Selling Property with Existing Tenants

It is an increasingly common business and possible from a legal point of view. It is attractive for investors looking for solutions with a return that they can estimate, calculate and receive from the moment of the purchase. We have been following, from a legal point of view, several property acquisitions processes in this area with national and mainly international clients.

The legal regime for urban leasing, Law No. 2/2020 of 31 of March, ensures the right to sale by those who are the landlords and legitimate owners of the respective properties. It is important to know the most current wording of the law and which duties and rights must be respected, by landlords and tenants.

Existence of Lease Agreement

The Civil Code (CC) states that the urban lease agreement must be presented in written form (article 1069, paragraph 1), but in reality, this is not always the case. When acquiring an occupied property, the existence of a written contract must be analysed, as well as the rules and clauses that govern it and that will have to be observed by the new landlord/owner. They can always be changed, if agreed between both parties and a new contract drawn up, if applicable. Such contract may also be terminated, by agreement of the parties, due to its limitation period, or any special denounce, or other causes provided for by law.

If there is no written lease agreement with defined rules, this does not mean that the current tenant is not entitled to continue occupying the property under the same housing conditions.

When there is no written lease agreement, and this gap is not the responsibility of the tenant, he can prove the existence of the lease in any way admitted by law, in particular demonstrating that the property is occupied without opposition from the landlord and that monthly payments have been made for at least six months (article nr 1069, nº 2 of the Civil Code).

If it is concluded that there is no lease agreement and that the person who inhabits the property does not pay any amount considered to be rent, or is living in such property without the formal knowledge and acceptance of its previous owner, then the new owner may propose a Civil Action (lawsuit).

Preference Right

Another imperative issue to observe in this type of business is the preference right.

The preference right, which is found in art. 1091 of the Civil Code, is what allows tenants to say whether or not they want to buy the property they are renting, when the landlord intends to sell it. The landlord must inform about his intentions and, if it is in the interest of the tenant, he may exercise the right of preference, thus substituting himself as the third party interested in the acquisition of the leased property, which may be residential or non-residential.

In order for the tenant to exercise this right, the lease must last for at least two years. Thus, this right of preference translates into an obligation for the landlord to communicate to the tenant the selling project and the clauses of the respective purchase and sale contract, by registered letter with acknowledgment of receipt. This communication must include the details of the deal, the price, the conditions and terms for the payment of the price and the deadline for exercising the preference right. Normally this period is of 8 days, being a legal preference right, the tenant has the same period to exercise its right, before the definitive purchase and sale agreement is signed, unless there is another period stated, shorter or longer, as predicted by article 416º, nº2 of the Civil Code.

If the tenant does not exercise this right, he will not be left without its home. What happens is that the lease is transferred with the property and the new owner assumes the role of landlord, assuming the rights and obligations inherent to this new quality, as established in article 1057 of the Civil Code.

If the landlord does not respect his obligations regarding the tenant’s preference right, the tenant may file a Civil Action with the competent court, pursuant to article 1410 et seq. of the Civil Code, to have his right recognized. Ideally, this action should be placed within 6 months of the notice given by the landlord.

In terms of this right, the law is the same whether it is a lease for residential or non-residential purposes. There are only changes to the above in the case of buildings/units in full property (not divided in horizontal property). Under these conditions, since the property is not constituted as a horizontal property, it is not mandatory to offer each tenant the right of preference in the purchase of the entire building. It is mandatory, in the case of the tenant, for more than two years, of an autonomous fraction, of the entire building or of a unit of a building not constituted as a horizontal property, only in relation to the leased, to define the percentage of the leased share in relation to the entire building. In these cases, the tenant has the preference right over the specific share of the building, corresponding to the value of each fraction, thus being able to buy the apartment for the proportional amount to the total sale amount and exercise their pre-emptive rights together (in co-ownership with other tenants).