Private Contracts Between Buy and Seller When Acquiring Property in Mexico: Are They Really Necessary?
by Agustin Galindo
¡A las palabras se las lleva el viento! Words are gone with the wind - Mexican saying
When I meet with a client who has the idea of acquiring property in Mexico with a private contract between buyer and seller, my recommendation is always the following:
1. First, Obtain a copy of the registered title of the seller, and
2. Once a title search is performed, sign a private and preliminary contract to acquire the property formally.
It is very important for me to clarify that to acquire property in Mexico the contract needs to be signed and formalized before a Mexican notary public as provided by law and then registered before the Public Registry of Property, so you can become an owner of record.
As a matter of fact, the acquisition of property can be handled by a notary public without the need of a private or preliminary contract, so then the question becomes: Why do I need to have a private preliminary contract???
It has been my experience, when parties have tried to complete real estate transactions before a notary public directly, without a private or preliminary contract in order to save time and money, very frequently (not in general, but frequently enough) the seller has withdrawn or tried to change the terms of the transaction at the last minute, making the transactions fall apart.
By having a preliminary contract you can be sure that you will have a binding document that can be enforced before a Mexican court in case of a breach.
Legally speaking, a private and preliminary contract to acquire property in Mexico shall contain two essential elements—the property and the price—with the understanding that the law provides the general terms of this type of transaction.
By having a preliminary contract you can take the time to check that everything is in order and to fulfill any special conditions. Depending on the transaction, the private and preliminary contracts that can be prepared are the following:
• A promise to transfer the property into a trust, or
• A promise to buy-sell or a buy-sell, in case of a Mexican corporation, or
• A transfer of beneficiary trust rights.
In many cases foreign buyers need a bank trust and if the property is for residential purposes, in my opinion the contract to be signed is a promise to transfer the property into a trust considering that by constitutional mandate (article 27 fraction I of the constitution, article 11 of the Foreign Investment Law and article 2210 of the Civil Code of Guerrero), a foreigner cannot acquire property directly, so a buy-sell contract can be challenged as null and void.
When you are acquiring property for commercial purposes through a Mexican corporation then a buy-sell private contract can be signed or a promise to execute a buy-sell contract in case that the corporation is not yet fully incorporated, with the understanding that in both contracts the obligation to formalize a buy-sell deed before a notary public shall be provided.
If you are acquiring trust rights for a property transferred into a trust, then the contract to be signed is an assignment (transfer) of beneficiary trust rights, this contract is generally used if a foreigner is transferring property to another foreigner, with the understanding that legally and technically speaking the beneficiary trust rights for the property is what is being transferred.
It is important to mention that for real estate transactions, the law provides that the notary public’s fees and expenses (including registration expenses) can be paid on a 50% basis by both parties, unless otherwise provided (article 2203 of the Civil Code of Guerrero). The custom in Mexico is that closing costs are fully paid by the buyer except for Income Taxes, which are paid by the seller.
Therefore, be aware that if you are acquiring property and you are paying for the notary public’s fees and expenses, you have the right to choose the notary public of your preference. The fees, taxes and expenses that the buyer has to pay are:
Real estate acquisition tax (2% of the price)
Certificate of non encumbrance
Property tax clearance certificate
Registration percentage (point .64% of the price)
Notary public fees (1% – 2%)
Please be aware that this article can not be applied as a recipe for all situations, but merely a guideline regarding common private and preliminary contracts to acquire property in Mexico. Every transaction has its own peculiarities and prior analysis needs to be done before determining the appropriate contract.
¡A las palabras se las lleva el viento!, nobody wants to see their words gone with the wind, especially during a real estate transaction.