Real Estate Law in Chile

In Chile, ownership over a real estate property can be obtained through one of four methods provided by law, which are regulated in the Civil Code (CC) in its Article 588 and follow: (i) transfer; (ii) inheritance; (iii) accession; and (iv) adverse possession. Each is briefly explained below.

Transfer

The main method of acquiring ownership of real estate property is by transfer (Article 670 CC), which is performed or completed with the registration of the relevant deed in the Property Registry in the area where the real estate is located. The transfer of real estate property requires a previous contract capable of justifying it, which is usually a purchase agreement (although it could be a donation, capitalization into a company or other), which must be executed by public deed. The public deed is a requirement that generates the contract or solemnity itself, and therefore, if missing, the contract will be absolutely null and void (Articles 1682 and 1701 CC), or even non-existent, since for the legislator, the public deed is the only way to express consent for these types of agreement. All agreements regarding real estate must be executed by public deed.

In summary, ownership is not created by the mere fact of having signed the deed of sale (which must be granted by public deed), but upon registration in the corresponding Property Registry (transfer). Once registered, i.e., once the transfer (the way of acquiring the domain) has been completed, ownership is established.

Inheritance

Real estate property can be acquired through inheritance, whether by cause of a testament or a mandatory legal provision. In this case, the successors must register their acquisition in the Real Estate Registry before disposing of it. This ensures that the registry is kept up to date.

Accession

Accession is a method of acquiring ownership of goods that have been incorporated into others. The basic principle in accessions is that the minor or accidental good is incorporated by the main or principal, and thus the owner of the latter acquires ownership of the former through accession, after paying the relevant compensation according to the circumstances. Building on someone else’s property is a typical scenario in which accession applies. Accession rules can be amended by a contract.

Adverse possession

Real estate can also be acquired through adverse possession, by continuously occupying the property for a period of 10 years. This period can be shortened to five years if the occupation has been initiated in good faith.

It is important to note that in the case of real property, occupation to these effects requires having registered the property under the occupant’s name, notwithstanding if an actual occupation has occurred.

Adverse possession is a key feature in analyzing real estate titles, as an ownership certificate from the registrar that shows registration for a period of 10 years is enough to certify ownership. Therefore, any title analysis will require registration and title for transfer for the last 10 years.

The “structure” in transactions involving the acquisition of real estate refers mainly to the title and the mode of acquisition. One of the most common modes regarding the title of ownership is the contract of sale, which is granted through a public deed (this means that it is executed before a notary public). The purchase and sale are defined in Article 1793 of the CC as "a contract in which one of the parties undertakes to give an item and the other to pay for it in money. The former is said to sell and the latter to buy. The money that the buyer gives for the item sold is called price". However, it is not simply the contract of sale that creates ownership, but the registry of an abstract in the respective Real Estate Registry.

On the other hand, there are two very important moments in this type of transaction (referring to the mode), which are: the real agreement and the transfer itself, which is completed in Chile with the registration of the purchase/sale in the Property Registry. In summary:

As for restrictions, Chile is not known for restricting the acquisition of real estate. This document is a tax identification number that, together with the passport, will allow the person to act before the various institutions involved in the process of buying and selling the property: notary's office, Property Registry, brokers, among others.

There are other stipulations that, although not legal, may be required by the financial entity that grants a mortgage, such as the accreditation of income in the country or the certificate of definitive residence. Notwithstanding, there is a prohibition in Chile on the acquisition of real property rights by foreigners in frontier areas, pursuant to Article 7 of Decree Law No. 1,939 of 1977, nationals of countries bordering Chile (Peru, Bolivia, and Argentina) are prevented from acquiring ownership and other real property rights, or exercising possession, or holding of real property located totally or partially in the areas of the national territory declared frontier areas. This prohibition extends to companies or legal entities whose principal place of business is in the bordering country, or whose 40% or more of capital is owned by nationals of the same country or whose effective control is in the hands of nationals of those countries.

Real Estate Registries are institutions that keep the registry system of properties in Chile. These institutions oversee lawyers who serve as ministers of faith (Article 446 Código Orgánico de Tribunales or COT), safeguarding and updating the real estate conservatory records in order to maintain the history of the real estate property and provide complete publicity to the encumbrances that may affect the real estate.

This system has produced a complete registry of land ownership in the country, which enables analysis of the history and titles of any real estate and guarantees the rightfulness of its ownership. The registration alone, however, is not complete proof of ownership, as there could be shortcomings on the titles which may lead to eviction.

In them, a team of officials study the legality and grant validity to the property titles, considering the registration as a requirement, proof, and guarantee of possession.

Notaries are described in Article 399 of the COT as "ministers of public faith in charge of authorizing and keeping in their files the instruments that are granted before them, of giving the interested parties the testimonies they request, and of practicing the other diligences that the law entrusts to them". One of the functions of the notaries, according to Article 401 N°1 of the COT, is to issue public instruments and as mentioned above, one of the solemnities of the purchase and sale contract in Chile is that it is granted through a public deed.

