The main sources of real estate law are the following:
The main trends in the real estate market in the last year include:
Industrial companies based in Lima are increasingly choosing to acquire land within the so-called "Industrial Parks" for their new factories and centres of distribution. This implies that industrial poles are being consolidated in some areas like Chilca, Lurín and Huachipa.
In respect of housing matters, mortgage credit decreased around 7% and sales around 15% at the end of the year, specifically in the districts of Lince, Surquillo, Jesús María, Magdalena del Mar, Pueblo Libre y San Miguel (called “Modern Lima”). Modern Lima catered for approximately 45% of the properties sold in 2019. The increase of the sales was because the investments return has been stabilised. Further, there was an evidence of an interesting number of collaborations in the new mortgage credits, including in provinces.
However, for example, in Lince district (part of Modern Lima) the housing sales consisted of 67% of the demand, followed by offices (14%) and other places (9%); while in Miraflores (Top Lima), housing sales consisted of 85% of the demand, followed by offices (7%).
In this context, is important to mention that the government continued approving actions in favour of the acquisition of estate. Beside the already approved “Mi Vivienda” and “Techo Propio”, the government approved the bond “Mi Vivienda Verde”, which could elevate in 3% or 4% the financing. certificate by the government by having the following characteristics:
New Sources of Funding
The most relevant in this aspect is that, in October 2019, the government approved the ampliation of the validity of tax incentives to promote the Real Estate Investment Funds (FIRBI) until 31 December 2022. These incentives apply income tax on the sale by contribution of real estate, for the FIRBI, and Alcabala Tax in the transfer of ownership of real estate, made as a contribution to the FIRBI.
The government has planned strong investment in infrastructure to connect the different regions of the country. Therefore, among the most important projects announced in 2019 are the following:
Real estate investors, developers and lenders linked to the real estate sector are in the process of adapting to the different virtual investment platforms. There is still no real rapprochement between the real estate sector and the Bitcoin, Ethereum, Bitcoin Cash, USD PAX markets, among other cryptocurrency wallets. However, there is a greater promotion to proptech and different events have been held, in which the main real estate investors have participated, in order to know in detail the implications of disruptive technologies within their projects.
The possibility of these technologies having a significant impact in the next 12 months is slight, especially as they are limited by the disinclination of Peruvian society to make investments of this size in physical stores, and by the traditional financing conditions for such investments.
In legislative matters, the following are in the process of reform:
This year, the government has promoted social housing, through the expansion of the coverage of social housing access programme bonds, such as the “Techo Propio” programme or “Mi Vivienda” programme.
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 available the state lands that are not presently being used, in order to generate more urban land.
In Peruvian legislation, there is a numerus clausus system of property rights. In other words, only the property rights specified by law qualify as such. In this sense, contractual parties cannot create property rights that are not listed in the law.
The main 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 modify the content of their rights, for example Articles 926, 1005 and 1030 of the Peruvian Civil Code authorise regulation through private autonomy of the content of property rights, usufruct and easements, respectively.
In relation to property rights, Peruvian legislation – through Law 27157 – has established 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 allows that the internal regulation or statute that governs this kind of property can conventionally establish rules that allow more precise regulation through private autonomy.
The transfer of property arises with agreement between the parties, as regulated by Article 949 ° of the Peruvian Civil Code. There is no formality established for the disposition of property. Peruvian law follows the system of consensual transfer of property, which means that the obligation to dispose of a property, by itself, makes the creditor the owner of the property.
This is consistent with the type of voluntary registration system that Peruvian law has, in which as a general rule, inscriptions are not obligatory and registration is not required as proof of existence and there are no impediments to exercising that ownership. However, the Peruvian Civil Code offers strong protection to those who do register their rights.
In order to register a transfer in the Peruvian Public Records, it is necessary to comply with certain formalities, which are regulated under notarial law and also under the registration rules (eg, the Public Deed).
Also, for transfer, it is necessary to consider the rules provided in the Civil Code (in relation to property rights, contracts, rules of protection of the registry system etc), notarial law about the formality necessary to access Public Records, and Municipal Tax Law in relation to the payment of taxes.
For the transfer of offices and hotels, there is no special regulation. 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 No 27157, so that, prior to acquisition, it is necessary to review the conditions of co-existence provided in internal regulation.
The legal transfer of property can take place using a preparatory contract or a definitive transfer contract. Parties can use a preparatory contract when they are not ready for a definitive one.
