Financing
Secured lending
Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?
In Portugal, real estate projects are usually financed by security-backed financing, which usually covers all stages of the property development (subject to the milestones and utilisation conditions contractually agreed). Banks are the typical providers of real estate financing in Portugal but direct lenders are increasingly starting to become significant players in the market.
A facility agreement secured by a mortgage and additional security is the most common financing and security method for real estate projects in Portugal. Securities usually associated with property financing comprise mortgage of property, assignment of income, pledge of shares or quotas, assignment of credits as security, pledge of bank accounts or sureties.
A mortgage creditor is not entitled to benefit from a right of appropriation over of the mortgaged assets under Portuguese law, as only judicial enforcement is permitted. Thus, a mortgage is commonly combined with a pledge over the shares or quotas representing the share capital of the borrower to enable the step-in of the lender. A pledge over shares might benefit from the financial collateral regime which enables the lender to enforce the pledge and the right of appropriation over the shares and benefits from an insolvency protection regime which permits the enforcement of creditor’s appropriation rights even in the context of an insolvency of the collateral grantor. A commercial pledge over quotas can also include appropriation rights but it does not benefit from the same insolvency protection regime.
The assignment of income arising from immovable assets (commonly, the rent) in favour of the lender is also a typical security (it must also be registered at the Land Registry). A similar security is the pledge of credits, which captures other types of credits not covered by the assignment of income. In addition, a pledge of operational bank accounts (notably for receivables) is also a typical security and subject to the financial collateral regime.
Leasehold financing
Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?
The tenant’s interest in the lease is a mere contractual right that cannot be given as collateral in favour of the lender. Thus, the common structure in Portugal for leasehold financing is the one under which the bank acquires the real estate asset and then enters into a financial leasing agreement with the lessee (with an option to buy for a residual value).
Form of security
What is the method of creating and perfecting a security interest in real estate?
The creation of security interests over real estate assets located in Portugal is, under the applicable conflict of laws rules, mandatorily governed by Portuguese law. But obligations secured thereunder may be subject to foreign law.
Mortgages are created by means of a notarial deed, which is a contract made before a notary public. However, to be fully valid and enforceable it must be registered at the Land Registry.
The mortgage automatically covers all the fixtures incorporated in the property pursuant to the exercise of construction rights. Together with the mortgage, incomes arising from the real estate assets are usually assigned to the lender as security for the payment of the financial obligations.
Valuation
Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?
The appraisal of the immovable property must as a rule be done by real estate appraisers registered with and regulated by the Portuguese Securities Exchange Commission.
The property valuation is a requirement for any mortgage credit agreement (subject to particular rules on consumer mortgage credits) and might be requested by the lender or borrower.
Legal requirements
What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?
The provision of lending activities in Portugal is a licensed activity that may only be conducted by entities with a local licence or benefiting from EU passport regime for credit institutions. These requirements apply whether services are provided to consumers or professional clients. Banco de Portugal oversees compliance with prudential and business conduct rules.
In turn, providing collateral does not trigger any licensing requirements, governmental permissions or any other restriction regardless of the lender’s home state. Therefore, a lender from another jurisdiction may have loans secured by Portuguese immovable or moveable assets. However, there are certain assets (eg, those located in the public domain or connected to public services) that cannot be pledged as collateral.
Mortgages are typically created by means of a notarial deed. Other connected security agreements are also typically entered into before a notary, as such a document would be an enforcement title and could be directly enforced.
Both the financing and the granting of collateral (if not granted and registered simultaneously upon execution of the financing agreement) is subject to stamp duty at a rate of 0.5 per cent or 0.6 per cent of the value of the financing or the secured obligations, depending on whether the maturity is below or above five years.
Loan interest rates
How are interest rates on commercial and high-value property loans commonly set? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?
Property loans can be contracted with a variable, fixed or mixed interest rate.
