Judgment of the Supreme Court of 17 November 2015

Express termination clause – Real Estate Leasing Agreement

In this decision, it was understood that the inclusion of an express termination clause in a real estate leasing agreement by virtue of which, should a particular event occur, one of the parties shall be entitled, if it sees fit, to terminate the contract, makes it unnecessary to comply with the legal requirements pertaining to the conversion of simple delay into default, as long as the condition of default has indeed occurred.

In the case in question, the real estate leasing agreement entered into by the parties in dispute stipulated, in favour of the lessor, that the agreement “(…) [could] be terminated, if there is breach of contract by the lessee, of any of its clauses (…)”. For this purpose, there would be an event of default in case the lessee was delayed in the payment of a rent for a period of more than sixty days. Once this event of default has occurred, the lessor would be entitled to terminate the agreement and request the immediate return of the property in question, free from any encumbrances or charges.

Justifying its interpretation, the Court argued that exercise of the right to termination is based on the occurrence of a fact that must be considered sufficiently serious, in the scheme of the agreement, to determine its termination, consisting on the breach of a quite specific and concrete obligation. This being the case, an event reflecting generic and “blank” breach by the lessee of any of its obligations does not constitute an event of default.

In a nutshell, the Court decided that the clause that entitles the lessor to terminate the real estate leasing agreement without compliance with the requirements set forth in the law with regard to the conversion of simple delay into default is valid, provided it is based on objective and contractually defined circumstances.

Judgment of the Court of Appeal of Lisbon of 3 December 2015

Commissioner agreement – Just cause for cancellation

In the Judgment in question, the Lisbon Appeal Court was of the opinion that the agreement by which a banking institution undertakes, in its capacity as arranger, to recruit financial backers for the design and execution of a project for the construction of a wind farm, being also responsible for setting up and structuring the operation, has a dual nature of services agreement and commissioner agreement.

The judgment in question bases this interpretation on the characterisation of the commissioner’s obligation to set up and structure the financing operation, performed by means of a number of different legal acts: the preparation and presentation of contract proposals, technical and legal analysis to ensure the implementation of the project, validation of the structure to be used for the operation, determination of the maximum affordable debt, and also the implementation of the selected financing solutions.

In addition to these complex of actions, the commissioner itself set out additional conditions, regarded as decisive, to be complied with by the principal for the financing to be effectively granted.

The judgment considered the conditions stipulated by the commissioner to be excessive and unenforceable in good time, leading to the delay of the operation for more than three years without the principal company being able to enter into the financing agreement and start the construction of the wind farm. Moreover, this delay meant that expiry date of the permits granted for the design and construction of the wind farm was approaching, including the preliminary operating licence issued by the Directorate General of Energy.

In light of the above, the Court concluded that it is lawful for the principal company to revoke the commission granted to that banking institution with just cause, since its object and purpose – setting up the financing operation – came up against the additional conditions imposed by the agent itself, thus frustrating the principal company’s desire to find, in good time, a solution that would allow it to construct the wind farm.

Judgment of the Court of Appeal of Lisbon of 17 December 2015

Retention of Title - Loan Agreement – Invalidity

The legal issue covered by this judgment concerns the possible unlawfulness of the retention of title clause set out and registered in favour of the lender in the context of a loan agreement executed for the acquisition of a motor vehicle.

In the context of the agreement examined in the decision, the lender provides a certain sum of money to the borrower and, as a guarantee for the full performance of obligations arising therefrom, a retention of title over the vehicle acquired was drawn up and registered in favour of the lender.

As set out in the judgment, legal theory and case law increasingly support the application to loan agreements of the retention of title provision, as set out and regulated in Art. 409 of the Civil Code, with regard to sales agreements. The justification for this interpretation is based on the development of trade practices, given that credit institutions, on the basis of the freedom of contract provided for in Art. 405 of the CC, make increasingly frequent use of clauses of this type as a guarantee of the performance of loan agreements and of the other agreements executed within the scope of their activities.

Notwithstanding the above, this judgment decided that this type of clause was invalid, since the law only envisages retention of title in favour of the seller of the asset, since the latter is its legitimate owner, and this is not the case of the lender, who simply provides a sum of money for the acquisition and does not have any rights over the asset.

Moreover, this interpretation is strengthened by the application of the principle of clarity of rights in rem, which prevents the creation, in rem, of any restrictions on the right of ownership, other than those provided for in the cases expressly set out in the law. Bearing this in mind, the borrower’s right to ownership over the acquired vehicle cannot therefore be restricted by a retention of title in favour of the lender without breaching this principle.

In conclusion, the Supreme Court of Justice ascertains that the retention of title clause established in favour of the lender under the terms described above is therefore invalid, since it is in breach with an imperative legal rule, pursuant to Art. 294 CC.