Real Estate 2019 Comparisons

Last Updated April 30, 2019

Law and Practice

Authors



Estudio De la Flor, García Montufar Arata & Asociados Abogados has a real estate team composed of four partners and 13 associate lawyers, within an overall staff of more than 40. With a key office located in Lima’s San Isidro district, the firm has a proven track record in practice areas including constitutional, civil, corporate, administrative, tax and labour law, as well as litigation and alternative dispute resolution.

The main sources of real estate law are the following:

  • the Peruvian Constitution of 1993, in accordance with the provisions contained in the Economic Regime (chapters i, ii, and iii) – mainly Articles 70 to 73.
  • the Peruvian Civil Code of 1984, mainly chapter v referring to real rights.

Special and dispersed regulations include:

  • the Law on Regulation of Urban and Building Qualifications, approved by Law 29090;
  • the Law on the Regularisation of Buildings;
  • the Procedure for Factory Declaration and the Regime of Real Estate Units of Exclusive Property and Common Property, approved by Law 27157;
  • the National Building Regulations, approved by Supreme Decree 015-2004-VIVIENDA;
  • the Regulation of Territorial Conditioning and Sustainable Urban Development, approved by Supreme Decree 022-2016-VIVIENDA;
  • the Law which creates the Integrated National Cadastre System and its connection with the Land Registry, approved by Law 28294;
  • the Temporary and Extraordinary Regime of Formalisation and Titling of Rural Properties, approved by Legislative Decree 1089;
  • the Framework Law for acquisition and expropriation of real estate, transfer of real estate owned by the state, release of interference and other measures for the execution of infrastructure works, approved by Legislative Decree 1192;
  • the Law on Private Investment in the Development of the Economic Activities in the Lands of the National Territory and Native Communities, approved by Law 26505;
  • the Law of opposition registration procedure to the process and cancellation of the registration seat by impersonation of identity or falsification of documentation and modification of Articles 2013 and 2014 of the Peruvian Civil Code and Articles 4, 55, the Fifth and Sixth Transitory and Final Supplementary Provisions of Legislative Decree 1049, approved by Law 30313;
  • the Complementary Law to Law 26662;
  • the Law of Non-contentious Matters of Notarial Competition, for the Regularisation of Buildings, approved by Law 27333;
  • the Law of the National System for the Evaluation of Environmental Impact, approved by Law 27446;
  • the General Law of the Cultural Heritage of the Nation, approved by Law 28296;
  • the General Law of the National System of State Property, approved by Law 29151;
  • the Law of Notaries, approved by Legislative Decree 1049; and
  • the Organic Law of Municipalities, approved by Law 27972.

The main trends in the real estate market in the last year include, in the first place, industrial companies based in Lima increasingly choosing to acquire land for their new factories and centres of distribution within the so-called 'industrial parks'. This means that industrial hubs are being consolidated in particular areas such as Chilca, Lurín and Huachipa.

Secondly, in respect of housing matters, mortgage credit increased by around 9.2% and sales by around 8% at the end of the year, specifically in the districts of San Isidro, Miraflores and Barranco (known as 'Top Lima'). On the other hand, the districts collectively referred to as 'Modern Lima' have shown different tendencies: the district of Jesús María consolidated its position as the district accounting for the largest portion (16%) of the real estate market, occupying the first place in terms of sales due to its strategic location and also because it permits the development of multifamily buildings of a greater height. The district of La Victoria saw an increase in the volume of real estate transactions, with 843 units being offered in January and 1,024 units at the end of the year. It is also important to mention real estate companies' increased interest in projects in Callao Region, where the construction sector is being revitalised, due to a cost per square metre of approximately USD906. Likewise, the social housing sector in Lima grew by 39% in 2018 as a result of the reactivation process that the Government began in 2017, approving measures such as initial mortgage loans, streamlining procedures and other state subsidies for social programmes such as 'Mi Vivienda' and 'Techo Propio'.

Thirdly, it is important to mention the new funding sources that boosted the housing market in 2018: FIRBIs, or Investment Funds Real Estate Income, and FIBRAs, or Securitisation Trusts in Real Estate Income. These new sources of financing serve as real estate investment vehicles for leasing operations or other forms of transfer of use. The advantages of these vehicles are the access they provide to the high-cost market, as well as the possibility to diversify investments with lower risks, the security and trust that they grant, and tax incentives, among other things. These new sources of financing look to boost the growth of the real estate market and encourage the participation of retail and institutional investors.

Finally, it is important to mention that the government has planned strong investment in infrastructure to connect the different regions of the country. Among the most important of the projects announced in 2018 are:

  • the 'Tren de Cercanías' railway between the Lima and Ica regions, which is ready to start its adjudication process in April 2019;
  • the 'Tren Macho' railway between Huancayo and Huancavelica regions, which consists in the modernisation of the existing railroad between said regions and the contract for which is currently being designed;
  • the 'Tren de la Costa railway' between the Trujillo and Chiclayo regions, which will link the north coast of Peru;
  • the modernisation of the Jorge Chávez International Airport, a project which has already received the land needed from the government;
  • Chinchero International Airport, the execution of which began with the movement of land by the government; and
  • the concession of the Third Group of Airports project to connect the regions of Jauja, Huánuco, Ilo, Jaén, Rioja, Yurimaguas, Tingo María and Chimbote.

