Maria Asuncion #152
La Manzanilla, Jalisco Mexico 48898
Telephone/Telephono : (315) 351-5167
Fax : (315) 351-5167

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Legal Aspects of Real Estate Transactions in Mexico

I. Body of Law

Many of you are familiar with the kelsen pyramid. This pyramid shows the legal framework and strength of laws in our country, that is the body of law. At the top you have the constitution and nothing is above it in terms of the law. It is followed by the international covenants and federal laws. The third step is the state and local laws, below you have the executive orders and administrative regulations and at the end here you have customs and public standards.

II. The Kelsen Pyramid

Applying this pyramid in mexico’s legal framework concerning real estate, we have as the first tier, the federal constitution of the united mexican states of 1917. ( herein after called the constitution).
We have as the second tier, the international and federal laws all of which are coequal, which are among others, nafta, other international agreements signed by mexico; the foreign investment law; the civil code for the federal district and territories; the federal procedures code; the penal code for the federal district and territories; the federal environmental protection law; the federal law for the use of land; the income tax law ( in mexico it is only a federal one, no state income tax); the commercial code with the general law of credit instruments and operations add the general law of mercantile corporations; the agrarian law and customs law. In the third tier, we may find the state’s civil codes and related laws; an example of the executive orders and administrative regulations you have the public registries of property and commerce and finally, as the bottom tier, customs and PUBLIC standards (actions that are not written yet they are observed by the people)

III. Property

A.- Article 27 of the constitution

Article 27 of the constitution establishes the ownership of lands and waters. This article grants to the mexican nation ownership of the lands and water within the national territory, and provides that the nation shall have the power to transfer ownership rights or such properties to private individuals, thereby creating private property.

Section i of the same article 27 grants the right to acquire ownership of land and waters only to mexican nationals individuals and companies; yet it empowers the state to grant the same right to foreigners, individuals and companies, subject to the condition that the foreigners contract with the state (represented by the ministry of foreign affairs) to consider themselves mexican nationals with regard to the property acquire and agree not to invoke the protection of their respective home governments with respect to their ownership right. If this covenant is breached or broken, all rights to such property shall revert to the mexican nation under this agreement. This is called the calvo clause (carlos calvo an argentinan lawyer and statesman created the above mentioned clause based on the doctrine condemning any reason of direct on indirect intervention of any country in the internal or external affairs of another. This doctrine is observed in just about every country in latin america). This clause compels foreigners to accept the same treatment as nationals pursuant to the law and resources of the relevant country.

B.- Restrictions in Residential Property

The new foreign investment law restricts foreigners rights to acquire property in the 100 kms strip along the borders and the 50 kms strip along the shore line (beaches and coasts) but only for residential use. However, foreigners may use and enjoy residential rights to property within the restricted zone through a fideicomiso or mexican trust.

C.- The Fideicomisio

In the fideicomiso, the settler (fideicomitente) delivers to the trustee (fiduciario, who can only be a licensed bank or a brokerage firm operating in mexico) in trust, the real estate so that it can be used and enjoyed by the benificiary (fideicomisario), while establishing an amount to be paid by this beneficiary in consideration for that use.
The fiduciario (trustee) has all the rights of the owner of the real estate, including administration and ownership and is empowered to acquire, sell, mortgage and enter into any form of leasing arrangement, receiving payments and granting bills, executing credit documents, granting powers of attorney and revoking them and desisting from any judicial action, so long as he/she is acting according to the instructions received in writing by the fideicomisario (the beneficiary).
It is the ministry of foreign affairs who authorizes this kind of fideicomisos (trusts) and the ministry has a maximum of 30 working days to decide, following the filing of an application permit. If no decision is issued in the time period, the permit is deemed to have been granted.
Foreigners are allowed to sell or lease any real estate and/or property in mexico.
The key differences in the fideicomiso and a u.s. trust are: first the trustee (only a bank or a brokerage firm operating legally in mexico), and second, the benificiary (fideicomisario) in the mexican trust is the one that controls the trust, not the trustee like in any u.s. trust
The term of fideicomiso may be as long as 50 years and it may be extended.

IV. REAL ESTATE USE

Real estate in mexico may be used in 4 categories:

A.- Commercial Propety
Commercial.- for selling any kind of legal product or service like stores, tourist activities and other services like parks, warehouses, hotels, resorts, shopping malls, bars and restaurants, etc.

B.- Industrial Propety
Industrial.- for the manufacturing and transformation of goods, producing any kind of articles and products, warehousing, etc.

C.- Residential Property
Residential.- for homestead in the property.

