1. Leasing under a built to suit model is a real estate investment variant where supply precedes demand. The consumer of the real estate space (the tenant, in this case), commissions the real estate investor (the landlord, in this case) to provide a business unit at the location of the tenant's choice and according to the project that the tenant, and consumer of the real estate space, prepared.

2. The built to suit model arose from a conjugation of needs generated by the just in time¹ production model, by real estate obsolescence², by companies' tendencies to divest themselves of their real estate assets³ and by the high costs that the leasing of real estate⁴ entails.

3. At the end of the 1980s and during the 1990s, built to suit leases began to appear in Brazil, and they were effectively consolidated in the first decade of the 21^st century. Built to suit leases are the product of the creativity of Brazilian property developers, who brought to Brazil a business model that had already been in use in the United States since the end of the 1970s, and who arranged for such leases executed under the built to suit model to be provided for in the Brazilian Tenancy Law, in effect since 1991.

4. It is important to stress that leases executed under the built to suit model were provided for in the Tenancy Law not only because this American product happened to be called "lease", thereby requiring, in its tropicalization, that it be contemplated in the Tenancy Law. The Tenancy Law⁵ creates many important rules in order to guarantee the stability of lease agreements in general. Among such rules, we can highlight:

(a) Guarantees that the tenant (whoever leases the property) will have at its quiet enjoyment and non disturbed use of the property for the term of the lease agreement. The landlord (owner of the property) cannot have back the leased property during the lease term. Accordingly, if a lease agreement is established for a term of 10 years, for example, if the tenant complies with all the conditions of the agreement during the term, the landlord may even ask for the property back for the landlord's own use, but his request will not be met until the 10-year term has elapsed.

(b) The ascribing of responsibility over the property to both landlord and tenant. The Tenancy Law establishes textually the responsibility of the landlord for the structure of the property and the responsibility of the tenant for maintaining the property. Accordingly, it establishes that the tenant should pay for the consumption of public utilities and taxes accruing on the property, if the parties so agree;

(c) The prevalence of the lease before third parties in the event of voluntary or involuntary alienation and/or encumbrance of the property, subject to the registration of the lease agreement in the property's registration documents at the property registry office; and

(d) The Law governs the hypotheses of causality relative to the properties.

5. What distinguishes an ordinary lease from a lease executed under the built to suit model?

6. An ordinary lease is one where the owner assigns possession of the asset to a third party, without the intention of transferring ownership, so that said third party may make use of the possession for the purposes established in the assignment and, in consideration of such assignment, the third party pays an amount to the owner of the leased asset and assumes responsibility for the maintenance thereof. The third party pays for the use the asset while it is using it. We can call this kind of lease "payment for use".

7. Accordingly, a couple that is going to get married or enter into a stable relationship and that does not want precipitately to take out financing in order to purchase a property, searches for a property that may be used immediately. In cases such as these, the couple (a) searches for a property in a location where there exists a property the rent amount of which is compatible with the couple's budget; (b) conducts occupation studies based on the dimensions of the property that it wants to lease; (c) signs up with the owner of the property so that such owner may conduct a credit analysis; (d) offers a competitive offer to the lessor of the property and; (e) signs the lease agreement that the lessor of the property submits to the couple.

8. Now let us imagine a situation where an industrial company, which has an old factory with steep sloping roofs and gigantic chimneys, needs a modern industrial shed with a high floor-to-ceiling height, artificial lighting, a central air-conditioning system and wastewater treatment plants. Additionally, the company needs to improve its liquidity rating in order to qualify for a public bid⁶.

9. The company therefore (a) commissions a real estate consultant to look for the most appropriate location on which to erect the industrial shed and a prospective purchaser for the old factory; (b) commissions a consultant to produce the technical specifications of the industrial shed contemplating the production lines and production-related infrastructure that the company intends to have installed in the industrial shed as well as any future expansion needs; (c) commissions the same, or another, real estate consultant to select the prospective real estate developers who will buy the land for the industrial shed and build it according to the specifications expressed in (b); (d) informs the prospective real estate developers of the investment that it imagines to be necessary to buy the land and build the shed and the reasoning behind the calculation of the rent based on the investment; and (e) presents to the prospective real estate developers the contractual conditions acceptable to it for the purposes of the execution of the lease agreement.

10. The real estate developer's return on the investment he makes to satisfy the needs of the industrial company will only be realized upon payment in full by the industrial company of the rental amounts during the agreed contractual term. The principle whereby payment for the investment that one of the parties makes in order to fulfill the contract is repaid with compliance of the agreement by the other party is expressed in the Brazilian Civil Code which, in section 473, determines the following:

Section 473. Unilateral termination, in cases where the law expressly or implicitly allows, operates upon notification of such termination to the other party.
Sole Paragraph. If, however, given the nature of the agreement, one of the parties should have made considerable investments in order for the agreement to be executed, the unilateral termination shall only become effective once a period commensurate with the nature and the size of the investments has elapsed.

11. In other words, section 473 means to say that, depending on the type of agreement, if one of the parties spends heavily to comply with its side of the agreement ("Investor"), should the other party terminate the agreement before its expiry ("User"), the termination may only take place after the User pays the Investor all compensations arising from the agreement for the period necessary for the Investor to recoup its investment.

12. We have previously discussed herein the process involved in a "payment for use" lease and in a lease executed upon the built to suit model. From a legal point of view, the primordial difference between a "payment for use" lease and a built to suit lease is that, in the case of early termination by the tenant, the "payment for use" lease is subject to the provisions expressed in section 4 of the Tenancy Law and the built to suit lease is subject to section 473. Section 4 of the Tenancy Law determines the following:

Section 4 – During the stipulated term of the contract, the landlord may not have back the leased property. The tenant may, however, return the property, paying the agreed fine in an amount proportional to the period of contractual compliance, or in the absence of a fine, a judicially stipulated amount.