In legislative matters, the following reforms are in process:

  • the Peruvian Civil Code reform (the main rules for real estate development in the country);
  • the approval of administrative simplification rules to generate greater dynamism in the construction industry; and
  • the pending amendment of Law 29090 (as a result of Legislative Decree 1426), modifying several articles of Law 29090, in relation to which the legal concept of 'integral projects' is being developed.

This year the government has promoted social housing through the expansion of the coverage of the social housing access bonds programmes such as the 'Techo Propio' and 'Mi Vivienda' programmes.

The Ministry of Housing has announced that it is working on a project to promote the rental-sale of housing (real estate leasing), because although there is currently a law in force regarding this system (promoted by the Ollanta Humala government) it has not been used with the scope that is expected.

The government has also announced, through the Ministry of Housing, that it will make state lands that are not presently being used available in order to generate more urban land.

Peruvian legislation operates a 'numerus clausus' system of property rights. In other words, only property rights that are specified by law qualify as such. Parties to a contract may not create property rights that are not listed in the law.

The main property rights are: right of property, possession, surface, easements, usufruct, and the right of use and habitation. Likewise, the mortgage is the main property right guarantee.

However, parties are allowed to modulate the content of their rights. Articles 926, 1005 and 1030 of the Peruvian Civil Code, for example, authorise regulation through the private autonomy of the content of property rights, usufruct and easements, respectively.

In relation to property rights, Peruvian legislation has established, through a special rule (Law 27157), the regulation of property in buildings and shopping centres where exclusive and common property exist simultaneously, generating a shared right over common areas and services. Its functionality means that the internal regulation or statute that governs this kind of property can conventionally establish rules allowing for more precise regulation through private autonomy.

Transfer of property arises by way of agreement between parties, as regulated by Article 949 of the Peruvian Civil Code. There is no formality established for the disposition of the property. Peruvian law follows the system of consensual transfer of property, which means that the obligation to dispose a property is sufficient by itself to make the creditor of the property its owner.

This is consistent with the type of voluntary registration system that operates under Peruvian Law, in which as a general rule inscriptions are not obligatory, their lack of registration does not prevent their existence and there are no impediments to their exercise. However, the Peruvian Civil Code has strong protective effects for those who register their rights.

In order register a transfer in the Peruvian Public Records it is necessary to comply with certain formalities which are regulated by the Notarial Law, as well as the registration rules (eg, the Public Deed). It is also necessary to consider the rules provided in the Civil Code (in relation to property rights, contracts and rules of protection of the registry system), the Notarial Law in relation to the formalities necessary to access the Public Records, and the Municipal Tax Law in relation to the payment of taxes.

There is no special regulation for the transfer of offices or hotels. However, in the case of offices, it is probable that they are immersed in a regime of exclusive and common property, in accordance with the provisions of Law 27157, meaning that prior to the acquisition it is necessary to review the conditions of coexistence provided in the Internal Regulation.

The legal transfer of property can take place by way of a preparatory contract or a definitive transfer contract. Parties can use a preparatory contract when they are not ready for a definitive one.

The final contract is made by signing a private document authorised by a lawyer. With this document, the notary can request that the Public Records blockade registration of the property to reserve the right of the purchaser, after which the parties will sign the Public Deed for the registration at the Public Records. The payment of the price must be verified by the Notary Public mandatorily.

The Peruvian Public Records System incorporates the Real Estate Property Record, where the registration of real estate is not mandatory; however, the civil system has been superimposed on the securities provided by the records system, which although it is not constitutive (rights are borne out of the registry) or validating (registered rights can be cancelled) has strong protective effects for those who register their rights, which are sustained by the high barriers of access that are established (only titles registered in a public instrument and approve the legality control they are subject to, are registered at the Public Records) in such a way that the holder of a registered right has in its favour:

  • the presumption of legitimacy of the degree it holds, which can only be enervated by a court ruling declaring the nullity of its right or its registration;
  • the benefit of the enforceability of their right over third parties interested in the same property: whoever registers first and in good faith has priority over parties that failed to register their right (cases of absolute incompatibility of rights) or has preference in the realisation of their right (cases of relative incompatibility or preference of order); and
  • protection of any third party that, in good faith and trusting in the information provided by the registry, acquires it for consideration and registers its right at the Public Records, in which case the third party is safe from previous defects that the transfer could have.