The reference interest rate generally corresponds to the EURIBOR, the most common being EURIBOR at three, six and 12 months. EURIBOR replacement language is usually included, but no replacement index is typically indicated. The spread is negotiated and freely defined by the lender for each agreement, taking into account its cost of financing, the borrower’s credit risk, the loan-to-value ratio and the security package. Fixed rates are now more common due to the current interest rate hikes.
Real estate financing agreements granted by credit institutions are not subject to usury limitations or other types of caps or limitations on interest rates. In the event of arrears, credit institutions may charge default interest. Default interest is capped at a maximum annual surcharge of 3 per cent, which is added to the compensatory interest rate. The capitalisation of default interest is not permitted, except in the case of debt restructuring or loan consolidation.
Loan default and enforcement
How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?
In the case of default of the secured obligation, the mortgage creditor cannot appropriate the mortgaged asset and must initiate enforcement proceedings requesting a judicial sale. Nevertheless, it will take priority over other creditors whose claims are not preferential or who have no registered priority. In the enforced sale, assets are transferred free of any liens and of any other real rights with no registration prior to any seizure, pledge or guarantee.
Enforcement to pay a fixed sum of money where the creditor’s claim is backed by a mortgage depends firstly on the enforced obligation being certain, due, and net. Where the mortgage creditor wishes to enforce mortgages constituted in its favour, the enforcement action must be brought against the owners of the assets, even if these are not its debtors.
The mortgage creditor will also be entitled to sue the debtors in this enforcement. Thus, where enforcement is brought by the mortgage creditor only against a third party owner of the asset and if it is established that the mortgaged asset is insufficient, the creditor can ask for the action to continue against the debtor to fully satisfy its claim. Any creditor may obtain the suspension of the enforcement to prevent the payments by demonstrating that the recovery of the company or the insolvency of the debtor was requested.
It is very difficult to define the average duration of enforcement proceedings, but, in our experience, enforcement proceedings for the payment of a fixed sum of money, where the creditor’s claims are secured by a mortgage, normally takes between 18 and 36 months (longer if there are any appeals). This period also varies depending on which court has territorial jurisdiction.
Loan deficiency claims
Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?
Lenders are entitled to recover money judgments against borrowers or guarantors for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure. There are no limitations on the amount or method of calculation of the deficiency.
Protection of collateral
What actions can a lender take to protect its collateral until it has possession of the property?
The purpose of a mortgage is to provide security for a loan against property, rather than facilitating possession of the property. For this reason appropriation of the property in the case of default is prohibited. The concepts of receivership and mortgagee in possession are not recognised under Portuguese law.
A mortgage must be enforced in court. Therefore, creditors enforcing a mortgage can only be paid from the proceeds of a forced sale of the mortgaged property and the debtor’s other assets can only be pursued if the proceeds of sale are insufficient to pay the debt in full. In enforcement, the property can be sold in several ways, such as sealed bids, private negotiations and auctions. The creditor can also ask for the property asset to be handed over directly to it.
During a foreclosure, a lender may solely collect rents with priority over the remaining creditors in the enforcement proceedings, provided it has a security interest over the rents (eg, a pledge, an assignment of income or even an assignment by way of security). Otherwise, mortgages will not cover the rent arising from lease agreements over the mortgaged property.
Despite the above, upon an event of default, there are no restrictions on the parties agreeing that the outstanding balance should be repaid by way of deed in lieu of the mortgaged property. If there is a financial pledge over the borrower’s shareholdings, the lender may also obtain an effect similar to entering into possession of the property in question. Under certain conditions the acquisition of the borrower’s shareholdings by the financial pledge beneficiary is allowed and, consequently, so is the indirect acquisition/control of the property.
Recourse
May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?
The creditor, usually the lending bank, can pursue the debtor’s other assets if its security over the property is not sufficient to pay the debt. Consequently, the creditor will first enforce the mortgage and if its claim is not satisfied. It can seek enforcement against the debtor’s remaining assets. Ultimately, the creditor can file a petition for insolvency in the event the remaining borrowers’ assets are insufficient for the repayment of the outstanding debt. Typically, the security documents do not make reference to having recourse to all assets of the borrower, because this is the general rule under Portuguese civil law.
