Cri Assignment Auctions

Fiduciary Assignment of Real Estate Property – Legal Reform and the Desired Full Legal Certainty

Fiduciary assignment (alienação fiduciária) of real estate property, created by Law No. 9,514, dated as of November 20, 1997 (“Law No. 9,514/97“) in the context of the Housing Financing System (“SFI”), in its origin had as main objective to stimulate the acquisition of real estate property by ordinary people by introducing a new framework for the recovery of credits that would make the financial institutions, construction companies and developers feel safe to widely finance real estate property.

 

Demand for the use of this guarantee was virtually immediate, in particular to give the security required by the market investing in certificates of real estate receivables-CRI, also created by Law 9,514/97. Over time, the structures became more sophisticated and the increasing demand for such guarantee was possible not only to secure obligations under the SFI, but also other obligations that could avail themselves of health and security offered by the fiduciary assignment (alienação fiduciária) of real state property. In response to the demands, Law 9,514/97 was changed to make possible that such guarantee would also secure the performance of the obligations in general, and not only the obligations incurred in financing transactions within the SFI.

 

The fiduciary assignment (alienação fiduciária) of real estate property has served as an important instrument of guarantee with respect to granting credit in transactions in the financial and capital markets, as well as in providing security and speed in the recovery of credits, to the extent that it allows out-of-court foreclosures, segregates the full ownership of the property of the debtor’s assets (debtor who is the owner of the property), allowing the creditor to foreclose the guarantee even though the debtor is in judicial reorganization process or situation of bankruptcy. This occurs because the legal nature of the fiduciary sale ensures the creditor the property, in fideicomissum, that is, with a very specific goal: ensuring the debtor will fulfill the obligations assumed before the creditor.

 

Nonetheless, as mentioned above, Law 9,514/97 was edited in order to contribute to the expansion of housing finance in Brazil, with the fiduciary assignment (alienação fiduciária) of real estate property as one of the main mechanisms the legislator came up with at the time, to achieve this goal. In this context, the main focus of Law 9,514/97 was originally to give individuals to “owned homes”, reason why it has provisions that are aimed at the protection of the debtor to ensure that, in the event of default, the creditor goes through a specific procedure to sell the property and recover its credit.

 

One of the main provisions to give such protection to the financed party is article 27, §5 of Law 9,514/97, according to which the creditor of the guarantee over the property in a fiduciary assignment (alienação fiduciária) is obliged to give full release of the debt in case that, after the proceedings of the extrajudicial foreclosure are completed and the two auctions are done, the property has not been bought at auction for, at least, the amount of the debt balance of the financing. In this case, i.e., failing to sell the property at auction, the creditor is obliged to keep the property, but may freely dispose of it by however means it deems necessary. Such legal solution, however, generates uncertainty in financing property secured by fiduciary assignment (alienação fiduciária) of real estate property, especially when the financing is not for the acquisition of the property given as guarantee.

 

Many questions arose about the validity of a waiver by the debtor to such legal prerogative, so that the creditor could, even in case of unsuccessful attempt to sell the property at auction, continue to collect credit against the debtor’s general assets. The controversy here is if the provision was mandatory, that is, would not leave the parties (creditor and debtor) free to negotiate a possible waiver of such a right by the debtor. In the face of this uncertainty, it was not uncommon to see creditors, especially financial institutions, opting for mortgages instead of fiduciary assignment when it came to transactions that did not involve financing of the property given as guarantee or which were not within the scope of the SFI. The traditional mortgage, even though it does not offer to the same advantage the fiduciary assignment (alienação fiduciária) does, that is, separating the ownership of the property from the debtor’s assets until debt is paid and, therefore, eliminating the risk of insolvency or bankruptcy of the debtor, it gives the creditor an opportunity to collect any remaining balance in case the amount gotten with the sale of the property at auction is not sufficient to pay the debt in full.

 

The market, creative as always, created over time contractual mechanisms that allowed the mitigation of this risk. Recurring examples are the provision in the contract of obligation requiring periodic preparation of appraisal report and additional guarantee, dividing the debt into portions, and binding the guarantee of each property by portions, for example with the use of bank credit notes – CCB for each portion of the debt, thus minimizing the risk of having the guarantee on the properties foreclosure lead to less than the balance due. A clear disadvantage of this “gymnastics” is that it usually leads to unwanted costs, which inevitably makes the granting of credit more expensive.

 

Therefore, it is evident that the extrajudicial procedure provided by Law No. 9,514/97 is perfectly adjusted to the demands arising from the market, reason why there was a strong mobilization in favor of the change to Law 9,514/97, culminating in Bill No. 6,525/13, which is currently in the House of Representatives.

 

The Bill, in the form currently approved by the Urban Development Commission of the House of Representatives, ratifies the alignment of Law 9,514/97 with the promotion of real estate financing proposed by the SFI, and allows, when it comes to financing in general (excluding real estate financing), the possibility for the creditor to collect the debt balance in court, as is the case with mortgage, without the obligation to give full discharge of the debt in the event of failure of auctioning the property off as mentioned above. The situation remains unchanged for real estate financing.

 

With the expansion of the use of fiduciary assignments (alienação fiduciária) of real estate property to beyond the real state property financing, what we saw was a legislative imperfection in the foreclosure procedure, which now seems to be about to be adjusted, but without deviating from the main goal of Law 9,514/97 and SFI, which is precisely the promotion of financing for acquisition of real estate property.

 

After passing at the House of Representatives, the Bill will go to the Senate and, if it passes, will need presidential approval. It is true that the financial and capital market should benefit from such legislative change, considering that the prohibition of the recovery of the balance due in case of failure of auctioning off property will no longer apply to financing in general, benefiting society as a whole, since such change certainly will give greater legal certainty to guarantee of fiduciary assignment (alienação fiduciária) of real estate property and as a result, will tend to reduce the costs of financing, which will be positive to the credit market in general.

 

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