Changes in laws limit flexibility in commercial rental market in Portugal

Portugal - 

Recent amendments to the urban lease regime set forth limitations as regards duration and extension of commercial leases, as well as on termination by the lessor, bringing back a higher level of regulation to the rental market with the objective of protecting tenants.

New laws came into force on 12 February 2019 (Laws 12/2019 and 13/2019) which modify important aspects of the Portuguese urban lease regime.

We highlight the main changes applicable to commercial leases:

Penalty for delayed payment

If the tenant fails to pay the rent or service charges when they fall due, the landlord (except when he terminates the contract for default on payment) is entitled to claim from the tenant, on top of the amounts outstanding, the payment of a penalty equivalent to 20% of such amounts.

This change reduces the relative impact of the penalty for the tenant, which was previously 50% of the amounts in debt.

Avoidance of automatic extensions

As regards commercial leases,  even though provisions on duration, break options and automatic extensions continue to be freely agreed between the parties, the Law no. 13/2019, of 12 February, brought the following new specific provisions:

  • Unless otherwise agreed by the parties – i.e. where the contract is silent – the lease entered into with a fixed term is automatically extended at the end of the initial period, for consecutive periods equal to the initial period, or of five years if the latter is shorter (exception is made to leases for specific limited length purposes, such as in touristic accommodation).
  • The law keeps the general principle that any of the parties may (by timely pre-notice to the counterparty) avoid the automatic extensions referred to above, therefore effectively terminating the lease at the end of the contractual period running. However, the new law sets forth in the first five years of the lease, regardless of the length of the initial fixed term agreed between the parties, the landlord cannot oppose to the automatic extension of the lease agreement (only the tenant will have this potion during said period of time).

Notwithstanding this, pursuant to paragraphs 1 and 3 of article 1110.º of the Portuguese Civil Code, the parties are free to enter into fixed term agreement that explicitly exclude any automatic extensions when the initial duration period elapses. 

Termination (break option)

From now on, other than in a default or breach of contract situation, the landlord may only terminate a commercial lease agreement unilaterally (break option) on the following grounds:

  1. For the demolition of the property or the execution of renovation or alteration works that imply the vacancy of the premises, provided that after such works the property will no longer include premises with characteristics identical to those currently let, where the maintenance of the lease agreement would be possible; or
  2. By notice to the tenant delivered at least five years prior to the date when termination is intended to take effect. In such case, the landlord must confirm the termination to the tenant between the fifteenth and the twelfth month prior to the date when termination is due to take effect, otherwise termination will be deemed ineffective.

This new regime on termination of commercial leases by the landlord is set forth in the new article 1110.º-A of the Portuguese Civil Code, with reference to the rules set forth in article 1101.º for the termination of the residential leases that are open-ended (no fixed term). A systematic interpretation of these new rules – as now applicable to commercial leases – leads inevitably to the understanding that the same apply only to open-ended leases (i.e. those that are not subject to a fixed duration, which is commercial leases is freely agreed between the parties and may even be shorter than five years).

Indemnification due in the case of early termination by the landlord

By terminating a commercial lease in the cases mentioned above, the landlord shall indemnify both the tenant and the workers of the commercial establishment operating in the premises for the actual losses arising from the termination of the lease agreement (except in the case that the tenant has taken the leasehold by way of a transfer of the business as going concern (“trespasse”) occurred in the past three years, where no compensation will be due by the landlord).

Where the termination is based on the demolition of the property or the execution of alteration or renovation works, the amount of the indemnification due to the tenant for the termination shall be deducted of the specific compensation set forth in the Legal Regime of Works in Leased Properties, approved by Decree-Law No. 157/2006, of 8 August (“RJOPA”), i.e. the minimum amount equivalent to two years of rent or (if higher) the double of the amount corresponding to 1/15 of the taxable value of the premises (as assessed by the Portuguese tax authorities).

Until now, under the regime set forth in RJOPA, in the case that the parties did not agree as to either (i) the payment of the compensation legally due by the landlord to the tenant for the termination based on the demolition or execution of alteration or renovation works, or, alternatively (ii) the relocation of the tenant to another property, the payment of the minimum indemnification would apply – i.e.  the amount equivalent to two years of rent or (if higher) the double of the amount corresponding to 1/15 of the taxable value of the premises.

With the changes now brought to the RJOPA, in the case that the parties do not reach an agreement, relocation will prevail and therefore the landlord shall be obliged to ensure the relocation of the tenant in equivalent premises for a period of at least three years. Only if the tenant does not accept the relocation (as long as offered to him accordingly with the legal criteria), or relocation is not possible in the case of a commercial lease, then the indemnification mentioned above will apply.

Lease suspension

According to the regime arising from the legislative changes now in force, notably in RJOPA, where the landlord intends to carry out alteration or renovation works in the let premises the lease agreement will be suspended during the execution of such works. However, if after such works no premises with characteristics identical to the premises currently let will exist in the property so that the maintenance of the lease agreement would still be possible, the landlord shall in that case be entitled to terminate the lease agreement (see above).

The suspension of the lease agreement takes effect from the written communication by the landlord to the tenant, which in turn may opt to terminate the lease agreement. If the tenant does not elect to terminate, the landlord shall ensure the relocation of the tenant during the execution of the works, to other comparable premises located in the same district, in similar or better state of maintenance, which are suitable for the needs of tenant, amongst other legal criteria. During the temporary relocation, the tenant continues obliged to pay the rent, in the same amount and conditions.

The landlord must inform the tenant about the completion of the works in the original premises, and the tenant shall be under the obligation to reoccupy said premises within the following three months, otherwise the lease expires.

New injunction service regarding lease matters (Serviço de Injunção em Matéria de Arrendamento)

A new mechanism was established by the new law for the collection of amounts in debt: the Injunction Service regarding Lease Matters (Serviço de Injunção em Matéria de Arrendamento) (“SIMA”), which aims to make effective the following rights of tenants:

  1. Payment of compensation due for the execution of works by the tenant in replacement of the landlord, in several situations defined by the law;
  2. To cease any activities that may cause risk for the health of the tenant;
  3. Correction any deficiencies in the premises, which may cause severe risk to the health or safety of people and goods;
  4. Correction of any situation that hinders the use of the premises.

The proceedings of injunction regarding lease matters are subject to an autonomous statute, which shall be approved by the Government within one hundred and eighty days after the Law No. 13/2019 was published on the 12th of February 2019. SIMA will have jurisdiction in all national territory.