Foreign Ownership

 

1.The Mexican Legal System.

Foreign Ownership

Mexico is a federal republic composed of 31 states and a federal district (Mexico City).   The federal government is comprised of three branches: executive, legislative and judicial.  The head of the executive branch is the President who is elected by the public for a six-year term. Legislative power is vested in the Chamber of Deputies and the Senate, whose members are elected for three-year and six-year terms, respectively.  The judicial branch consists of a Supreme Court of Justice, Circuit Courts and District Courts. Federal laws in Mexico with republic wide application include the Code of Commerce and the General Law of Negotiable Instruments and Credit Transactions.

Each of the 31 states of Mexico has its own constitution, civil and criminal laws, other local laws and regulations, as well as its own executive, legislative and judicial authorities.  The head of the state executive branch is the Governor of the relevant state.  The legislative branch consists of the Chamber of Deputies and the judicial power is exercised by the local courts.

Unlike the United States of America which follows a common law system, Mexico follows a civil law system that is based on the Continental European legal tradition stemming from Roman law and Napoleonic principles.  Under this system, basic legal principles are largely codified in civil, commercial, criminal, judicial and procedural codes.  Judicial precedents are not binding except for Supreme Court decisions under certain circumstances.

Within Mexican Law there are a series of areas of law that regulate or relate to real estate, such as Constitutional, Administrative, Agrarian, Urban, Notarial, Civil, Corporate, Environmental, Foreign Investments and Civil Law, to name a few.

As stated above, each of the 31 states of the United Mexican States has its own constitution and local laws and regulations, which include a Civil Code for each state.

Civil Mexican Law provides us a primary definition of what is a real estate, in article 750 of the Federal Civil Code, (“Código Civil Federal”): “...Article 750.- Real estate is: the ground and the constructions adhered to the same...”.  In addition Mexican Law considers among others, the following items as real estate: (i) plants and trees while they remain attached to the ground; (ii)everything attached to  real estate that can not be separated without damage to the real estate; (iii) statues, paintings and other ornamental items placed on buildings in such a manner that defeats the purpose to affix them in a permanent manner;(iv) “real” rights over real estate, etc.

Constitutional Law. Article 27 of the Political Constitution of the United Mexican States sets forth the primary rules that regulate title to real estate in Mexico. Such article establishes that the original title of land and waters within Mexico’s territory correspond to the Mexican Nation, and that the Mexican Nation has the authority to convey the same to private parties to conform private property.  Likewise, Article 27 of the  Constitution, contemplates  important prohibitions or limitations regarding real estate, such as the following: (i) foreigners may not hold legal title to any real estate in Mexico which is located within 100 kilometers from the border or 50 kilometers from the coastline ( the “Restricted Zone”); (ii) Mexican corporations may only hold title to rustic lands in the area required to carry out their corporate purpose, without exceeding certain limits; and (iii) individuals may only hold title to agricultural and cattle raising lands up to certain limits depending on the characteristics of the land.

Registration Law, gives security and certainty to real estate conveyances and therefore grants legitimization, protection and recognition to a recorded right, allowing the exercise and enforceability of the recorded right before third parties. The notable characteristic of Registration Law, is the publicity of the recorded right, which publicity allows that the recorded right to be enforced before third parties.

Regarding Notarial Law, certain requirements of Civil Law pertaining to the validity of legal acts related to real estate, provide that conveyances of real estate, formalization of certain liens, acquisition and extinction of rights over real estate be formalized in a public instrument granted before a Notary Public observing the requirements provided for under Notarial Law.

2.Foreign Investment in Real Estate.

2.1.  Foreign Ownership of Land. Section first of Article 27 of the Political Constitution of the United Mexican States provides that foreigners, without distinguishing individuals from legal entities, may acquire real estate in Mexico, outside of the so called restricted zone, if the Mexican Government grants the corresponding authorization, and provided that such foreigners agree with the Secretariat of Foreign Affairs (“SFA”) to consider themselves as Mexican nationals with regards to such real estate and not to invoke the protection of their government as to their real estate. Duly organized Mexican affiliates of foreign entities may hold direct title to land, including within the Restricted Zone, provided that, if the piece of land is located within the Restricted Zone the same not be used for residential purposes.

2.2.  The Restricted Zone.  Under the Political Constitution of the United Mexican States, foreign individuals and legal entities, may not hold legal title to any real estate in Mexico which is located within 100 kilometers from the border or 50 kilometers from the coastline. Mexican legal entities whose organizational documents allow foreign equity participation may hold legal title to real estate located within the Restricted Zone, provided they do not use the same for residential purposes. The Restricted Zone encompasses some 40% of Mexico's land area.  Such large metropolitan areas as Mexico City, Monterrey, and Guadalajara, however, are not located within the Restricted Zone.

2.3.  The Trust Arrangement.  The Federal Government recognized that the outdated protective constitutional restriction against foreign ownership could cause substantial harm to the economic development of the Restricted Zone.  Hence, on April 29, 1971, President Luis Echeverria issued a decree clearly setting forth the rules according to which foreigners could obtain the exclusive and absolute use and enjoyment of real estate located within the Restricted Zone, for the purpose of carrying out industrial operations or tourism activities therein. The new Foreign Investment Law (“FIL”), which amended such Presidential decree, provides that the Secretariat of Foreign Affairs may authorize a Mexican banking institution to acquire title over real estate located within the Restricted Zone, as trustee of a trust (fideicomiso) which could have a foreigner designated as an absolute beneficiary.   Real estate trusts in Mexico have a renewable duration of fifty (50) years.

