Real Estate COVID-19 Help Desk

The effects of the current COVID 19 crisis are, generally speaking, rather complex and represent a mixture of both nationally and internationally repercussions in many business or industry sectors. The same happens in the commercial real estate sector, where the crisis caused a particular need for action due to a variety of direct or indirect side effects.

In this respect, the Real Estate COVID-19 Help Desk is intended to provide a practical response to the most common questions related to this sector: Are there any relevant governmental emergency measures which should mitigate the negative effects? Can current commercial lease agreements be renegotiated or even terminated under certain circumstances? What happens in case of an ongoing transaction? Etc.

Please check out the FAQs of the country of your interest and get in touch with our experts for more detailed information.

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Brazil

Country Introduction

The Brazilian real estate market has experienced rollercoaster effects in the last decade. It increased sensibly after accommodating the impacts of the global financial crisis of 2008, with an annual average growth of 20% from 2008 to 2011, and an impressive 121% accumulated growth from 2008 to 2013. In this period, loans in connection with real estate deals[1] broke record after record, and in 2013 culminated in astonishing BRL 109,2 billion over 500 thousand transactions.

Between 2013 and 2015, the real estate market reduced its growth pace, anticipating the economic crisis that would come in 2015. As cost of credit for real property acquisition increased, transactions dimmed from 2015 to the first half of 2019. Recently, the second semester of 2019 and the first two months of 2020 indicated the real estate market started to grow again (for example, transactions in February 2020 were 25% superior to February 2019), but, as of March 2020, the COVID-19 pandemic and the subsequent social-distancing restrictions (closed stores and restricted visitations) pushed the market downwards once more, impacting both new developments and used properties.

On the other hand, the Brazilian Real (BRL) is overly devalued as of March 2020. In April 2020, new legislation arose regarding acquisition of real estate by non-Brazilians. This scenario makes real property in Brazil quite attractive for foreign buyers (whether for use or for investment). Brazil has a huge demand for residential properties, resort hotels, and business facilities. Recovery of Brazilian real estate market is a matter of time only. Storming out the current COVID-19 crisis is likely to bring long-term advantages to investors.

[1] The Brazilian real estate market is very depended on the financial system, as most transactions (involving either new or used properties, for either residential or business purposes) a bank or a financial institution to finance a portion of the price, in a contractual arrangement called alienação fiduciária em garantia, whereby, similarly to a mortgage, the acquired real estate is offered as collateral for payment of the loan.

Are there any emergency and/or interim measure regarding Commercial Lease Agreements in Brazil?

Yes, State Governments have applied measures to ensure social distancing. Brazil’s most relevant capitals, such as São Paulo/SP, Rio de Janeiro/RJ, Salvador/BA, Belo Horizonte/MG, and Manaus/AM, are dealing with limited circulation outdoors and businesses closed to the general public (delivery and take-away services are generally allowed). This scenario affects the economy, especially small and local businesses.

On May, 20, 2020, the Federal Congress approved Bill of Law (PL) 1.179/2020, the so-called “Emergency and Transitory Legal Regime of the legal relations of Private Law during the Coronavirus (COVID-10) pandemic period”. The bill now awaits presidential sanction. Among other matters of private law, this bill deals with lease agreements and the relationship between landlords and tenants. Particularly, the bill (i) forbids tenant eviction based on payment delay, as to lawsuits filed from March 20, 2020 to October 30, 2020; (ii) determines that the effects of Covid-19 and its impacts in the contractual relationship shall not retroact to cover facts prior to March 20, 2020; and (iii) also forbids that inflation, deflation, exchange rate variation or other modifications of contractual monetary standards be considered sufficient motivation to review the economic basis of the contract.

Is it possible to cancel, suspend or modify the Lease Agreement's conditions due to the COVID-19 crisis?

Yes. Brazil is a civil-law country, with a significant influence of the Roman-Germanic legal systems, similar to Germany, Italy, Portugal, Spain, and others. General clauses of contractual law as rebus sic stantibus apply, but in a very restricted sense.

Several companies and entrepreneurs – especially stores situated inside shopping malls which are closed to the public following local rules, as well as “nonessential” commercial businesses, also mandatorily closed to the public – filed claims to stop payment (or at least obtain a reduction) of rent and maintenance fees. When the claim seeks continuity of the agreement after the pandemic, the claimant’s argument focuses on the rebus sic stantibus clause versus the pacta sunt servanta clause. When the claim seeks to terminate the agreement without penalties or damages, the claimant’s argument focuses on Covid-19 as a force majure event.

Courts have so far issued preliminary rulings allowing tenants to stop or reduce rental payments, provided that tenants prove the impossibility of, or severe limitation on, running their businesses, and the subsequent income reduction. Courts have been more inclined to accept rebus sic stantibus arguments to suspend agreements than force majure arguments to terminate them.

We have recommended that Clients use negotiation to try and solve each situation on a case-by-case basis, so that the Client keeps in control of the contract and obtains a solution in the short term. Under this approach, only severe contract disruptions would be brought to the Judiciary.

In case you are in the middle of a sales and purchase transaction - how can you handle this situation? Are there special urgent measures?

There are no specific rules forbidding the execution of any given type of purchase and sale agreement due to the pandemic. Purchasing real estate now may be advantageous for investors, because prices in general have decreased since the pandemic began.