D.- Aricultural Property
Agricultural.- livestock and forest purposes are other type of owning property and are limited according to the constitution.
Individual agricultural property generally can not exceed 100 hectares (aprox 200 acres) of irrigated land. Land for the production of cotton can not exceed 150 hectares (aprox 300 acres) of irrigated land; land used for the production of a few specialized crops like coffee, bananas, cocoa and fruit trees can not exceed 300 hectares (aprox 600 acres) of irrigated land; land to raise livestock can not exceed necessary land to raise a maximum of 500 large farm animal or equivalent small farm animals; and forestry property can not exceed 800 hectares (1600 acres).
However, companies may own land for agricultural, livestock and forestry purposes in tracts not greater than 25 times the factor for individual landholdings mentioned before, always having sufficient number of shareholders or partners to justify their landholdings.
In relation to agricultural, livestock and forestry purposes in ejido property, we will address that topic later.

V. How to acquire or obtain Real Estate.
There are several ways to obtain or acquire real estate; you may obtain ownership, possession, right of use and enjoyment and even all rights to dispose, sell or lease.

A.- Purchase Agreement

One of the most common ways to acquire real estate is through a purchase agreement (this is similar to a contract to purchase in the u.s.). In a purchase agreement you have a buyer, a seller, and the description of the product to be purchased. The seller establishes his intent to transfer the property, possession and use of a real estate according to its characteristics for the consideration, while the buyer, establishes his will to acquire the product according to the conditions and for the payment of a consideration.

1.-Registry of Property

The purchaser should verify clear title, or the absence of any liens on the real estate he wishes to obtain, as well as the payment by the seller of the real estate tax, and water contribution fees for the previous 5 years and make sure that the desired real estate is registered in the name of the seller at the corresponding public registry of property.

Since most real estate purchases are for over $15,384 pesos (365 times the daily minimun wage) the legal necessity is to formalize it by executing a deed of transfer before a public notary, which will then be recorded in the corresponding public registry of property, to produce effects before third parties. A public notary in mexico, although similar by title, is not similar to the one you have in the united states of america. A public notary in mexico has to be a lawyer and obtain a degree of notary with the local authorities, and then is granted by opposition the right to operate as a public notary. As an example, there are only 300 public notaries in mexico city. Public notaries are well known people in their towns and usually are considered very honorable personalities in their communities.

2.- Public Notories

since public notaries are quasi government agents and recorders, they assist the authorities in such way that they verify the legal capacity of the parties to exercise their rights to sell and acquire the real estate; recordal of ownership to the real estate to be transfered at the corresponding public registry of property; and payment of real estate property taxes and water contribution fees; they will even register the transfer of the real estate property; they pay the legal fees of taxes for registration of the real estate and they even withhold the income tax generated by the gains of the seller and pay each tax to the corresponding authorities.

3.- Title Insurance

I strongly recommend to ask for title insurance, which is now offered in mexico by several american title insurance companies. This meassure gives the buyer a ” more confident” approach similar to the us practice in operations related to real state property.

It is important to understand that defenses to a transaction embodied in a public instrument granted before a public notary and thus recorded at the public registry of property will be few, accordingly, you must verify that everything you want, be included in the public instrument. The law in mexico protects an innocent third party purchaser from damages or fraud in the event there are any hidden vices (“vicios ocultos”) in the instrument, and protects against civil and penal damages. In other words, much as here, a recorded instrument loses any rights of avoiding the conveyance on grounds of mistake, fraud, duress, etc.

B.- Joint Venture Agreement

In a joint venture agreement, where one partner contributes real estate to capital, the real estate becomes part of the capital of the agreement and the transfer of the property has to be done in a public instrument before a public notary. The whole agreement of the joint venture must then be included in the public instrument and recorded in the competent public registry of property; unlike here where joint ventures are private contracts. Accordingly, to maintain joint venture agreements private, it is necessary to segregate the transfer of the real estate in a separate agreement.
All corporations in mexico have to be organized pursuant to a public instrument executed before a public notary and recorded in the competent public registry of property and commerce. If a real estate is part of the capital of a corporation acquired from or contributed by any shareholder(s), always make sure that the public instrument creating the corporation identifies the real estate and is recorded in the public registry of property and commerce of the jurisdiction where the corporation has its address. If the real estate is not in the same state or city where the corporation is located, make sure that ownership to the real estate is recorded in the public registry of porperty where the real estate is located and that the owner of record is the corporation.
Real property that is part of a trust, again, has to be identified in the trust agreement, which will be a public instrument, and recorded at the competent public registry of property, even if it is registered at the ministry of foreign affairs.

C.- Condominiums

Condominiums in Mexico operate very Similary to American condominiums, where the condominium owner has an exclusive right to his apartment or unit of property and, at the some time, is also co-owner of the common areas of the condominium in the percentage established in the condominium agreement. A condominium owner may do any legal thing he wishes in his unit of property without alterating the condominium’s title documents and its regulations. As co-owner of the common property, the owner has the right to use it and enjoy it according to the agreed terms established in the condominum’s title document, and any changes in this area have to be approved by the majority of voters of the condominium owners, gathered for such purpose in the condominium meetings.

