Legal aspects of buying a property in Portugal
Portugal has a rich seafaring past and is one of Europe’s well-preserved gems with its land of traditional villages, vibrant and tech-enabled cities, and a countryside strewn with historical treasures.
Portugal has long been a destination for foreign second-home buyers. During the last decade Portugal has experienced increased investment into residential real estate by expats and in recent years increased investment into commercial real estate by institutional investors.
There are several reasons for such change, but the increasing business competitiveness, combined with attractive tax breaks for expats (such as the non-habitual tax residency), the establishment of international businesses, or the allure of a Golden Visa (residency permit for investors) were key factors.
A member of the European Union (“EU”) since 1986, Portugal is one of the most cost-effective countries in which to live in Europe. Portugal is robustly equipped with a network of well-developed infrastructure and a globally competitive workforce.
Legal framework of real estate in Portugal
Portugal’s free-market allows foreigner individuals and companies to acquire, hold, or sell a property in Portugal without any restrictions. When acquiring property in Portugal foreign individuals and companies are afforded the same rights as Portuguese citizens.
Property ownership rights are well protected and regulated by law. Issues regarding real estate in Portugal are governed by Portuguese law alone. Rigorous control is enforced on new construction and refurbishment of properties, in line with the long-term goal of retaining architectural unity or avoiding the overdevelopment that has blighted other parts of Europe.
In Portugal, the right attached to real estate is classified as in rem. It means that the right is associated with a particular property rather than a person. The owner will always have an absolute right over the property and a tenant will simply be a party to a rent/lease agreement.
Portuguese Land Registries are organized on a local basis and supervise the registration of ownership, title, description of the properties, charges, encumbrances or liens, mortgages, and third-party interests.
Portuguese law differentiates between greenfield sites and urban property. A given property serves as a greenfield site (rural property) or as an urban property in accordance with the registered use on the Land Registry, in line with State land management and urban planning policies. These policies are key in determining whether a greenfield site can be converted into an urban property and be built upon. A single property may be divided internally in an urban property and a greenfield site.
Subdivision of land for construction purposes is subject to prior authorization. Furthermore, the construction of a building, its modification or demolition can only take place under a license granted by the City Hall. However, this license may not be required for modifications to the inside of a building or part thereof, if they do not entail any modification to the building’s main structure, roofing, or façade. Applications for such a license must include an architectural plan as well as all additional legally required plans.
Where the license was applied for on behalf of a specific person or entity and this person or entity transfers ownership of the building, or the property where it is to be built, to a third person, an amendment to the application must be requested, so that the license can be issued to the new owner.
In Portugal, apartments are generally sold under the Propriedade Horiztonal (Commonhold or Condominium) regime. The regime applies to apartments that meet the requirements to be considered independent units sharing a separate entrance to common areas of the building or directly to the street.
Unit holders will be the exclusive owners of their apartments and co-owners of the common parts of the building. In a block of apartments or building, common parts usually include the ground, roof, entrance hall, stairs, gardens, parking areas, and swimming pools. The maintenance of the common parts of the building, mandatory fire insurance, security services, and other common expenses are paid by the unit holders in accordance with the units’ percentage value. A common fund is generally set up to face these expenses.
Conveyancing in the residential property market
Conveyancing is substantially more complex in Portugal than in common law jurisdictions, given the many steps involved in the transfer of the ownership of a property through a purchase and sale, as well as in urban construction and land subdivision.
In Portugal, due diligence is key for a successful negotiation and acquisition.
Preliminary legal due diligence is advisable to ascertain the condition of the property, its characteristics, restrictions of use or construction, size, location, tax liabilities, the identity of the seller, if there are any liens or encumbrances, mortgages, and third-parties’ rights such as pre-emption rights or tenancy rights. It is also important to determine if the seller is in a situation of bankruptcy or if any pending lawsuit would make the assignment of assets ineffective.
Reservation Agreements have become increasingly frequent because of many broker’s tactics to lead buyers to commit funds to the deal as soon as possible. These agreements are often portrayed by brokers as granting the buyer some time to decide on the acquisition while the seller would refrain from offering the property to a third party. Often a refundable fee is agreed.