In sum, in relation to the civil risk of eviction, the registration system has superimposed the protective effects granted to registered rights in such a way that if the registration requirements are met, it is possible to avoid eviction and, consequently, preserve the acquired right. Notwithstanding the foregoing, as it is always possible that there are registry mistakes, the right to be compensated for such mistakes is established as a guarantee of the system. There is no immediate compensation mechanism, but it must be demanded in the proper judicial way.

There is no individual guarantee of the title that a person can hold in a similar way to the 'title insurance' systems.

Diligent buyers usually entrust a specialist real estate lawyer to study the records of the property they would like to acquire.

The study of the records implies, in the case of properties registered at the Public Records, evaluation of the following aspects:

  • the current ownership of the property, and any previous owners during the past ten years, which is equivalent to the acquisitive prescription;
  • the documents which support the records (considering that to invoke the public registry, the purchaser must verify the non-existence of possible cases of nullity, falsification or impersonation, resolution of the right of the registrant in the aforementioned documents);
  • the existence of charges or encumbrances that affect the property;
  • the correspondence of the registered descriptive data of the property with the real data;
  • verification of the payment of municipal taxes;
  • the nature of the property, whether rural or urban; and
  • verification of possible overlaps with other registered properties after obtaining a Cadastral Search Certificate.

In special cases, the study may include specific questions about zoning and compatible uses of the property, or if the property is located in areas protected for their cultural heritage or natural qualities, or which are designated as risk areas.

In the case of unregistered properties, the evaluation is limited to the verification of the property title of the seller, the payment of municipal taxes and the documents that prove the possession of the property, preferably for a period longer than the ten years which are required for acquisitive prescription.

The sales contract contains, first of all, the declarations of the parties required by the Peruvian Civil Code: the willingness to transfer and acquire the property right, the description of the object of the sale, and the determination (or criterion of determinability) of the agreed price and the form of payment.

Usually, contracts include the declaration of the seller regarding the payment of the municipal taxes due, the commitment to formalise the contract and to give possession of the property. Likewise, it is common to include the seller's statement regarding the absence of encumbrances or charges that limit or restrict the free disposition of the property as well as the obligation to clean up in the case of eviction, including hidden defects that do not allow for allocation of the transferred property for the purpose for which it was acquired or which decrease its value, in accordance with the regulations of the Peruvian Civil Code.

With regard to the buyer, the Peruvian Civil Code provides that the contract could be terminated due to the sanitation to which the seller is bound, which generates the obligation to pay the value of the property, interest, expenses, fruits and, if necessary, compensation for damages, without prejudice to the grounds for nullity of the contract in the case of it having incurred in any of the causes provided in the Peruvian Civil Code regulations.

The most important legal areas that every investor must take into account when buying a property are civil law, specifically in real estate matters, and administrative law, specifically in issues regarding registration law, urban law, environmental law and the legislation protecting the cultural heritage of the nation. Likewise, in the acquisition of a property belonging to a peasant community, an investor must take into account the framework of Law 24656 (General Law of Peasant Communities), with due observance of Directive 10-2013-SUNARP-SN, approved by Resolution of the National Superintendent of Public Registries No 343-2013-SUNARP-SN. Finally, if the property is part of the private domain of the state, its acquisition must take into account the Law 29151 (General Law of the National State Property System) and its regulations approved by Supreme Decree 007-2008-VIVIENDA.

The buyer of a property is not responsible for soil pollution or environmental contamination that he or she has not caused. Instead, the party that caused the damage bears the responsibility. In light of this, the administrative, civil and even criminal responsibilities shall be taken by whoever committed the act causing the pollution or contamination.

The buyer of the property protects itself by making the development of the project at the acquired property conditional on its cleanliness. If it is contaminated, and this contamination makes it impossible to carry out the activity for which the property was acquired, then unless otherwise agreed between the parties the issue will be faced by those who have an interest in developing activity at the said property. For this reason, the payment of the price is usually conditional on the completion of the cleaning of the property.

In accordance with Law 27972 (Organic Law of Municipalities), the provincial municipalities are responsible for planning of the development and organisation of land uses, while the district municipalities are responsible for approving regulations complementary to the requirements at a provincial level. A buyer that wants to determine the permitted use of a property must review the regulations issued by the municipalities, which regulate the zoning and permissible uses, and which are in full accordance with the Regulation of Territorial Conditioning approved by Supreme Decree 022-2016-VIVIENDA. The main rules are the following: Supreme Decree 022-2016-VIVIENDA (Regulation of Territorial Conditioning and Sustainable Urban Development), Law 27972 (Organic Law of Municipalities) and the resolutions issued by the provincial municipalities and the district municipalities.

We should point out that it is possible for a buyer to enter into agreements with the authorities to facilitate the development of a specific project, as long as this does not violate rules of public order. These agreements are called co-operation agreements and are signed in accordance with Article 86.4 of the Law of General Administrative Procedure and Article 23.20 of Law 27972 (Organic Law of Municipalities).