Finalising a contract involves signing a private document authorised by a lawyer. With this document, the notary can ask the Public Records office to block 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. It is mandatory for the notary public to verify payment of the price.
The Peruvian Public Records System includes 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 born out of the registry) or validating (registered rights can be cancelled), it is strongly protectiveof those who register their rights. This is sustained on the high barriers of access that are established (only titles registered in a public instrument and subject to approved legality control are registered in the Public Records) in such a way that the holder of a registered right has:
To sum up, the registration system has superimposed the protection 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. As it is always possible that there can be registry mistakes, the right to be compensated for such errors is established as a guarantee of the system, but as there is no immediate compensation mechanism, compensation must be demanded through the judicial system.
There is no individual guarantee for the title that a person can hold in a similar way to "title insurance" systems.
Diligent buyers usually entrust a specialist lawyer in real estate law 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:
In special cases, the study may include specific questions about zoning and compatible uses of the property, or if the property is located in a protected cultural heritage area, natural protected area or risk area.
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 possession of the property, preferably for a period longer than the ten years required for the 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 property that is the object of the sale, as well as the determination (or criterion of determinability) of the agreed price and the form of payment.
Contracts also usually include the declaration of the seller regarding the payment of municipal taxes, 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 case of eviction, which would not allow the transferred property to be allocated for the purpose for which it was acquired or to reduce its value, in accordance with Peruvian Civil Code regulations.
With regard to the buyer, the Peruvian Civil Code provides that the contract may 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 where necessary, compensation for damages; without prejudice to the grounds to nullify the contract should any of the causes provided in Peruvian Civil Code regulations have been incurred.
From a tax perspective, the transfers and acquisitions of goods constitute operations that are generally subject to income tax and "alcabala" tax, and, exceptionally, to general sales tax. Therefore, it is important and increasingly required by investors to define the tax treatment of such taxes and how they will affect the financial structure of the operation.
Additionally, it has generated in investors a special interest in verifying the absence of tax contingencies accompanying the property, which could generate solidarity with SUNAT for the purchaser of the property. This is based on the criteria set forth in Reports No 085‐2019 – SUNAT/7T0000 and 097‐2019 – SUNAT/7T0000 from SUNAT.
The buyer of a property is not responsible for contamination if they have not generated it, because whoever caused the damage is responsible for it. In this sense, the administrative, civil and even criminal responsibilities shall be borne by whoever committed the act.
The buyer of the property protects itself by making the development of the project at the acquired property conditional on the cleanliness of it. Where it is contaminated and this contamination makes it impossible to carry out the activity for which the property was acquired, unless otherwise agreed between the parties, the contamination will have to be dealt with by those who have an interest in developing activity in said property. For this reason, the payment of the price is usually conditional upon completion of cleaning of the property.
In accordance with Law No 27972, the Organic Law of Municipalities, the provincial municipalities are responsible for planning the development and organisation of land uses, while the district municipalities are responsible for approving complementary regulations to the provincial level. In this sense, when a buyer wants to determine the permitted use of a property, they must review the regulations issued by the municipalities, which regulate the zoning and permissible uses, 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 No 27972 (Organic Law of Municipalities) and the resolutions issued by the provincial and district municipalities.
It is possible for a buyer to enter into agreements with the authorities to facilitate the development of a specific project, as long as it does not violate the 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 No 27972 (Organic Law of Municipalities).
In the constitutional framework, expropriations which are justified by public necessity are distinguished from those that are justified by national security. Cases of public necessity are usually linked to the construction of infrastructure, or public goods and services that contribute to community welfare as opposed to those linked to situations in which the order and security of the country are 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 power, 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; and the expropriation requires the payment of the fair market price in cash of the justified compensation, including compensation for eventual damages to the owner.
As a matter of principle, onerous transfers of real property are taxed with income tax and alcabala tax.
Here, the seller is the one that pays tax. The income tax rate in these cases varies depending on who performs the operation, as follows:
Here, the buyer is the one that pays tax. This tax is determined applying a rate of 3% on the transfer value or the self-assessment of the real estate readjusted. Those that are expressly established in Articles 27 and 28 of the Municipal Taxation Law, are not expected to pay this tax.
It should be noted that when it comes from the first sale of a newly-built property, the transfer will be taxed with General Sales Tax (also called VAT) at a rate of 18% of 50% of the price of the sale. Said tax paid could be used by the buyer as a tax credit.