We recommend that investors obtain proper legal advice in order to avoid future claims from sellers seeking judicial cancellation or nullification of the sale, based on allegations of injury (lesão) or meager/vile price. We also recommend clear wording of the contract clauses as to whether a party assumes the COVID-19 pandemic as a normal or as an exceptional scenario, in order to avoid that the other party uses the pandemic as a reason to change the foundations of the agreement in the future. We equally advise clear contract wording to establish whether parties are willing to review the economic basis of the contract in the future, vis a vis changes in the health, economic, and legal environment arising from developments of the pandemic.

What is the legal situation regarding cancellation of rentals of tourist apartments, hotels or holiday homes?

Most touristic sites, premises, and venues are closed or at least functioning with very restricted access since the pandemic was officially recognized in Brazil (February/March, 2020). Tourism businesses (agencies, hotels, apartments, etc.) who had reservations cancelled generally choose to grant credits for future trips or stays, rather than to provide reimbursements.

The President issued Provisory Measure (MP) 948/2020 determining the suspension of tourist and cultural events and granting to culture tourism businesses the right to offer to the consumer, in lieu of reimbursement, the option that the consumer uses his/her/its credit throughout the entire year of 2021. If the consumer does not accept the offer, the consumer has a right to reimbursement, but such may be performed until the end of 2021, and a grace period must be granted until December 31, 2020. That is, according to the provisory measure, tourism and cultural businesses are allowed to delay reimbursements until January 2020 and to perform payments in installments.

What effects does the current situation have on ongoing construction projects and contracts?

The pandemic rules regard the construction sector as an essential economic activity, so construction workers can continue with their jobs. Moreover, the first two months of 2020 were positive. However, the pandemic affected the construction sector, because it impacted the financial capacity of purchasers (on residential market) and the government’s focus (to fight Covid-19). Buyers are afraid to enter into new agreements due to the uncertainty of the economy.

Brazilian public bank Caixa Economica Federal, in a program designed to medium-low income populations, released a BRL 43 billion[1] credit line for the construction sector in April 2020, hoping to stimulate potential buyers to purchase residential real estate. The same credit line grants buyers a 180-days grace period, so payments would initiate by the end of 2020, when economic perspective shall hopefully be better.

Also, there are likely opportunities for construction projects in the areas of health and logistics, due to the impacts of the pandemic and the urge to expedite construction in some locations. Due to the public calamity status brought by the pandemic and the urgency that follows, contracts with the government currently do not need to undergo public bidding.

[1] Exchange rate on May 22, 2020: 1,00 EUR = BRL 6,04.

Which courts have jurisdiction, what are the expected trial times and what are the costs?

As above, parties are been stimulated both by lawyers and by judges to negotiate, regardless of the type of discussion and the amounts involved. Alternatives such as mediation and dispute boards are largely recommended in construction projects, especially the most complex ones.

When self-guided solutions fail, parties may seek the Judiciary or, if provided in the contract, arbitration. Demands involving governmental bureaus will be subject to specific jurisdictions, whether federal or state courts. Some kinds of contracts with governmental bureaus may also be subject to arbitration procedures, provided it is previously adjusted and authorized by state and local laws and regulations (for example, in the city of São Paulo, Law 16.873/2018). Private agreements may be subject to commercial or civil state courts, depending on the venue of the litigation (some states and cities have a more specialized judiciary structure).

Litigation on State Courts may take approximately from 3 to 5 years up to the definitive ruling (res judiciata), if case goes through both first and second-level state courts, plus one of the superior courts (either the Superior Court of Justice (STJ) or the Federal Supreme Court (STF)). Costs of litigation in state courts may vary around 5% to 10% of the suit value, and attorney’s fees follow the English rule (i.e., the losing party must pay to the prevailing party’ attorney fees fixed by the court between 10% and 20% of the amount involved in the case).

Arbitration procedures in Brazil are generally conducted within arbitration chambers connected to chambers of commerce. Costs of arbitration vary depending on the chamber elected, the number of arbitrators involved (if one or three, generally) and the amount under discussion. In general, affordable arbitration procedures shall cost around EUR 15,000 and lasts approximately 3 to 6 months. Arbitration awards issued in Brazil are not subject neither to appeal nor to ratification by a judicial court. Only enforcement procedures, if needed, shall be taken to court based on the arbitration award.

What financial assistance packages or ways to mitigate the financial impact have been adopted?

As mentioned on section 5 above, there is a project to finance the purchase of real estate by medium-low income population conducted by Caixa Econômica Federal. Private banks are also offering loans so that entrepreneurs can push their businesses go through the pandemic with lower interest rates and longer grace periods as compared to regular conditions.

As to labor aspects, the federal government issued several provisory measures since the beginning of the pandemic, aiming to offer relief to employers regarding the collection of welfare contributions, payment of severance fund, payment of vacation bonus, reduction of the working day and respectively salary, anticipation of vacation periods and holidays, and even temporary suspension of the employment contract. Some measures require the employer to commit to keep the existing jobs and salaries.

Finally, there is a number of federal rules issued to temporarily reduce or postpone payment of taxes (PIS, COFINS, welfare contributions, FUNRURAL, CPRB, System “S”, etc.) during the pandemic.