By Caio Cesar Corso Quincozes and Peter Bonnevialle Odebrecht
M&A transactions in the construction industry present unique challenges. Long project cycles, dependence on land registry records, stringent environmental regulation, labor-intensive operations, and direct interaction with end consumers require due diligence and transaction structuring to be specifically tailored to the sector.
The analysis begins with the corporate structure and the use of the segregated assets regime (patrimônio de afetação). As a common market practice, each development project is typically carried out through a Special Purpose Entity (SPE). Consequently, the buyer must assess whether the most appropriate approach is to acquire the equity interests of the SPE or specific project assets, such as land plots, inventory of units, and receivables portfolios.
Where a project is subject to the segregated assets regime, the land, construction works, and corresponding cash flow are legally segregated from the developer’s general assets and are liable only for debts and obligations related to the respective development. This segregation protects purchasers of units against the insolvency of the corporate group and has direct implications for transaction structuring: project cash cannot be freely transferred to other entities; transfers of segregated assets are subject to the specific rules governing the regime; and the segregation is only terminated upon registration of the completed construction, registration of the purchasers’ titles, and repayment of the construction financing, pursuant to Article 31-E of Law No. 4,591/1964.
Any party acquiring control of the SPE or assuming the role of developer inherits all obligations arising from the regime vis-à-vis purchasers and financing institutions. This requires a thorough audit to confirm that the segregated assets have been properly constituted and maintained and to ensure that liabilities from other SPEs or the holding company do not contaminate the acquired project.
An important tool in defining the transaction structure is real estate due diligence, which focuses on the registrational regularity of the development. It is essential to verify whether the development registration statement (memorial de incorporação) was duly recorded with the competent Real Estate Registry Office, as required by Article 32 of Law No. 4,591/1964, before any unit sales occurred.
The sale of units prior to registration of the development statement constitutes an offense against the popular economy under Article 66 of Law No. 4,591/1964, subjects the developer to fines, and allows purchasers to seek termination of their agreements with reimbursement of amounts paid. Such circumstances may significantly impair the receivables portfolio that supported the target company’s valuation, potentially resulting in post-closing purchase price adjustments or even rescission of the transaction.
From the buyer’s perspective, contractual responses typically include conditions precedent requiring registrational regularization, specific representations and warranties regarding the validity of completed sales, and indemnification provisions supported by dedicated purchase price holdbacks. For sellers, prior regularization reduces contingencies and helps avoid valuation discounts.
Further registrational issues also require careful attention. Security interests encumbering the target company’s real estate assets must be analyzed in detail, as one of the most common and potentially harmful mistakes in due diligence is the misinterpretation of their legal effects.
Although Precedent No. 308 of the Brazilian Superior Court of Justice (STJ) protects end purchasers by providing that a mortgage granted between the developer and the financing bank is unenforceable against them, the Court has recently held that this protection does not extend to fiduciary transfers of real estate (alienação fiduciária), as established in Special Appeal No. 2,130,141/RS.
The distinction is far from academic. Because the market has become accustomed to treating the protection afforded by Precedent No. 308 as universal, entire inventories subject to fiduciary liens are frequently marketed as though no legal risk existed. Under Law No. 9,514/1997, the sale of property subject to a fiduciary transfer without the formal consent of the secured creditor constitutes a sale a non domino—that is, a sale by a party that does not hold full ownership rights.
If the developer defaults on its obligations to the financing bank, a good-faith purchaser may face the real risk of losing the property. This creates significant contingent liabilities affecting both the receivables portfolio and the inventory of the target company. In transactional practice, this requires a complete mapping of encumbrances recorded in the property’s registry, obtaining consent or waivers from fiduciary creditors as a condition precedent to closing, negotiating release mechanisms linked to debt repayment or refinancing, and, where residual risk remains, implementing purchase price holdbacks proportional to the exposure.
It is also important to note that, although Articles 54 to 58 of Law No. 13,097/2015 establish the principle of concentration of information within the property registry record, suggesting that a review of the registry alone should be sufficient to identify risks affecting the asset, consolidated case law imposes on the purchaser the responsibility of investigating prior transactions and circumstances beyond the seller’s acquisition.
Accordingly, a finding that a previous owner committed fraudulent conveyance or tax-related misconduct may render the transaction ineffective against public authorities, together with all subsequent transfers in the chain of title.
Moreover, real estate developments may be interrupted at any time by judicial orders or administrative determinations. As a result, the approval process adopted for the project, the timing of pre-sales, and the quality of completed sales—including the likelihood of contract terminations and the payment conditions negotiated with purchasers—must all be evaluated, as these factors may directly affect cash flow projections and the overall feasibility of the development.