Finally, when it comes to the sale of shares in a property-owning company, only income tax is applicable, following the same considerations mentioned here in relation to the transfer of real estate. However, exemptions 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 the entities controlled by foreigners are subject to the same conditions as Peruvians regarding real estate property, except that they cannot acquire or own property, directly or indirectly, within 50 km of any Peruvian border.
The acquisition of real estate is usually financed through entering into mutual commitment contracts with the creation of a mortgage guarantee between the buyer and a financial entity. The financial entity 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 from loans made by creditors domiciled abroad. These conditions are fundamentally linked to confirming:
The existing modifications in Peru have not yet incorporated changes specifically referring to FIRRMA. However, Peruvian investments must also comply with the regulations approved by the CFIUS.
The creation of guarantees on real estate requires that fees 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, and may not be greater than one Peruvian Tax Unit (UIT) for each guarantee. In 2019, one Peruvian Tax Unit (UIT) was equal to PEN4,200.
Notarial payments are not considered tax rates and depend on the rates set by each notary.
In the evaluation of the property that is carried out to grant the guarantees, the sufficiency of powers of the representatives that grant the guarantees is verified. This is generally evaluated in relation to the fact that express powers are registered on the disposition of the assets.
It is usual to request, prior to the disbursement of the loan, that the registry items of the properties granted in the guarantee are blocked (according to Decree Law 18278). This is valid for 60 working days, counted from the date of annotation in the registry. During this period, the Public Records may not register any act or contract related to the properties granted.
There are two types of guarantee: personal and real. The persecution 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 their guarantee will be satisfied. In addition, a mortgage has the procedural effect of giving rise to a singular process of execution.
In the event of default of the obligation secured by a mortgage, the lender is entitled to sue 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 in the enforcement proceedings is not a requirement for 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 taken 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:
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 at the property or for transgression of environmental laws, as long as the creditor did not cause the damage.
In accordance with the General Law of the Bankruptcy System (Law No 27809 and its modifications), after the procedure has been published in the INDECOPI Bankruptcy Bulletin (Commission for the Elimination of Bureaucratic Barriers of the National Institute for the Defence of Competition and Intellectual Property 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 establish the different conditions regarding compliance with borrower obligations). In other words, the obligations of the borrower become unenforceable. The law 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 which case they may be a matter of execution.
Finally, the judge can declare as ineffective and unenforceable - against the lenders in the insolvency proceedings - the 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 could damage their assets and/or that have been acquired during the last year before the date on which they submitted the request to access any benefit from the bankruptcy proceedings, or were notified of the resolution of the settlement, or that were notified of the beginning of the dissolution and liquidation. In other words, the real estate guarantees (mortgages) that the borrower acquired a year before, can be declared as ineffective by a judge, in what is known as a "period of suspicion".
The main legal consequence in Peru of the expiry of the LIBOR index will be how to determine 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 for six-month deposits. During the next few years, before the expiry date of this ratio, it is likely that Peruvian legislation will be modified to designate another ratio that meets these objectives.
The planning of urban development and zoning, and the use and occupation of land falls on the regional governments and provincial and district municipalities, according to the rules in the 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, owners must follow the procedures included in the above regulation.
Peru does not have a land code. However, in recent years, some urban development and zoning established by the municipalities has been considered by the INDECOPI to be illegal bureaucratic barriers lacking reasonableness, giving rise to the declaration of their unenforceability, even with general effect.
In order to execute a new work (building) or expansion, renovation, etc, of a building, it is necessary that the work is adjusted to the parameters established by the municipalities (basic characteristics of the construction such as the number of floors, number of parking spaces, normative front) for the area where the property is located. The construction characteristics are established in the National Building Regulations, as are the administrative procedures to apply for a licence to carry out the work, as well as to obtain the conformity of works and building declaration in due course, as established by Law No 29090.
According to Law No 27972, the competent entities to approve and supervise compliance with the required technical standards and to supervise the execution of the work are the district municipalities.
The Ministry of Housing is competent to design, regulate and implement the national policy on housing, as well as to promote the building and urbanising activity of Peru. Law No 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.
Regarding the restrictions that are imposed on real estate projects to be carried out in urban areas, these commonly refer to the maximum height, number of parking spaces per unit and population density, among others. In the case of urban habitation projects, in some cases it is necessary to have road impact studies and environmental or integrated planning studies duly approved.