Article 70 of the Political Constitution of Peru of 1993 states: "The right to property is inviolable. The State guarantees it. It is exercised in harmony with the common good and within the limits of law. No one may be deprived of his property except, exclusively, for reasons of national security or public necessity, declared by law, and after payment in cash of justified compensation that includes compensation for eventual damage."

In the abovementioned constitutional framework, expropriations which are justified by public necessity are distinguished from those that are justified by national security. The first applies to restricted cases that constitute a state of necessity (usually linked to the construction of infrastructure works, public goods and services concerned with the community welfare). The second case is linked to situations in which the order and security of the country is at risk.

Expropriation is regulated by Legislative Decree 1192 (Framework Law for Acquisition and Expropriation of Real Estate, Transfer of Real Estate Owned by the State, Freedom from Interference and Dictates Other Measures for the Execution of Infrastructure Works). According to this decree, expropriation constitutes the forced transfer of the right of private property, authorised only by express law of the congress in favour of the state, at the initiative of the executive, regional governments or local governments, of property that is required for the execution of infrastructure works or for other reasons of public necessity or national security declared by law; expropriation requires payment in cash of the justified compensation, including compensation for any eventual damage to the owner.

As a matter of principle, onerous transfers of real property are taxed by income tax and the 'Alcabala' tax.

In the case of income tax, the taxpayer is the seller. The income tax rate in these cases varies depending on who performs the operation, as follows:

  • When the operation is carried out by an individual, the tax will be 5% of the capital gain obtained by the transaction, with the following exceptions:
    1. for transfer of property acquired prior to the year 2004; and
    2. if the property is considered by law to be the seller’s home.
  • When the operation is a 'habitual act' (in other words, when a natural person transfers real estate, or shares and rights, three or more times within a tax period) or a commercial activity (in other words, when done by a legal entity that is dedicated to the transfer of real estate, shares and rights), the transfer will generate an income taxed with the corporate income tax (third category) in which case it is taxed at a rate of 29.5% of the net profit for the year. In this second case, the only exception to the payment of this tax exists as long as the taxpayer is not affected or is exempted from income tax by Articles 18 or 19 of the Income Tax Law.

In the case of the 'Alcabala' tax, the taxpayer is the buyer. This tax is determined by applying a rate of 3% to the transfer value or the self-assessment of the real estate readjusted. Those who are not liable for payment of this tax those are expressly established in Articles 27 and 28 of the Municipal Taxation Law.

It should be noted that when it comes from the first sale of a property made by the constructor of it, the transfer will be taxed by the general sales tax (or also called VAT), at a rate of 18% is applied on only 50% of the price of sale. Said tax paid could be used as a tax credit by the buyer.

Finally, in the sale of shares of a property-owning company, only the income tax will be applicable, following the same considerations mentioned above in the case of the transfer of real estate. However, the exemption assumptions apply in cases where the shares are acquired through a centralised mechanism such as the Lima Stock Exchange.

According to Article 71 of the Peruvian Constitution of 1993, foreigners or entities controlled by foreigners are subject to the same conditions as Peruvians regarding real estate property, except for the fact that they cannot acquire or possess property, directly or indirectly, within 50 kilometres of any Peruvian border.

Usually, the acquisition of real estate is financed through entry into mutual commitment contracts, with the creation of a mortgage guarantee between the buyer and a financial system entity. The entity of the financial system lends the money for the purchase and, in guarantee of the return of the borrowed money, a mortgage is constituted on the property right of the purchase object.

The mortgage guarantee is the typical security created or entered into by a commercial real estate investor.

There are no restrictions on granting guarantees to foreign lenders.

In recent years, the tax regulations have established different legal requirements that must be considered to accredit and, if applicable, deduct tax payments on loans that are made in favour of creditors domiciled abroad. These conditions will be fundamentally linked to:

  • confirming if a direct or indirect link exists with the non-domiciled creditor; and
  • if the creditor is domiciled in a country considered high risk or a tax haven.

The existing modifications in Peru have not yet incorporated changes referring specifically to FIRRMA. However, Peruvian investments must also comply with the regulations approved by the CFIUS.

The creation of guarantees on real estate requires fees to be paid to the National Superintendence of Public Registries, which is responsible for the registration of properties in which the guarantee is registered. The rate will be linked to the value of the guarantee, which may not be greater than one Peruvian tax unit (UIT) for each guarantee. In 2019, one Peruvian tax unit equates to PEN4,200.

Notarial payments are not considered tax rates and will depend on the rates set by each notary.

In the evaluation of the property that is carried out in order to grant the guarantees, the capacity of the representatives that grant the guarantees is verified. This is generally evaluated in relation to the fact that there are express powers registered on the disposition of the assets.

It is usual to request, prior to the disbursement of the loan, the blocking of the registry items of the properties that are granted in the guarantee (according to Decree Law 18278). This has a validity of 60 working days counted from the date of its notation in the registry entry. During this period the Public Records may not register any act or contract related to any property right of the land.

