Real Estate Law in Mexico

Article 27 of the Political Constitution of the United Mexican States (PCUMS), states that “Ownership of land and water within the limits of the territory national, originally corresponds to the nation, which has had and has the right to transmit the domain of them to individuals, constituting private property”. In this sense, the real estate considered as private property is governed under civil law, which is regulated by each state of the Mexican Republic as it is not reserved to the federation.

Each of the 32 Mexican states has the right to regulate civil matters in their own Civil Code (CC) with their own specific rules, limitations and formalities, but considering that all CC have the same principles as grounds and, if a figure is not fully regulated in the Civil Code of the corresponding state, and there is no express reference to any other local or federal legislation, as a general rule there will be supplementation of the Federal Civil Code (FCC).

According to this, Section III of Article 13 of the FCC states that, in real estate, the applicable law for the constitution, regime and extinction of real rights over real estate will be governed by the law of their location, even if the owners are foreigners. This, differentiating the law that might apply to the specific agreement from which the ownership arises. For example, if a purchase agreement is executed in order to transfer a property to the purchaser, the agreement can be subject to the law of any of the states that the parties decide so, however, the formalities and specific procedures to formalize the transfer of ownership will be the ones of the state in which the property is located.

On the other hand, considering that some real estate is used for specific sectors, some additional local or federal regulations might apply, as the case of environmental, health, zoning and construction, rural, urban settlement regulations, among others, depending on if the property is state-owned, deemed as “social land” or private.

The acquisition of real estate in Mexico can be carried out by means of a purchase, donation, inheritance, or usucapion (an individual can be considered as owner by the passage of time if some conditions are met).

Each of the agreements to acquire the ownership has specific requirements, but, as general rule, they require:

• To be formalized before Mexican civil notary public; and
• To be registered before the Property Public Registry (PPR) of the state or municipality in which the real estate is located.
  

According to the appraisal value of the property, some local tax benefits might apply, or less formalities may be required. For example, in Mexico City in the case of real estate with an appraisal value less than 365 times the Unit of Account of Mexico City current at the time of the operation, the ownership rights can be transferred in private document granted before two witnesses and ratifying their signatures before notary public, competent judge or the PPR.

In the case of foreigners (companies or individuals) they cannot directly acquire ownership of real estate located in the “restricted zone,” as marked in Article 27 of the PCUMS. Such restricted zone covers:

• 100 kilometers from the Mexican borders; and
• 50 kilometers from the Mexican beaches.
  

The legal strategy for foreigners to acquire some rights over real estate in the restricted zone is the incorporation of a trust, where the trust will be the owner of the property but the foreigners that incorporate the trust and act as trustees can use such property.

On this, foreigners that intent to acquire the ownership of real estate outside the restricted zone, will have to file, before the Mexican Ministry of Foreign Affairs (MFA) a clause where they accept to waive to the protection of their country of nationality and be deemed as Mexicans in all regards to such property. In case they fail to comply this, the ownership will be lost in benefit of the Mexican nation.

The PCUMS and secondary regulation also state limitations to the acquisition of rural or rustic lands or to the acquisition of property made by religious associations, private or public charitable institutions, banks or entities that are part of the Mexican financial system.

As previously mentioned, since civil law (and thus, real estate) is local, each Mexican state will have the right to regulate specific regulations applying to their respective PPR.

However, as a general rule, such registration procedure is carried out by the notary public that notarized the public deed containing the document that create, transfers, modifies or extinguish the ownership rights, prior to the payment of the applicable duties and federal and local taxes. Nevertheless, the interested party can also request it.

In case there are any liens or encumbrances over the property right, such document must be also notarized and registered before the PPR.
It is important to consider that in Mexico, the registration before the PPR is not constitutive of rights but for the act to have effects against third parties and in order to consult the background of a property, any individual can request it if they have the applicable real folio (which is the one assigned to each property at the time of first registration).