The authority and administration in the condominium property, specially in the common areas, is the one elected by the condominium owners and established by written agreement in the condominium’s title documents, and its regulations. In the absence of these documents, the corresponding articles of the civil code of the jurisdiction are applicable.

D.- Time Sharing

Time sharing purchases, unlike here, are not a real estate purchase. The buyer doesn’t buy any real property interests or rights, rather he/she is buying only the right to use the real estate for a specific time period. Besides the prices, the buyer agrees to pay for using the time-share property for a definite period of time, he/she will have to pay the maintenance cost of using the property for the time he/she occupies it, according to his/her contract. This maintenance cost varies yearly.
Time sharing is regulated in mexico by standards established by the secretary of economy called “normas oficiales mexicanas; (nom) (mexican official standards) which is the competent authority that controls registration of time-sharing in mexico.

E.- Donation

Donation is a legal instrument to transfer the property from one person to another. In connection with a donation of real estate, it is important to know that there are no pending claims or litigation to avoid or minimize taxes. Donations can be done through estate bequeaths. If not made to collateral or direct heirs, or between family members, a donation is usually subject to income tax based on capital gains from its original value to its commercial value, at the time of the transfer. Donations have to be made pursuant to a public instrument and in the event they are of real estate property, donations must be recorded at the competent public registry of property.

F.- Judicial Foreclosure

Judicial foreclosure is yet another way to transfer real estate. The judgment transfering ownership to the real estate has to be recorded in the competent public registry of property, and related inscription or recordal fees must be paid.

VI.- Civil Law

Mexico is one of many countries where the legal system is based upon a civil system of law, all the way back to roman law.

Civil law is a set of codes and principles which make up the law.
In mexico, our constitutional chart encompasses the individual guaranties (constitutional rights) in its first 29 ARTICLES. THOSE guaranties are similar to the ones encountered in any free and democratic country.

Our civil code recognizes any agreement reached between any parties but, at the same time, automatically protects the parties by, for example, nullifying illegal clauses. Thus, the civil code gives you all the legal protection you may need as a legal entity. Besides, there is consumer protection, which in mexico also benefits corporate parties.

VII.- Civil Procedures in Mexico:

The judge is both the trier of fact and law. He is not only involved in the legal analysis of the case, but he is also involved in the factual aspects of the case. Therefore, since the judge is the trier of fact and law, there is no right to a jury trial in mexico.

Civil procedures in mexico, just as in the u.s., begin with the filing of the complaint or demanda by the plaintiff. A demanda has usually a statement of fact (recital), considerations of law (consideraciones de derecho), and the prayer for relief (conclusiones).
Serving the defendant to acquire personal jurisdiction is the next step (generally it is done personally, although it can be served by mail or publication).

Once served, the defendant has a short period of time (usually 10 to 20 days) to answer or respond to the complaint.

The judge then dictates the acuerdo (answer) and the parties are ready for the introduction of evidence. If there is no answer by the denfendant, a default judgement is reached which has to be asked by the plaintiff.

In the introduction of evidence (which is not like discovery in the u.s.) the judge holds a series of evidientionary hearings, attended by the judge, the judge’s assistants (secretaries) and the parties; and each party may bring a translator. Usually, the parties do not agree with the other translators, so there is the possibility of a court appointed translator, and consequent delays (delays are done sometimes to win time like denial of translated documents, etc.).

There are several types of evidence; public documents, private documents (which have to be translated into spanish and corroborated by a witness), photographs, photocopies, and the judge can do a judicial inspection by going to the premises in question, and filing a memorandum of his findings to the court file (expediente).

For witness testimony, it is the judge who asks the questions instead of the lawyers. The lawyers may submit a list of questions to the judge. There is no cross examination and depositions are authorized and may be taken at the nearest consulate.

In the testimony of the parties (confesional) the judge recites a series of statements of facts to be answered by a negative or affirmative of either of the parties (admit or deny). If the judge is absent at the evidentiary hearings or at the testimony, everything is done in writeen form and are considered part of the written record of the case that the judge will use to make a decision. After the case has been reviewed by the judge, the lawyers may ask for oral arguments. Once completed, the judge will issue the judgment (sentencia) which provides a brief explanation of the facts and law used by the judge for his decision and the relief granted. Failure to comply with a judgment can result in fines and imprisonment. There is the recourse of appeal of judgment and/or habeas corpus.

