Law no. 6/2006, of February 27, as amended from time to time (“Urban Lease Law”), is the main piece of legislation that sets forth the legal rules that currently govern leases in Portugal, the majority of such rules being included in the Portuguese Civil Code. A lease (“arrendamento”) corresponds to a private agreement pursuant to which one party (the landlord) undertakes to provide to the other (the tenant) the temporary use of a real estate property against the payment of a rent. Lease agreements must be executed in writing, and whenever their term is of 6 years or more they must be registered with the Land Registry.
In addition to the mandatory references (identification of the parties, description of the leased premises, rent, indication of the relevant municipal use permit, etc.), leases typically include provisions related to term, renewal, early termination, rent review mechanisms, security (typically consisting of a deposit, a surety or a bank guarantee), maintenance, reinstatement, and works on the leased premises.
Unless agreed otherwise, tenants may not assign its contractual position to third parties nor sublet the leased premises without the prior consent of the landlord. On the other hand, landlords may sell the premises to third parties without prior consent of the tenants, (being the landlord’s position automatically assigned to the acquirer) although tenants with leases in force for more than 2 years are granted a pre-emption right in the sale of the property. Pursuant to recent changes to the Urban Lease Law, in the case of residential leases, specific procedures must be followed whenever serving the tenant with a notice for the exercise of its pre-emption right and the procedure will be different in case the real estate properties are structured as a Condominium, or not.
Due to the national and international spread of the coronavirus pandemic (COVID-19), the Portuguese authorities have approved special measures with impact on leases (notably a legal moratorium in the payment of rents due until 31 December 2020 that shall be settled until 31 December 2022).
The assignment of the use of a commercial property in Portugal is normally formalized pursuant to lease arrangements. Depending on the kind of property where the leased premises are located and the set of services provided by the landlord, commercial leases may be divided in (i) standard leases, (ii) services agreements and (iii) shopping center contracts.
The assignment of use of properties for commercial, industrial and office purposes is typically formalized by means of standard lease agreements, subject to the Portuguese Urban Lease Law.
The Urban Lease Law is quite flexible in relation to these types of leases (for non-residential purposes), as the most relevant features of the lease may be freely stipulated by the parties (such as duration, renewal, termination, rent review scheme, maintenance, works, etc.).
Even though standard leases are the main contractual type used for the lease of offices, the Portuguese real estate market currently evidences an increase of office services agreements, whereby the assignment of use of offices goes together with a range of ancillary services provided by the landlord, such as mail handling, security, cleaning services, common reception and secretarial services, among others. A significant set of services provided in parallel with the use of the leased premises converts a standard lease into a real “services agreement”.
These agreements should not be directly subject to the Urban Lease Law but should instead be subject to the general rules applicable to contracts (as in the case of shopping center contracts – please see below). This notwithstanding, Portuguese courts have not yet recognized the specific nature of these agreement (as they have for shopping center contracts) and, consequently, parties tend to adopt a conservative approach, and assume that both the Urban Lease law (as regards the assignment of use) and the general rules applicable to contracts (as regards the ancillary services rendered by the Landlord) should be applicable to these agreements.
Shopping Center Contracts
The lease of retail units in shopping centers, retail parks and other similar commercial schemes (such as factory outlets), is normally carried out through “shopping center contracts”. These contracts are usually very detailed agreements that govern not only the use of the shop but also the ancillary services provided by the shopping center administration to the shopkeepers and the respective service charges.
Such contracts are not subject to the Urban Lease Law, although they need to abide by the general rules applicable to contracts. These agreements tend to follow similar standards within the relevant segment in question.
Duration / Termination
In standard leases, in services agreements, as well as in shopping center contracts, parties may freely agree on the main terms and conditions, including term (with a maximum initial duration of 30 years in the case of standard leases and services agreements), break options, rent review mechanisms, works, maintenance and upkeep, reinstatement, etc.
In relation to standard leases and services agreements, due to recent changes in the Urban Lease Law, in situations where the agreements are subject to automatic renewals, the landlord will not be able to terminate the agreement, by means of opposition to its renewal, during the initial 5 years.
The typical initial term for standard leases and services agreements ranges between 5 to 10 years although longer leases may occur (in some cases with break options). Leases entered into for an initial term equaling or exceeding 6 years must be registered with the Land Registry Office as a condition for being opposed against third parties.