According to Law No 29090, the administrative procedures to obtain the rights to develop a new project or complete a major remodelling are:
Regarding whether third parties have the right to participate and object to a building project, third parties do have the right to report any infringement or violation of public order rules that apply to the execution of building works.
According to Law No 27444 which regulates general administrative procedure and is applicable to the entire public administration in Peru, the following are allowed:
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 the appeal must be resolved within a period of 30 business days.
Should the administrative route be exhausted, an objection may be filed before the judicial power through a contentious-administrative process.
In Peru, real estate projects are required to have a feasibility of services test, which generates an obligation on the part of companies that provide these services for the conclusion of a contract (after compliance with the legal requirements).
In exceptional circumstances, some projects need to have certain facilities, eg, 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, it may be 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 restrictions for the development of a project is in the charge of the municipalities at different stages, as follows:
In Peru, there is no restriction to access ownership of real estate assets. Natural or legal persons are able to hold real estate assets. The types of legal persons are regulated by the General Law of Companies.
In some cases, the main asset of a company is its real estate, which may mean that investors would prefer to buy the whole corporation.
Other alternatives used are trusts, which are becoming more of a force in the real estate market because they act as a guarantee of the investments in real estate projects.
Also, the growth of the market has led to the consolidation of investment funds in real estate (FIBRA) 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 even possible to set up a company with foreign natural or legal persons, if they have the necessary permission to sign the constitution of the company.
The by-laws of the company must describe the corporate purpose and activities to which it will be dedicated, how much capital it has, the organs of the company and its operation, among others.
In the case of trusts, the settlor transfers assets to the trustee, to constitute an autonomous patrimony with a specific purpose in favour of the settlor or a third party called a beneficiary.
Both trusts and investment funds need to be managed by a company authorised for such purposes.
The legislation in Peru does not stipulate a minimum capital requirement for the establishment of a legal entity, or for the formation of a trust or 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 are in turn subject to the rules established by the Superintendence of Banking and Insurance (SBS).
The cost of maintenance of each institution is based on their activities, the investments they develop, their staff, and taxes payable, among other elements. It is not possible to establish a fixed annual cost.
The contractual agreements regulated in the Civil Code and most used in the real estate practice of Peru are:
being that a transfer of the property right is not configured in any of the aforementioned contracts, ie, the owner of the property or land does not lose its status.
The first two contracts mentioned allow the economic and temporary use of real estate through its use and occupation, regardless of whether this is for a commercial activity, but the contracts differ, among other aspects, in the maximum legal deadlines provided for each (ten years, for the lease contract, whether it is a natural person or legal entity; while for the usufruct right constitution contract, the term is 30 years in the case of legal persons and may be for life in the case of natural persons).
On the other hand, through a contract for the constitution of surface rights, an owner is granted the power to erect buildings on the real estate, in respect of which they will hold a special property right (other than the property right on the ground). The maximum legal term for this right, whether for natural persons or legal persons, is 99 years.
In Peru, commercial leases are structured under two modalities:
In both cases, the tenants can allocate the property to commercial activities, against the payment of a periodic rent. However,it is a particularity of financial leases that the condition of tenants necessarily falls on entities that are part of the financial system (banks and financial, savings and credit co-operatives) – with the authorisation of the competent authority – and the tenants. They are granted a right-of-purchase option on the leased asset.
The terms of lease agreements can be freely negotiated and fixed by the contracting parties, with the exception of some provisions provided in the Civil Code referring to:
With regard to income, there are no provisions that set or limit its amount and method of payment.
A lease agreement can 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 has been established.
Unless otherwise agreed, the Peruvian Civil Code establishes that maintenance and repair costs are the responsibility of the tenant.
The parties can freely establish the frequency of rent payments; usually, this is a monthly payment.
The rent payable will depend on what the parties agreed in the lease agreement. It is usual to establish annual adjustments.
The parties freely determine the increase or adjustment of the rent.
VAT is payable on rent only when the rent is paid by taxpayers subject to third category income tax (corporate income tax), because in that case it is considered a service provided inside the country.
The tenant is usually 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 on the rent.
In addition, depending on the type of property, the tenant is requested to pay the costs of services provided to the property, either internal (such as maintenance of the building) or external (rates for public services).
