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Real estate sale and lease back deals in Brazil

2 February 2012
by Ana Beatriz Nunes Barbosa, Raphael Moreira Espírito Santo & Rodrigo de Castro

The Brazilian market has had an increasing number of sale and lease back deals involving real estate. This type of deal occurs when a company, the holder of certain assets, sells them to another party and leases them back (entirely or partially) from the buyer, paying a periodic payment as rent.

This type of deal has been acknowledged by the national jurisprudence for some time now¹. Initially, the Real Estate Registry had some difficulty in understanding such transactions, confusing them with real estate leasing. Real estate leasing is a financial operation where the asset is transferred in exchange for a loan, and the property, at the end of the payment of the related value and applicable interest, is transferred to the party who was in possession of the property and obtained the loan. In this case, the ownership of the property is a guarantee to the lender².

In the sale and lease back, the property is, in fact, transferred to a third party with a permanent intent. A separate lease agreement is jointly signed when property is for sale. This has a tax planning reason, according to Raffaele Russo³, for it is applicable when a company wishes to switch to leasing existing assets as a refinancing measure.This option enables the company to obtain cash by selling to a third party and then assume a rental payment for a period of time.

In Brazil, many companies that do not have as their corporate purposes real estate deals are opting to make such restructuring of their assets. However, a careful draft of the related lease agreement and registration at the Real Estate Registry Office are always recommended to assure the right of remaining in the property if it is once again sold. Such a clause is named a válidity clause.

Finally, it shall be pointed out that, as the Brazilian Lease Law has a public nature, it will apply in certain conditions whether the parties establish otherwise or not. However, there are provisions in the referring law, as the possibility of lessor, in case of change of economics, after three years of the lease, or the last adjustment to the rent negotiated by the parties to reflect the present market value, requiring a judicial increase of the rent, that should be expressly waived in such lease back agreements, due to their particular nature.

1 - FILHO,Elvino Silva,0 Leasing Imobiliário no Registro de Imóveis, in Revista de Direito Imobiliário, vol. 15, p. 11, Jan/1985.
2 - RUGGIERO, Biasi, SOUZA, José Reynaldo Peixoto de, O "Lease Back" no Registro Imobiliário, in Revista de Direito Imobiliário, vol. 13, p. 47, Jan/1984.
3 - Fundamentais of International Tax Planning, IBFD Publications
BV, 2007.

Source: Latin American Law & Business Report