In addition to this, depending on the state in which the real estate is located, some cadastral information might or might not be publicly available.

As applicable to all legal acts in which the consent is required, in case of agreements or transactions that relate to the creation, regime and extinction of real rights over real estate are ruled by the principle of prohibition of “consent vices.”

In this sente, civil law recognizes error, willful intent, bad faith, violence, and injury as consent vices.

If any agreement or legal act is consented and there is a consent vice the legal act or agreement in question would not have all of its elements to be considered valid, so it would be void or null, as the consent had not been legally formed and according to the specific consent vice that is alleged.

In this sense, each consent vice will have different consequences. For example, in case the error is arithmetic, the only consequence is that the rectification is allowed, without voiding the agreement whereas the willful intent, violence or bad faith will imply that legally the consent was never formed and thus, the agreement or legal act is fully void.

The criteria for determining the consequences will depend on the type of consent vice and how decisive it was for the granting of consent.

In the specific case of a purchase agreement of real estate, as there are several modalities, the consequences may differ in the event of any consent vice or misrepresentation. For example:

• Ad mesuram purchase, where the price is calculated based on the specific measurements of the property; in case of variation to the measurements, the parties must adjust the price accordingly; and
• Ad corpus purchase, in which the price is calculated based on the property itself and not its specific characteristics; there is no right to request the rescission of the agreement if there are variations to the measurements provided at the beginning of the transaction.
  

In this regard, it is always preferable to seek the assistance of attorneys specialized in the field.

When acquiring real estate in Mexico involving a financing for such purposes, the financing institution or individual may request a mortgage, which, according to Article 2893 of FCC, is a real security incorporated over assets that are not delivered to the creditor.

The main characteristics of the mortgage are:

• It survives even if the property is transferred to a third party;
• The mortgage can only be incorporated regarding assets duly identified;
• Must be granted before notary public and registered before PPR (its creation, amend or extinction when is related to property).
• It is considered “extended” over the improvements of the mortgaged property, its attached and non-movable goods, new buildings over the mortgaged property, non-removable personal property or its natural accessories;
• Mortgages (unless convened otherwise by the parties) do not comprehend: (i) pending income in separation of the property that produces them; (ii) movable assets and decorations; (iii) easements, unless they are mortgaged together with the dominant property; and (iv) the right to receive the fruits of the usufruct granted to ascendants on the property of its descendants; among others;
• It can be constituted by the debtor or by a third party on his/her favor; and
• Mortgage over a property can only be constituted by the one with the right to dispose of it.
  

Even when mortgage is the standard guarantee requested when financing the acquisition of real state, there are other alternatives, such as:

• Bail;
  
• Promissory notes;
• Joint liability; or
• Insurance.

Regarding the lease, FCC defines it as an agreement where “the two contracting parties bind each other, one, to grant the temporary use or enjoyment of a thing, and the other, to pay a certain price for that use or enjoyment.” In this sense, we must make a distinction between commercial lease and civil lease.

The civil lease is the one where both parties (lessor and lessee) are individuals, and the lease is not for lucrative purposes. On the other hand, commercial lease is the one where at least one of the parties is a company or merchant (considering that, if one of the parties is individual non-merchant, the lease can be of civil nature for such party).

In this regards, commercial lease does not have a specific regulation, thus, the rules included into the FCC are applicable, and, for civil lease, the local CC will contain the regulation that will apply.

However, as a general rule, leases have the following formalities:

• Must be granted in writing;
• The rent can be in money or any other equivalent, as long as it is certain and determined;
• In order to execute a lease, the lessor must have, at least, the rightful possession of the property (and, if applicable, the authorization of the owner);
• Any asset can be leased, except those forbidden by law or personal rights;
• In case of co-ownership, all the co-owners must agree to the lease;
• In order to sublease, the lessee requires consent or authorization from the lessor;
• Improvements made by the lessee into the property must be reimbursed by the lessor, only if the lease agreement states so or if the improvement is useful and due to fault of the lessor the agreement is rescinded;
• The lessor must carry out all the necessary or structural repairs of the property; and
• The lessee is responsible of the damages caused in the property due to his/her negligence or willful intent.
  

