MAIN CONCERNS WHEN ACQUIRING REAL ESTATE

Jurisdiction:Mexico

Made by Schondube Abogados, S.C. (Ricardo Schöndube Domene)

Last Update: 01/03/10

STRUCTURE OF THE DEAL
1 / Most common structures:asset deals or share deals. / Real estate acquisitions are mainly structured as an asset deal acquisition. Nevertheless, share deals are made on real estate assets that are being used for the operation of a business (i.e. hotels, facilities, real estate developments, among others).
2 / What are the main differences between both? /
  1. Taxes. The type and amount of taxes to be paid. Asset deals taxes are (i) 33% income tax on the profit amount calculated between the original acquisition price + authorized expenses made on the asset; (ii) No more than 1% of the value of the property for transfer taxes (there are some States of Mexico that have a cap amount on this tax) and; (iii) recordation rights around 1% of the value of the property. The calculation for the share deals is much more sophisticated and it is recommendable to have an accountant to prepare this calculation.
  1. Liabilities.Acquiring a corporation may trigger possible liabilities to buyer mainly dealing with employees, labour unions, contracts and lawsuits, among others. Due diligence is recommended in both types of acquisitions; however the due diligence on a share deal shall be more extensive than an asset deal.

3 / Are option agreements commonly used? If so, main types and their characteristics / Yes. Option agreements together with, memorandums of understanding, letters of intent and promises to purchase agreements are commonly used.
TITLE AND CHARGES
4 / Types of property ownership: freehold, leasehold, condominium, other. / Main acquisition of properties (including private property or condominium regime) is freehold (full ownership). Other ways of acquisition includes, joint-ownership and fractional. Properties located on a frontier state or with a beach front to be acquired by a foreign person with residential purposes will need to perform the acquisition through a so called “Mexican Restricted Zone Trust”.
5 / Evidence or title and charges: registry, insurance, other. /
  1. Title. The acquisition of all properties shall be made through a public instrument before a Mexican Public Notary.
  2. Recordation (registry). All States have a Public Registry of Property on which the public instruments containing the formalization of the acquisition of the property are recorded.
  3. Charges for Recordation. Recordation fees for recording a public instrument may vary from one State to another. In some States this fee is caped to a minimum amount, however other States charge a percentage over the acquisition price (approximately 1%).
  4. Insurance. There is no obligation to insure the property.

