Maria Asuncion #152
La Manzanilla, Jalisco Mexico 48898
Telephone/Telephono : (315) 351-5167
Fax : (315) 351-5167
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).
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.
IV. REAL ESTATE USE
Real estate in mexico may be used in 4 categories:
A.- Commercial Propety
B.- Industrial Propety
C.- Residential Property
D.- Aricultural Property
V. How to acquire or obtain Real Estate.
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.
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.
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.
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).
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.
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:
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.
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.
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.
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.
Both, the seller and the purchaser are liable for the taxes upon the purchase and sale of real estate located in mexico.
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
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:
construction permits and licenses