NEWS BRAZIL DESKApril 2015

REAL ESTATE ACQUISITIONin Brazil, Germany and Hungary

Brazil

Title to Real Estate inBrazil

Brazil is considered one of the most at-tractive countries for investing in realestate. Amongst others, the Brazilianreal estate market offers valuation po-tential in view of the large housingshortage.

Under Brazilian law, real estate is de-fined as the land and any accessoriespermanently attached to it, such asbuildings. Furthermore, for legal pur-poses, ships and planes are also consid-ered real estate.

The Real Estate Registry Office (Cartóriode Registro de Imóveis) keeps the recordfiles which evidence title to real estate. Ifsomeone intends to transfer any rightsover real property (such as ownership,

mortgages and easements), such trans-fer is only legally effective against thirdparties upon recording of a deed withthe competent Real Estate Registry Of-fice. In addition, such deed recordingcreates priority against third parties,since the Real Estate Registry Office rec-ords any court-ordered injunctions orattachments.

As a consequence, ownership of real es-tate can be evidenced by a certificate ofregistration of the relevant real estatetransfer instrument (for instance, pur-chase and sale agreement or successiontransfer agreement) issued by the RealEstate Registry Office.

However, it is important to note that theBrazilian system of land registration ischaracterized by registration effects,which are primarily constitutive of therights, but only generate a rebuttable

Dear Reader,

We are glad to present our firstNoerr Brazil Desk Newsletter of2015. The Brazilian real estate mar-ket has been growing over the lastyears as a result of large-sized infra-structure investments in areas suchas airports, transportation, hotelsand shopping centres. It is expectedthat the Olympic Games of 2016continue to attract further invest-ments.

Germany’s real estate market isbooming. In particular, the marketfor retail, office and residential prop-erties in prime locations benefitsfrom continued investor demand.Rents in prime locations have in-creased significantly, even thoughthe economic growth rate is onlyslightly above zero. Dynamic growthis also recorded in the Hungarian realestate market, where demand is ris-ing both in the commercial and resi-dential segments.

Real estate investments can be im-portant in asset planning as a safetyand value-oriented investment intangible assets. Real estate investorsare well advised to obtain compre-hensive information concerning theproposed form of investment. As afirst step, it is critical to look at po-tential legal risks and local require-ments to be fulfilled to successfullyensure any intended transfer ofrights to real property.

Against this background, this news-letter offers an overview of real es-tate acquisition in Brazil, Germanyand Hungary, especially with respectto foreign investments and new leg-islation in Germany and Hungary. Wehope you enjoy reading this issue ofour newsletter.

Yours sincerely,

Holger Alfes, Alexander Liegl &

Luiza Saito Sampaio

Newsletter Brazil Desk – April 2015

presumption of the registered rights. Inother words, any interested party mayrequest the rectification or annulment ofa given land registration and, if such reg-istration is cancelled, the true ownermay recover the property regardless ofthe good faith or the title of the thirdparty who acquired the real estate. Forthis reason, it is indispensable to con-duct proper due diligence before the ac-quisition of real property.

Real Estate Due Diligence

Typically, any investor interested in ac-quiring real estate would perform a duediligence. This due diligence covers thefollowing aspects:

(a) Due diligence on the seller, espe-cially with respect to any existingdebts and foreclosure proceed-ings which could trigger the an-nulment of the acquisition of thereal property in the future;

(b) Legal proceedings related to thereal property, which could pre-vent the transfer of title or theexercise of any in rem rights bythe purchaser; and

(c) Due diligence related to ade-quate licensing of commercialand industrial buildings, liens andencumbrances over the property,description of property in the re-spective real estate register (in-cluding boundaries and any builtareas) and any potential envi-ronmental liabilities.

One of the most important documentsto be analysed is the so-called 20-yearcertificate (certidão vintenária), whichneeds to be obtained in order to verifythe chain of title of the property in thepast 20 years. The 20-year certificatealso includes information about any en-cumbrances over the property.

Seller and PurchaserLiability after Disposal

As a general rule, the seller is releasedfrom any liabilities relating to the realproperty after disposal, unless the saleand purchase agreement provides oth-erwise. The purchaser, at its turn, inher-its liability related to the property, such

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Noerr Brazil Desk

Embedded in a leading European law firm, Noerr Brazil Desk provides advice and

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support to Brazilian companies wishing to invest or already conducting business inGermany and Central and Eastern Europe (CEE) countries, as well as to Europeancompanies having an established presence in Brazil or contemplating entering theBrazilian market.

We work as a gateway to a comprehensive range of legal advisory services and taxsolutions offered by our firm in Germany and CEE. In Brazil, we rely on a networkof experienced “best friends” law firms.

