MEXICO REAL ESTATE LAW: AN OVERVIEW

Gerrit M. Steenblik

© 1997 Gerrit M. Steenblik

Arizona State Bar Certified Specialist in Real Estate Law

Jennings, Strouss & Salmon, P.L.C.

Two North Central Avenue, Suite 1600

Phoenix, Arizona 85004

(602) 262-5846

Perspectives: Mexico is the world's most populous Spanish-speaking county, and its capital, Mexico City, is the world's largest urban concentration. By the year 2000 most of Mexico is expected to be open to foreign investors of all nationalities. NAFTA merely gave the U.S. and Canada a headstart. With over 6,000 miles of coastline and spectacular archaeological sites, Mexico's potential for resort and tourism development is almost unlimited.

Real Property: In Mexico real property is defined to include the following: (1) the land and the improvements (including new buildings or new floors added to the mortgaged buildings): (2) plants, trees and fruits which have not yet been separated by harvest; (3) objects attached to the improvements which cannot be separated without damage to either the improvements or the object; (4) statues, paintings and other ornamental objects placed upon the property in such a way as to reveal an intention to attach them permanently; (5) objects which the owner keeps upon the property to propagate birds, fish, bees, etc.; (6) machinery and implements used directly and exclusively for the activities conducted upon the property; (7) fertilizers and seeds necessary to cultivate the property; (8) electrical apparatus and accessories which are attached to the land or improvements; (9) sources of water and aqueducts or pipelines for transporting water or other liquids or gasses on rural property; (10) animals used for breeding purposes; (11) working animals which are indispensable for the cultivation of the property; (12) improvements constructed in waterways, rivers or lakes with the intent that they remain at a fixed point; (13) rolling stock of railroads, telephone and telegraph lines and radio stations, and (14) any other in rem rights. An appraisal of the real estate, however, may not take into account the value of anything other than what appears to be immovable. The Mexican nation is deemed to be the owner of all minerals and substances which exist as deposits beneath the surface.

"Finca rustica" is defined as rural property located outside of the city limits. The development of rural property may require the approval of the Federal Ministry of Agrarian Reform. "Finca urbana" is real estate located within the city limits.

The Restricted Zone: The so called "restricted zone" includes all of Baja California and all other land located within 100 kilometers (about 62 miles) from Mexico's international borders or 50 kilometers (about 31 miles) from its coastline. The restricted zone constitutes approximately 40% of Mexico's land mass and much of its most valuable real estate.

The Federal Zone: The federal maritime land zone ("la zona federal maritimo terrestre") consists of the first twenty meters of beach-front property on firm traversable ground. The twenty meter distance is measured from the high tide line or from the first point above that line where the slope is no more than 30 degrees. Within the federal zone, the government controls water rights and limits vehicles, certain activities and the construction of improvements that could endanger people using the beaches, interfere with free passage, or cause pollution. The federal zone is intended to remain public land and to be enjoyed by everyone; however, the Mexican constitution allows the government to grant "concessions" for use of the federal zone.

Ejido Property: After the Mexican revolution in 1917 large tracts of previously privately owned land were made available to agricultural cooperatives ("ejidos"). Originally, the land was owned by the federal government and the members of the ejidos were allowed and required to use and work the land. Neither the ejido community nor an individual "ejiditario" could sell the land, lease it or use it for collateral until after Mexico adopted its new agrarian law in 1992. Therefore, a contract to purchase or lease ejido land entered into before 1992 is invalid.

The new agrarian law requires the ejido communities to establish procedures whereby their members may obtain private ownership of their respective parcel ("pequeña propiedad") of the ejido property. Until parcelled off to individuals, all of the ejido property is deemed to be owned by the ejido as a legal entity. An ejido community also may transfer ownership of a portion of its property -- known as its "common use" property -- to a partnership, corporation or joint venture in which either the ejido itself or its members participate.