Likewise, in case the lease is intended for housing, some additional requirements or obligations may arise. For example, in housing leases, the minimum term is one year mandatory for both parties and the lessee has a pre-emptive right to acquire the property if he/she matches the purchase conditions set by a third party or to request that the lease survives such purchase if the lease is still valid.

Furthermore, as stated before, each of the CC will have specific formalities, obligations or rights arising from the lease.

In the particular case of Mexico City, due to a recently published amend to its CC, housing leases are now registrable, and the monthly rent now has a maximum yearly increase of the equivalent to the National Consumer Price Index (INPC).

Another regulated lease in the FCC is the one of rustic or agricultural properties, where, in case there is no payment term, the rent must be paid by expired semesters or where the lessee will not have the right to a reduction in rent due to sterility of the land or due to loss of fruits resulting from ordinary fortuitous cases; but only in case of loss of more than half of them, due to extraordinary fortuitous cases.

Finally, the FCC also regulates the lease of assets, where the general provisions state that to such agreements the provision that are compatible will be applicable.

In the practice, the terms and conditions of lease agreements are usually determined in accordance with the will of the parties, having as a minimal frame the rights and liabilities set forth for each party into the local CC and the formalities required in such regulation that are not waivable.

Depending on the specific location of the property, the requirements and procedures may vary, however, the usual documentation needed to obtain a construction license are:

• Land use zoning permit;
• Feasibility report on hydraulic services;
• Declaration of environmental compliance;
• Soil mechanics study;
• Alternative rainwater collection system; and
• Neighborhood advertising.
  

Unless the construction is carried out in federal property, each of the states will apply their own local laws and regulations for authorizing any construction, and, according to the type of construction (housing, industrial, etc.) the requirements will vary.

Please note that, the construction license also covers the structural changes intended to any property.

As stated in the previous section, in order to be able to obtain a construction license, the local or federal authorities require the particulars to carry out the applicable environmental studies.

This is achieved with an Environmental Impact Manifestation (EIM) and an Environmental Impact Evaluation (EIE), which are regulated under the General Law of Ecological Balance and Environmental Protection (GLEBEP), which also states the framework for the local laws on the matter.

In this sense, Section XXI of Article 3 of the GLEBEP defines a EIM as “the document through which it is made known, based on studies, the significant and potential environmental impact that a work or activity would generate, as well as the way to avoid it or mitigate it if it is negative”.

Regarding the EIE it is defined as “the procedure through which the Ministry of Environment and Natural Resources establishes the conditions to which the execution of works and activities that may cause ecological imbalance or exceed the limits and conditions established in the applicable provisions will be subject in order to protect the environment and preserve and restore ecosystems, and to avoid or minimize its negative effects on the environment”.

The GLEBEP states that the EIE is mandatory when conducting the following:

• Changes in land use of forest areas, as well as in jungles and arid areas;
• Industrial parks where highly risky activities are expected to be carried out; and
• Real estate developments that affect coastal ecosystems; among others.
  

On this, in order to obtain such EIE the law requires the requestor to submit the EIM which must contain, at minimum, a description of the potential effects in the ecosystem that can be affected by the specific work or activity intended, as well as the mitigation measurements to reduce to the minimum such negative effects.

So, considering this general framework on ESG matters, each state has the power to issue their own local laws and regulations stating additional requirements or the timeframe of such procedures.

The main direct taxes applicable to the sales are the income tax (IT) and the local real estate acquisition tax (REAT).

Both will depend on the particularities of the transaction (if it was carried out by individuals or companies, the appraisal value of the asset, among others). However, the IT, in the case of a real estate acquisition, can be up to 35% of the value of the real estate.

Download: Handbook for Real Estate Transactions