Consisting of Brazilian and German qualified lawyers, the Noerr Brazil Desk teamoffers its clients:

Cultural awareness

Effective exchange of information in Portuguese, German and English

Excellent knowledge of the German and Brazilian jurisdictions

In-depth market knowledge of Brazil, Germany and CEE

Interdisciplinary solutions and industry know-how ranging from au-tomotive, banking and finance, energy, health care to machine build-ing and real estate

s unpaid taxes, environmental civil lia-ility, condominium expenses and any

iens and encumbrances over the prop-rty. In case of an indirect acquisition ofeal estate by means of a share deal, anyiability matters related to the propertyemain with the acquired company andhe allocation of risks is to be negotiatedetween seller and purchaser.

estrictions on Acquisitionf Real Property byoreigners

nder Brazilian law, as a general rule,oreign individuals and companies havehe same rights to acquire real propertyn Brazil as Brazilian citizens and compa-ies. For the sake of clarity, the termforeigner” refers to a foreign citizennd the term “foreign legal entity” in-ludes also the Brazilian branch of a for-ign company operating in Brazil and arazilian company whose majority of thehare capital is held by foreign individu-ls or legal entities domiciled outsiderazil.

he following restrictions are currentlypplicable:

(a) General prohibition on foreignersand foreign legal entities domi-ciled abroad to acquire ruralproperties, with exception of theacquisition of land by a foreignindividual by succession law;

(b) Foreigners residing in Brazil andforeign legal entities authorizedto trade in Brazil may only pur-chase limited areas of rural prop-erty subject to the actual use ofsuch land approved by Brazilianauthorities;

(c) Prior approval by the NationalDefence Council (ConselhoNacional de Defesa) is requiredfor the acquisition of real estatelocated within 150 kilometres ofthe terrestrial border of the Bra-zilian territory (faixa de fronteira)by foreigners or foreign legal en-tities; and

(d) Acquisition of foreign ownershipof property near the coastlineand navigable rivers (terra demarinha) is prohibited, except ifauthorized by the President ofthe Republic or the Finance Min-ister. The acquisition of condo-minium units in beachfront build-ings is, however, permitted.

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Germany

No Thresholds for ForeignInvestors

In Germany, there are no special regula-tions applicable to foreign investors. Inparticular, there are no statutory re-strictions on real estate investments byforeign companies or persons.

A well-functioning real estate marketwith generally accepted and clear struc-tured procedures for real estate acquisi-tion has been established in recent dec-ades in Germany. As each plot of land isregistered with the land register, whichis maintained by the local courts, a titlesearch is quick and reliable.

Sale and purchase agreements regardingreal property require notarization. Thismaintains a high level of legal certainty.The buyer of a plot of land acquires notonly the title to the land but also be-comes owner of any buildings erectedon it.

Not only the owner of a property is reg-istered in the land register but also cer-tain encumbrances over the property.Land charges, which are typically used tosecure the acquisition financing, are reg-istered with the land register as well.

New Legislation on RentControl

Currently, a rent control by law for newresidential lettings is intensively debatedin the German real estate market. OnOctober 1

st, 2014 the federal govern-

ment published its proposal for a reformof German tenancy law and the new leg-islation can be expected to enter intoforce in 2015. Investors looking for in-vestment opportunities in the Germanresidential market of prosperous citiesand areas, such as Berlin, Frankfurt andHamburg, will have to consider the newlegislation on rent control in their busi-ness plans for envisaged acquisitions.

In case of a new letting, the initial rentmay not exceed the customary local ref-erence rent (ortsübliche Ver-gleichsmiete) by more than 10%. Thecustomary local reference rent is the av-erage rent paid in the same or a similarmunicipality over the previous four

years for housing of a comparable type,quality and size in a comparable locationequipped with comparable fixtures. Thisapplies to mostly urban districts yet tobe identified by each federal state. Theindividual federal state governments areentitled to identify certain areas charac-terised by tense housing markets inwhich the provisions on rent control willbe applicable for a period of five years atthe utmost. These areas will have to beidentified by December 31

st, 2020.

The new rent control will apply to the re-letting of any property previously leasedprior to October 1

st, 2014 and located in

an area characterised by a tense housingmarket. Thus, it is most likely that theowners of rented properties in prosper-ous cities will not be able to concludenew residential leases at the market rentbut rather at the average rent plus 10%.If the previous tenant’s rent exceededthe customary local reference rent bymore than 10%, this higher rent amountcan still be agreed upon (but not anamount surpassing than such higherrent).

According to the grounds stated in theproposal, the German federal govern-ment expects that this rent restrictionwill result in residential tenants paying atotal of EUR 284.14 m less rent per year.Correspondingly, this would be theamount by which landlords’ turnovercould otherwise be increased. Moreo-ver, taking into account that the averagepurchase price multipliers for rented res-idential units in good locations can reachup to thirty times of the annual net rentin certain areas, this would lead to a lossin value increase for the owners of up toEUR 8.52 bn.

The new legislation will not only affectproperty owners in prosperous citiesand areas, but also real estate compa-nies with a diversified portfolio of prop-erties located in both declining andprosperous cities and areas. The limitedpossibility of increasing rents even in thecase of re-lettings reduces the potentialcash-flow of such properties in the fu-ture. This should be taken into accountwith respect to calculating the purchaseprice. In light of this, the value of existingflats and residential premises in pros-perous cities and areas is expected to beadversely affected.