The public deed is the public or authentic instrument granted by the competent notary in a legal manner and incorporated into its protocol or public registry. This is where the main role of the notary lies in the purchase and sale of real estate in Chile; it is the notary who extends and before whom the public deeds containing the purchase and sale contract are executed. In addition, they are the ones who keep and preserve "in strict chronological order the instruments that are granted before them, in order to prevent any loss and make their examination easy and expeditious" (Article 401 N°7 COT) and facilitate any person who requests it, "the examination of the public instruments that are granted before them and documents that they notarize" (Article 401 N°9 COT).

Usually, notaries do not draft the public deeds, although they can, but they are instead drafted by the lawyer responsible for the transaction.

The seller's essential obligations are:

• The delivery or transfer; and
• To cure concealed defects or eviction of the item sold (Article 1824 CC).
  

Obligation to deliver the item sold

The delivery of the item sold is made by transfer, the purpose of which is to confer to the buyer the legal and material possession of the item referred to in the contract. In the case of real estate, as stated above, the transfer is completed with the registration in the respective Property Registry. This registration gives the dominion and legal possession of the item, which only ceases with the cancellation of the registration. For the Chilean legal system, this is the only accepted form to acquire or transfer the ownership of real estate, and if this registration is not made, the legal delivery of the item is not carried out.

On the other hand, it is necessary to distinguish when the material delivery of the item is understood to be completed, since it may not be at the same time as the legal delivery.

For the obligation to deliver that the contract of sale imposes on the seller to be deemed fulfilled, it is required that: (i) there is a real intention to deliver the item to the buyer and an intention on the part of the latter to acquire it; (ii) the registration of the contract is verified, that is, that the seller divests themselves of all the rights they have over the item; (iii) the seller abandons it completely so that the buyer can use it; and (iv) the buyer is in a position to exercise over it all the functions of an owner, that is, they receive the real, de facto, effective possession of the item.

The legal transfer of the real estate, therefore, is not enough; the seller must also put the item at the disposal of the buyer, which means that the seller abandons the property and stops performing acts of lord and owner over it.

Cure of concealed defects or eviction of the item sold

This obligation is based on the fact that if someone buys an item, it should be useful to them, i.e., they should be able to use it according to its nature and possess it with the peace of mind, without being disturbed from its possession. Basically, this obligation consists of guaranteeing the buyer a peaceful and quiet possession of the item being sold and a useful possession. That is to say, the buyer must not see their possession disturbed by legal actions brought by third parties with respect to the item sold and that the item does not have hidden defects that make its use by the buyer impossible. It is precisely these two aspects to which Article 1837 CC refers when it establishes that the obligation of cure includes: cure of eviction and cure of concealed defects.

The most common method used in Chile for the acquisition of real estate is financing through mortgage loans granted by financial institutions, such as banks or authorized financial institutions.

Naturally, these institutions need to guarantee the payment of such credits and for that purpose the most used figures are the mortgage, and the prohibition to encumber and alienate.

The mortgage (Article 2407 CC) is especially important because it is the most frequently used security, and it is considered the one that provides the creditor with the most guarantees, since real estate is difficult to destroy and generally does not lose value.

On the other hand, all real estate mortgaged in favor of financial institutions must be backed by an appraisal or certification of its value, carried out and signed by persons who are qualified in the matter, preferably outside the bank and, in any case, independent of the debtor. In this way, the banks ensure that the price of the mortgaged property is sufficient to guarantee the value of the loan in case of a foreclosure due to non-payment.

In addition to the mortgage, the banks and financial institutions that grant these loans register a prohibition to encumber and alienate the real estate. In practice, these are impediments to transfer or sell a real estate property without the prior consent of the bank or financial institution in whose favor the prohibition is granted.

Both the mortgage and the prohibition must be registered in the corresponding Real Estate Register, in the Registry of Mortgages and Encumbrances, and in the Registry of Interdictions and Prohibitions, respectively.

Lease agreements are regulated by Article 1915 and following the CC, by Act 18,101 about the lease of urban property and by specific laws regulating leases in rural areas.

The lease agreement is defined as an agreement through which two parties undertake reciprocal obligations, one to concede the use of an item, and the other to pay a price for it.

The obligations of the lessor are:

• To deliver the leased property; and
• To maintain the property in a state for its proper use.
  

The obligations of the lessee are:

• To pay the rent; and
• To return the property at the end of the lease agreement.
  

The lease agreement may terminate:

• By the destruction of the property;
• By the expiration of the stipulated time of lease;
• By the extinction of the right of the lessor; and
• By court decision.
  

Formalities and enforceability toward third parties

Ground lease contracts for urban areas do not require a special formality for their enforcement. However, executing a ground lease through a public deed has an important effect, as any third party that acquires the ownership of the property will be bound by the lease. Furthermore, if the lease contract is registered in the Real Estate Register, then even creditors guaranteed by mortgages created after the lease are obliged to recognize the agreement.

