Brokering Thought # 8; Market Focus #4

In this MARKET FOCUS edition:

• Leasing Practices, Part 4 – Non-disturbance
• The long drama of Rio de Janeiro

Lease Security / Registration

In common law, there's a concept known as “Privity of Contract” (“Privacidade de Contratos”), paralleled in civil law by “Relativity of Contractual Effects” (“Relatividade dos Efeitos de Contratos”). This principle dictates that a contract is binding only between the parties who signed it, affecting only them and not any external parties.

For instance, if Tenant A has a lease contract with Landlord B, and Landlord B sells the property to Landlord C, Landlord C is not necessarily obligated to honor the existing lease with Tenant A. This could potentially force Tenant A to vacate the property, if Landlord C so wishes.

There are ways to mitigate or eliminate this risk. In Brazil, tenants can take two measures:

1. Non-Disturbance Clause: Tenant A should ensure that their lease contract with Landlord B includes a “Non-Disturbance Clause” (“Cláusula de Vigência,” literally translated as “Validity Clause”). This clause obligates Landlord B to ensure that any sale of the property includes a clause for the buyer to respect the lease.

Yet, that alone, is insufficient:

2. Public Notice: To fully enforce this protection, it is also necessary to establish "public notice" through Property Registration systems, known in Brazil as Publicidade Registral (literally “Registral Publicity”). This step ensures that any potential buyer is aware of the existing lease and its terms.

While it is uncommon for leases to be terminated by purchasers in major markets — since buyers are often investors seeking rental income — it is still possible. Additionally, a landlord defaulting on a loan could result in the foreclosure / loss of the property and the lease becoming ineffective.

In conclusion, tenants are strongly advised to include a non-disturbance clause in their lease and ensure it is registered in the Property Register.

Let us know in the comments if you have experienced or seen a lease termination due to a lack of non-disturbance measures.

Rio de Janeiro – What Is Going On?!

The history of the challenges faced by the city and state of Rio de Janeiro can be told through various time frames and contexts. We could discuss the legacy of Rio being the capital of Brazil until 1960, explore the topic from a cultural or socio-economic perspective, or analyze crime rates. This topic could fill several books, making it too complex to cover comprehensively here, let alone by me.

I'll focus on more recent history, starting slightly before 2014. Brazil had been enjoying positive international perception and apparent economic growth, with a reduction in poverty. Unfortunately, much of this growth was based on a short-term, consumer-centric economy, a recurring issue in Brazil regardless of the government in power. Our state apparatus is extremely large and costly. In 2011, the economy slowed. The government adopted populist measures, such as controlling rising electricity and gasoline costs, which later backfired. By mid-2014, Brazil was in a recession, exacerbated by corruption scandals exposed by “Operation Car Wash,” including those involving our largest state-controlled company, Petrobras.

Petrobras was (and still is) the largest tenant in Rio, and the city's office market was heavily dominated by the petroleum industry, including suppliers and partners of Petrobras. Between 2014 and 2020, Petrobras reduced its office space occupancy across Brazil by about 180,000 m2.

On top of that, Rio, like many cities in Brazil, suffered high costs from hosting the FIFA World Cup. Rio then faced further financial strain from the expenses associated with the 2016 Olympic Games.

The graph below shows how vacancy rates for Class A/AA/AAA corporate spaces in Rio de Janeiro rose from an extreme low of 2% in 2010 to over 20% in 2014, and then to more than 40% by the end of 2016. Although much of this vacancy was due to new space being delivered of projects which had began during optimistic times, Petrobras's impact was significant.

When we add the broader downturn of the Brazilian economy, worsening crime issues, and poor city management, Rio has faced a perfect storm. Despite some recent positive net absorption, in practical terms, Rio has been in a recession for over a decade.

It is a tough scenario to resolve. Rental prices are attractive, but the city hasn't been able to sell itself to the business world. The best we can say is that the solutions are political.

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