VIII.- The Ejido

Originally, ejidos were agricultural land grants issued by the mexican government to farming and ranching cooperatives, for the use of federally owned property.
Before 1991, the agrarian authorities had a registry where all the measurements and boundaries of every ejido were recorded. The recorded information was used by the federal government to define each ejido.
The ejidos did not own their property, they only had the right to use it. In january 1992, with the amendment of article 27 of the constitution, and based on article 9 of the new agrarian law, the ejidos were granted title to the land they used for farming and ranching. The deeds reflected the records shown at the agrarian registry.

Although the ejido is not the same as a corporation, it is very similar. An ejido is a legal entity governed by something much like a shareholder’s meeting and administered by a board consisting of a president, a secretary and a treasurer.

The mentioned shareholder’s meeting or the ejido member’s meeting is where each member of the ejido has voting rights with regards to the use of the property owned by the ejido.

IX.- The Ejido Property

The real estte property of the ejido is divided into three categories:

Individual parcels
property for common use, and
property for community development
Individual parcels are those for which parcel certificates have been issued to individual ejido members by the decision of the ejido member’s meeting, and inscribed in the national agrarian registry. No individual parcel may be larger than “pequeña propiedad” (100-800 hectares) and no more than 5% of the ejido property. The national agrarian registry will issue a deed of an individual parcel of the ejido which in turn will be recorded at the corresponding public registry of property.

The property for common use in the ejido is really the patrimony of the ejido and it is the ejido member’s meeting which decides what is to be done with this land. It can be subdivided into individual parcels or used to do business with other private individuals or corporations.
The property for community development is intended to meet the needs of the ejido community for urban development.

Article 75 of the new agrarian law states that the ejido may transfer ownership of common use properties to partnerships or companies in which the ejido or its members participate in joint venture corporations in which their capital contriubutions consists of real estate property. It is important to point out that the title to the property in a joint venture is assigned to the corporation and the ejido no longer owns the real estate property in question.

The agrarian authorities no longer intervene to regulate transactions between third parties and the ejidos. The process of formation of an ejido is similar to the one for a joint venture corporation. As in the latter case, members in the aggregate contribute their rights to the real estate for common use. The contributions are approved by the ejido members meeting. The contributed rights then constitute the economic support or capital of the ejido community.

Purchasing property of the ejido is a decision of the ejido member’s meeting. Only the property for common use may be purchased.
Many foreign investors have entered into joint venture agreements with large ejidos using the ejido population as workers and producing vegetables and fruits, which are subsequently sold throughout the world.

In projects not involving agriculture, which could include tourist developments, ther are no restricitions on how much the ejido must hold in capital of the corporation.
There is no restriciton whatsoever in dealing with indiividual parcels if a parcel certificate has been duly issued and registered.

Leasing of property for common use is permitted. Article 45 of the new agrarian law states that common use of porperty and individual parcels may be the object of any contract that entails the use of property. Such contracts are limited to a term of 30 years, and may be renewed.

X.- Taxex

Both, the seller and the purchaser are liable for the taxes upon the purchase and sale of real estate located in mexico.

A.-Federal taxes:

Income tax has to be paid by the seller of real estate upon:

25% capital gains on the gross amount of the operation or 34% on the net amount of the operation or
40% if dealing with tax heaven.
34% on the net profit obtained. (32% in 2005 in a face out program of 1% per year)
However, if you use the net profit obtained in the sale of a property to buy another property, there is not any tax.. This tax is payable 15 days after the transaction has been accomplished.
Value added tax (iva) is payable by the purchaser of structures at a rate of 15% calculated on the amount of the operation, which shall include taxes, other fees, interests or any other concept. No value added tax is payable on residential uses.

Iva will be paid for all the services rendered by all the professional people that intervene in the fulfillment of the operation. This value added tax is 15% of the amount paid.

B.- Local Taxes:

There is a real estate acquisition tax that any purchaser has to pay when acquiring a real estate. In most states in mexico, this is 2% of the value of the property.

XI.- Due Diligence

This is a list of searches and inquiries that any purchaser should consider when buying a real estate property in mexico:

title deeds
prior history of owenership
copy of the registration folio at the public registry of property
obtaining of certificate of absence of liens and of good standing from the public registry.
search of the type of land and its authorized usage & zoning compliance
outstanding mortgages or other encumbrances on the property or structures thereon.
review of payment of real estate taxes and water contributions.
physical identification of the boundaries and surface
existance or railroad spurs
lease agreements, if applicable
employee claims on the property
easements and other property rights
verification for compliance of environmental regulations
If there are structures, it is important to verify the following:

construction permits and licenses
authorization for the plans drafted
health licenses
contracts for the construction of buildings, installations and equipment
permit and licenses for electric and gas installations
permit and licenses for wells, hydraulic equipment and pumping equipment
trust deed on the property
operation licenses, permits and approvals