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 Office.
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 approved special measures with impact on leases (notably a legal moratorium in the payment of rents, for street shops, and an exemption of minimum remuneration up to 31 December 2020, for shops in shopping centers). Currently, none of the referred laws are in force anymore, either because they have naturally expired or because they have been revoked by the Portuguese authorities.
Commercial Lease
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.
Standard Leases
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.).
Services Agreements
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 agreements (as they have done 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.
Rents
Parties may freely agree on the amount due as rent and on the rent review scheme. In the case of the standard leases, 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 without housing based on the previous 12 months for which there are values available at 31 August of each year).
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 a 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.
The Portuguese state budget law approved for the year 2024 maintained the changes made to the lease law in respect of the possibility to make advance payment of rents and to deliver a rent-deposit which had been imposed by the state budget law for 2023. These amendments determine that (i) the advance payment of rents may not exceed the amount corresponding to 2 (two) monthly rents (previously the advance payment was limited to 3 (three) monthly rents) and (ii) the rent-deposit may not exceed the amount of 2 (two) rents, not specifying if the concept of rent should refer to a monthly payment or if it could correspond, for example, to an annual payment (previously the rent-deposit was not subject to any limit). Although the wording of the limitation referred to in (ii) above is not completely clear, recent court decisions have been pointing to the interpretation according to which the limit to the rent-deposit is actually correspondent to the value of 2 (two) monthly rents, and not to 2 (two) rents independently of the duration of the rents, agreed by the parties (monthly rents, yearly rents, etc…).
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.
Residential Lease
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 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 rents 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).
Standard Leases
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 into 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 elapsed 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).
As a result of the entry into force of the Mais Habitação Program, it will no longer be possible for landlords to promote the transition of old residential lease agreements (i.e., executed before the year 1990) to the Urban Lease Law (which is the regime currently in force), in case the tenants of such agreements prove to (i) have a corrected gross annual income below five times the minimum national annual return and/or (ii) be over 65 years old or have a degree of disability over 60% (sixty percent). This means that landlords with tenants in the above situations may only terminate these lease agreements based on breach by the tenant.
Rents
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 (which is based on the consumer price index without housing based on the previous 12 months for which there are values available at 31st Augufst of each year).
The Portuguese state budget law approved for the year 2024 maintained the changes made to the lease law in respect of the possibility to make advance payment of rents and to deliver a rent-deposit which had been imposed by the state budget law for 2023. These amendments determine that (i) the advance payment of rents may not exceed the amount corresponding to 2 (two) monthly rents (previously the advance payment was limited to 3 (three) monthly rents) and (ii) the rent-deposit may not exceed the amount of 2 (two) rents, not specifying if the concept of rent should refer to a monthly payment or if it could correspond, for example, to an annual payment (previously the rent-deposit was not subject to any limit). Although the wording of the limitation referred to in (ii) above is not completely clear, recent court decisions have been pointing to the interpretation according to which the limit to the rent-deposit is actually correspondent to the value of 2 (two) monthly rents, and not to 2 (two) rents independently of the duration of the rents, agreed by the parties (monthly rents, yearly rents, etc…).
As a result of the entry into force of the Mais Habitação Program, there is now a limit on rent increases, for new agreements. This means that the properties for which lease agreements have been signed in the past five years cannot be subject to a rent increase of more than 2% (two percent) than the rent practised in the previous lease agreement.
Despite the above, in the case of properties which have undergone extensive remodeling or restoration works (fact that shall be certified by the competent city councils), the initial rent for new rental contracts may be increased by the amount of the costs and expenses borne by the landlord, up to a limit of 15% (fifteen per cent) of such expenses per year.
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 29 August, 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. This registration is made by means of an online communication addressed to the competent Municipality and submitted through a specific online platform (“Balcão Único Eletrónico”), being automatically forwarded to the National Tourism Registry and following which a survey may be conducted by the Municipality, in order to verify the compliance with the applicable legal requisites. However, each Municipality may define specific areas (“Zonas de Contenção”) where the possibility to apply to a new Short-Term Rental registration is capped to a maximum limit.