The tenant usually assumes the payment of excise taxes for the public areas, as well as 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 of utilities and telecommunications, 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 no legal obligation to insure the property subject to a lease agreement. In this sense, the decision to insure is entirely at the discretion of the contracting parties.
Restrictions can effectively 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 cannot 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 in the leasing of their properties; however, these modalities are not compulsory.
There is no provision in the bankruptcy legislation for any specific consequence for a tenant who is declared insolvent. Payment default of the rent will entitle the lessor to terminate the lease agreement.
Regarding the payment of the rent, in some cases this 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 on the part of the lessee.
The tenant does not have any right to continue to occupy the real estate after the expiry or termination of a commercial lease. Article 1700 of the Peruvian Civil Code establishes that if the tenant retains use of the property, and if the lessor does not request its return, it is understood that the lease agreement will continue (by tacit renewal), under the same conditions, until the lessor requests its return. The contract must clearly establish the completion date and any 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 No 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.
Lease contracts usually prohibit the sublease of the premises, in order to avoid a second market that reduces the expected profit for the lessor. However, national legislation does not contain any limitations in this regard.
The entry into the real estate market of new proposals such as co-working, have generated a change in these practices.
In these cases, it is recommended that the lessor incorporates clauses that clearly establish the range of activities for which the leased premises may be used, and obliges its lessee to share the policies of use of and behaviour at the premises with all sublessees or future users.
Article 1697 of the Peruvian Civil Code has foreseen certain causes of termination of the lease agreement, mainly the following:
No response has been provided in this jurisdiction.
In the event that a situation of non-compliance by a tenant is verified, the lessor may obtain (judicially or extra-judicially) the conclusion of the contractual relationship and with it, simultaneously or subsequently, demand the return of the leased asset.
However, in the event of reluctance on the part of the former tenant to return the property, the legal system has provided various legal mechanisms:
The provisions contained in the Civil Procedure Code for summary proceedings (referring to those that do not have a complex procedural structure) are applicable and for their procedural nature, the contracts do not require any formality (they can even be contracts entered into verbally). The Ordinary Process, in usual judicial practice, is from two to three years.
Through Law No 30201, a more expedited mechanism was introduced to the ordinary scheme of the Civil Procedure Code, trying to verify the tenant's non-compliance, thus enabling faster and more objective eviction. It should be noted that the only causes are the expiry of the contract or non-payment of the rent. What is required is that the tenant declares in the contract it's express agreement for the purposes of the aforementioned law and that, at least, the signatures of the parties are notarised. Its duration, in usual judicial practice, is 12 to 15 months.
Legislative Decree 1177
Through this rule, the Single Eviction Execution Process was introduced, applicable to real estate leases exclusively for housing purposes. The procedural structure provided for in the standard brings about a considerable reduction in the recovery periods of the possession of the ordinary mechanisms (up to four months).
For the purposes of applying to this mechanism, contracts must be concluded in writing, through the use of the forms established by the aforementioned standard, with signatures certified by a notary or judge or justice of the peace.
Eviction with Notarial Intervention
Through Law No 30933, notaries were assigned the competence to verify, in a quick and objective manner, certain grounds for eviction:
After the positive verification of the notary public, the eviction will proceed and will be executed by the judicial jurisdiction.
For the applicability of this mechanism, it is required that the contract fully identifies the property, and that it is recorded in the Single Lease Form provided in Legislative Decree 11177, or by Public Deed. Its duration, according to the procedural structure provided by law, is one month.
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 expiry of the term, the tenant may demand compensation for damages.
Another possibility is expropriation of the property by the national or local government, as explained in 2.9 Condemnation, Expropriation or Compulsory Purchase.
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 allow for a price adjustment for changes in law, force majeure, and economic equilibrium, among others.
According to Peruvian legislation, the responsibility is mainly assigned to the building contractor, who is responsible for the construction, the quality of the materials or defects in the land, among others. The building contractor also assumes the risk of damages until the finished building is handed over to the owner. In addition to this, if the building under construction is destroyed or there is a risk of construction defects, the contractor is held responsible for five years after handing over the works.
Contractors usually provide a performance bond issued by a bank to guarantee compliance with their obligations. On the other hand, limited liability is a way to distribute the risk in building a construction. It is, however, important to mention that the Peruvian Civil Code establishes that any limitation of liability based on negligence will be invalid.
