Over the years, we have witnessed and actively participated in the evolution of build-to-suit contracts in the many transactions of this nature that we have advised on in Brazil. Those classic contracts—acquisition of a property chosen by the tenant and subsequent construction of a tailor‑made project—today share space with more flexible and creative BTS structures.

One of these structures, developed by our firm and which we call the “Hybrid BTS,” has been increasingly used by landlords and tenants, including in strategic leases, and was recently tested and validated by the Judiciary. An important step forward for this thesis.

The major driver behind the flexibilization of the BTS contract concept was the 2012 amendment to Law No. 8,245/91 (the Tenancy Law), which introduced Article 54‑A and began to give legal treatment to BTS‑type lease agreements.

By recognizing that a BTS Contract may originate from investments by the landlord in the acquisition, construction, or substantial renovation of the property, the law more clearly opened the possibility for new structures to receive proper legal protection—such as, for example, buy‑to‑lease (acquisition, at the tenant’s request, of a ready property for subsequent lease to such tenant) or the ‘surface rights’ BTS model (the Brazilian law equivalent of a ground lease).

However, there has always been considerable doubt in the market regarding the expression “substantial renovation” as the sole element anchoring a BTS Contract. The doubt is natural, given that the wording of Article 54‑A does not provide details and there is no settled case law on the subject. After all: must the renovation be “substantial” relative to the area of the property, material relative to the property’s overall value, or only in an amount that is, in itself, significant? Considering a property that has already been built on a speculative basis and would undergo a substantial renovation at the request of a given tenant, from what investment amount would it be possible to consider that the entire lease is subject to the BTS regime under Article 54‑A?

These doubts have always been more frequent in the logistics‑warehouse market. A few years ago, our firm began to be consulted by developers in the sector that were facing requests from prospective tenants willing to lease space in already‑built and vacant logistics warehouses (many with a few years of use), provided that the landlord carried out adaptation works in such warehouses to tailor them to the tenants’ specific operational needs.

The market logic is simple: for an e‑commerce company, for example, an older warehouse that has been updated and customized to its needs can function just as well as a new one built to its specifications. For these companies, it often matters more to have a warehouse ready to start the intended operation on the desired date than to wait for the development of a new build‑to‑suit warehouse and delay operations.

These customizations funded by the landlord, truth be told, are not exactly new. This type of work is internationally known as “tenant improvements (TI)”—improvements to the property made by a landlord specifically for a given tenant. In return for such investments, these tenants would be willing to pay a rent premium specifically to compensate the landlord for the TI investments.

However, one question persisted in these cases: without adopting a BTS for the entire lease, how can one ensure repayment and remuneration of the landlord’s investment, considering that the amounts involved in such renovations are substantial, though not necessarily relative to the value of the warehouse as a whole (generally around 10% to 40% of the property’s value)?

The solution we structured at our firm a few years ago involves combining, within a single lease agreement, one portion of the rent that would be subject to the traditional leasing regime under the Brazilian Lease Law, and another portion—corresponding to the material investments made by the landlord—that would be subject to the legal regime of a BTS Contract, with the attendant protection of the landlord’s investment.

With this structure, it is possible to ensure that the portion of the rent related to the landlord’s actual investment is fully repaid and remunerated in the manner and within the term agreed by the parties, while the remainder of the rent, related to the use and enjoyment of the already‑built property (known in the market as the “shell”), remains subject to the traditional lease legal regime. Hence the concept of a Hybrid BTS—i.e., a lease with a hybrid legal regime—since there is a BTS rent component (and therefore guaranteed) and a traditional rent component in the same lease.

The portion of the rent that would be subject to the traditional lease legal regime, referred to as the “Shell Rent,” is adjusted annually for inflation, but remains subject to judicial rent review claims and early termination upon payment of a penalty prorated to the time elapsed on the lease, as is the case with any non‑residential lease.