With regard to shopping center contracts, their initial term typically ranges between 5 and 6 years and with no automatic renewal. For anchor retailers the initial term tends to be longer, although typically some special early termination options tend to be negotiated (in some cases, indexed to the shopping center’s occupancy rate).
Leases for logistic purposes are generally entered into for an initial period of 3 to 5 years, except in standard leases in case of “built-to-suit” transactions, whereby the initial term is normally longer.
Failure to comply with the rental payment by the tenant entitles the landlord to terminate the contract (in standard leases, services agreements as well as in shopping center contracts) by serving a notice to the tenant. In case of standard leases and services agreements, if following the termination of the contract, the tenant does not deliver the premises, the landlord will need to resort to an eviction procedure. Shopping center contracts typically set out other more expedite eviction mechanisms.
Parties may freely agree on the amount due as rent and on the rent review scheme. In the case of the standard leases and services agreements if the parties do not set out the rent review scheme, subsidiary rules will apply and the rent shall be updated yearly by reference to the coefficient published every year by the Portuguese National Institute of Statistics (which is based on the consumer price index).
In standard leases, the rent is usually a fixed amount, which also applies to the services agreement (even though in this case the fixed amount comprises also the compensation due for all services provided by the landlord). Conversely, most shopping center contracts set forth a fixed and a variable rent, linked to the tenant’s turnover. In shopping center contracts, it is also common that the shopping center charges key money, as an entry fee.
Although parties may agree on different periodicity, rent is usually payable on a monthly basis and, typically one month in advance.
Rent-free periods and stepped-up rents are also common.
Costs and Service Charges
In standard leases, services agreements as well as in shopping center contracts, the parties may freely agree on the allocation of maintenance, repair and other costs, as well as determine which party shall be liable for the execution of works in the premises.
It is standard market practice that the landlord, in all commercial lease formats, passes on to the tenant all costs for maintenance, repair, utilities and other services and that the landlord takes on the costs relating to building insurance, property taxes and structural works. Although not common (except in built-to-suit or “sale and leaseback” transactions), it is permitted under Portuguese Law to foresee “triple net” leases, whereby the tenant bears literally all the costs relating to the premises during the duration of the lease/contract.
In all sorts of commercial leases service charges are normally determined by reference to the area of the premises in proportion to the overall area of the building.
Additionally, in shopping center contracts, shopkeepers usually pay a “marketing charge”, in order to contribute towards the cost of shopping center marketing.
Along with commercial leases, the Urban Lease Law foresees specific rules applicable to residential leases. The main rules addressed below are specifically applicable to “new” residential lease agreements (as “old” residential leases, i. e., lease agreements entered into prior to the Urban Lease Law being enacted, may follow different rules).
Portuguese government has recently enacted some initiatives aimed to promote and increase the supply of real estate properties in the residential lease market, as well as to encourage landlords to opt for long-term leases. As an example of such initiatives, we signal (i) the Affordable Leasing Program (“Programa de Arrendamento Acessível”), whereby rents are capped to 80% of market tents and the landlords joining the Program may benefit from tax exemptions (as detailed below) and (ii) the income tax rate reductions applicable to landlords that enter into long-term leases (as also detailed below).
The assignment of use of properties for residential purposes is typically formalized by means of standard lease agreements, subject to the Portuguese Urban Lease Law (which was subject to recent legislative amendments).
The Urban Lease Law is reasonably flexible in relation to these types of leases (less flexible than in commercial leases, but still quite flexible) Although the majority of the terms and conditions may be freely agreed by and between the parties (notably, provisions related with rent, rent review, works, costs and service charges, etc.), the rules regarding term and termination of residential standard leases are mandatory and parties are not allowed to establish otherwise.
Special Purpose Leases
Residential lease agreements may also be entered for non-permanent residence or for transitory purposes, such as, labour, education or touristic reasons. Certain mandatory provisions foreseen in the Urban Lease Law are not applicable to these special purpose leases.
Duration / Termination
In standard residential leases entered for a certain period (typically the most relevant type of leases in the residential market – leases without term are an exception), the term must be of 1 year or more, but not exceeding 30 years, and parties may freely agree on the lease term within the referred limits.
Residential leases are typically subject to automatic renewals and in these situations, both landlord and tenant are entitled to terminate the lease by serving the other party a prior notice regarding the term of the initial or renewed period (prior notice will vary depending on the period of the lease). Nonetheless, according to the recent changes introduced in the Urban Lease Law, in standard leases, landlords cannot terminate the agreement, by means of opposition to its renewal (oposição à Renovação), until 3 years have lapsed as from the starting date of the lease.
