Brokering Thoughts #4: Market Focus#2

In this MARKET FOCUS edition:

? ??Leasing Practices, Part 2 – early termination;

? ??Brazil’s largest markets, ranked;

? ??The extremes in S?o Paulo – fresh numbers.

Leasing Practices in Brazil? (part 2)

Early Termination

In Brazil, as mentioned in the last Market Focus, by law, a tenant under a typical lease may break their lease at any time during the lease term. But what the law does not specify are the penalties for doing so, nor the notice period. These are determined during the original lease negotiations.

There is a traditional sized penalty applied to a large percentage of leases, which is 3 months’ rent, and the notice period is often not even mentioned (in which case good practice is at least one-month notice). But do not assume this is standard – this changes depending on the market. In the majority of corporate Class A leases in major markets, this penalty will be higher, and the notice period will be several months. This will change depending on who has the most leverage during lease negotiations. In tenant-favorable markets in Brazil, the penalty is usually the traditional 3 months’ rent, with a notice period varying from 1 month to 3 months.

There is a concept under Brazilian legal doctrine called illicit enrichment, but not precisely the same concept as elsewhere specifically referring to fraud. Courts may decide that a very high penalty falls under this principle. A landlord requiring the tenant to pay all rents up to the termination would fall under this principle. There are two exceptions to this under the leasing law, article 54-a, which refers to build-to-suit operations, classified as atypical leases.

Proportionality: In a 2012 update of our leasing law, the idea of reducing the penalty in proportion to the elapsed term was added to the law, adopting previous legal precedent.? A 5-year lease broken at the end of year 4 would result in a penalty one-fifth of the contracted amount.? For this reason, landlords often like to replace some of the penalty with longer notice periods. In practice, this is good for all – a business usually knows several months in advance if they are intending to break the lease anyway.

Questions? Please ask away in the comments section.

What are the penalty practices where you do business?? Are they fair?

Brazil’s largest markets.

Our firm, Ocupantes, powered by www.buildings.com.br, tracks the market in 18 cities.? Although other databases might have slightly different numbers, generally they are close and generally the trends they show will be similar.

The following are the eight largest office markets in Brazil, considering classes C, B, BB, A, AA and AAA:

There are contexts / caveats that are important to consider:??

• Condominium laws in Brazil are effective, and most office buildings are condominiumized.? In smaller and older markets,? ownership of buildings is considerably more fragmented.? One floor divided into 10 office suites can have 10 owners.
• The larger markets are more professional.? Ownership is mostly by investors, and much less fragmented.
• The smaller markets have generally lower quality buildings.? There is a high percentage of owner-occupiers.
• The smaller markets have generally smaller suite sizes and floor-plates.
• The smaller markets have a higher percentage of stand-alone, street-front offices, often owned by the occupier, and often adapted from retail or residential properties.? We often refer to these spaces as “commercial houses”.? It is impractical to track these types of space.

What is the size of your market?

Do you have condominiums or owner-associations?

Share your market’s peculiarities.

S?o Paulo Office Market?

Extremes

If you were to ask what is the vacancy rate in S?o Paulo, the answer would be about 20%.? Yet the most prime sub-market in S?o Paulo, the New Faria Lima, has a vacancy of just above 7% (78,000 m2), and likely to get tighter.

That is quite a brutal difference.? The? New Faria Lima is, consequently, very expensive at the moment, with record-breaking asking rates of over R$300 / m2, and even over R$350 / m2 in some cases.? That high price is the only reason that the vacancy hasn’t remained at the 4% level reached in 2022. Some firms have chosen to move to “calmer” areas rather than face rent reviews.? The New Faria Lima region will revert to serving banks, wealth management offices and high-end law firms, as well as Facebook, Apple and Google.

The Chucri Zaidan region, which hardly existed a decade ago and was really just a smaller part of another sub-market, has grown to become a new sub-market of its own. It has at the moment 230,000 m2 of vacant space (24.75%, down from 32% one year ago) for classes BB, A, AA and AAA, at one-third of the price.? The Chácara region has a vacancy of 35%.

BUT there is news.? As we have just seen in the? local press, a recent update in the zoning law will allow a more intense use of the last 500 meters of the New Faria Lima avenue, giving room for growth in a geographically tight area.?

How do your office markets compare??

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