Judicial sale of a mortgaged property with a rural lease after the mortgage does not cause the lease to lapse

As this is a decision with a clear economic and social relevance and an impact on markets such as mortgage credit or Non-Performing Loan (NPL) portfolio transactions, it is important to know and take into account its meaning and terms.   

This Decision was published on 12 December 2024 in the Portuguese State Gazette - Diário da República, 1ª série - and this Alert sets out the most relevant points of the grounds for this decision.

Issue to be resolve by the SCJ

To know whether, in the context of common enforcement proceedings, the judicial sale of a mortgaged and leased property, under a rural lease contract entered into after the mortgage, results in the termination of the lease, pursuant to the provisions of paragraph 2 of Article 824 of the Civil Code (“CC”) or whether, on the contrary, such termination does not occur under the provisions of paragraph 1 of article 22 of the Rural Lease Legislation (RAR - Decree-Law no. 385/88, of 25 October, as amended by Decree-Law no. 524/99, of 10 December).   

The SCJ's uniformizing decision was negative. 

Main arguments presented by the SCJ

• Obligational nature of the lease contract (rural);
• The list of cases in which the lease contract expires (art. 1051 of the CC) does not include the judicial sale;
• In paragraph 1 of Article 22 of the RAR, the legislator, being aware of the doctrinal and jurisprudential controversy surrounding the application of paragraph 2 of Article 824 of the CC, expressly stated (and in a more emphatic manner than Article 1057 of the CC) that the lease does not terminate upon the transfer of the property;
• It cannot currently be asserted that a lease has the same aptitude as rights in rem to jeopardize the enforcement sale of the property for the best price, as it is a personal right of enjoyment (direito pessoal de gozo) and no longer possesses the characteristics of a potentially unlimited right;
• The most recent rural lease laws have emphasised the social and economic importance of this right;
• Although there may be cases of fraudulent behaviour on the part of real estate owners who, by leasing their mortgaged property, are defrauding the mortgage creditor of its expectations, the non-expiry of the lease does not leave mortgage creditors totally unprotected, as they may resort to the following instruments:
  • Request the substitution or strengthening of the mortgage, under penalty of demanding the immediate fulfilment of the obligation or, in the case of a future obligation, the registration of a mortgage on other assets of the debtor;
  • Resort to an actio pauliana against the debtor who encumbers the mortgaged property, provided the legal requirements are met;
  • Preventively establish a contractual clause that the mortgage debt becomes due immediately if the mortgaged property is encumbered with a lease.

Comments

• This SCJ decision is unsurprising, considering the recent uniformizing case law issued by the SCJ in its Decision No. 2/2021, dated 5 August, albeit in relation to residential leases and judicial sales in insolvency proceedings.
• This SCJ decision heavily relies on the arguments supporting the (controversial) prevailing thesis adopted in Decision No. 2/2021, particularly the prioritization of tenants' interests over those of mortgage creditors.
• Despite the SCJ’s effort to argue that mortgage creditors are not left entirely unprotected, the mechanisms it identifies are, as the SCJ itself acknowledges, weak.
• This decision, following the case law set by Decision No. 2/2021, further underscores the loss of security and legal robustness of mortgages as a creditor's guarantee.
• In our previous publication regarding Decision No. 2/2021, we alerted to the potential extension of this jurisprudence to judicial sales carried out in the context of enforcement proceedings, which has now been confirmed.
• Finally, as with Decision No. 2/2021, the prevailing thesis in this case is far from achieving a consensus among the Judges of the SCJ (17 votes in favour versus 11 against).