Fiduciary sale of supervening ownership of real estate

Rossana Fernandes Duarte
Mattos Filho Advogados, São Paulo
rossana@mattosfilho.com.br

Bruna Carolina Fernandes Teixeira
Mattos Filho Advogados, São Paulo
bruna.fernandes@mattosfilho.com.br

Introduction

Several transactions that require security over real estate are often characterised by the sale of future assets, involving raising funds through securitisations and other forms of long-term finance. Therefore, these transactions are subject to a range of circumstances that may affect the solvency of debtors, the actual entrepreneurs and, consequently, the discharge of contractual obligations.

Given the characteristics of fiduciary sales – such as the availability of enforcement out of court – they became the security of choice for these types of transactions. However, formerly in Brazil, a fiduciary sale used to apply to the entirety of the encumbered property, often creating dead capital, the result of the gap between the value of the secured obligations and the value of the asset given by way of security.

The market needed forms of security that could be created successively and have different priorities, as is the case with mortgages, so that the full potential of encumbered assets could be utilised. Scholars considered different ways to address this issue, including the fiduciary sale of the supervening ownership of the property (also called supervening fiduciary sale), namely, the ownership that the fiduciary seller would acquire back at the time of satisfaction of a suspensive condition, that is, the cancellation of a higher priority performed fiduciary sale. This security could, in their view, be created for the benefit of the original fiduciary buyer or another creditor. Nevertheless, it was necessary to regulate the rights of such supervening creditors and the ability to perfect supervening fiduciary sales by registering them. Hence the importance of Law No 14,711/2023, the New Security Packages Law.

Fiduciary sales of supervening property are of particular importance for cross-border lawyers representing foreign and international clients engaging in all types of transactions secured by real estate.

The New Security Packages Law – Law No 14,711/2023

The New Security Packages Law, or Law No 14,711/2023, amended the Brazilian Civil Code and Law No 9,514/1997 to expressly regulate the creation of fiduciary sales of supervening ownership as discussed above, effective upon the satisfaction of a suspensive condition ­– that is, the cancellation of a higher priority performed fiduciary sale.

Likewise, Law No 14,711/2023 allowed the registration of fiduciary sales of supervening ownership at any point after they are entered into. The timing of registration of a supervening fiduciary sale is of the essence because the fiduciary buyer’s right against third parties is retroactive to the date of registration. Therefore, the beneficiary of security over supervening ownership is only protected from the risk of being adversely affected by subsequent liens over the same property if the supervening fiduciary sale is immediately registered upon its execution.

In case of judicial reorganisation, the credits of the fiduciary buyer – including the creditor of a fiduciary sale of supervening ownership – will not be subject to the effects of the reorganisation. In this event, the ownership rights over the property will prevail, as contractually agreed between the parties.

Law No 14,711/2023 does not specify though how supervening creditors will be treated if the funds resulting from the enforcement of the security are not sufficient to discharge all secured obligations. Consequently, this issue will in principle be resolved by case law. Brazilian courts may find guidance in their decisions on pledges and mortgages, or a completely new mindset may be developed.

In any event, the passing of Law No 14,711/2023 expressly regulating supervening fiduciary sales has been well-received by the market as it created legal certainty in relation to a form of security long awaited by all stakeholders. The market has since witnessed a credit boost that optimised the use of funds in the real estate sector because of the utilisation of dead capital.

Conclusions

In the scenario prevailing in Brazil before the passing of Law No 14,711/2023, dead capital was often created because fiduciary sales applied to the entirety of the encumbered asset. As such, the full potential of encumbered assets was not being utilised.

From an economic point of view, a form of security that could be created successively and have different priorities, such as mortgages, was required. Any such form of security over real estate needed to be registrable to be valid and enforceable against third parties.

Law No 14,711/2023 expressly regulates the creation of fiduciary sales of supervening ownership and allows their immediate registration. This law allows a beneficiary of a fiduciary sale over supervening ownership to be protected from the risk of being adversely affected by subsequent liens over the same property.

The creditor of a fiduciary sale of supervening ownership will not be subject to the effects of judicial reorganisation and the contractual terms of the fiduciary sale of supervening ownership will prevail.

Law No 14,711/2023 does not regulate the treatment of supervening creditors if, after the enforcement of security, there are insufficient funds to discharge all secured obligations. Therefore, case law is expected to play an important role in this regard.

The market has been optimistic about the passing of the passing of Law No 14,711/2023 as an effective answer to its needs.