Hungary

New Hungarian Civil Code

Hungarian civil law has been changedwith the new Hungarian Civil Code,which entered into force in March 2014and amended some of the provisions ofreal estate law. One of the amendmentsis that the new Civil Code includes theprinciples of the real estate register. In-terestingly, the Civil Code does not de-fine real estate. Legal and court practiceestablished the definition of real estateThe ownership of a property includesanything permanently jointed to it, i.e.,there shall be a strong and solid connec-tion between them (e.g. houses andtrees).

According to the current legislation, theowner may establish a restriction on al-ienation and encumbrance of the prop-erty at any time, in order to safeguardthe right of ownership, whereas pursu-ant to the previous legislation such a re-striction could only be established uponconveyance of the title.

Land Register in Hungary

The land register covers all of the realestate properties and buildings in Hun-gary. The land register database com-prises the title deeds in a readable form,the document archives, the cartographicdata and deleted entries. The title deedcontains the relevant details of theproperty such as its type, the right ofownership, title, encumbrances andeasements. Buildings are usually regis-tered with the same plot number as theland. However, it is possible to register abuilding under a separate plot numberin case the ownership of the land andthe building situated on it is divided. As aconsequence, buildings can be sold sep-arately from the land. The owner of theland may restrict the alienation of thebuilding by means of an agreement con-cluded with the owner of the building.The restriction is only legally effectiveagainst a third party if it is filed with therelevant land registry office and record-ed in the land register. In case of dividedownership, the parties have mutual pre-emption rights.

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In order to transfer real estate’s owner-ship, the legal transaction creating thetitle (e.g. sale and purchase), the actualconveyance and the registration withthe competent land register are neces-sary. In case of a transfer, the registra-tion itself is a constitutive act resulting inthe transfer of ownership. In addition toownership, certain other rights may onlybe validly created by registration in theland register, such as asset managementrights, land use rights, usufruct and theright of use, easement and mortgagesbased on contract.

Land register records are deemed au-thentic and accurate. Third parties canrely on land register entries as accurate,unless the contrary is proved. The landregistry system in general protects bonafide acquirers of properties, who havetrusted in the validity of previous titleregistrations and have acquired theownership for consideration.

Real Estate Due Diligence

If someone is interested in acquiring realestate in Hungary, it is important to notethat the land registry system has beenconsidered reliable. However, in thecourse of a due diligence, it is importantto fully examine all the titles in the regis-ter and take into consideration all thepossible risks. The proper review of theownership chain is especially importantif the local government or the state isinvolved in the chain, since in this caseparticular provisions are applicable onthe transfer of ownership.

In addition to the title, a due diligenceshould cover the permissions of thebuilding, the registered encumbrances,lease agreements, circumstances of us-age and operation of the building, possi-

ble environmental risks and any on-going litigation and administrative pro-ceeding, if applicable.

Restrictions on Acquisitionof Real Property byForeigners

As a result of the liberalization of theHungarian agricultural land market, Eu-ropean Union (EU) nationals are subjectto the same rules as Hungarian individu-als in terms of land acquisition. The newLand Act, which entered into force in2014, allows EU-nationals to acquire ag-ricultural land, if they meet certain re-quirements. However, Hungarian or for-eign legal entities and non-EU nationalsare still not allowed to acquire owner-ship of agricultural land. EU citizens andlegal entities registered in the EU mayown any other real property without anyfurther restrictions.

Foreign individuals and legal entitiesregistered outside the EU may ac-quire (non-agricultural) real estatesubject to the approval of the com-petent government agency(Kormányhivatal). The applicantsshall enclose to the application theirpersonal identification documentsor, in case of companies, the extractfrom the commercial register, as wellas the contract for the acquisition ofreal property and a certified copy ofthe title deed. The governmentagency shall adopt its resolutionwithin 15 days from the date of re-ceipt of the application. If the acqui-sition of real estate injures publicinterest or municipal interest, thegovernment agency will not author-ize such acquisition.

For further informationplease contact:

Noerr Brazil Desk

Dr. Holger Alfes, LL.M.Rechtsanwalt (Germany)Attorney-at-law (New York)T +49 69 971477231holger.alfes@noerr.com

Prof. Dr. Alexander LieglRechtsanwalt (Germany)T +49 8928628266alexander.liegl@noerr.com

Luiza Saito Sampaio, LL.M.Advogada (Brazil and Portugal)T +49 30 20942018luiza.saitosampaio@noerr.com

Dr. Dennis LepczykRechtsanwalt (Germany)T +49 69 971477411dennis.lepczyk@ noerr.com

Dr. Zoltán NádasdyÜgyvéd (Hungary)T +36 1 2240900zoltan.nadasdy@noerr.com

www.noerr.com

The information provided in this news-letter is of a general nature and doesnot substitute legal advice in particularcases.

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