Ejido property is not registered in the public registry. Evidence of its title will need to be obtained from, and transfers must also be registered with, the Ministry of Agriculture.

Water Rights: In Mexico, water is deemed to be part of the public domain -- the property of the nation. According to Article 27 of the Mexican Constitution, waters are an integral part of the property through which they flow; thus, water rights are incorporated into the real property rights. Historically, an owner could exploit the water from his property but could not sell water rights without selling the property. Recently Mexico has vested the authority over its waters in a National Water Commission which may control the use and the cost of water.

Foreign Investment in Real Property: The Mexican Constitution and the 1973 Foreign Investment Law prohibited "direct" foreign ownership of land or water within those border and coastal areas known as the restricted zone except through a title holding "fideicomiso" -- a bank trust. Until recently, a fideicomiso for restricted zone property could last not more than 30 years. After that, the trustee had to sell the property to a "qualified" buyer (a Mexican citizen or another trust). Indirect ownership through a Mexican company owned by foreign investors also was prohibited.

In 1989, Mexico promulgated new regulations to allow the 30-year trust term to be renewed at least once. As a result of further reforms in 1993, the term of the trust may now extend to 50 years, and the trust may be renewed indefinitely for additional periods of up to 50 years each. The 1993 new foreign investment law also allows ownership of "non-residential" real estate within the restricted zone through a foreign-owned Mexican corporation, provided that formal approval is obtained from the Secretariat de Relationes Exteriores (SRE). Otherwise, all foreign individuals and foreign corporations as well as Mexican corporations which include any foreign investment may hold title to property within the restricted zone only "indirectly" through a bank trust arrangement known as a "fideicomiso".

Notaries: A Mexican "notario" is an official who has been trained and licensed as a lawyer, and then, after passing rigorous examinations, commissioned as a public notary. A notary holds high office for life unless he is removed for cause. The notario fulfills a public function delegated by the government. Although licensed as an attorney, the notario is not in a position to provide either of the parties with legal advice. The notario drafts documents, verifies the facts therein and records the documents with the public registry. The notario's fee generally ranges between 1% and 2% of the value of the asset and the total amount which the buyer pays to the notario (including taxes) is usually approximately 6% of the price.

Escrow Arrangements: Escrow arrangements as we know them generally do not exist in Mexico. It is important to place deposit money with a reputable Mexican or U.S. attorney to be held in a trust account. A bank may also perform this service but will charge a setup fee and a commission based on the amount of money held.

Real Estate Loan Documents: Mexican real property security laws will govern the enforcement of remedies, and real estate litigation, including foreclosure sales, will occur in the Mexican State where the property is located. A mortgage of real property ("hipoteca") creates a security interest in all articles deemed to be real property under Mexican law, including natural accessions. Unless otherwise agreed in writing, it does not encumber industrial production from the property or rents that have already matured when payment is requested. Recourse liability is the general rule, and Mexico does not have anti-deficiency, single action, or security-first rules. Moreover, under Mexican law, there are no usury limits, and both due-on-sale clauses and prepayment penalties, if properly drafted, can be enforced. A mortgage cannot last for a period longer than 10 years unless the longer period of time is set forth in the mortgage; and a mortgage on a building alone does not include the surface area of the land. As yet there is no concept of lender liability in Mexico.

Foreclosure: Mexico does not have procedures for nonjudicial foreclosures such as trustee's sales. In general, a borrower's rights under hipoteca cannot be terminated except through judicial process. A foreclosure sale takes place by public bidding. The price is based upon an expert valuation, and the lowest allowable bid is two-thirds of that appraised value. Bidders must pre-qualify by making a deposit of ten percent of the appraised value. Until the termination of the foreclosure sale, a debtor may redeem the mortgaged property by paying the debt and accrued costs. After the foreclosure sale, a debtor does not have the right of redemption.