Attention must also be paid to obligations undertaken by the acquired company—or by the entity whose equity interests are being acquired—with third parties, particularly landowners contributing property to the development (terrenistas). Appropriate contractual mechanisms should be implemented to protect the buyer if such obligations are not disclosed during negotiations or if the project fails to achieve expected performance levels, resulting in an increase in the effective acquisition cost of the land.
The physical and tax regularity of the construction works likewise requires close scrutiny, regardless of whether the transaction involves an asset acquisition or a share acquisition, since irregularities attach to the project itself and follow whoever incorporates it into their assets.
In addition to reviewing permits, licenses, and occupancy certificates (habite-se), due diligence should focus on the social security compliance of the workforce. Tax oversight of construction projects is currently conducted through the National Construction Registry (Cadastro Nacional de Obras – CNO), which replaced the former CEI registration system and is integrated with the Federal Revenue Service’s Electronic Construction Assessment System (SERO).
If project data and tax payments are not properly linked through these electronic systems, the Federal Revenue Service may maintain outstanding tax assessments, prevent the issuance of tax clearance certificates, and block registration of the completed construction with the Real Estate Registry Office, thereby preventing the legal delivery of units to purchasers.
Environmental liabilities represent another critical area due to the direct impact construction activities have on land, vegetation, and water resources. Due diligence must verify compliance with all conditions attached to preliminary, installation, and operating environmental licenses.
It is important to remember that environmental liability in Brazil is strict liability and has a propter rem nature, meaning that it follows the property itself. Because the obligation to remediate environmental damage is attached to ownership of the property, the purchaser inherits responsibility for contamination or environmental irregularities, even if they were caused by third parties long before the acquisition.
This principle applies equally to direct acquisitions of land or SPEs, as well as acquisitions of holding companies, since in the latter scenario the acquired group remains the legal owner of the relevant assets and liabilities associated with them.
Labor matters have historically been among the largest sources of contingent liabilities in the construction industry. Compliance assessments should closely examine occupational health and safety practices, particularly adherence to Regulatory Standard No. 18 (NR-18), which governs safety conditions in construction sites.
With respect to outsourcing and subcontracting arrangements, although Precedent Guideline No. 191 of the Brazilian Superior Labor Court (TST) generally excludes labor liability for the owner of the work (dono da obra), the analysis changes where governance failures are identified. Under Repetitive Theme No. 006, the TST held that if the owner of the work engages a contractor whose economic and financial capacity has not been adequately verified, the owner may be held secondarily liable for unpaid labor obligations, through the analogous application of Article 455 of the Brazilian Labor Code (CLT).
The structuring of construction contracts and post-completion liability periods also require particular attention. Construction agreements are governed by Articles 610 through 626 of the Brazilian Civil Code, yet there remains considerable confusion in the market regarding limitation periods for construction defects.
The five-year period established under Article 618 of the Civil Code constitutes a statutory warranty period. If a latent defect affecting the structural integrity or safety of the property manifests itself within those five years, the purchaser has the general ten-year statute of limitations established by Article 205 of the Civil Code to bring an indemnification claim, according to well-established case law of the Superior Court of Justice (STJ), including Special Appeals No. 1,534,831/DF and No. 1,721,694/SP, as well as, more recently, Interlocutory Appeal in Special Appeal No. 2,499,655/MS.
In practical terms, a construction company may face litigation concerning structural defects for up to fifteen years following project completion if the defect emerges at the end of the five-year warranty period and the claim is filed during the subsequent ten-year limitation period. Exposure may extend even further if the developer performs corrective interventions that effectively restart the warranty period.
This extended liability horizon frequently leads purchasers to negotiate longer escrow periods and more robust post-closing indemnification protections.
Where the target company focuses on residential development, consumer protection issues and contract terminations (distratos) assume central importance. Purchaser withdrawals are governed by Law No. 13,786/2018, which generally limits the developer’s retention to 25% of the installments paid by the purchaser. This retention may increase to 50% where the project is subject to the segregated assets regime (patrimônio de afetação).
To benefit from the higher 50% retention threshold, however, the developer must comply with strict disclosure requirements in the contractual Summary Schedule (Quadro-Resumo), pursuant to Article 35-A of Law No. 4,591/1964.
Despite the apparent clarity of Law No. 13,786/2018, STJ case law concerning permissible retention amounts remains unsettled. In a series of recent decisions involving land-lot developments, the Court limited retention to 25% of the amounts paid even where the statute appeared to authorize retention of up to 10% of the total contract value (Special Appeals No. 2,106,548/SP, No. 2,117,412/SP, No. 2,107,422/SP, and No. 2,111,681/SP). In theory, similar reasoning could be extended to residential development contracts, although contrary decisions have also emerged, such as Interlocutory Appeal in Special Appeal No. 3,081,626/SP.
