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Purchasing property in Mexico’s restricted zone

Property and Corporations in Mexico

The restricted zone, in accordance with Article 27 of the Mexican Constitution, is all land located within 100 kilometers of any border and 50 kilometers of any ocean. Article 27 of the Constitution states that no foreigner will be allowed to acquire direct title to land within the restricted zone. However, Mexico’s Foreign Investment Law allows foreigners to acquire indirect title to land in the restricted zone by one of two methods; through a Mexican corporation, or through a bank trust (fideicomiso).

This document will take a look at both options available:

I. – Acquiring property in the restricted zone using a corporation:

As of 1995 foreigners can fully own, operate and administrate Mexican corporations. There are still some restrictions on the activities that a Mexican corporation can do when foreigners are involved such as mining, airports, and the communications sector; however the general rule is 100% participation. There are no investment restrictions on foreign owned Mexican corporation that buy and develop property.

Mexican corporations require a minimum of 2 associates or shareholders. These shareholders can both be foreigners and there is no need to have a Mexican partner.

There are several different types of Mexican corporations, however the 2 most common are the S.A. de C.V. and the S. de R.L. de C.V. The S.A. de C.V. is a limited liability corporation of shares and the S. de R.L. de C.V. is most commonly associated with a limited liability partnership. Choosing which type of corporation to set up is important for tax purposes both in the US and Mexico and you should talk with an attorney or accountant on both sides of the border to understand the benefits and pitfalls each one offers. Making sure these things are done right from the beginning will, without a doubt, save you time and money.

The Mexican legal system is a very “formal” system in that there are “forms or procedures” that must be followed in order for certain types of documents to be considered valid. This holds true with setting up a Mexican corporation. If the “forms and procedures” are not done properly, the limited liability nature of these corporations can be taken away and the shareholders or partners could be held jointly and unlimitedly liable.

Once your Mexican corporation is formed it has the legal capacity to acquire property anywhere in Mexico, including the restricted zone. Acquiring property is also a “formal” procedure and you need to make sure all of the proper steps are done to secure title. The following section on trusts (fideicomisos) goes over some of these formalities.

If everything is done correctly you should have no problem acquiring title insurance on this property from any of the major US title insurance companies. That should be a reflection as to how secure purchasing property in Mexico can be when done properly.

II. – Acquiring property in the restricted zone using a trust (fideicomiso):

A fideicomiso (trust) is a three party contract by means of which the seller (fideicomitente) irrevocably transfers to a bank/trustee (fiduciario) real property so that a third party (fideicomisario/beneficiary of the trust) can use and enjoy such real property. The transfer of the real property from the seller to the bank is a definite and irrevocable transfer of title. UNDER MEXICAN LAW ONLY AN AUTHORIZED MEXICAN BANKING INSTITUTION CAN BE A TRUSTEE.

The bank acquires the title to the real property and is obligated to allow the beneficiary to use and enjoy the property as he see fit (as long as the manner in which he or she does so is lawful). If the beneficiary wishes to rent the property to third parties he or she will be able to do so once they have obtained the necessary authorizations. The beneficiary also has the right to sell the property when he or she sees fit and receive the benefits produced by such sale.

The bank cannot encumber or sell the property without the express written consent of the beneficiary, thus jeopardizing the property.

Mexican law requires that all real property transactions be done by a Public Notary. The Notary is obligated to register in his books the deed of transfer of title, have it signed by the parties involved and have it registered in the Public Property Registry that corresponds to the location of the property. Once the deed of transfer of title is signed before the Notary and registered with the Public Property Registry, the real property transaction has taken the form required by Mexican Law.

There is no escrow institution in Mexico, for which from the time the parties agree on a price and give a down payment until the deed of transfer of title is signed before the Notary, a preliminary agreement is usually signed to secure the rights of the parties involved. This agreement should only be signed after having confirmed with the Public Property Registry that the property involved in the transaction is free of encumbrances. Once the preliminary agreement is signed, all the needed paper work and authorizations are obtained and sent to a notary for signing and registration.

The deed of transfer of title that is registered in the Notaries books as well as with the Public Property Registry will contain the entire trust agreement and is the document that will prove that you have rights to a certain piece of real property. Once the deed has been registered with the Public Property Registry, the first deed of title goes to the bank and the second deed of title is given to the buyer/beneficiary.

If you need to verify to authorities outside Mexico that you have invested in a foreign country, an “Apostille” or “legalized” copy of your deed of trust will be sufficient.

The Foreign Investment Law permits trusts for up to 50 years, with a one time renewable term. Once the term of the contract has been reached, the fideicomisario (buyer / beneficiary of the trust) will have to give instructions to the bank, specifying who the title to the property should be transferred to. (i.e. family members by means of setting up another trust).

Besides the above, some of the general terms of the contract of fideicomiso are as follows:

1.- There can be more than one fideicomisario (beneficiary). If more than one fideicomisario is designated, each will be co-beneficiaries of the property held in trust (unless otherwise established).

2.- Substitute beneficiaries or “fideicomisarios sustitutos” will need to be designated. Substitute beneficiaries are usually family members and will only have the right to participate in the trust once all of the first beneficiaries have passed away (unless otherwise established).

3.- If the fideicomisario is not happy with the bank that is acting as fiduciario, the fideicomisario has the right to change banks.

4.- If the property held in trust is unimproved land and larger than 2,000 meters square, the Ministry of Foreign Affairs will require that the beneficiaries sign a letter promising to invest in the land a certain amount of money over a 24 month period. The amount of money that will need to be invested will be determined by the location of the property and its size.

Courtesy Connell & Associates(lawyers in Mexico)

Contracts in Mexico

According to the Ley Federal de Protección al Consumidor, Capítulo X, de los Contratos, Artículo 85 (Mexican federal law): “…Todo contrato de adhesión celebrado en territorio nacional, para su validez, deberá estar escrito en idioma español y sus caracteres tendrán que ser legibles a simple vista y en un tamaño y tipo de letra uniforme…”

In strict adherence to this law, a real estate contract, either for purchase or rental, is considered a “contrato de adhesion,” given the consistencies in format and content.

However, in the Código de Comercio (Commercial Code) regarding international contracts, contracts in English are recognized. However, for purposes of Mexican jurisdiction, such contracts must be translated into Spanish by a certified translator. This is necessary if the contract is to be registered or if it is brought to litigation by any party to the contract.

Real estate contracts between Mexican nationals and foreigners are often treated as international contracts, and are therefore recognized as such when in a foreign language.  However, if for any reason they need to be registered or litigated, the Spanish translation must be filed either in the courts or the Registro Público de la Propiedad (Public Property Registry).