13. Section 4 of the Tenancy Law determines that the tenant may terminate the agreement upon the payment of a fine proportional to the period in which the tenant was compliant with the agreement. Section 473 determines that the tenant may not terminate the contract until he pays the number of rents determined as being equivalent to the investment made by the landlord.

14. Up to this point, everything is quite clear, because section 4 applies to the fine owed by the tenant to the landlord in the event of the early termination of "payment for use" leases, while section 473 applies to the indemnity owed by the tenant to the landlord in the event of the early termination of leases executed under the built to suit model.

15. Problems arise because:

(a) the Brazilian Civil Code, in section 2036, determines that the lease of an urban building continue to be governed by the Tenancy Law; and

(b) in accordance with Bill 356/11, in passage through National Congress, "in cases of the early termination of lease agreements by the tenant (relative to leases executed under the built to suit model), the tenant shall undertake to pay the remainder of the agreed fine, which shall not exceed the sum of the rents receivable up to the expiry date of the lease term".

16. Not to confuse things, in order to resolve the question of the applicability of the indemnity that the tenant must pay the landlord, which consists of the coming-due rent amounts, in the case of the early termination of a lease executed under the built to suit model, one need only say that section 473 of the Civil Code applies to this case, expressly revoking section 2036 of said Code.

17. Accordingly, if the rent of a built to suit lease with a ten year lease term were one million reais per month and if the tenant wanted to terminate such lease half way through its term, he could

(a) reduce the financial impact of the indemnity associated with the original rental stream agreed with the landlord pursuant to the lease, answering directly for the monthly rents "for a term compatible with the nature and size of the investment" (previously established in the agreement), until the landlord manages to lease the property again for an amount equal or in excess of one million reais per month; or

(b) reduce the financial impact of the indemnity associated with the original rental stream agreed to indirectly, if he were to act as an intermediary or a guarantor of a new occupier of the property who was prepared to pay an amount equal to or in excess of one million reais per month. This is how it works in the United States.

18. On the other hand, if we follow the line of Bill 356/11, the tenant owes the landlord a fine that cannot exceed the sum of the rents receivable up to the date of the expiry of the lease term, which, in the example referred to above, means that the tenant would have to pay the landlord a fine of sixty million reais in one single payment. We wish to make clear that indemnity and fine are different concepts. In relation to the charging of an indemnity of sixty million reais grounded in the argument expressed in item 16 and taking the form presented in item 17, such indemnity is sustainable. In relation to the charging of a fine of sixty million reais in a single payment, together with the return of the property upon the act of paying the fine is a controversial concept and can be considered by the courts as cumbersomely excessive, especially in the event that the landlord leases the property to a third party for a period that coincides with the remaining five-year term of the originally terminated lease.

19. Lastly, in addition to the serious problem regarding both the return of the leased property and payment of the rental income for the full term of the agreement, without discounting the proportional rental income upon the early termination of the lease or in the original and convenanted rental stream, Bill 356/11

(a) determines that for the purposes of assigning the amounts relative to the rents coming-due, the respective agreement needs to be registered at the Notary Public's Office. For the purposes of the effectiveness of the lease in the event of the sale of the property to third parties, the lease agreement should be registered in the registration documents of the property at the property registry office. Accordingly, in the example given above, in the State of São Paulo, the registration of the lease in the registration documents of the property, in accordance with the table of prices effective in March 2011, costs approximately R$40,000 and the registration of the agreement at the Notary Public's Office costs approximately R$11,000. Does not this call for one single registration that meets both purposes? and

(b) in the central/western region of Brazil and all along the harvest transport routes the market has tended to favor the built to suit lease model when the subject is the installation of centers for grain storage and the overflow of agricultural loads. If we limit built to suit leases to urban properties, the built to suit market will be denied access to agribusiness.

20. Attempts to create situations of exception to the law in order enable the institution of new concepts generally result in actions of unconstitutionality that take many years to be heard until all appeals are exhausted and, during this time, doubt concerning the legality of the new concept hangs in the air. A case in point is the fiduciary alienation of real property that was created in 1997 and only constitutionally recognized more than a decade later.

21. In order to avoid that the debtor of a fine levied by reason of the early termination of a lease executed under the built to suit model contests both the collection in full of the coming-due rents and the early return of the property, ideally only the applicability of section 473 to such early termination of the lease by the tenant should be recognized, and section 2036 should be revoked, both set forth in the Brazilian Civil Code.

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1 Industrial companies reduced their stocks and began to require that their suppliers supplied them with inputs for immediate use in the production lines, whence comes the name just in time.

2 Environmental restrictions have been created since 1960 restricting the emission of gaseous, liquid and solid residues. These restrictions affect all sectors of the economy. In addition to the environmental restrictions, new industries arose or were consolidated, with special emphasis on the telecommunications, information technology and technology industries.

3 Consumers of real property ceased to be owners of the buildings they occupied and became tenants thereof.

4 The operation under the terms of which a financial institution (a) acquires the property from a company that is installed and active in such property in order to rent said property back to said company and (b) gives the company/tenant the option to buy back the property for the amount acquired by the financial institution, deducting the amount paid in rent. Property leasing has become very expensive because it is practiced only in the ambit of the financial market and, accordingly, is subject to the fees practiced thereby.

5 Law 8.245/91, with amendments provided in Laws 9.256/96, 10.931/04, 11.196/05 and 12.112/09.

6 One of the way of doing this, without increasing revenue is to reduce its property, plant and equipment and generate a deductible operating expense (the old factory is totally depreciated).

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