by law.

An interested party may submit a request for advance information (“pedido de informação prévia” – “PIP”) on the feasibility of a specific urban project as well as to any legal or regulatory constraints. This highly relevant mechanism is widely used in the field of property transactions. An interested party may request the municipality to provide advance information on diverse aspects of a specific urban project it is interested in performing, such as volumetric, eaves height, number of apartments or an estimate of urban planning costs/charges. The municipality has a fixed time limit within which to consider the request and give its decision. The decision is binding on competent entities in respect of the licensing or the advance notice decision to which it refers. The effects of such information are valid for a period of one year.

Subsequently, after the building has been completed, a property use permit (“autorização de utilização”) for the buildings or condominium units must be obtained. The purpose of this authorization is to verify the urban project’s completion and conformity with approved plans and licensing or advance notice conditions. The property use permit certifies the permitted use of the building or condominium units and is a mandatory requisite for the occupation and use of real estate built after 1951. For residential properties where the use permit has been requested after August 2004, a habitation certificate (“ficha técnica de habitação”), issued by the competent municipality, is also required.

Specific properties, such as commercial retail establishments (“estabelecimentos comerciais”) and commercial complexes (“conjuntos comerciais”), or tourist resorts may be subject to special licensing regulations.

Finally, operations which are less relevant and have less of an impact in terms of urban planning are exempt from licensing or advance notice requirements.

All the above licenses and permits, when granted, benefit the property and are not personal, which means that they remain in force regardless of any change of ownership.

Property use permit and habitation certificates are valid as long as no modification is made in the building and as long as the activity authorised in that building is operated under the conditions stated in the licence.

Before a sale is contemplated, insurance is generally the responsibility of the owner of the freehold interest in a property. However, where such property is the subject of a lease or if a mortgage or lease is registered, the terms of the mortgage or lease will prescribe which party has responsibility to insure.

Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant, in this context, tenants may contract, and frequently owners compel them to buy through, multi-risks building insurance schemes. Buildings and structural insurance is normally held by the owner.

Should a mortgage be registered over a property, the mortgagee (usually a financial institution) often requires the owner to have comprehensive buildings insurance in which the beneficiary is the mortgagee. This kind of policy usually covers additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism, i.e., any contingencies which may decrease the value of the property, or which may reduce the mortgagee’s guarantee for the repayment of the loan. To reinforce the mortgage, borrowers may be required to take out life insurances.

Insurance policies may comprise a single policy for each property or a block policy for a portfolio of properties.

Occupiers generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.

Insurance against fire is the only cover required by law and must extend not only to each apartment but also the common areas of the building.

Insurance policies are personal and not transferable on sale. Where a sale is taking place, the risk, except if otherwise agreed by the parties, is normally transferred with the execution of the sale agreement. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion or, in some cases, such insurance is paid by the seller and reimbursed by the buyer in a pro rata temporis basis.

Permits are required for numerous activities, including but not limited to those which involve noise pollution, water usage, air pollution, greenhouse gas emissions, and waste management.

For industrial facilities, legislation requires operators of particular activities (e.g. energy, chemical, metal, mineral industrial facilities) to obtain an Environmental Permit to ensure the prevention and integrated control of the pollution. Operators can only explore the facilities after the issue of the Environmental Permit.

For some projects – likely to produce significant effects on the environment – an Environmental Assessment can be required prior to the construction of the facility or infrastructure. Assessments are required for urban allotment operations and commercial centres or establishments with an area comprising over 10ha (or 500 residential units) or over 1.5ha.

Environmental Assessments are also required for urban allotment operations and commercial centres or establishments with an area comprising over 2ha and 0,50ha respectively, if located in sensitive areas (e.g. National Agricultural Reserve).

The Portuguese law foresees three different environmental liabilities: civil, administrative and criminal liability.

The primarily legal responsibility follows the “polluter pays” principle (the person or operator who spilled, released or discharged a substance will be liable for the effects). However, the liability can also be applicable to future owners of the facilities if the substance is causing or will cause actual harm to humans, to property (including personal property), to protected ecosystems or groundwater or surface waters and the new owner fails to make reports to public entities or take appropriate steps to limit the harm.

There is a legal obligation on operators to provide a financial guarantee in respect of the environmental responsibility. The financial guarantees may be obtained through insurance policies, bank guarantees and participation in environmental funds.

Directives of the European Parliament and Council, concerning the energy performance of the buildings have been translated into Portuguese law under which the owners of new buildings must obtain an energy certificate.

Acquisition due diligence usually includes an environmental assessment. Due to potential environmental liability, it is important to identify potential problems so they can be considered in the negotiations.

The purpose of the valuation is to determine market value of the relevant property. The market value is the average price that can be obtained for a property to be sold, at the date of the valuation.