On the contrary, if the lease has not been executed through a public deed, then a third party acquiror is not bound by the contract and is entitled to eject the tenant. The tenant will have no more recourse than to claim damages from the original landlord. In rural areas, the law requires ground leases to be executed through a public deed or before two witnesses. In both cases, a possible acquiror is bound by the contract.

Chile’s smallest administrative divisions are communes, which are locally governed by a municipality. The head of a municipality is the major or alcalde, which is an elected position.

Municipalities, and specifically their construction departments (DOM), are responsible for managing construction permits within their limits. The rules for construction permits are set, in general, in the General Law of Urbanism and Construction, but each municipality is entitled to specify detailed requirements within its urban area through a specific body (Ordenanza Municipal).

Pursuant to the General Ordinance of Urbanism and Construction Act, the construction, reconstruction, repair, alteration, extension and demolition of buildings, and urbanization works of any nature, whether urban or rural, will require a permit from the relevant DOM, at the request of the owner, with the exceptions indicated in the General Ordinance. The Director of Municipal Works will grant the permit or the required authorization if, according to the accompanied antecedents, the projects comply with the urban development regulations, upon payment of the corresponding fees (Article 116 OGUC).

After finishing the works, the municipality certifies that the actual building matches the construction permit, and in such case, issues a final approval certificate (recepción definitiva).

Currently, for the construction of houses and apartments, real estate and construction companies must submit to the Environmental Impact Assessment System (SEIA), which is an environmental management instrument for the evaluation and prediction of the environmental impacts that may be generated by projects and activities carried out in the country and that is legally required to be evaluated. In other words, any project or activity likely to cause an environmental impact, including its modifications, can only be executed, or modified after an evaluation of its environmental impact through the presentation, as appropriate, of an Environmental Impact Statement (EIS) or an Environmental Impact Assessment (EIA).

The EIS is the descriptive document of an activity or project to be carried out, or of the modifications that will be introduced, given under oath by the respective owner, the content of which allows the competent agency to assess whether its environmental impact complies with the environmental regulations in force.

The EIS is part of the Environmental Impact Assessment System (SEIA), which is a management instrument designed to prevent environmental deterioration due to the execution of investment projects in the country. The EIS is addressed to the owners of those investment projects that are likely to cause environmental impact. These projects are specified in Article 10 of the Environmental Bases Law, without prejudice that the owners of those projects that are not included in the lists may voluntarily submit for environmental assessment.

In the case of EIAs, we are also allowed to determine whether the project or activity is responsible for the environmental effects it generates, through the application of appropriate mitigation, repair and/or compensation measures.

After the evaluation process, the Evaluation Commission of the respective region, or the executive director of the Environmental Evaluation Service (SEA), depending on whether it corresponds to a regional or interregional project, issues a resolution that environmentally qualifies the project.

Value added tax (VAT - "IVA" in Spanish)

With the Tax Reform of 2014, the tax treatment between furniture and real estate was equated, which resulted in a redefinition of concepts such as "sale" or "seller", in the sense that now a seller would be someone habitually engaged in the sale of tangible property, whether movable or immovable.

Habituality is presumed to exist when a period of less than or equal to one-year elapses between the acquisition or construction and the disposal. However, the application of the VAT on older properties must be studied for each transaction.

Income tax

The tax reform partially limits the exemption to the profits obtained in the sale of real estate, which will be available only to individuals with domicile or residence in the country. In these cases, the tax would be applied on the difference between the sale price and the cost, considering the improvements, with a total and cumulative limit of 8,000 UF/US$314,852.11 (the value of 1 UF, amounts to 38,364.73 Chilean pesos/US$39,35*), regardless of the number of disposals made and the number of real estate properties of the taxpayer, with the excess being taxed according to the general rules, or with a single and substitute tax of 10% on the basis of the income received, as per the selection of the taxpayer/seller. Simply put, any sale of real estate that generates profits in excess of UF 8,000 (US$314,852.11*) must pay tax. If the gain is less than this amount, it will be registered and added to the gains obtained in a new operation. The UF 8,000 (US$314,852.11*) cap is not limited to the sale of a single house but is accumulated during all the sales made by the person. Upon reaching UF 8,000 (US$314,852.11*) or more, the income tax must be paid.

Stamp tax

Considering that most of the real estate sales and purchases in Chile are financed through mortgage loans, it is important to point out that with the tax reform, the rates of this tax were increased, with its maximum rate being 0.8% of the value of the loan.

That is to say, the operations that were financed through mortgage loans will have to pay “mutual tax”, which can be reduced depending on whether the property is economic or social housing.

*According to the 10 December 2024 exchange rate

Chapter authors and key jurisdiction contacts: Ruby Soteras | Deloitte Legal | Chile

Download: Handbook for Real Estate Transactions