Real Estate Law in Costa Rica

In Costa Rica, the acquisition and ownership of real estate assets is mainly governed by the Civil Code (CC), which outlines general property rights, its ownership, transfer, acquisition, and registration.

In general, the CC provides that ownership over a real estate property can be obtained through:

• Agreement (e.g., sale and purchase agreements, donation, and any other form of transfer);
• Accession (which refers to the areas under and above the surface of the property);
• Inheritance; and
• Adverse possession (which applies to cases of a continuous, public and in good faith occupation of a third party property, for a period of 10 years).
  

In addition to the CC, there are other laws and regulations that cover certain specific scenarios and conditions of real estate ownership, such as beach concessions, farmlands, forest-covered properties, leases, condominiums, among others.

Finally, it is important to mention that ownership rights are recognized and protected by the Costa Rican Constitution.

Acquisition structure

In general terms, real estate transactions in Costa Rica usually take place under one of the following categories:

• Direct transfers: Those by which the title to the property is directly transferred from one party (seller) to the other party (buyer). This transfer must be formalized before a notary public via a sale and purchase public deed and registered with the Real Estate Registry of the National Registry.
• Indirect transfers: In this type of transfer, the legitimate and registered property owner/title holder is an entity (company, LLC, corporation, etc.). The share capital ownership of the title holder is transferred to the buyer. At the Real Estate Registry level, the title holder remains the same, but the transaction has taken place privately via the transfer of the entity.
  

For the purposes of their particular transaction, whether a direct or indirect transfer, parties are free to structure the acquisition, with the support of specialized legal counsel, via different valid and legal agreements, such as sales and purchase agreements, share purchase agreements, promissory notes, escrows, trusts, among others. It is important to mention that, regarding direct transfers, pursuant to the CC the agreement between the parties is valid from the moment of its execution, but it must be registered via public deed with the Real Estate Registry in order for it to display full effects in relation to third parties.

Restrictions

Except for certain specific cases, there are no relevant restrictions concerning the acquisition of real estate in Costa Rica, and foreign citizens and entities can acquire most properties without any sort of restrictions. However, there are areas under special protection regimes, such as native/indigenous reserves and environmentally protected areas that, in principle, cannot be subject to any form of transaction. Also, according to Act No. 6043, private ownership over the maritime-terrestrial zone (which is a 200-meter-wide strip of land along the Atlantic and Pacific coasts), is prohibited and beach concessions are required for any intended use. In this regard, beach concessions cannot be granted to: (i) foreign citizens who have lived in Costa Rica for less than five years; (ii) foreign entities; or (iii) national entities in which foreign citizens own more than 50% of its shares/participations.

It is important to highlight that there are also particular regulations, conditions and restrictions based on the intended use of the property. For example, farmlands, forest-covered properties, and properties adjacent to national parks and wildlife reserves, have strict limitations and conditions regarding the use and exploitation of the land. Also, the Golfo de Papagayo Tourist Project, a major tourism development project in the Costa Rican Pacific coast, has its own specific regulations, and is exclusively governed by the Golfo de Papagayo Tourist Project Execution and Development Act.

The Real Estate Registry plays a central role in Costa Rican real estate law and transactions, ensuring that ownership rights and interests in properties are duly documented and enforceable.

The Real Estate Registry supervises and regulates all deeds, documents, records, maps, and general information relating to real estate and properties. According to the CC, any deed, document, or title that constitutes, modifies, or extinguishes any ownership rights, easements, liens, mortgage, or any other right over real estate is (and must be) registered with the Real Estate Registry for legal recognition, and transactions affecting ownership, such as transfers or mortgages, require formal registration to be valid. Consequently, any right or title that is not registered therein is binding only on the executing parties and will not affect third parties. In other words, any and all ownership rights, transfers, modifications, etc., must be recorded in the Real Estate Registry in order to display full legal effects.

Finally, the Real Estate Registry is open to public consultation, whether on their web page or by visiting any of their offices located countrywide. As a result, any person can look into the history of a certain property, its location, transfers, mortgages, liens, conditions, restrictions, etc., and make an informed decision to enter into a transaction.

Under Costa Rican law, sellers of real estate are bound by contractual representations and warranties. They must ensure clear, lawful, and legitimate title to the property, free of encumbrances, and compliance with any applicable regulations. Failure to disclose any relevant or legal issues affecting the property may result in liability.

Usual contractual representations and warranties of the seller are:

• That the seller is the legitimate owner of the property and holds a valid and marketable ownership title;
• That there are no visible or hidden defects, issues, contingencies with the property; and
• That, other than those disclosed during negotiations or registered in the Real Estate Registry, the property is free of any disputes (judicial, administrative or any other kind), debts, liens, encumbrances, restrictions, conditions, etc.
  

Costa Rican law, mainly the CC, also provides for certain warranties in favour of the buyer, should any issue arise in connection with a real estate transaction. In sum, these are:

• Eviction warranty: Basically, this means that the seller warrants that no third party will deprive or disturb the buyer of the full enjoyment of its newly acquired ownership rights.
• Hidden defects warranty: Seller’s liability extends to all those defects not disclosed or that the buyer was not aware of, did not know or could not have known about at the time of the transaction, or existing prior to the transaction. It also extends to defects that make the property unfit for the original intended use by the buyer.