The parties which have an interest in the transaction usually hire the services of an expert evaluator (“perito avaliador”). Apart from real estate funds, hiring a valuation expert is not compulsory under Portuguese law and the parties may appoint an independent third party who is not so qualified.

Each valuation is performed after inspecting the property. When pricing a property, the professional will take into consideration several factors , such as the construction area, adjacent (not constructed) area, the value per square metre including land, location, type, quality and comfort levels of the property, characteristics of surrounding areas, municipal zoning regulation, and a comparison with similar properties. A valuation report will contain a description of any works carried out, the location and surroundings of the property, its legal and town-planning status, the market sector, comparison points used, an estimate and conclusions.

The property expert may use several methods to carry out a property valuation, such as the comparison or analogy method or the revenue method or a mixture of them.

However, for real estate investment funds, the valuation must be carried out by expert evaluators duly registered at the Portuguese Securities & Exchange Commission (“CMVM”).

Expert evaluators must use at least two of the following methods of valuation: (i) the comparative method, (ii) the yield method and/or (iii) the cost method. Completed real estate properties must be valued in the interval between their acquisition cost and the arithmetic mean of the valuations of them made by the respective expert evaluators. The evaluation report to be issued by an expert evaluator must, in these cases, specify various elements of the valuation, which are legally foreseen.

The purchase of a real estate is subject to the following costs:

IMT (“Imposto sobre as Transmissões Onerosas de Imóveis”), which is due on the transfer of ownership of property located in Portugal. In general terms, the transfer of real estate located in Portugal is subject to IMT, which is applied to the higher of the purchase price or the official tax registration value, appraised under the annual local property tax (IMI) rules. This tax is borne by the buyer, whether resident or non-resident.

IMT is charged on the transfer of ownership of property at the rate of 6% for the acquisition of residential property above EUR 550,836. However, for dwellings acquired for own residential purposes, the 6% rate only applies for dwellings above EUR 574,323. The IMT is assessed at a variable reduced rate, depending on the purchase price or the official tax registration, in case these values are lower than the referred amounts.

The IMT rate is 5% for rural land and 6.5% for other urban properties (commercial or services) and other onerous acquisitions. When an entity acquiring a property located in Portugal is tax-resident or domiciled in a tax haven, the IMT rate is 10%, except for individuals.

In addition to IMT, Stamp Duty (“Imposto do Selo”) is levied on the transfer of property ownership at 0.8%, being its taxable basis calculated on the same terms as the IMT. However, if the transfer of property is subject to VAT, by means of waiving the VAT exemption, it is not subject to Stamp Duty.

In accordance with the Portuguese VAT code, operations subject to IMT are VAT exempt. Therefore, the transfer of property subject to IMT is, as a general rule, exempt from VAT (as in the case of a lease). Nevertheless, in order to mitigate the effects arising from this exemption, the relevant legal provisions allow a VAT exemption waiver, with the VAT at the current rate of 23%. According to the VAT exemption waiver regime on real estate transactions, there are several strict conditions that need to be fulfilled, regarding the property, the nature of the transaction or the status of the parties.

The VAT exemption waiver is requested on a transaction basis, in respect of each property sold or leased (in case of a building comprising several autonomous fractions, a certificate per autonomous fraction must be obtained), through a request made by the seller/landlord to the Portuguese VAT administration on its internet website. This must be obtained prior to the execution of the sale or lease agreement.

In the event of an acquisition of property, in principle, the VAT will be self-assessed by the acquirer, meaning that VAT will be charged and deducted, if and when possible by the acquirer of the property.

Finally, the buyer will be responsible for the payment of the Notarisation and Land Registry fees associated with registration of the transfer to the buyer.

The ownership of real estate is subject to the payment of the municipal tax IMI (“Imposto Municipal sobre Imóveis”). This tax is due by the owner of the property on 31 December of each year.

IMI is charged on the tax registration value of the property (land or building) located within each municipality. IMI rates are: (i) Rural property – 0.8%, (ii) Urban property appraised before the IMI rules – 0.5% to 0.8% and (iii) Urban property appraised under the IMI rules – 0.3% to 0.5%. The applicable rate is fixed annually by the competent municipality.

When the annual provision of IMI is less than EUR 250.00, it must be paid in full during the month of April. Should the tax payable range from EUR 250.00 to EUR 500.00, it must be paid in two installments during the months of April and November. If the value exceeds EUR 500.00, the owner may pay the IMI in three installments during the months of April, July and November.

In addition to IMI, ownership, use or surface rights of residential urban properties with an official taxable registration value equal to or greater than EUR 1m are subject to Stamp Duty, calculated at the rate of 1%