There are two types of guarantee: personal and real. The effect of personal guarantees is almost null, so it is recommended that the borrower offers real guarantees to the lender. The most-used guarantee in the real estate field is the mortgage, because it grants security to the creditor that the guarantee will be satisfied. Additionally, the mortgage has a procedural effect of giving rise to a singular process of execution.

In the event of default on the obligation secured by a mortgage, the lender is entitled to sue for the execution of such mortgage in the courts. In this regard, in accordance with the provisions of subparagraph a of Article 9 of the Conciliation Law, conciliation is not required in the enforcement proceedings as a requirement for the admissibility of the claim. However, it is common practice for the lender to require the borrower to comply with the obligation, by means of a notarised letter.

Measures to protect the interests of the lender include obtaining real guarantees, especially mortgages, which must be duly constituted and registered.

The preference of the mortgage constituted in favour of the lender is determined based on its registration in the Public Registry. However, this preference can be altered in three cases:

  • by decision of the creditor itself; that is, based on its autonomy;
  • due to the existence of a creditor with a privilege recognised by the Constitution and the laws, as is the case of labour creditors; and/or
  • due to a situation of insolvency of the debtor that gives rise to the application of the General Law of the Insolvency System (Law 28709). According to this law, the mortgagee will collect its credit in the third order of preference, after the labour credits owed to the workers, as well as the unpaid contributions to the Social Security of Health and the alimentary credits.

A secured creditor that, as a consequence of the execution of its right, becomes the owner of the property will not be responsible for contamination of the property or transgression of environmental laws, as long as it has not caused the damage.

In accordance with the General Law of the Bankruptcy System (Law 27809), after the procedure has been published in the INDECOPI Bankruptcy Bulletin, the enforceability of all obligations that the borrower has pending will be suspended until the approval of the Restructuring Plan, the Global Refinancing Agreement or the Liquidation Agreement (documents that establishes the different conditions regarding compliance with the borrower's obligations). In other words, the obligations of the borrower become unenforceable and may not be a matter of forced execution. Law 27809 thus provides that, after the bankruptcy situation has been declared and the proceeding has been disclosed, the judicial or extrajudicial execution of the borrower’s assets affected by guarantees will not proceed, unless said assets have been affected as a guarantee of third-party obligations (in this case the execution could proceed).

Finally, we must point out that a judge can declare as ineffective and unenforceable (against the lenders in the insolvency proceedings) liens, transfers, contracts and other legal acts (whether gratuitous or onerous) that do not refer to the normal development of the activity of the borrower, that damage their assets and/or that have been completed within the year preceding the date on which they submitted their request to benefit from any of the bankruptcy proceedings, or that was notified of the resolution of the settlement, or that was notified of the beginning of the dissolution and liquidation. In other words, the real estate guarantees (mortgages) that the borrower completed a year before can be declared as ineffective by a judge. This is what is known as the 'period of suspicion'.

The main legal consequence of the LIBOR expiry in Peru will be the determination of the minimum interest rate in foreign currency that the Administration uses to establish the presumed interest that a loan in foreign currency could generate. This is due to the fact that, currently, said presumed interest is calculated using the LIBOR index for six-month deposits. We estimate that during the next few years, before the expiration date of this ratio, Peruvian legislation will be modified and designate another ratio that meets these objectives.

The competence to plan urban development and the zoning, use and occupation of land falls on the regional governments, provincial and district municipalities, according to the rules indicated in their organic laws. The most important national rule in this matter is the Regulation of Territorial Conditioning and Sustainable Urban Development, approved by Supreme Decree 022-2016-VIVIENDA, which identifies the instruments of urban planning, the procedures for its approval and the conceptual categories to be used by local governments in the exercise of their powers. In other words, the owners must adapt to the procedures included in this regulation.

Peru does not have a Land Code. However, in recent years, some urban development or zoning established by the municipalities has been considered by the Commission for the Elimination of Bureaucratic Barriers of the National Institute for the Defense of Competition and Intellectual Property (INDECOPI) to constitute illegal bureaucratic barriers lacking reasonableness, giving rise to the declaration of its unenforceability, with general effect.

In order to execute a new work (building) or expansion, renovation, etc, of a building, it is necessary that said work is adjusted to the parameters established by the municipalities (basic characteristics of the construction such as number of floors, number of parking spaces, normative front, withdrawal, among others) for the area where the property is located. The construction characteristics are established in the National Building Regulations and administrative procedures to achieve the authorisation to carry out the works (ie, the licence), as well as to ensure the conformity of works and building declaration in due course, as established by Law 29090.

According to Law 27972, the competent entities to approve and supervise compliance with the technical standards to which they will be subject, and also supervise the execution of the works, are the district municipalities.

The Ministry of Housing is competent to design, regulate and implement the national policy on housing, as well as promoting building and urbanising activity in Peru. Law 27972 (Organic Law of Municipalities) establishes that the competent entities to supervise the fulfilment of the development, design and construction of real estate projects are the district and provincial municipalities, according to their jurisdiction.

