Real estate ownership in Brazil and why many banking institutions seek to renounce it.

Real estate has been, and will probably still be for many years, a great investment in Brazil. We have all good ingredients for this perfect recipe: large parcels of land (rural or urban), commercial potential in many different industries (energy, logistics, residential developments and, yes, agribusiness) and many locations that seem to be waiting for investment and development.

In most cases, one buys land and does whatever is not prohibited by law and enjoys a very robust system of public registries that, assuming that an adequate due diligence has been performed, will guarantee fair and general powers for as many years as necessary. But, to every majority of cases, there is a counterparty of exceptions that can make ownership taste as sour as sour can taste. This article will discuss a few of them.

First point to mention is that ownership of real estate in Brazil, like in many other countries, is perpetual until sale, succession, or expropriation thereof (upon prior and fair compensation, with very few exceptions, such as indigenous land). However, some of the effects of ownership outlasts ownership itself.

This is the case of environmental liabilities and real estate taxes (for up to five years from the taxation fact), as well as of defects in the ownership chain of domain, even if the purchase agreement is filled with covenants, representations, warranties or indemnifications (note that the buyer is entitled to indemnification caused by undue payment, but this kind of compensation cannot be imposed against the public authorities). This means that, if you bought a piece of land with environmental fines and liabilities, you are likely to be charged and required to pay it or comply with it. This applies even if the information was not disclosed in the acquisition (and that is why we lawyers do a thorough legal due diligence, by the way), but is less risky for acquisition by foreclosure, enforcement of real estate guarantees (such as mortgages) and expropriation.

The second point, already mentioned above, is when the acquisition was not really planned or aimed. This is the case, for example, of creditors who enforce a real estate guarantee and end up having no option but to receive the real estate as payment – especially in fiduciary mortgages, which is a type of mortgage with faster and securer procedures for enforcement and a strong protection from other creditors but obliges the creditor to receive the ownership if there is no buyer after two public auctions.

A third and, for the purposes hereof, final point, is the existence of restrictions inherent to the land, such as landmark restrictions or special ownership structures (a common one is related to properties located beside seas and some rivers, which are automatically owned by the Federal Government up to a determined extension). There have been cases in which owners of landmark protected properties preferred giving-up on the ownership of the real estate to the alternative of complying with all restrictions applied thereto, which would allegedly impair commercial projects due to the number of additional authorizations and conditions to make improvements therein.

Now, imagine having all these situations at once and, occasionally, in a very high number of properties. This is the current situation of many financial institutions related to housing developments and construction financing in Brazil.

According to data collected by ReSale (a real estate “outlet” tech company) in 2019, replicated in a market analysis published by ABECIP (an association of real estate credit entities, mostly of banks), the five biggest banks in Brazil were, at the time, owners of approximately a hundred thousand properties.

The cause is, basically, acquisition by enforcement of guarantees; the effect is a large list of undesired real estate properties (or unwanted debt generators), as not all properties can be sold in private bids or by means of innovative technology companies.

There are some properties, as in our example above of landmark protected properties, that may not appeal at all to buyers, and this is when the idea of abandoning or renouncing ownership can be quite appealing, especially when, not rarely, the debts generated overtime (e.g., real estate ownership taxes and/or condominium fees) surpass the value of the property.

The main question here is: can one really renounce real estate ownership in Brazil?

The short answer is, yes, as expressly provided in the Brazilian Civil Code. The long answer comes when one effectively tries to do it. Remember what we said in the beginning of this article: Brazil has a robust public registries system and, in practical terms, even if an owner expressly states that they are renouncing ownership and even if law does not condition the loss of ownership to prior government authorization, there will be a title record in the land registry stating that the owner of such property is still the same as before.

Then, the first obstacle is determining what to annotate in the public registries, considering that this update is needed. This is easy when we think of an object such as a pen or an umbrella, but, for real estate, the general understanding is that the renounce should be made by means of a unilateral (otherwise, it becomes a donation) public deed, with a notary public (private instruments are a rare exception for these purposes).

With a renounce deed, the second obstacle is trying to register it with the land registry. Land registrars are enabled to verify matters of formalities, but not facts, such as, for example, existence of outstanding debts or intent to harm or reduce rights of third parties by renouncing that ownership. This causes a sensible legal doubt and, considering that land registrars are personally liable for misconduct (remember, we have a robust system, and the registrars bear a high-level responsibility), most of cases go to judicial review for confirmation of the validity of the renouncing act. Under judicial review, there have been cases when the renounce was allowed, but there also have been cases when it was denied (as if it were a request and not the exercise of a right within ownership) because of, for instance, possible harm to third parties in condominiums, which could result in a relevant raise in the other owners’ common expenses ratio.

After overcoming the time needed to exercise a legal right, the property becomes vacant and the Municipality (for urban land) or the Federal Government (for rural land) may collect it as a public asset.

Regarding existing debts, like the other topics above, there is debate. As we said earlier, they should be levied upon any owner, including the new one, which, being a public entity, would be immune to this type of taxation. The common ground here (and general judicial understanding) is that, in these cases, the debts remain with the individual or private entity; otherwise, it could become an easy way-out of real estate taxes and potentially harm the respective tax collection.

Despite the operational obstacles, that can be overcome with diligent preparation, real estate ownership renounce is an option to avoid scaling and unwanted debts on real estate when sale is not reachable.