The Mais Habitação Program impacted significantly the short-term rental regime, namely by introducing the following measures:
- Suspension of the issuance of new short term rental licenses/registries in any of the modalities available;
- Re-evaluation of the existing licenses/registries in 2030, being this re-evaluation renewable for five-year periods from 2030 onwards;
- Impossibility to transfer the short term rental registration to third parties, in all modalities of short term rentals;
- Expiration of the license to operate the short term rental establishments, in case any part of the company’s share capital is transferred;
- The new registries for short-rental establishments are now only valid for the period of 5 (five) years, being renewable upon authorization of the respective municipality;
- Expiration of the existing licenses/registries of short term rental after 2 (two) months of inactivity of the short term rental establishment, unless owners present their tax return declaration proving otherwise;
- The operation of short term rental establishments in buildings subject to the horizontal property regime (and whose constitutive title foresees residential use) shall be dependent of the issuing of an express authorization, for such purposes, by the condominium general assembly.
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 centre 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%.
Stamp Duty
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.
Extraordinary contribution on short-term rental
From 2024 onwards, a new extraordinary contribution will apply on short-term rentals. The tax base will be determined by reference to indicators related to the average value of fees charged and the urban pressure of the area in which the local lodges are located. Short-term rental properties will be subject to the mentioned contribution, levied on the entity carrying out the exploitation (but is may also be charged to the owners of the relevant properties, should the first entity fail to comply with the applicable tax obligations). The contribution will be levied at the rate of 15%, upon submission of a specific tax declaration. The payment will be due by 20 June of the year following the taxable event (31 December).
Tax Benefits for Residential Leases
Affordable Leasing Program (“Programa de Arrendamento Acessível”) and Student Housing (“Alojamento Estudantil”)
Leasing income deriving from lease agreements subject to the Affordable Leasing Program or to the StudentHousing regime is exempt from Corporate and Personal Income Tax. The application of the income tax exemption depends on the compliance with specific requirements foreseen in the respective legal frameworks for affordable leasing and student housing.
Properties covered by the Affordable Lease Program
The following tax benefits are foreseen in connection with properties covered by the Affordable Lease Program:
- Exemption from Municipal Property Transfer Tax (“MPTT”) applicable to the acquisition of land for construction for construction of urban buildings or units provided that (i) at least 70%, or the totality of the property, in case of full ownership or unit, is allocated to the Affordable Lease Program and (ii) the licensing proceeding is initiated within 2 years as from the acquisition date;
- Exemption from MPPT and MPT for a period of 3 years (with the possibility of renewal for another 5 years) applicable to the acquisition and ownership of urban buildings or units acquired or built to be allocated to the Affordable Lease Program.
The tax exemptions will not be applicable if (i) the properties cease to be allocated to the Affordable Lease Program within 5 years from the date of the acquisition (or, in the case of a renewal of the benefit, within 10 years) (ii) the properties are not leased under the Affordable Lease Program, within 6 months as from the date of acquisition.
A reduced 6% Valued Added Tax (“VAT”) rate will be applicable to construction or rehabilitation works for properties under the Affordable Lease Program, provided that at least at least 70%, or the totality of the property, in case of full ownership or unit, is allocated to the Affordable Lease Program, recognized by IHRU.
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).
Long-Term Leases
Application of PIT reduced rates to rental income deriving from residential lease agreements for permanent dwelling purposes with a term equal or higher than 5 years:
- Lease agreements with a term equal or higher than 5 years and less than 10 years – 15%
- Lease agreements with a term equal or higher than 10 years and less than 20 years – 10;
- Lease Agreements with a term higher than 20 years – 5%.
The above-mentioned reductions do not apply to rental income arising from residential lease agreements which entered into force as of January 1st 2023, if the monthly rent exceeds 50% of the general rent price limits depending on the council in which the property is located.
If the new residential lease agreements foresee a rent that is at least 5% lower than the rent of the previous residential lease agreement on the same property, an additional 5% reduction will apply.
Personal Income Tax (“PIT”) and Corporate Income Tax (“CIT”) exemption for rental income arising from properties transferred from Short-Term Rental t
A PIT and CIT exemption is applicable to rental income arising from leasing agreements for permanent dwelling purposes, provided that:
- Such income is derived from a property which has been transferred from the local lodging to the residential lease;
- The registration of the local lodging has been concluded until 31 December 2022;
- The execution of the lease agreement and its registration before the PTA is concluded until 31 December 2024.
The PIT and CIT exemption will be applicable to rental income received until 31 December 2029.
Increase of Property Transfer Tax rate on Short-Term Rental
The aging coefficient – a relevant variable for the determination of the taxable value for MPT purposes – applicable to properties that are totally or partially allocated to local lodging establishments shall always be 1 (irrespective of the number of years that have elapsed since the date of the issuance of the use permit or the date of conclusion of the construction works). Before this amendment, the aging coefficient may be reduced up to 0.40, depending on the age of the property.