Mortgages are the most common financing instrument in connection with real estate assets in Costa Rica. They are regulated by the CC (Articles 409-417). Only property owners can create mortgages, and these must be formalized through a public deed with a notary public and registered with the Real Estate Registry.

Other forms of financing involving real estate assets are trusts and escrows, by which a property is temporarily registered under a trustee or escrow agent, as a guarantee for a debt incurred by owner.

Finally, it is also somewhat common for development projects or other larger commercial or office parks to be developed under the administration of a real estate investment fund, but these transactions are more complicated since these funds are regulated.

Leases in Costa Rica are mainly governed by the Urban and Suburban Leases General Act (LA), which is a public order law and generally applies to both residential and commercial leases.

The LA expressly provides for mandatory minimum legal requirements that lease agreements must comply with such as minimum term and price updates in residential leases, as well as rules of interpretation in case of lack of clarity in the document.

Leases may be registered with the Real Estate Registry, but this is not a common practice, and landlords usually prefer to have private lease contracts.

Before any construction and/or commercial exploitation of a real estate asset, certain administrative permits are required, depending on applicable municipal zoning regulations, and building codes.

Costa Rica is politically and geographically divided into provinces, and each province is divided into counties. Each county is managed and administered by a local government (municipality). Municipalities are responsible for issuing construction permits, use of land permits and operation permits. The Ministry of Health is in charge of issuing the health permit, which is required for any commercial activity. Finally, depending on the size of construction/project and its potential environmental impacts, special permits, including, but not limited to environmental impact studies and feasibility analysis, may be required from other government agencies.

Costa Rica is recognized worldwide for its focus on environmental protection and conservation, and is considered a leader in the protection of forests and the promotion of renewable energy. The ESG approach is also aligned with

Costa Rican values and culture, as the country has a strong tradition of democracy, equality, and respect for human rights.

Tourism is one of the main industries in Costa Rica and is highly dependent on the country's image and reputation as an environmentally friendly destination and sustainability.

The right to a healthy environment is recognized as a human right, protected as such by the Constitution and a number of international treaties and conventions fully adopted by Costa Rica. As such, internal laws and regulations aim to protect the environment and to condition real estate projects to minimum requirements that must be met in order to obtain applicable permits.

Some of these laws and regulations are:

• Constitution: Recognizes the government’s liability to ensure the greatest well-being for all its inhabitants, including the right to a healthy and ecologically balanced environment. It also encourages reporting acts that may violate this right, demanding the repair of any damage caused.
• Wildlife Conservation Act: Considers wildlife (biodiversity) and other natural resources to be part of the public domain and the country’s national heritage. It demands the government to make substantive efforts for its protection and the regulation of its exploitation.
• Environment Act: Provides for the necessary legal instruments and tools to achieve a healthy and ecologically balanced environment, in accordance with the Constitution.
• Forest Act: Establishes the government’s liability in the conservation, protection and administration of forests and their resources.
• Biodiversity Act: It underlines the importance of making efforts to conserve biodiversity and the sustainable use of resources, and the need of a fair distribution of the benefits and costs derived from these uses. Formalizes preventive, precautionary, and public interest environmental criteria, recognizing the importance of anticipating, preventing, and attacking the possible causes of biodiversity loss.
• Water Act: Establishes that all bodies of water (lakes, seas, rivers, underground deposits, etc.) are public domain and national property, not to be owned privately.

Direct taxes applicable to the sale of real estate are:

• Real estate transfer tax: Which is 1.5% percent of the real value of the transfer (which in practice is the highest value between the price agreed by the parties and the property value registered in the respective municipality). This tax must be filed and paid within one month after the execution of the transaction and is usually paid by the buyer, even though the law provides that it must be paid proportionally by the seller and the buyer.
• Capital gains tax: Basically, taxes the profit earned by the seller as a result of the transfer of a real estate asset, it generally is 15% on the difference between the historical cost of the asset and the transfer/sales price, except for certain specific cases depending on the original acquisition date of the asset by the seller or the use given to the property. The tax must be filed and paid within the first 15 days of the month following the execution of the transaction. It is important to mention that, if the asset being transferred was used by the
  seller in its productive/commercial activity, this income will be treated under the rules applicable to income tax and not under capital gains rates.
• Withholding tax: This is only applicable if a non-resident sells property located in Costa Rica to a local buyer subject to income tax filings, the buyer is required to withhold 2.5% of the transaction price.
• Stamp taxes and registration expenses: As mentioned above, all public deeds by which real estate rights are created, transferred, modified, must be registered with the Real Estate Registry. In order to do so, certain stamp taxes (such as National Registry Tax, Bar Association tax, municipal tax, etc.), must be paid, and the amounts will depend on the transaction price and location of the asset.

Chapter authors and key jurisdiction contacts: Ricardo Güell | Deloitte Legal | Costa Rica

Download: Handbook for Real Estate Transactions