Parties are effectively 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, discount on the payment or a compliance bond, which are executed in case of delay.
It is also common for owners to look for security on the contractor's performance, not only through letters of guarantee or performance bonds, but also through previous accredited experience.
The contractors could enter a legal claim duly accredited in order to lien or encumber a property. This could happen by judicial decision after verifying the debt.
As mentioned in 4.4 Obtaining Entitlements to Develop a New Project, before the project can be inhabited or used:
General Sales Tax (or VAT) only taxes the first real estate sale made by a builder. Therefore, in the purchase of corporate real estate there will only be a VAT obligation as long as the acquired property is a building (VAT does not apply to land), and the operation constitutes the first sale made by the builder (or whoever fits the definition of this, by law).
The seller is in charge of paying VAT, however, the law does allow the tax to be transferred to the buyer. In turn, the buyer may use the VAT paid as a tax credit in their tax returns, and discount it against the VAT of their own taxed sales.
Finally, it is important to mention that there are no exceptions to the payment of VAT applicable to real estate transactions.
Depending on the specific operation, it is possible to use investment structures that allow a party 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 tTax, or the acquisition of a company or business group that incorporates real estate portfolio among its assets.
The main municipal taxes to be considered for commercial premises are:
property tax taxes the patrimony; therefore, it is the responsibility of 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 providing the following services:
This tax is the responsibility of the occupant of the property or, directly, the owner. The amount charged will depend on the competent municipality.
A person not-domiciled in Peru is nevertheless obliged to pay tax to the Peruvian treasury for their Peruvian-source income. Income generated by investments in real estate located in the country are 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 owed by the non-domiciled party.
Non-domiciled income tax rates vary depending on the type of real estate investment and the structure used for that investment. These rates can vary between 5% and 30%. The exceptions to the tax also vary according to the conditions mentioned.
The ownership of assets in real estate (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 rate, which will depend on the duration of the lease agreement, starting at a minimum of five years.
Specialist legal advice has acquired unquestionable relevance in real estate during the last few years in the acquisition and regularisation of the land required for the growth and development of investment projects (mining, electricity, oil and gas, retail and industrial, among others). In fact, these projects are mostly granted as a concession, requiring the acquisition of rights over the areas where they are located as, according to Peruvian law, concessions are a different and totally separate real right from ownership rights over the land.
For this reason, there is increased demand for technical-legal diagnosis, regularisation and legal opinions regarding real estate and/or negotiation strategy, and expert advice in negotiating the acquisition of lands and rights over them. It is important that the acquisition of rights overland is achieved within the framework of the laws that are in force and abiding by the rights of indigenous populations and/or Peasant Communities.
In this context, it is important to take into account that in Peru:
Finally, it should be noted that, although there is no limit and/or restriction on the transfer of real rights, the Peruvian constitution restricts the possibility that foreigners may be owners or direct or indirect holders of property located within 50 km of the frontier, under the penalty of losing said right in favour of the Peruvian state.
Legal Framework Applicable to Real Estate
The Peruvian legal system has several rules governing real estate, for instance:
The most relevant laws issued during the last months regarding real estate are summarised below:
Trends and Developments
Oil and gas
The oil and gas sector involves exploration, exploitation, transport, refining and/or processing of organic, gaseous, liquid or solid compounds consisting mainly of carbon and hydrogen.
According to Andina (a Peruvian news agency), this sector will be favoured with investments of USD4,000 million in the period 2019 to 2023 in order to increase production to 100,000 barrels of oil per day, which would mostly come from Blocks 67, 64, 95, 192 and 8; apart from generating taxes, royalties, mining canon (the 50% of the annual income tax revenue collected by the government from the mining activity) and employment.
The energy sector has evolved in Peru during the last few years, with the development of and investment in renewable energy resources (RER), such as biomass, wind, solar, geothermal and tidal resources, which are considered as the future in this sector.
With the enactment of Legislative Decree No 1002, the development of new electricity generation was declared of national interest and public need through the use of RER. This led to increased interest in acquiring land for the installation of solar panels and wind facilities, among others.
In Peru, the connection projects Mantaro–Nueva Yanango–Carapongo and associated substations and Santa Teresa 2 have been highlighted. Provinces such as Lima, Huanuco, Pasco, Piura and Tumbes are attractive for the development of wind and solar energy investment projects. Other provinces, such as Ayacucho, Arequipa, Madre de Dios and Tacna, have potential for hydropower and thermo-electric projects (based on natural gas), as stated by EY Peru.
