Supreme Court of Justice Judgment no. 2/2021, which determines the non-lapse of the lessee's rights in the sale, in insolvency proceedings, of mortgaged property with a lease celebrated subsequently to the mortgage.
Legal alert no. 158
Judgment no. 2/2021, of the Supreme Court of Justice ("STJ"), published on August 5th, 2021, in the Portuguese Official Gazette, standardises and confirms the jurisprudence regarding the determination of the non-lapse of the lessee's rights in the sale, in insolvency proceedings, of mortgaged property with a lease entered into subsequently to the mortgage.
This Judgment arose following an Appeal for Standardization of Jurisprudence, filed by the Plaintiff against the judgment of the STJ, dated 27/11/2018 (hereinafter the "Appealed Judgment"), as it is in clear opposition, on the same fundamental question of law, with jurisprudence foreseen in a judgment previously decided by that same court, specifically, the judgment of the STJ of 09/07/2015, of the 6th Civil Section of the STJ (hereinafter the "Fundament Judgment").
The divergence of the judgments concerns the question of whether, with the judicial sale of a mortgaged property which was leased to a third party after the registration of the said mortgage, the right of the respective lessee lapses, pursuant to article 824 (2), of the Civil Code. This article provides that "The assets are transferred free of any guarantee rights encumbering them, as well as of any other rights in rem not registered prior to any attachment, garnishment or guarantee, with the exception of those that, having been constituted on a prior date, produce effects in relation to third parties irrespectively of registration".
The Fundament Judgment considers the above-mentioned article applicable by analogy, in the sense that the lease lapses with the execution sale, since it constitutes a form of encumbrance on the property, limiting the right of ownership, guaranteed through the mortgage previously constituted and registered, becoming unenforceable against the purchaser.
The Fundament Judgment states that, in the case of declaration of insolvency of the debtor, the lease of property, with mortgage registered prior to such declaration, will expire with the judicial sale, pursuant to article 824 (2) of the Civil Code, since although the lessee's right has a personal nature, it assumes contours similar to those of the rights in rem, applying the regime of the latter, especially the aforementioned article. It was emphasised that "we believe, as almost all the authors do, that this right has a personal or credit nature, but its contours are similar to those of rights in rem, in that the regime of rights in rem applies to it – as per the article 1037 (2), of the Civil Code. The requirements of justice and the interests teleologically detectable in the referred article 824 (2) of the Civil Code point towards the application to the lease of the lapse regime provided for in the latter".
In an opposite way, in the Appealed Judgment, the STJ considered that the wording of article 824 (2) of the Civil Code, does not apply, neither directly nor analogically to the lease, being the nature of the lessee’s right is merely credit or obligation-related, for which it concluded that the lease agreement should be maintained, the mortgage creditor succeeding the landlord, under the terms of article 1057 of the Civil Code. In terms of article 1057 of the Civil Code, "The purchaser of the right on the basis of which the contract was entered into succeeds in the rights and obligations of the lessor, without prejudice to the rules of registration", pursuant to Article 109 (3) of the Insolvency and Company Recovery Code ("CIRE"), which provides that "A declaration of insolvency does not suspend the execution of a lease contract in which the insolvent is the lessor (...)".
In light of the above-mentioned judgments, the Standardization Jurisprudence Judgment, in relation to the thema decidendum, points out that
i) To strive for the subsumption of the lapse of the lease agreement in relation to the sale occurred during the insolvency liquidation, in the terms stated by the Fundament Judgment, would be to equate the existing lease relationship, from the lessee's perspective, to a right in rem, since article 824 (2) of the Civil Code only refers to the extinction of rights in rem and not to all the rights, in rem and/or obligations, that are over the transferred asset;
ii) The lease agreement, in its structure, is a personal right of enjoyment, of an obligatory nature, from which derives the lessor's obligation to provide the lessee with the use of a property, temporarily, in exchange for a given consideration, being, in this specific field, subject to the principle of typicity, by article 1306 of the Civil Code, which excludes, from the outset, any possibility of analogy;
iii) This concrete typicity is covered by the rule of Article 824(2) of the Civil Code, which is clear, precise and concise as regards the rights that expire in the course of an execution sale, as these are only the real rights and not also the obligations, as is the case of the lease;
iv) Furthermore, pursuant to the provisions of article 109 (3), of the CIRE, the lessee has a guarantee that its lease will be maintained, pursuant to the provisions of Article 1057 of the Civil Code. This specific rule sets aside the application of the rule set forth in Article 824(2) of the Civil Code due to the fact that there is no reference therein to the occurrence of expiry of the lease in relation to contractual rights and, within those, to the lease, and because the causes for expiry of the lease agreement set forth in article 1051 of the same legal diploma do not include the sale, whether in an enforcement action or in liquidation in insolvency proceedings;
v) The circumstance that the property, for sale, may be mortgaged, does not inhibit the owner from renting it, nor from transferring it to a third party with a profit, as is unequivocally clear from the provisions of article 695 of the Civil Code, since nowadays the subsistence of the lessee’s right depends on the subsistence of an agreement, which the landlord may terminate by his unilateral will, through opposition to the renewal, termination and/or rescission.
In light of the above, the STJ concluded that "As the regime of transferability of the lease is perfectly framed by the provisions of article 1057 of the Civil Code, to which the provisions of article 109 (3) of the CIRE also refers us, there is no doubt that the regime provided for in article 824 (2) of the Civil Code is foreign to these provisions. The reasoning and conclusion sustained, under a cloak of normative interpretation, could never derogate from an exceptional rule of the CIRE, the one contained in article 109 (3) of the CIRE. The reasoning and conclusion sustained, under the mantle of a normative interpretation, could never derogate from an exceptional norm of the CIRE, the one contained in that article 109 (3), taking by dragging what is laid down in article 1057 of the Civil Code, in frontal collision with the duties imposed on us, as judges, of strict obedience to the Law, arising from article 8 of the Civil Code and 203 of the Portuguese Constitution”.
Therefore, "the guarantee rights and the rights in rem have nothing to do with the rights of contract, where the lease is included, and it cannot be concluded without further ado that the former may encompass the latter, (...) The sale of the leased property in the insolvency proceeding does not deprive the lessee of the rights recognised by civil law in such a circumstance, which would always rule out any extensive or analogical interpretation".
In this sense, the Standardization Jurisprudence Judgment confirms the Appealed Judgment, maintaining the position and decision sustained therein, determining the non-lapse of the lessee's rights in the sale, in insolvency proceedings, of mortgaged property, with a lease entered into subsequently to the mortgage.
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