Right of retention and mortgage: which prevails?

July 2014 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

The Portuguese Supreme Court recently delivered an important judgment consolidating case law that put an end to a jurisprudential and doctrinal discussion on the priority of the right of retention over a mortgage. The court’s ruling limited the priority of the right of retention over a mortgage to the fulfilment of certain requirements.

The problem under analysis

In the context of loans, a mortgage (hipoteca) on real estate is usually requested and offered in order to ensure that payments are met. Under Portuguese law, a mortgage is a type of security right in rem that must be registered at the land registry to be effective and gives the lender the right to be paid, usually with priority over unsecured creditors, against the value of certain real estate owned by the debtor or by third parties.

It should be noted that, according to Portuguese law, the retention right (direito de retenção) over real estate has priority over a mortgage, even if that mortgage has been previously registered. The right of retention is a security in rem which is not subject to registration under Portuguese law. This right allows the possessor to hold the real estate until its claim against the debtor is paid.

The question analysed by the Portuguese Supreme Court was whether a promissory buyer that entered into a promissory contract of purchase and sale of real estate (which was not effective vis-à-vis third parties because it had not been subject to registration), had the right of retention over such real estate for payment of its claim with priority over a mortgage on the same property within an insolvency proceeding. The promissory buyer was a consumer and the mortgagee creditor was a bank institution.

The First Instance Court recognised the right of retention of the consumer and its priority over the mortgage. However, the mortgagee creditor appealed and the Second Instance Court decided that the mortgage should have priority over the claim from the consumer due to the fact that the promissory contract was only effective between parties. The consumer subsequently appealed to the Portuguese Supreme Court.

Jurisprudence to date has been divided, although the majority view was that the right of retention had priority over the mortgage based on the handover of the real estate (traditio) being the object of the contract. Doctrine was also not unanimous; some considered that the mortgage should prevail, excluding the right of retention from the promissory buyer when the handover of the real estate had occurred, with the promissory contract not being binding on third parties.

Right of retention and mortgage – reasons for allocation and priority

In 1986, the Portuguese Civil Code extended the right of retention to several cases, among which we specifically highlight the one that refers to the beneficiary of a promise of transfer or constitution of a right in rem, when the object of the promised contract had been handed over, by the claim resulting from the non-performance of the contract attributable to the other party pursuant to the deposit regime.

According to the deposit regime, if the breach of contract is attributable to the promissory seller and the real estate object of the promised contract is handed over to the promissory buyer, the latter has the right to be paid by its value with the reduction of the price agreed, as well as to the return of the deposit and part of the price already paid.

The Portuguese Supreme Court stated that the aforementioned deposit regime was introduced by a decree-law in 1980 with the aim of safeguarding the position of the promissory buyer of real estate, in particular when the real estate is for residential purposes.

Moreover, the Portuguese Supreme Court also commented that the decree-law that has extended the right of retention to the situation under analysis in 1986, expressly mentions that in the case of a conflict of interests between mortgagee creditors and consumers it is reasonable to assign priority to the latter. This comes from the logic of consumer protection and from the fact that consumers are usually the weakest parties in these contracts, because they usually invest their savings in property and incur debt for many years. In contrast, the mortgagee creditor, usually a bank, has economic, legal and logistical advice that allows it to more accurately assess the risks involved and to consider carefully whether to grant credit.

The summary of the Portuguese Supreme Court decision states that, within an insolvency proceedings, the consumer promissory buyer in a contract not effective vis-à-vis third parties with tradition and that has paid a deposit, when the insolvency administrator does not perform the contract, has the right of retention.

Based on the statement of reasons of the Portuguese Supreme Court decision, it can be concluded that the following requirements have to be met: (i) the promissory buyer that holds the retention right is a consumer; (ii) the promissory buyer has a credit resulting from the non-performance of the promised contract of purchase and sale of real estate (with effects only between the parties); (iii) the non-performance of the promissory contract is attributable to the promissory seller; (iv) the real estate object of the promissory contract was handed over to the consumer; and (v) the real estate is for residential purposes. It should be noted that the reasonableness of this decision is also applicable to enforcement lawsuits.

Joaquim Shearman de Macedo is a partner and Cristina Rogado is a senior associate at CMS Rui Pena & Arnaut. Mr Shearman can be contacted on +351 21 095 81 00 or by email: joaquim.macedo@cms-rpa.com. Ms Rogado can be contacted on +351 21 095 81 00 or by email: cristina.rogado@cms-rpa.com.

Joaquim Shearman de Macedo and Cristina Rogado

CMS Rui Pena & Arnaut