In truth, these contracts are often void of enforceability. In many cases, the buyer has no obligations to refrain from selling because he/she is not a party in the contract, the realtor does not have exclusivity in promoting the property, or they are simply disregarded because a better offer came along.
Promissory contracts of purchase and sale are widely used in Portugal. Many aspects of promissory contracts are directly regulated by law but can and should be fine-tuned by the parties. Common to most promissory contracts is the use of a deposit paid by the promissory buyer to the promissory seller, which serves as a first installment and determines some aspects of indemnities for default.
In case of breach of contract, the non-defaulting party may seek to enforce the contract, trigger a specially designed penalty clause, or terminate the contract and receive compensation determined according to the original deposit. The promissory seller usually retains the original deposit, but the promissory buyer may claim twice such amount.
The transfer of ownership takes place with the execution of a public deed before a Notary Public (Public Deed), but it is also possible to take place using a private contract validated by a lawyer under the latter’s notarial powers.
It is important to determine if the sale of particular property requires giving notice to third-parties due to the existence of pre-emption rights which they may choose to exercise.
The Public Deed grants ownership of the property to the acquirer, but until it has been registered it is enforceable against the seller only, and not against third parties acting in good faith.
The opening of a bank account is recommended because property owners must make several types of payments recurrently, mostly related to collecting rents or paying for utilities and taxes. For the conveyancing process itself, the opening of a Portuguese bank account is not required in most cases, and many clients use their lawyer’s client account.
Obtaining a taxpayer number is required to acquire property and it must be issued by a tax office. It is also needed to open a Portuguese bank account and, of course, to pay taxes associated with the transaction — Property Transfer Tax and Stamp Duty. The appointment of a local fiscal representative is required for non-EU resident individuals and companies. The fiscal representative must be an entity resident in Portugal.
Property Transfer Tax is payable on the transfer of real estate properties and the transfer of any rights in rem. It must be paid by the buyer. Other acts and contracts where a transfer of real estate property is deemed to have taken place are also liable to Property Transfer Tax.
It is levied on the purchase price set out in the deed or on the taxable value of the real estate property, whichever is the higher. Please note that the criteria used for determining the taxable value of urban buildings are substantially different from that of rural properties. It is payable immediately before the taxable event takes place such as the execution of a Public Deed.
Rates differ between Urban and Rural property, and between residential, second homes and commercial properties. In the event the acquirer is a resident or is domiciled in a blacklisted jurisdiction, the tax rate may be exponentially higher.
Stamp duty is also due on the transfer of real estate and is also applicable to donations.
During the process of buying a property, you should validate the credentials of all parties and advisors involved.
Buyer side realtors are uncommon in Portugal. As a rule, Portuguese realtors receive a commission paid by the seller and do not act on behalf of the buyer, nor represent the latter according to their professional rules. It is key to understand the dynamics of the market and its agents, to avoid conflicts of interest and self-dealing risks. All real estate brokers must be registered with the Associação de Mediadores Imobiliários and hold a license number.
Although it is not mandatory for buyers or sellers to be represented by a lawyer, buyers should seek independent legal advice by registered professionals before signing any documentation in respect of a property, regardless of the size of the investment.
In Portugal, legal professions include two categories: Advogado and Solicitador. The Advogado is a qualified lawyer, enrolled with the Bar Association, and can represent clients regarding all legal matters, including court proceedings regardless of type and value.
The practice of law requires a Law degree, passing the Bar exam, and enrollment with the Portuguese Bar Association. Legal advisory provided by non-registered advisors constitutes a criminal offense and creates several risks for the clients.
All steps of the acquisition process can be conducted by a lawyer with a valid power of attorney.
This publication or document contains general information and is not intended to be comprehensive nor to provide legal or tax advice or services. It should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Professional legal advice should be requested for specific cases. We do not undertake any continuing obligation to advise on future legal amendments, or of the impact on the conclusions herein. Prior results do not guarantee a similar outcome. The contents of this publication or document may not be reproduced, in whole or in part, without the express consent of GFDL.
GFDL Advogados assists both individuals and companies regarding doing business, investing, and moving to Portugal. For more information contact us.