2.4.  Obtaining a Trust Permit.  According to the  FIL and its regulations, the SFA has the discretional authority to grant a Trust Permit, taking into consideration the economic and social benefit that the transaction implies to Mexico.

2.5.  Specialized Trust Arrangements.  Many Mexican real estate transactions involving foreign investors have been predicated upon financing in foreign money markets.  In such cases it has become common for trusts to be established in ways which facilitate the requirements of the foreign lender providing the financing.  As an example, the SFA has authorized trusts in which a duly organized and qualified Mexican subsidiary of a foreign investor is appointed as the primary beneficiary ("Use Beneficiary") and the foreign investor itself is appointed as the secondary beneficiary ("Patrimonial Beneficiary").  In such trust agreements, it is provided that: (a) The Use Beneficiary is entitled to use the corpus of the trust (i.e. the land and improvements) exclusively to conduct industrial and related activities, which it is qualified to carry out; and (b)The Patrimonial Beneficiary is entitled to the disposition and other rights over the property, excluding only the right to use.

Under the above structure, the Patrimonial Beneficiary would be entitled to direct the trustee to dispose of the property in any manner and to receive the proceeds in the event of a sale.  Thus, the Patrimonial Beneficiary will normally carry the property as an asset on its books.

2.6.  Quantitative Restriction of Land Ownership.  The Mexican Constitution and regulatory agrarian legislation establish limitations on the amount of rural land a person may own and protect against expropriation for communal use.  For example, the maximum area of irrigated land which may be protected from expropriation is 100 hectares per person.  For lands subject to seasonal use and unirrigated pastures subject to agricultural harvest, the maximum protection area is 200 hectares.  Typically, agricultural lands fall within the 100 hectares limitation.

3.Other Key Areas of Mexican Law and Practice.

3.1.  Conveyance and Title Transfer. Real estate transactions in Mexico are subject primarily to civil law as opposed to commercial law.  Civil law is within the jurisdiction of the states; whereas commercial law is of federal matter jurisdiction, governed primarily by the Federal Code of Commerce.  There is substantial uniformity among the different civil codes and related statutes of the states, especially with respect to the conveyance of real estate.  In most respects, the model for the various states' civil codes is the Civil Code for the Federal District, which is also the applicable code when provisions of civil law are to be applied to federal matters.  Judicial conflicts involving real estate are within the jurisdiction of the courts of the state where the property is located.

All the civil codes of the states require that any contract whereby an interest in real estate is conveyed or otherwise affected, be formalized through a "notarial public instrument" (escritura publica) and recorded before the corresponding Registry of Property (normally in the city or municipality where the real estate is located).  A civil law notary public, as opposed to its U.S. counterpart, is a quasi-public official who is vested with irrefutable authority to attest to the veracity of the legal transactions formalized before him/her.  A civil law notary public is generally required to be a licensed attorney who undergoes substantial qualification procedures to ascertain his/her outstanding capabilities.  A notary public will often participate in transactions on a basis of neutrality, although often the interest of the party who bears the expense of his/her fees (normally quite substantial) will be more protected by the notary. In most larger transactions, the parties are represented by separate counsel, in addition to the notary's participation.

In addition to the formalization through a public instrument, real estate transactions (i.e. acquisitions, mortgages, easements, leases for terms greater than five years, etc.) are required to be recorded in the Public Registry of Property.  Thus, the status of title to a property may be verified through a search of such public records.  Also, the Registry must, upon request, issue a "Certificate of Liens," which reflects both the identity of the holder of title and whether the property is subject to any existing liens or other real or personal interests (when the latter are subject to being recorded).

While not directly issued in Mexico, acquiring Title insurance is nevertheless a common trend with respect to properties located in Mexico. Concurrent therewith, it is advisable to carry out a due diligence on real estate transactions, such due diligence will typically include a title search and title report by counsel.

3.2.  Practical Issues. In addition, real estate may be affected by certain interests or liens which would not necessarily be revealed by a Certificate of Liens issued by the Public Registry of Property or by a search of such records.  Some of such interests could run with the land and pass to succeeding holders of the estate, such as the following:

  • Agrarian or "ejido" interests.
  • Precautionary labor attachments.
  • Municipal assessments for public improvements and property taxes.
  • Street or municipal improvement dedications.
  • Unpaid utility charges.
  • Nonconforming uses pursuant to restrictive covenants not of record.
  • Discrepancies, conflicts or shortages in area or boundary lines, encroachments and any overlapping of improvements.
  • Rights of third parties in possession.

In the light of the above, counsel's title search and opinion should be required to cover not only the records in the Public Registry of Property but also the elements necessary to ascertain that none of the above potential risks is present.

Especially in the case of rural properties, it is of vital importance to conduct the necessary research to verify that the property is not subject to "ejido" interests, which are rights afforded by the State to possessors who are entitled to benefit from the property but (at least until the new contemplated amendments are enacted) have no conveyable interest.  Such rights are inalienable and are not subject to prescriptions of waiver.

In the case of industrial or commercial properties which are already developed, it is important to verify the non-existence of labor claims which may affect the property.  Under Mexican law, labor claims are subordinated only to tax claims.

By law, appraisals must be performed in all real estate transactions in order to determine the tax base for the transfer.  The appraisal must be performed by a certified appraiser and in many cases it must be confirmed by a banking institution.

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The content of this document should not be construed as legal advice of any nature. Should there be any questions with regards to any of the topics contained in this document, please contact either Toshiro Ishino or Armando Esquer by telephone at (011-52-664) 684-9966, by fax at (011-52-664) 638-8100 or via e-mail at the following addresses: tishino@ishinolaw.com or  aesquer@ishinolaw.com
 

 

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