Major Liberalization Of Brazilian Law: Use Of Agricultural Land As Security Interest For Financial, Other Transactions

• Published date: 11 May 2020
• Author: Mr Sanjiv Kapur, Luis Riesgo, S.Wade Angus, Marcello Hallake and Artur L. Badra
• Subject Matter: Finance and Banking, Real Estate and Construction, Charges, Mortgages, Indemnities, Real Estate
• Law Firm: Jones Day

Brazil has changed its laws to facilitate the use of fiduciary liens as security interest over agricultural lands. Some of the most valuable lands in Brazil are agricultural lands, but because of existing laws that limit foreign ownership of rural lands, there was legal doubt whether fiduciary liens could be granted over agricultural lands. To the extent a foreign controlled company was offered a security interest in rural lands, the only instrument that appeared available on a risk-free basis, before the change in law, was a mortgage.

Mortgages, unlike fiduciary liens, are not bankruptcy remote. A secured party with a mortgage cannot act to foreclose on a mortgage without approval of its credit in a bankruptcy reorganization plan, where the secured party is often subject to a haircut on what it can recover. With the change in law specifically authorizing the grant of fiduciary liens over rural lands, foreign controlled entities can now obtain a security interest in rural lands that is generally not subject to frustration in an insolvency proceeding. This change in the legal framework should facilitate an increase in financings and other transactions with foreign investors with a concomitant increase in foreign investments into Brazil.

Brazil has taken a major step to facilitate transactions with foreign or foreign-controlled entities involving rural lands. In a country where grants of security interests or guarantees consisting of liens over real estate assets are commonplace to secure obligations, foreign-controlled entities can now rely on a fiduciary lien ("alienaç'o fiduci'ria") on rural lands. Law No. 13.986/2020, commonly referred to as MP do Agro, was signed into law by President Bolsonaro on April 7, 2020.¹

Given Brazil's strong agricultural sector, some of the more valuable properties consist of rural lands. Under Brazilian law, ownership of rural lands by foreigners is subject to several restrictions and limitations. Notwithstanding such limitations on foreign ownership, MP do Agro makes clear foreigners are entitled to receive fiduciary liens on such properties; as a result of foreclosure of such fiduciary liens they can also own rural lands. Previously, if rural lands were to be the subject of liens to be granted to foreign or foreign-controlled entities, the only legal instrument that did not pose risks of enforcement was that of a mortgage ("hipoteca"). Mortgages are more difficult to execute upon than fiduciary liens, especially in the context where the party granting the security interest has become subject to insolvency or judicial restructuring proceedings. MP do Agro, however, also now permits foreign-controlled secured parties to become owners of the rural lands subject to the mortgage.

To better understand the impact of the changes imposed by MP do Agro, it is...