On the other hand, the BTS portion of the rent under the same lease, referred to as the “TI Rent,” would be fixed, subject to annual inflation adjustment, but would not be subject to judicial rent review claims, so as to keep the cash flow stable throughout the term and in line with paragraph 1 of Article 54‑A. In addition—and equally important—in the event of early termination, the tenant would be required to pay all remaining installments of the TI Rent, as in a traditional BTS.

For the landlord, as it may be intuitive, the investment is protected. From the tenant’s perspective, this structure is also beneficial, as it ensures that the “guaranteed” and locked‑in portion of the rent—the BTS‑type portion—is linked only to the investments made by the landlord and not to the property as a whole.

It seems to us, therefore, that this alternative fits well with the spirit of the legislation, which aims to protect the landlord’s investment, while allowing the parties—landlord and tenant—to freely negotiate the applicable contractual conditions.

In this regard, it is worth recalling that Article 54‑A of the Tenancy Law was shaped based on BTS contracts that predated its enactment, in which Article 473, sole paragraph, of the Civil Code was used as an element of investment protection for the landlord.

Nothing in Article 54‑A suggests that, once adopted, it must be the sole and comprehensive legal regime of the lease. On the contrary, the very caput of Article 54‑A provides that the parties may freely negotiate the contractual conditions. Moreover, paragraph 2 of the same Article 54‑A provides that the penalty amount shall be that agreed by the parties, not to exceed the sum of all rents due until the contractual end date. These statutory provisions reveal the intent to grant the parties greater flexibility as to the level of protection they wish to establish, including with respect to guaranteed rent.

That is precisely what is done in the Hybrid BTS. The parties use the protection afforded by Article 54‑A to the exact extent they need, while remaining subsidiarily supported by Article 473, sole paragraph, of the Civil Code.

In some more recent cases, we went further and structured a TI Rent portion that provided for full repayment of the amounts over, for example, a 10‑year period, while the contractual term was only five years, renewable. We arranged in such case that, if there were a renewal, the amount of the TI Rent would remain stable, following the scheduled 10‑year amortization. However, if there was no renewal (or if termination occurred), the remaining amount of the investment to be repaid would become due in a “bullet” payment at the end of the lease term. The logic is to allow for greater dilution of the amount due under the TI Rent over time, so as not to overburden the tenant’s monthly rent payments while betting on a renewal, yet at the same time ensuring full repayment and remuneration for the landlord should renewal not occur.

Recently, this specific structure faced its first test in the Brazilian courts and was recognized as valid.

A certain tenant that had entered into a Hybrid BTS lease for a logistics warehouse chose not to renew at the end of the 5-year contractual term and, dissatisfied with the bullet payment, challenged its legality in court. The Judiciary of the State of Rio de Janeiro, in a solid and well‑reasoned decision, completely rejected the tenant’s allegations, stating that “it is not credible that a business corporation of the plaintiff’s size [the tenant] would claim vulnerability in order to seek, in the present action, a revision of the clauses initially agreed upon (…).” The decision goes on to emphasize: “Note that the remuneration for the costs incurred by the landlord, now defendant, in carrying out the substantial renovations is part of what the parties agreed as the monthly rent, therefore, by the express will of the parties, the reimbursement is included in the amount paid as rent, and discussing it in the present action amounts to revising its terms.”

The cited judicial decision recognizes the obvious: that the parties are free, pursuant to Articles 421 and 421‑A of the Civil Code, reinforced by Article 54‑A of the Brazilian Lease Law, to structure the lease and give it the commercial arrangement that best suits them, and they must thereafter honor it.

For all these reasons, we believe that the Hybrid BTS lease model poses no threat to the market for traditional BTS contracts—which will remain robust and in strong growth. On the contrary, it is a useful legal innovation for many concrete cases, now tested and validated by the Judiciary. Unsurprisingly, the Hybrid BTS has been consolidating in recent years and is being adopted by various players in significant leases, a trend that should contribute to its wider adoption.

Bruno Amatuzzi

brunoa@amatuzzi.com