According to the information published by the General Direction of Promotion and Mining Sustainability of the Ministry of Energy and Mines, during 2019 a mine construction project portfolio comprised of 48 projects and investments amounting to USD57,772 million was submitted. These investments covered projects for the construction of new mines, extension or replacement of existing ones, and tailings reutilisation.
In 2020, an investment of USD2,845 million is expected, which means a growth of 14% on the previous year. This increase is estimated based on the greater disbursements expected from the projects Quellaveco, Mina Justa and Extension Toromocho, as well as the start of construction projects Ampliacion Pachapaqui, Corani, Integracion Coroccohuayco, Optimizacion Inmaculada, Yanacocha Sulfuros and San Gabriel.
The economic sector of retail is comprised of companies specialised in massive trade in products or services, such as supermarkets, department stores, home improvement stores and shopping centres, among others.
The investment in this sector is growing in Peru. Today, more than 10 projects in the portfolio are ongoing. From 2019 to 2021, it is expected there will be an investment of around USD934 million in the construction and opening of shopping centres. In 2019, around USD454 million was invested in the development of seven projects. During 2020 and 2021, the commencement of another six projects is expected, with an investment of around USD480 million, as reported by Gestion (a Peruvian daily newspaper).
The trend in developing these real estate projects is focused on the acquisition of lands located in the outlying districts of Lima and the provinces. The attraction of these places is that the price per square metre of land in is substantially less than the price per square metre in consolidated cities.
Acquisition of Rights
As previously mentioned, according to the Peruvian legal framework, the acquisition of ownership rights over real estate is made by the mere agreement of the interacting parties in accordance with Article 949 of the Civil Code, or as a distinct legal provision or as otherwise agreed by the parties, without any formality for transfer being required. In this way, the Peruvian transfer system adheres to the consensual system of ownership transfer.
Another form of acquiring ownership is adverse possession (usucapion), very commonly used not only for acquiring ownership rights but also for correcting defects that may affect them (legal remediation). In that sense, adverse possession allows a person who possesses land to acquire the ownership right after the term demanded by law has passed. The ruling in an adverse possession judicial process is merely declarative of the ownership right.
Alternatives to ownership
It has become common in the last few years that companies do not opt for the acquisition of ownership right over real estate, but look for other alternatives, most frequently, usufruct, surface, easement and lease, regulated in Articles 999, 1030, 1035 and 1666 of the Civil Code, respectively.
Easements are one of the most used rights in the oil and gas and energy sector, and can be established, according to the special laws regulation of those sectors, either by means of constitution or imposition.
In sectors such as retail, it is usual to resort to rights such as surface, usufruct or lease agreements. In addition to all of them granting the right to use the property, they also have distinguishing characteristics.
A surface right is the temporary power of having a construction in a separate property for a maximum legal term of 99 years and grants the right of withdrawal. The right of withdrawal is granted by law to certain people to subrogate in the place of the buyer and in all provisions of the purchase and sale contract (inadmissible in sales made by public auction) within a term of 30 days, counted from the communication of a definite date to the person enjoying this right. The withdrawing party should reimburse the purchaser for the price, taxes and expenses paid by the latter and, as the case may be, the interests agreed.
Usufruct right is the temporary power to use and enjoy goods for a maximum legal term of 30 years for legal entities and it grants the right of withdrawal.
A lease agreement, on the other hand, gives temporary power of using goods for a maximum legal term of ten years and does not grant the right of withdrawal.
With regard to the similarities of the surface right, usufruct and lease agreement, in all of them, forced and voluntary periods may be agreed, which are deemed convenient, in favour of any of or all parties. Also, it is possible to agree on a fixed or variable rental, apart from the following clauses: resolution; preference (either to renew or purchase); and/or restrictions.
Main Aspects to Take into Account
Although there are several aspects which, from the real estate point of view, should be analysed and considered regarding project feasibility and development, the main aspects to be taken into account with regard to the execution of a hydrocarbon, energy, mining or retail project are developed below.
Execution of oil and gas, energy and mining projects
The execution of this type of project usually requires drawing up a technical-legal diagnosis of the land and legal sanitation of this. Both are reciprocal consequence and assumption, as the first provides an x-ray of the legal status of the land, which constitutes an essential input for organising legal sanitation typologies and determining the legal mechanism to follow according to the casuistry (contractual, legal, administrative, registration).