Cash management and reserves
Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?
It is common to find cash management clauses in property loan agreements. This is a standard clause included by a lender in a loan agreement to restrict the borrower’s use of income generated by the property secured by the loan, other than for approved purposes (eg, permitted payments to permitted distributions to investors in the case where certain financial covenants and project milestones are met).
Credit enhancements
What other types of credit enhancements are common? What about forms of guarantee?
Real estate financing projects typically provide for guarantees and security to secure the construction of the project until its completion. These are conceived by the parties to reach the stage at which the project may start operating to generate revenues in the business-like manner on which the project was based.
For example, utilisation requests made during the term of the loan agreement may depend on achieving the milestones and the likelihood of complying with the works schedule by completion (which is typically assessed by an external or independent appraiser). Interest reserve or cash reserve accounts are also typical in financing agreements to develop real estate projects.
Loan covenants
What covenants are commonly required by the lender in loan documents?
Covenants can be financial, meaning they pertain to some sort of financial requirement (such as loan to value or debt service coverage ratio), or operational, meaning they pertain to property operations. Alternatively, they can relate to the loan’s collateral.
An operational covenant relates to the day-to-day operations of a property and its aim is to give the lender an early warning about any material deterioration in the performance of the property or the borrower’s financial situation. Common examples include reporting obligations (including material adverse changes) or meeting certain milestones.
Collateral covenants pertain to the collateral securing the loan. Common examples include negative pledges or restrictions to disposals. The purpose of these types of collateral covenants is to ensure the lender will continue to maintain its first position in the repayment priority in the event of default.
A borrower’s failure to meet these covenants is typically an event of default event under the financing agreements (remedy periods are also typical).
Financial covenants
What are typical financial covenants required by lenders?
Property projects and developments usually have financial covenants in line with global market practice (ie, focused on financial ratios), notably: loan-to-value ratios, interest coverage ratios, net debt/EBITDA and debt-service coverage ratios.
Under real estate financing involving non-consumers, these financial covenants have particular relevance as they could involve reinforcing security whenever the ratios fall below what was agreed. In this event, if the borrower does not reinforce the collateral following a lender’s request, this constitutes a default event. Therefore, the parties typically give undertakings and reporting covenants (notably, the periodic provision of financial statements and interim balance sheets or periodic real estate valuations) to ascertain compliance with the above ratios.
Secured movable (personal) property
What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?
The concept of a security interest is very broad under Portuguese law. In relation to security interests in movable property, the most common category of security is the pledge. This may be created over tangible assets, such as equipment and machinery, or intangible assets, such as accounts, equity interests, and insurance receivables in connection with the project or development. Nonetheless, in real estate financing, the parties typically create additional securities to strengthen the security package securing loans, notably, by way of assignment of receivables, bank guarantees or sureties, etc.
Under the Portuguese Civil Code, a pledge corresponds to an in rem security which gives creditors preferred payment status over other creditors, for the value of a specific movable asset or amount of other credits or asset rights which cannot be mortgaged. While the Portuguese Civil Code establishes that only the party that has the right to dispose of the movable assets can create pledges over them (ie, the owner), a commercial pledge or financial pledge (created over funds or securities), subject to certain requirements, grants the creditor the right of appropriation over the security assets.
The concept of ‘control agreement’ is not common in Portugal, nor it is required to perfect a pledge (or even a security interest). In effect, a symbolic transfer of possession is considered by scholars and case law to be sufficient to perfect a pledge.
Single purpose entity (SPE)
Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?
It is not a requirement under Portuguese law and in our experience lenders do not require that each borrower be an SPE. However, this is market practice for certain real estate developments to ring-fence the project and the pledge of shares or quotas representing the borrower share capital in favour of the lenders.