Mortgage Alternatives: Because of the risk that a buyer or borrower, through appeals, may delay the final outcome of a foreclosure process, some sellers and lenders prefer not to use a mortgage. One common security device is the "fideicomiso" where a Mexican bank acting as a trustee ("fiduciario") holds legal title and has fiduciary responsibilities to the borrower or buyer and to the lender or seller.

Fideicomiso: The parties of this bank trust agreement are the seller or the lender of the property ("el fideicomitente"), the bank which acts as trustee ("el fiduciario"), and the buyer or borrower ("el fideicomisario") which is the beneficiary. The beneficiary retains the use and enjoyment of the property, and the trustor agrees not to revoke the trust so long as there is no default. The trust agreement must clearly define the procedures that will apply in the event of a default. For example, after notice and a cure period, the trustee, which still holds legal title, may either reconvey to the trustor or sell the property at auction as provided in the agreement.

A fee for registration of the fideicomiso must be paid to the Ministry of Commerce. The amount will vary depending upon the duration of the trust. If foreign ownership is involved, a registration fee also must be paid to the Ministry of Foreign Investment. Both of these fees are collected by the notario. In addition, the bank will charge a fee for review and acceptance of the trust, an annual administration fee, a fee for any contracts executed by the trustee, and a fee based upon the recorded value of the property or the sales price.

The purpose and effect of the fideicomiso is somewhat different when it is used for a sale of real property located in the restricted zone. In that case, the purchase price is generally paid in full, the seller does not retain a right to revoke the trust, and the conveyance to the trust is deemed to be a completed transfer. In the restricted zone, the fiduciario holds the title solely to satisfy the requirements of the Mexican Constitution.

Title Insurance: At this time, title insurance is not available in Mexico for Mexican citizens or corporations, including a Mexican subsidiary of a U.S. corporation. Instead, Mexicans usually rely upon a notario's title search and the opinion of a Mexican attorney. Certain U.S. companies, however, are now beginning to offer title insurance on Mexican real estate interests to non-Mexican investors and lenders. These title policies will typically have additional coverage limitations which are not common in the U.S., and the cost also will be greater. An application fee of at least $3,000 is paid up front for the lawyer's title search and for copies of the documents which are necessary in order for the company to issue a title commitment. A survey will also be required and will cost at least $750.00. The title search and survey requirements usually mean that the turnaround time for the issuance of a commitment is considerably longer than we expect in Arizona, but obtaining such a commitment is a valuable part of a buyer's due diligence. Under these policies of title insurance, the obligations of the title insurer will be decided under U.S. law and in the United States. Otherwise, the only defense or recourse against title defects is to litigate in Mexico.

The policy premium is due at the closing. For an owner's policy, the premium cost is approximately $8,750 per million dollars of coverage. For an additional lender's policy on the same transaction, the premium will be approximately $300.00 per million dollars of coverage. By comparison, in Phoenix the premium for a $1 million Owner's ALTA policy is between $2,800 and $4,000.

Title Searches and Title Documents: Title to real property is evidenced by an "escritura publica" which must be signed before a notario and recorded in the local public registry-- "el registro publico de la propriedad". Therefore, except in the case of ejido property or federal zone property, the public record of a parcel of real estate can be obtained from the local public registry. An official stamp attached to the last page of a document assures the parties that the instrument has been duly recorded and also provides the necessary filing information. Title documents will include the chain of title, the meets and bounds description of the property (including, in some cases, the name of the owner of or the nature of abutting properties) and the public registry filing information. In general, the public registry will not provide information regarding concessions that have been granted in connection with the land. When the title search is done by an attorney, it usually reflects at least the three prior owners. In many instances, it may be worthwhile to trace the chain of title back further.

Real Estate Documents: In general, contracts relating to real estate (including sales, leases, mortgages, etc.) must be in writing, and the document must be in the form of a public instrument. A preliminary "promissory agreement" ("contrato de promesa") is commonly used as the basic document for a purchase and sale. In the promissory agreement the parties establish their respective conditions, and, upon satisfaction of those conditions, agree to execute a final public agreement -- either a sales agreement, a real estate trust, or an assignment of the beneficial rights in a real estate trust. The promissory agreement, which is a private contract between the parties, should never be used as the final agreement, although by signing it and exchanging consideration the parties do create a binding obligation.