6 / Can a charge that is not registered in the Land Registry be opposed to the purchaser of a real estate? / The registration of title protects the owner against a new purchaser. If title has not been registered a new purchaser in good faith may be able to overrule the owner’s rights. A creditor or bankruptcy will overrule any non-registered owner, even if the purchase was not in good faith. (SAME FOR MEXICO)
7 / Are there any restrictionsregarding foreign ownership, occupation or security? / Yes.
Mexican Foreign Investment Law (“FIL”) provides restrictions on real estate ownership with residential purposes to be acquired by foreign buyers, depending on where the property is located.
If the property is intended to be used with residential purposes, Mexican Constitution establishes that foreigners cannot directly acquire title to a property located within 50 kilometers of the coastline or within 100 kilometers of the land borders (the “Restricted Zone”). Foreign purchasers may indirectly own a real estate through a Mexican Real Estate Trust, on which a local banking institution acting as fiduciary and foreign purchasers as beneficiaries.
Foreign buyers may acquire non-residential properties in the Restricted Zone through a Mexican entity instead of a Mexican Real Estate Trust.
EXISTING LEASE AGREEMENTS
8 / If leased real estate is sold to a third party, is this third party bound by the lease? / Generally, the new buyer is obligated to continue with complying with the terms and conditions of the lease agreement. However, pre-emptive rights of lessee shall be observed as well as notifications to be made by Landlord to lessee before selling the rental property.
9 / In asset or share transfers, do tenantshave a pre-emptive right to acquire the real estate? / Yes only in asset transfer and will depend on from one State to another, but generally tenants shall have pre-emptive rights to acquire leased properties after certain period of the lease (5 years).This right may be waived in the lease by the tenant, and such waiver is customary.
On share transfers, may vary depending on the bylaws and any shareholder agreement that the corporation may have.
10 / If an asset or share transfer takes place, are tenants entitled to terminate the lease early and/or modify any lease terms? / No. Tenants retain all rights and obligations of the rental agreement toward the new landlord.
11 / Mandatory rulesandcommon practice regarding rent updates. / With commercial real estate the parties are free to agree on rent update procedures. Commonly, the rents are yearly adjusted up or down by the consumer price index (CPI) or any other method agreed by the parties.
12 / Mandatory rulesand common practice regarding the duration of leases. / There are mandatory provisions in some of the State’s Civil Codes, providing duration of leases that limit the term for a period between 10 to 20 years with renewable periods of the same years.
Breach of the rental agreement is grounds for termination.
13 / Mandatory rulesand common practice regarding penalties that tenants must pay if they terminate a lease agreement early. / Common practice on leasing real estates is to include a penalty of certain months of the rent amount of the lease (between 2 and 4). However, on industrial and commercial leases penalties can be increased and sometimes secured by collateral or a bond.
14 / Mandatory rules and common practice regarding guarantees to the benefit of landlords. Are there any required formalities to ensure that the guarantees are assigned to the purchasers? / The guarantees in favor of the landlord are commonly a 2-6 month deposit paid directly to the landlord, or a bond guarantying the payment of the lease amount. Rules and requirements may change from one State to another as well as to the type of asset that will be leased. (i.e house leases are less sofisticated that industrial or commercial leases.
15 / Relevant concerns/particularities oftermination procedures (eviction) in cases of tenant’s default (e.g. length, costs) / If a tenant does not pay the rent amount, the landlord can terminate the lease agreement, by submitting a lawsuit before Mexican Civil Courts.
Lease Lawsuits can take between 6 months to 3 years.
POLLUTION
16 / Summary of the liability regime for pollution. / Mexican legislation provides that the owner of the property is responsible for any pollution that may exist on its property.
Former owner shall be responsible of any pollution on real estate properties and clean up costs shall be agreed and paid by seller.
17 / Is there any public registry with details of contaminated soil or buildings? / No.
HIDDEN DEFECTS (SOIL OR CONSTRUCTION)
18 / Mandatory rules and common practice regarding hidden defects. / Seller shall be responsible for any hidden defects on the property during a period of 1 year.
19 / Can the purchasers benefit from any action taken againstthird parties (such as developers, constructors and developers)? For how long developers, constructors and architects remain liable? / Actions can only be claimed against the seller of the property. Seller of the property may claim developer and/or constructor in a period of 1 year after selling the sale of the property is made.
ZONING LAW RESTRICTIONS
20 / How do you ascertain whether a property can be utilised for a particular purpose or be commercially exploited? / Based on the Urban Develop Plan issued by the Municipal Urban Develop Office or the Ecological Programs issued by the Environmental Federal or Estate Office. This is a crucial item to review prior to acquiring a property.
21 / Main and usual licenses or permits required to build and operate a real estate. / Any construction permit is subject to a local plan, which is subject to municipal and sometimes ecological plans so called “Urban Development Plans” or “Ecological Development Plans”.
A special use land license together with a construction license is required to build any type of construction.
Operating licenses are also necessary to start a business on a real estate. Those licenses, are generally granted by the Urban Land Office of the Municipality.
22 / How is sufficient license proved? / Sufficient. However, due diligence and approach to the urban land authorities is recommended to avoid future problems.
23 / Can licenses or permits be obtained through administrative silence? How long does it usually take to obtain a license? / Yes. Administrative Silence (so called “afirmativa ficta”) may apply in some licenses and permits on some States in México. Periods to claim administrative silence may vary from one state to another and from one authority to another. Specific review is required on each case.
24 / Can third parties object to the grant of licenses and permits / Neighbours and others affected by the construction can participate in hearings and file objections to the grant of licenses and permits.
EXISTING PRE-EMPTIVE THIRD PARTY’S RIGHTS
25 / Mandatory rules and common practice regarding first refusal / pre-emptive rights. / Landlords are required by law to grant all tenants occupying space for a term of more than five years a right of first refusal in the event the lease property are sold. This right may be waived in individual agreements.
CONTRACTS
26 / Mandatory rules and common practice regarding contract formalities: Notarial Deeds, Property Registry, other. / The acquisition of a real estate shall be made in a public instrument executed before a Mexican Notary Public and shall be recorded before the Public Registry of Property of the State or City where the real estate property is located.
27 / When does transfer of ownership formally takes place in a sale and purchase contract? / Transfer of ownership takes place upon executing a public instrument before a Notary Public and all sales conditions have been fulfilled a final purchase agreement. Acquisition of real estate shall also be recorded before the Public Registry of Property of the place where the real estate properly is located. is considered as subject to all condition precedents having been met.
28 / Customary representations and warranties (title, charges, pollution, hidden defects, etc.), and their effects. / In almost all asset or share transfer agreements, the seller will give representations and warranties on all material matters and concerns. The extent of the representations and warranties, and indemnification provisions are normally subject to the extent of the due diligence and the negotiation skills of the parties.
29 / Brief summary of taxes and expenses related to asset and share deals. What taxes/expenses must sellers or purchasers usually take on? / 1. Real Estate Transfer Tax.The sale of a real estate property is subject to the real estate acquisition tax, which is between 2 and 3 percent of the highest of the appraised treasury value or transaction value, whatever is higher.
2. Recordation Fees. The Municipal Treasury will charge a recordation fee that may vary between 1% and 2% of the sale price. Some States and Municipalities are caped to an amount that is not subject to the sale price.
3. Value Added Tax.Value Added Tax applies to constructions, improvements on real estate property as well as construction services, but does not apply to purchases of land itself and there are certain exceptions, such as the acquisition of residential property. Except for improvements and construction on real estate property in the border areas where the VAT rate is 11 percent, the general rate is 16 percent of the value of the product or service.
4. Notary Public Fees. Notary Public Fees shall range between .5% and 3% depending on the sales price of the real estate property and the State where the property is located.
5. Appraisal Fees. The appraisal must be performed by the Ministry of Treasury or in certain States by acommercial broker or a certified appraiser confirmed by a banking institution. The normal cost for the appraisal and the bank’s certification is 1% of the appraised value, although such fee is normally lower.
OTHER
30 / Main bankruptcy law concerns. Does the market value price protect against bankruptcy claims? / Real estate properties can be sold by entities that are under a bankruptcy by observing a specific procedure and specially the recognized creditor’s rights. If the seller of a real estate property is not declared by a judge under bankruptcy, the real estate property can be sold at the price agreed by the parties.
31 / Any other main practice and concern in this jurisdiction. / Due diligence on real estate properties is generally recommended before acquiring a real estate in Mexico, especially in borders States and beach front properties.
A specific procedure for acquiring the so called “ejido land” shall be observed.
Mayor real estate acquisition shall be made together with an ample due diligence and a solid tax structure.

Page1/10