Restrictions imposed on real estate projects carried out on urban land commonly refer to the maximum height, number of parking spaces per unit and population density, among other things. In the case of urban residential projects, in some cases it is necessary to have road impact studies, environmental or integrated planning studies duly approved.

According to Law 29090, the administrative procedures to obtain the rights to develop a new project or complete a major remodelling are as follows:

  • First of all, accreditation of the urban condition of the property. For this it is necessary to obtain the Urban Authorisation Licence (in order to have the infrastructure and public services to convert land into an 'urban' site) before the competent municipality.
  • Second, it is necessary to obtain a Building Licence. By issuing this licence, the municipality grants its authorisation for the execution of building works.
  • At the end of the execution of the works, the procedure of conformity of works and declaration of construction must be initiated before the competent municipality. The purpose of this procedure is to verify that the works were executed in accordance with the terms of the Building Licence mentioned above. The declaration of said building can be registered at the Public Records.

Peruvian legislation provides for the possibility of regularising buildings that were executed without a licence before 2016; in this case, it is necessary to comply with the procedure specified in Law 27157.

Regarding third parties' right to participate and object to a building project, we must point out that third parties have the right to report any infringement or violation of public order rules warning of the execution of building works.

According to Law 27444, which regulates the general administrative procedure and is applicable to the entire public administration in Peru, administrative decisions may be appealed in the following ways:

  • Motion for reconsideration, which will be filed before the same administrative body that issued the first act that is the subject of the objection and must be supported by new evidence. In the case of administrative acts issued by administrative bodies that constitute only one instance, no new evidence is required. This remedy is optional and its non-filing does not prevent the filing of a motion for appeal.
  • Motion for appeal, which is filed when the objection is based on different interpretations of the evidence or when it refers to matters of pure law. This should be addressed to the same authority that issued the act objected to, and this authority should in turn raise the proceedings to its hierarchical superior.

It is important to mention that only in cases established expressly by law or legislative decree is it possible to file an administrative motion for review.

The term for the filing of appeals is 15 business days, and they must be resolved within a period of 30 business days.

The administrative acts that exhaust the administrative route may be objected to before the judicial power through a contentious-administrative process.

In Peru, real estate projects require feasibility of services, which generates an obligation for the companies that provide these services to conclude contracts (after compliance with the legal requirements).

Exceptionally, some projects need to have certain facilities, for example those that need a complementary public area for their real estate development (such as a beach area that requires a zone for yachts). As a result of the requirement mentioned above, it is necessary to have a concession from the state.

Additionally, Legislative Decree 1362, which regulates the National System for Promotion of Private Investment, establishes that private entities can reach agreements with local authorities, agencies or public service providers to facilitate a development project (including real estate projects).

The control of the restrictions on the development of a project are enforced by the municipalities in different stages:

  • the processing of the permissions is carried out by public officials, urban reviewers (by delegation) and the technical commissions, according to the complexity of the project;
  • during the execution phase of the building works, municipalities carry out the technical verification; and
  • after the construction, the municipalities supervise the building, being able to order demolitions, declare inhabitability or enforce closure.

In Peru, there is no restriction on access to the ownership of real estate assets. Natural or legal persons may hold real estate assets. The types of legal persons available are those regulated by the General Law of Companies.

In some cases the main asset of a company is real estate, which means that in some cases investors prefer to buy whole corporations directly.

Other alternatives used include trusts, which are becoming more current in the real estate market because they act as a guarantee of the investments in real estate projects.

The growth of the market has also led to the consolidation of investment funds in real estate (FIBRAs) as investment vehicles for the purchase and development of real estate projects that generate income through the sale or rental of real estate units, either for residential or commercial purposes.

At least two partners are required for the constitution of a company in Peru. It is possible to set up a company with foreign natural or legal persons, as long as the necessary permission to sign the constitution of the company has been granted.

The bylaws of the company must describe the corporate purpose and activities to which it will be dedicated, its capital, organs and operation, among other things.

In the case of trusts, the settlor transfers assets to the trustee, to constitute an autonomous patrimony affected by a specific purpose in favour of the settlor or a third-party beneficiary.

Both trusts and investment funds need to be managed by a company authorised for such purposes.

Peruvian legislation does not provide for a minimum capital threshold for the establishment of a legal entity, nor for the formation of a trust or an investment fund.

Legal persons pursuing a lucrative purpose are regulated by the General Law of Companies.

In the case of trusts and investment funds, insofar as their administration is carried out by an institution authorised for such purposes, they must in turn be subject to the rules established by the Superintendence of Banking and Insurance (SBS).

The cost of maintenance of each institution will be based on their activities, the investments they develop, the staff and any taxes payable, among other elements. It is not possible to establish a fixed annual cost.

The most common types of arrangement allowing for a person, company or other organisation to occupy or use real estate for a limited amount of time without buying it outright:

  • the lease, with a maximum term of ten years;
  • the usufruct with a maximum term of 30 years in the case of legal persons; and
  • the surface right, which is also used, with a maximum term of 99 years, especially to be able to build on the land and also under the land.

