Revitalisation of the Portuguese real estate lease market – ABBC

The dominant topic in the current Portuguese real estate market is the reform of the urban lease regime. Since 2004, much debate has surrounded the need to revitalise this market. The current regime has not delivered the much sought after boost of the urban lease market. Over the past two years, the real estate sector has retreated and it is now essential that this issue be addressed.

There is a widespread consensus, both politically and socially, that the current regime does not cater to the country’s interests. The “Memorandum of Understanding” between the Portuguese Government and Troika set the general conditions of the economic policy defined under the scope of Portugal’s external financing programme, including some for the real estate market.

The dominant topic in the current Portuguese real estate market is the reform of the urban lease regime. Since 2004, there has been much debate surrounding the need to revitalise this market.

The current regime, approved in 2006, has not delivered the much sought after boost of the urban lease market, especially given the protection of tenants’ interests and the complex, time-consuming procedure for landlords terminating contracts if tenants default.

Over the past two years, the real estate sector has retreated and it is now essential this issue be addressed. There is a widespread consensus, both politically and socially, that the current regime does not cater to the country’s interests.

The ‘Memorandum of Understanding’ between the Portuguese Government and Troika set the general conditions of the economic policy defined under the scope of Portugal’s external financing programme. Among the conditions imposed, there are some that focus on the real estate market corresponding to programmatic provisions that will be the object of legislative reforms.

At the end of 2011, the Government put forward the urban lease regime reform plan, at the heart of which are the following objectives:
a) The provision of housing at an affordable price, tailored to the different needs of the Portuguese population; and,
b) The promotion of a lease market to rehabilitate and revitalise the cities.

The main measures are as follows:
a) To update old leaseholds through direct negotiation between landlords and tenants;
b) To terminate the old lease contracts on the initiative of the landlord, giving two years notice; and,
c) To create an out-of-court contract termination mechanism for the landlord where tenants fall behind on rent payments by two or more months.

These changes, however, contain exceptions that could create a bottleneck within the market. For example, tenants with economic needs, over 65 or with a disability (assessed at 60% or greater) could benefit from an exceptional rent update regime, which would substantially restrict the limits of the new update and for a period of five years. Micro-entities tenants could also benefit from this, among others, those whose total balance sheet does not exceed €500,000.

There are also significant restrictions in contract terminations and evictions of tenants that are in economic need, over 65 or with a disability (assessed at 60% or greater).

In any of the above-mentioned cases, the Government’s proposal results in the landlords adopting the role of the welfare state, something that many of them may not be able to afford.

If the tenant opposes the new eviction scheme, proceedings are taken to court, which may irreversibly jeopardise the speed and efficiency in a decision being reached.

Finally, new measures for making future contracts more flexible are also introduced, in particular in relation to the deadline and termination of housing leases.

As buying and selling properties is strongly restricted because of the sharp real estate credit crunch, there are high expectations for revitalising the lease market. To what extent the changes to the legal scheme of urban lease may aid this much needed revitalisation remains to be seen.

Luís Filipe Carvalho is a Partner and Helena Nunes Menúria is an Associate Lawyer at ABBC – Sociedade de Advogados. They can be contacted at lf.carvalho@abbc.pt and h.menuria@abbc.pt