Accordingly, legal due diligence should assess whether sales agreements were properly drafted to support the target company’s cash flow projections and historical cancellation rates, while also evaluating the financial impact of potential judicial limitations on contractual retention rights.
Financial and accounting due diligence likewise presents sector-specific complexities. Revenue recognition by developers operating under the segregated assets regime is governed by CPC 47 (the Brazilian equivalent of IFRS 15) and Technical Guidance OCPC 04.
Revenue is recognized over time using the Percentage of Completion (POC) method, based on the physical progress of construction. Any error or understatement in the project’s estimated total cost artificially inflates the percentage of completion and, consequently, the historical EBITDA reported by the target company.
For this reason, technical engineering reviews of ongoing projects are essential to validate construction budgets and avoid significant distortions in the determination of the purchase price.
Purchase price adjustment mechanisms therefore play a critical role in construction-sector transactions. The choice between completion accounts and locked-box structures, adjustments for net debt and working capital, incorporation of remaining construction costs into adjustment calculations, and post-closing verification procedures all serve to ensure that the buyer does not overpay for an artificially inflated EBITDA generated by unrealistic project budgets.
In large-scale transactions, antitrust considerations also become part of the deal timetable. Market consolidation may require prior approval from the Brazilian Administrative Council for Economic Defense (CADE) pursuant to the criteria established under Law No. 12,529/2011.
Pre-merger notification is mandatory whenever at least one of the economic groups involved generated gross annual revenues in Brazil of BRL 750 million or more, and another group involved generated gross annual revenues of BRL 75 million or more in the preceding fiscal year.
This issue is often underestimated by industry participants, who frequently assume that the mere acquisition of a real estate asset could never fall within the jurisdiction of the competition authority. That assumption is incorrect.
Article 90, item II, of Law No. 12,529/2011 expressly defines as a concentration act the acquisition, whether by purchase or exchange, of tangible or intangible assets, without distinguishing the purpose for which the acquirer intends to use the asset. Accordingly, the rule applies equally whether the property is acquired for demolition and redevelopment or for the continued economic exploitation of the existing asset.
CADE Resolution No. 33/2022 reinforces this interpretation by expressly listing asset acquisitions among the transactions subject to mandatory notification. CADE’s decisional practice further confirms this understanding. In Proceeding No. 08700.002172/2023-37, the authority approved without restrictions a transaction involving assets that would partially be demolished for the development of a new real estate project. A similar approach was adopted in Proceeding No. 08700.006162/2025-32, involving properties intended for future economic exploitation by the acquirer.
Therefore, whenever the statutory revenue thresholds are met, even isolated acquisitions of land plots and greenfield development projects may require prior notification to CADE. Premature implementation of the transaction before obtaining the required approval—commonly referred to as gun jumping—may subject the parties to substantial fines and potentially result in the nullification of acts performed prior to clearance.
The practical translation of all these risks ultimately lies in the transaction documents and the allocation of liabilities between the parties.
Specific representations and warranties concerning compliance with CNO/SERO requirements, environmental licenses, registrational regularity, and liabilities arising from subcontractors are essential tools for protecting the purchaser. Tailor-made indemnification provisions, robust escrow arrangements, and earn-out mechanisms linked to physical milestones—such as the issuance of the occupancy certificate (habite-se)—or financial milestones, such as the effective realization of the project’s Gross Sales Value (VGV), enable a balanced and sophisticated allocation of the risks inherent in this highly complex sector.
Conclusion
M&A transactions in the construction industry require a multidisciplinary analysis that extends far beyond traditional corporate due diligence. The legal, registrational, environmental, labor, tax, accounting, consumer protection, and antitrust issues associated with real estate development directly affect valuation, transaction structure, risk allocation, and post-closing exposure.
The sector’s particular characteristics—including segregated assets regimes, long-term construction liabilities, complex regulatory requirements, environmental obligations attached to the property, and accounting methodologies based on construction progress—demand a level of scrutiny that is both broader and deeper than that typically required in transactions involving other industries.
A well-executed due diligence process, combined with carefully negotiated contractual protections, allows the parties to identify, quantify, and allocate risks appropriately. Specific representations and warranties, indemnification mechanisms, escrow arrangements, purchase price adjustments, and milestone-based earn-outs are not merely contractual provisions; they are essential instruments for preserving value and ensuring that the economic assumptions underlying the transaction remain valid after closing.
Ultimately, successful M&A transactions in the construction sector depend on the ability to transform legal, operational, and regulatory complexities into a clear and predictable framework for decision-making, thereby creating a balanced allocation of risks and fostering long-term value for both buyers and sellers.