Commercial leases can be structured in two ways:

  • the common or general lease, regulated in the Peruvian Civil Code; and
  • the financial lease (also known as Leasing), regulated by Legislative Decree 299 and which is only entered into with entities that are part of the financial system, which grants the possibility to acquire the ownership of the property leased, exercising a right of purchase option.

The terms of the lease agreements can be freely negotiated, with the exception of some provisions given by the Peruvian Civil Code, referring to the maximum period of validity, the status of tenants or the need to obtain unanimous consent of all co-owners of the property to agree to the lease.

Regarding to the income, there are no provisions that set or limit the amount and form of payment.

The lease agreement could be fixed for a maximum term of ten years. If the leaser is a public entity or incapacitated person, the maximum limit of term is reduced to six years. In the case of financial leases, no maximum term is established.

Unless otherwise agreed, the Peruvian Civil Code establishes that maintenance and repair expenses are responsibility of the tenant.

The parties can freely establish the frequency of rent payments; usually it is a monthly payment.

Rent variation will depend on what the parties agree in the lease agreement. It is usual to establish annual adjustments.

The parties freely determine the increase or adjustment of rent.

Only when rent is paid to taxpayers subject to the third category income tax (corporate income tax) is VAT paid on it, because in this case it is considered a service provided inside the country.

Usually, the tenant is requested to provide a guarantee amount against the damages that the property could suffer during the term of the lease agreement, and is also requested to pay an advance of the rent.

In addition, depending on the type of property, the tenant is requested to pay the costs of the services provided to the property, either internal (such as the maintenance of the building where it is located) or external (ie, rates for public services).

Usually the tenant assumes the payment of the excise taxes for the public areas, as well as the maintenance fees for the common areas inside the building. This is agreed by the parties in the lease agreement.

If there is no system of individual measurement of consumption, the cost is distributed among the occupants of the different units, according to the percentage of expenses established in the internal regulation of the building.

There is not a legal obligation to insure the property subject to a lease agreement. The decision to insure is entirely at the discretion of the contracting parties.

Restrictions can be established on the use of the leased property, without prejudice to the limitations already established by zoning rules or by the internal regulation of the buildings.

According to the Peruvian Civil Code, the tenant may not make changes to the property without the prior consent of the lessor. The only modifications permitted without prior consent are those that are urgent and modifications on which the preservation of the property depends. These provisions could be modified by agreement of the parties.

There is specific regulation referring to the lease of real estate for housing purposes, which basically promotes and facilitates lessors' leasing of their properties; however, these regulations are not compulsory.

There is no provision in the bankruptcy legislation for any specific consequences of a tenant being declared insolvent. Default on payment of rent will entitle the lessor to terminate the lease agreement.

In some cases, the payment of rent is insured through a surety bond; regarding the diligent use of the property, it is common practice to demand a payment as a guarantee; and, finally, lease agreements usually include penalties in favour of the lessor, to discourage non-compliance.

The tenant does not have any right to continue to occupy real estate after the expiration or termination of a commercial lease. It is important to mention that Article 1700 of the Peruvian Civil Code establishes that if the tenant remains in occupation of the property, until the lessor requests its return, the lease agreement is understood to continue (not to have been tacitly renewed), under the same stipulations and until such a time as the lessor requests the property's return. The contract must clearly establish the completion date and the other events that may determine its conclusion.

Additionally, it is recommended to incorporate a future break-in clause (called 'allanamiento futuro'), provided for by Law 30201, by virtue of which the lessor may judicially request the restitution of the property upon conclusion of the contract or by resolution of the same for lack of payment in accordance with the provisions established in Article 1697 of the Peruvian Civil Code, in which case the tenant can only contradict said demand by proving the validity of the contract or the cancellation of the rent owed.

Article 1697 of the Peruvian Civil Code foresees certain causes for termination of a lease agreement, mainly the following:

  • If the tenant does not pay the rent of the previous month and another month, 15 additional days. If the rent is agreed for longer periods, the expiration of a single period and 15 days is enough. If the rent is agreed for periods of less than one month, it is enough that three periods expire.
  • If the tenant makes different use of the property than that for which it was expressly or tacitly granted, and/or if the tenant permits any activity contrary to public order or good customs.
  • If the tenant sublets or assigns the lease contrary to express agreement with, or without written permission of, the lessor.

Extrajudicial eviction of tenants is not permitted. However, in accordance with Article 594 of the Peruvian Code of Civil Procedure, the parties can establish the possibility of an early demand for eviction, whose favourable ruling would be executed six days after the expiration of the term.

The lease agreement can only be resolved by its parties, in other words by the lessor or the tenant, and under the terms established in the agreement.

However, if the lessor transfers the leased property to a third party, and if the lease agreement is not registered at the Public Records, the new owner could terminate the lease agreement. If the new owner terminates the lease agreement before the expiration of the term, the tenant may demand compensation for the damages caused.