Subdivision Development: A subdivision of land for development purposes is referred to as a "fraccionamiento". A developer must obtain governmental approval for a "fraccionamiento" and, by obtaining such approval, the developer becomes obligated to install the offsite improvements (grading, drainage, water, electricity, streets, etc.).

Co-Ownership. If property to be sold is held in co-ownership, the "certificate of no encumbrances" which is obtained from the public registry should so indicate. One co-owner may not sell or encumber the property or even his undivided interest in the property without the consent of all of the other co-owners. Moreover, a co-owner of property is required to notify all other co-owners of the potential sale through a notario or the courts and to allow each to exercise a right of first refusal. The co-owner with the greatest share in the property has the first preference; if any other co-owners have equal percentages, their order of preferences is determined by lot unless it has been agreed otherwise in their contract.

Easements: Under Mexican law, easements ("servidumbres") are expressed in terms of servient properties and dominant properties. A variety of easement rights are created by law, including the right of an adjoining owner to access to a public roadway over adjoining lands, the right of the owner of rural property to transport livestock through neighboring properties to watering places, the right of an owner to use adjoining land in order to harvest fruit from trees overhanging a boundary, the right of an owner to move building materials through one building to another in order to perform repairs, and the right to establish telephonic communication or to conduct electric power across the property of another and to maintain those facilities. These easement rights are not reflected in the public registry.

Possession of Land: Mexican law creates a presumption that the person in possession of property is entitled to continue in possession and has all related ownership rights. This presumption is designed to prevent a breach of the peace. Before acquiring any real estate, it is important to verify that no one is in possession of the property.

Adverse Possession: In Mexico, the concept of adverse possession is referred to as "prescription". The possession must be under claim of ownership, continuous, quiet and public. Acquisition by prescription occurs when real property is possessed for five years either in good faith or by evidence of possession recorded in a public registry. In the case of bad faith, the period is ten years. Prescription does not operate as to either ejido or federal zone lands, and does not run between husband and wife, between parents and children, between or among co-owners, between an incapacitated person and his or her guardian, or against soldiers in active service in time of war.

Time-Share Properties: Time-share contracts are required to be registered pursuant to federal standards known as Normas Oficiales Mexicanas, which are enforceable throughout Mexico. A time-share purchase, is not considered to be an investment in real estate, and even if the property is located within the restricted zone, a fideicomiso is not required.

Condominiums: Various states of Mexico have adopted local statutes to govern condominiums and these may vary significantly from one state to another. A condominium owner ("condomino") is the individual or legal entity who owns and is entitled to the exclusive right to possession of the premises and has a co-ownership right to the common areas. The condominium owner's interest in the common areas is proportional to the respective original values of the units as determined in the condominium's title documents. Common walls and floors that separate only particular individual units are deemed to be owned by the contiguous owners. When a condominium development includes staircases, courtyards or gardens, the related maintenance expenses may be allocated in the condominium documents primarily to those benefitted.

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Gerrit Steenblik is the chair of the International Practice Group at Jennings, Strouss & Salmon. In addition, he is certified as a specialist in Real Estate Law by the Arizona State Bar and is the past chair of his law firm's Real Estate Department. Gerrit acknowledges the assistance of Lic. Luis Rubio Barnetche and Lic. Marcela Trujillo Zepeda, attorneys at the Mexico City law firm of Rubio Villegas y Asociados, S.C.

This publication should not be construed as legal advice or a legal opinion on any specific fact or circumstance. The contents are intended for general information purposes only. The laws of Mexico change often; therefore you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have. For further information about these contents, contact the author, Gerrit M. Steenblik, at (602) 262-5846.

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