Supreme Court of Justice (Portugal): the judicial sale of a mortgaged property with a lease subsequent to the mortgage does not make the lessee’s rights expire

Portugal - 

Portugal Litigation and Arbitration Alert

The Portuguese Supreme Court of Justice (SCJ) has delivered a Decision uniformizing case law (SCJ Decision nº 2/2021, dated 07.05.2021) in the following sense: “The sale during insolvency proceedings of a mortgaged property, with a lease entered into subsequent to the mortgage, does not make the lessee’s rights expire, in line with the provisions of article 109.3 of the Insolvency and Companies Recovery Code (Código da Insolvência e da Recuperação de Empresas - CIRE), combined with article 1057 of the Civil Code (CC), with the provisions of article 824.2 of the CC not being applicable”.

On 08.05.2021, the aforementioned Decision was published in the Portuguese State Gazette (Diário da República), series 1, and this Alert describes the most relevant points of the grounding of this decision.

I. Issue to be resolved

Knowing whether a judicial sale, carried out within the scope of a liquidation performed in the insolvency proceedings of the lessor, of a property that is mortgaged and subsequently leased triggers the expiry of the lease.

The uniformizing decision of the SCJ was negative.

II. Main arguments put forward by the SCJ

a) Obligational nature of the lease agreement;

b) Judicial sales do not appear on the list of cases for the expiry of lease agreements (art. 1051 of the CC);

c) The transfer of the position of lessor, made within the insolvency proceedings of the lessor, does not affect the lease agreement or the position of the lessee (art. 109.3 of the CIRE and art. 1057 of the CC);

d) Impossibility of the analogous application of art. 824.2 of the CC which, with regards to foreclosure sales, establishes that “the assets are transferred free from any security rights encumbering them, and from any other in rem rights not registered prior to the attachment, pledge or security, except for those which, constituted at an earlier date, render effects in relation to third parties independently from such registration”;

e) Recent legislative changes enacted in respect of leases have emphasized their transitional nature and made them highly profitable legal instruments, and it is not possible to continue defending that the lease involves a devaluation or financial encumbrance of the asset, or that it thwarts and/or diminishes the position of the claiming creditor.

III.  Comment

This decision of the SCJ is contrary to the majority guidelines followed to date by the SCJ in this matter, which, on deciding on this issue, considered the lease agreement to have expired.

As this is a uniformizing decision of the SCJ, it is of significant persuasive force for all courts that hereinafter have to rule on this issue.

It is a controversial decision with regards to the nature, solidity and persuasion of the arguments used, as shown by the voting procedure of this decision by the judges of the SCJ (15 votes in favor vs 14 votes against).   

It is a decision which, although limited to sales carried out in insolvency proceedings, suggests a potential impact on judicial sales carried out in enforcement proceedings, and it is likely to increase the litigation relating to judicial sales of mortgaged assets.