The Importance of Title Insurance in Brazil
With more overseas real estate and land investors focusing their attention in Brazil, the need to have adequate title insurance in place needs to be stressed in order to ensure that assets within the country are fully protected. Please see the following interview with Zachary S. Klughaupt – Managing Director at Brazil FNF Title International – a US lawyer based in São Paulo with a specialism in underwriting cross-border insurance policies:
1) Can you tell us a bit about yourself and your background?
I’m a US-trained lawyer, born and raised in New Jersey. I’ve always been drawn to new countries and cultures, and in the course of a few study abroad programs and backpacking trips through Latin America, I became fluent in Spanish. In law school, I took a semester of Portuguese on a lark, which later helped me manage Brazilian cross-border transactions while working as a corporate attorney at Gibson Dunn & Crutcher. When the opportunity came for me to manage the Brazilian operations of the world’s largest title insurer, I jumped.
2) With more foreign investors purchasing real estate and land in Brazil – why is it particularly important to have title insurance in place?
Title insurance makes cross-border real estate transactions safer, more liquid and more efficient by guaranteeing clean ownership. Because land cannot literally be held in one’s hand, there always exists a risk that land records for “your” property do not correspond to what you thought you purchased. The risk is magnified in cross-border transactions, because foreigners are naturally less familiar with local laws and customs, and unfortunately are often seen as easy victims by unscrupulous sellers. Foreigners also will have an especially hard time enforcing their rights in court should problems arise. For foreign investors in Brazilian real estate, FNF Title International offers an English-language, US-law guaranty that can be enforced in New York. Purchasing title insurance up front should be a fundamental part of an investor’s exit strategy, as the title policy will remain in force for as long as the investor owns the property, and will insure any representations regarding title that the investor will need to make when selling the property. Finally, title insurance mitigates risk for lenders, meaning that a project insured against title can more easily obtain financing. Title insurance is especially attractive for securitizations, syndicated loans, and other complex financial vehicles, because the presence of a guarantee eliminate the needs for each investor to separately evaluate title to each property involved in the financing.
3) What kind of issues have occured with title in the past that investors should be aware of? Can you give some specific examples / occurrences in Brazil?
The most serious title loss investors face is a complete loss of their property to a third party who had a superior claim than that of the person or company who sold the investor the property. Although the Brazilian economy has made incredible strides over the past few years, the legal and land registration systems have lagged behind and continue to create uncertainty for investors. This is particularly true in less developed regions of the country, such as the Amazon and the Northeast, where many foreign investors are now focused. For example, over 500 European investors lost their shirts investing in a luxury resort near Natal. The developers had plans for 30,000 homes, a marina, golf course, sports centre, spa, heliport, shopping centre and a plastic surgery clinic, all on an idyllic beach and around a lagoon. The problem was that nothing was ever built, none of the investors’ funds every reached the project, and the developer is now sitting in a Spanish prison (see this article). In rural areas, land grabbers have an “investment” strategy called grilagem, from the Portuguese word for ‘cricket’. People have been known to falsify a deed and then store it in a box full of crickets to make the paper seem older (and thus more authentic). In addition to fraud, title issues can arise when mistakes are made in transferring property. For example, if a spouse or child is left out of a deed, the person not included could show up later on and challenge the rights of the property’s current occupant. In less developed regions, the boundaries between properties can be based on physical objects that can move or disappear (i.e.: “Start at the old tree, then take 50 steps to the stream…”). Squatters such as the Landless Peasant Movement could obtain possessory rights over land even if they do not appear in any registry. Although your attorney or the cartorio could theoretically be liable for mistakes, an investor would need to prove negligence in order to win a lawsuit, which is no easy matter for a foreigner up against well-connected local attorneys. Even if the investor wins the lawsuit, the Brazilian courts can easily delay the date of judgment for decades. These are just some examples of title risks faced by real estate investors. Title insurance protects foreign investors against these and other risks for a small, one-time fee, which is paid at closing.
4) What are the fundamental elements of a cross-border title insurance policy for a foreign investor operating in Brazil?
In one sentence, a cross border title insurance policy ensures that overseas investors get all the rights to real property that they bargain for. This means that investors are protected from challenges to ownership, undiscovered liens, border disputes, etc. Lenders are also ensured that the mortgage (or garantia) they obtain over the property is valid and enforceable. FNF’s international policies are based on the form developed by the American Land Title Association and used in most states in the US. For more detailed information about the terms and conditions of an international title policy, please see our website, FNF Title International, or contact me directly.
5) What about the costs of any potential litigation – should that be incorporated into the title insurance contract?
Yes, and it is. If you are covered by an FNF title policy and receive notice of a claim or title problem, just contact us and we will hire counsel, at our expense, to defend your title and resolve the situation. If we cannot protect your investment from a covered title claim, we will indemnify for any losses.
6) Should title insurance contract be written in English – how can investors ensure their interests are protected in the eyes of Brazilian law?
One of the advantages of an international title policy is that it is written in English and governed by New York law. Thus, a foreign investor need not expose itself to the Brazilian judiciary system for title issues.
7) Would you recommend sending the contract to an independent lawyer to be on the safe side?
I absolutely recommend that any purchaser of real estate or land retains a reputable Brazilian-qualified attorney to negotiate the transaction and perform due diligence. In fact, FNF will not issue a title policy for Brazilian real estate unless a Brazilian attorney has issued an opinion regarding title issues. Whether the investor should retain separate counsel to analyze our policy is an interesting question. As a lawyer, I would never advise an investor not to retain counsel. That being said, lawyers can be expensive and each investor will need to evaluate whether hiring separate counsel to review the title policy is worthwhile. With few exceptions, FNF’s international policy is based on a form published by the American Land Title Association and used in most states in the US.
8)How can Brazil investors contact you and find out more about your services in the country?
Please see my contact information below. I would be happy to answer any questions an investor may have. You can also check out our website: FNF Title International.
Zachary S. Klughaupt
Managing Director, Brazil
FNF Title International
c/o Mrs. Elizabeth G Liotti
Avenida Maria Coelho Aguiar 215 – Bloco D – 4º Andar
CEP: 05804-900 – São Paulo – SP
mobile Brazil: +55-11-7183.2357
U.S. / International number: +1 973-986-6821