Tenants are entitled to terminate the agreement once one third of the lease has lapsed, by serving the landlord with a prior notice regarding the intended term.
Special purpose leases do not have a minimum duration period and are usually not subject to automatic renewals (although parties may agree otherwise).
Parties may freely agree on the amount due as rent and on the rent review scheme. If the parties do not set out the rent review scheme, subsidiary rules will apply, and the rent shall be updated yearly by reference to the coefficient published every year by the Portuguese National Institute of Statistics.
Costs and Service Charges
In residential leases, it is also standard market practice that tenants undertake to bear all costs for ordinary maintenance and repair, as well as for the utilities and other services, and landlords are liable for all costs related with the ownership of the premises, notably building insurance, property taxes and structural works.
New Forms of Occupation
New forms of occupation, such as co-working and co-living are more and more common in the Portuguese market.
Portuguese Law does not yet address these new forms of occupation (neither as regards their specific assignment of use terms and conditions nor as regards their specific licensing requisites) and, consequently, investors tend to use ad-hoc assignment of use structures and licensing solutions.
Short-Term Rental (Alojamento Local)
Pursuant to Decree-Law no. 128/2014, of August 29, the owners of houses and apartments licensed for residential purposes are entitled to offer “Short-Term Rental” (“Alojamento Local”) and related services to tourists. This legal frame constitutes an alternative to the lease market and allows broader investment possibilities and opportunities for the residential market without the necessity of obtaining specific licenses for tourism facilities, as this legal framework is applicable to properties that do not need to meet the mandatory requirements for tourism facilities.
The operation of a house or apartment as “Short-Term Rental” (“Alojamento Local”) requires a registration with the National Tourism Registry, which may normally be done by means of an online communication, following which a survey may be conducted by the Municipality in order to verify the compliance with the applicable legal requisites. Nevertheless, each Municipality can limit the parishes in which it is possible to obtain authorization for the operation of a house or apartment as “Short-Term Rental” (“Alojamento Local”), so this possibility needs to be analyzed on a case-by-case basis.
Value Added Tax (VAT)
As a general rule, the leasing of real estate under standard leases is VAT exempt.
However, taxpayers (landlords) that lease properties to other VAT taxable persons under standard leases may waive the exemption (typically to recover VAT in construction or renovation), provided that the latter use those properties for activities that are subject to VAT and are also granted the right to deduct VAT. In that case, the rents are subject to VAT at the standard rate (currently 23%), and no Stamp Duty is payable.
In shopping center leases and services agreements (in this last case, to the extent certain requisites are met), rents are subject to VAT at the standard rate of 23%. Hotel and accommodation services (such as Short-Term Rental) are also subject to VAT at a reduced rate of 6%.
Standard lease agreements are subject to Stamp Duty (known in Portugal as “Imposto do Selo”) at a rate of 10%. Stamp Duty applies upon registration of the lease agreement with the Tax Authorities and is levied on the amount of one monthly rent.
Tax Benefits for Residential Leases
Affordable Leasing Program ("Programa de Arrendamento Acessível")
Leasing income deriving from lease agreements subject to the Affordable Leasing Program is exempt from Corporate and Personal Income Tax. Please note, however, that the application of such exemption depends on the compliance with the formal requirements of the Affordable Leasing Program.
Conversion of Short-Term Leases into standard leases
Under Personal Income Tax rules, the termination of Short-Time Rental activities and the re-allocation of the real estate to passive holding may imply the immediate taxation of real estate latent capital gains (regardless of any disposal of property). The Personal Income Tax code was amended in 2020, allowing that latent gains remain untaxed if upon termination of the Short-Time Rental activities the real estate property is used for standard leasing activities (arrendamento).
Leasing income deriving from “long-term” lease agreements may benefit from Personal Income Tax rate reductions, as follows:
- reduction of 2% in respect of lease agreements with a duration from 2 up to 5 years; for renewals with the same duration, an additional reduction of 2% shall also be applicable (which may never go below the 14% tax rate);
- reduction of 5% in respect of lease agreements with a duration from 5 up to 10 years; for renewals with the same duration, an additional reduction of 5% shall also be applicable (which may never go below the 14% tax rate);
- reduction of 14% in respect of lease agreements with a duration from 10 up to 20 years; and
- reduction of 18% in respect of lease agreements with a duration of over 20 years.