Another possibility is the expropriation of the property by the national or local government, as explained in 2.9 Condemnation, Expropriation or Compulsory Purchase, above.

The most common pricing structures used for construction projects are lump sum and unit price. In both cases the project agreements have specific clauses that cause a price adjustment, for example changes in law, force majeure and economic equilibrium, among others.

According to Peruvian legislation, responsibility for the design and construction of a project is mainly assigned to the building contractor. The building contractor is responsible for the construction of the works, the quality of the materials or defects in the land, among other things. In addition, the building contractor also assumes the risk of damages until the finished building is handed over to the owner. In addition to the above, if the works are destroyed or there is a risk of construction defects, the contractor is responsible for the five years following handover of the works.

Usually, contractors provide a performance bond issued by a bank to guarantee compliance with their obligations. Liability limitations are also used to distribute the risk of construction, however, it is important to mention that the Peruvian Civil Code establishes that any limitation of liability based on negligence will be invalid.

Effectively, parties are allowed to agree that an owner is entitled to monetary compensation if certain milestone and completion dates are not achieved. Moreover, agreements usually include penalties, discounts on the payment or compliance bonds, which are executed in the case of delay.

It is common for owners to look for security to guarantee a contractor's performance not only through letters of guarantee or performance bonds, but also through previous accredited experience.

Contractors may enter a duly accredited legal claim in order to lien or encumber a property. This could happen by judicial decision after verification of the debt.

As mentioned in 4.4 Obtaining Entitlements to Develop a New Project, above, a project first needs to obtain the Urban Authorisation Licence. In order to obtain the Building Licence, the competent municipality then verifies that the project complies with the zoning rules. Finally, after execution of the works the project needs to meet the requirements for conformity of works and declaration of construction.

The general sales tax (VAT) only taxes the first sale of real estate (ie, that which is made by the constructor). Therefore, in the purchase of corporate real estate there will only be a VAT obligation if the acquired property is a building (ie, it does not apply to lots of land) and the operation constitutes the first sale made by the builder (or an entity that fits this definition according to the law).

Although VAT is levied on the seller, the law allows transfer of the tax to the buyer. In turn, the buyer may use the VAT paid as a tax credit in their tax returns, and discount it against VAT on their own sales.

Finally, it is important to mention that there are no exceptions to the payment of the VAT applicable to real estate transactions.

Depending on the specific operation, it is possible to use investment structures to obtain a tax saving. The most common methods are business collaboration contracts that do not involve property transfers, business restructuring contracts that do not affect VAT or income tax, or the acquisition of the company or business group that incorporates the real estate portfolio among its assets.

The main municipal taxes to be considered for commercial premises are the property tax and the municipal tax (the rates for public services).

The property tax taxes the patrimony, and is therefore levied on the owner. This tax amounts to approximately 1% of the value of the property per year.

The 'Arbitrios' is a municipal tax which is levied by the municipal authority to cover the costs of collection of solid waste, street sweeping, maintenance of parks and gardens, and security. This tax is charged to the occupant of the property, or directly to the owner. The amount charged will depend on the competent municipality.

A person who is not domiciled in Peru is obliged to pay tax to the Peruvian treasury on their Peruvian-source income. Income generated by investments in real estate that are located in Peru is considered to be Peruvian-source income.

The form of payment established by the Income Tax Law is through withholding; this means that the individual who is going to make a payment in favour of an individual not domiciled in the country has the obligation to withhold and pay the tax that corresponds to the non-domiciled individual.

Non-domiciled income tax rates depend on the type of real estate investment and the structure used for that investment, and can vary between 5% and 30%. The exceptions also vary according to the conditions mentioned above.

The ownership of real estate assets (buildings) can be used as a tax deduction through depreciation. The ordinary depreciation of a property will depend on the estimated time of use, considering a minimum time of 20 years. However, if the property was acquired through a lease it is possible to use an accelerated depreciation, which will depend on the duration of the leasing agreement, with a minimum of five years.

Peru is in the process of implementing stricter tax planning controls in order to avoid elusive structuring of tax burdens. These regulatory changes go hand in hand with the legislative reforms implemented by the US government. This implies that investments in commercial real estate in the US should consider the application of structures that comply with the international requirements established to combat the tax-planning strategies of BEPS.

Estudio De la Flor, García Montufar, Arata & Asociados

Calle Mariano de los Santos 140
San Isidro
Lima
Perú

+511 512 3870

+511 441 2136

estudio@ldgabogados.com www.ldgabogados.com
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Law and Practice in Peru

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Estudio De la Flor, García Montufar Arata & Asociados Abogados has a real estate team composed of four partners and 13 associate lawyers, within an overall staff of more than 40. With a key office located in Lima’s San Isidro district, the firm has a proven track record in practice areas including constitutional, civil, corporate, administrative, tax and labour law, as well as litigation and alternative dispute resolution.