The aim of the technical-legal diagnosis is to determine the legal status and legal sanitation actions to implement in the project area of interest, generally comprising several dozens of plots. This work comprises the collection and classification of information through the search of public and private cartographic and cadastral sources. At this stage, all possible sources of information that enable diagnosis of the technical and legal situation of the area of interest are exhausted. It should be mentioned that in order to carry out this work, legal advice is provided by lawyers and technical advice is provided by specialised engineers.
Once the information is gathered, it is classified by typologies of plots and geographic areas and a graphic reconstruction is produced and incorporated into the cartographic base of the land under study within the areas of interest.
The aim of legal remediation of the land is to perfect the right over a plot through technical-legal actions addressed at regularising the ownership right or other real right, with the objective that it may be “suitable” for registration with the Public Registry.
It is important to highlight that around 30% of Peruvian territory is owned and/or possessed by Peasant and Indigenous Communities with a special regulation regarding the ownership of their lands. For this reason, special care is required in negotiations and agreements reached with this type of community. In general, it is necessary to have a multi-disciplinary team experienced in management of community relations, inter-institutional relations, negotiation, conflict prevention and acquisition of rights to protect the investor’s interests and ensure that the processes are socially and economically sustainable.
Lastly, it is important to take into account that the execution of these projects usually involves contracting the services of teams that can offer legal advice, planning and execution of strategies, and negotiation in order to face problems or cases that are not provided for in the typologies of technical-legal diagnosis or that, having been provided for, change their legal status.
Execution of retail projects
The execution of this type of project generally involves conducting a study of titles, which consists of analysing the real estate based on the information contained in the registry entry (partida registral) and municipal documentation. The aim of this study is to verify the legal and commercial feasibility of the projects and identify potential contingencies that could affect the project's feasibility, as well as propose legal solutions to such contingencies.
Thus, the title study will enable identification of, among other aspects, the following:
Registration in the Real Estate Public Registry
As previously indicated, in Peru, the ownership right does not need to be registered in the Public Registry for its existence and validity to be recognised, and it is transferred merely by the agreement between the parties. For this reason, not all properties in Peru are registered in the Public Registry. Moreover, it is important to understand that even with said registration, there are frequently cases of dual (or more) ownership.
Since registration in the Real Estate Public Registry grants the highest level of enforceability and safety against third parties, it is suggested that acquisition of ownership or other right with respect to land is registered in the Real Estate Public Registry. To this end, plots should already be registered; if not, they should be registered in the future (first registration of domain).
There are two mechanisms for registering plots: titles of more than five years (recorded in a public deed); and other titles (such us administrative resolutions or judicial sentences). For the former, it is sufficient to submit the public deed of ownership before the Real Estate Public Registry accompanied by the corresponding technical documentation (blueprints approved by the competent entity according to the nature of the plots) in order to process its registration. The term of five years is counted from the definite date of the title (public deed) containing the acquisition. However, if the title has not been issued as required according to the law, it is possible to submit other titles from which the purchaser’s right derives, ie, it is pertinent to “accumulate titles” in order to ascertain their seniority.
The exercise of ownership right is made abiding by urban standards. Licences (urban feasibility and building) issued by the municipalities (public administration) verify that this exercise is compatible with the urban and building parameters. General interest in a particular case with the aim of obtaining harmonious urban development must take precedence (subordination principle).
Law No 29090 defines “building” (which requires that a previous licence is held) as the result of constructing a work of permanent nature over a plot, at least with an approved urban feasibility project, the aim of which is to host the person during activity development. It also comprises attached fixed and complementary facilities.
This is what qualifies as a “building” and, therefore, those works complying with the following characteristics need to procure a building licence: works of a permanent nature; and works destined to host a person during activity development. In order to process and procure a building licence, it will be necessary to verify the plot over which it will be constructed is an “urban plot”. An urban plot is the consequence of an urban feasibility procedure, which supposes the execution of works destined for the development, growth and possible expansion of a city. It is important to highlight that the existence of works such as roads and utilities (electricity, water, gas, among others), and even a construction, does not necessarily determine that these are for an urban plot, until this is corroborated in the title study performed on the plot.
Finally, it should be mentioned that district municipalities, within their jurisdiction, provincial municipalities and the Lima Metropolitan Municipality, within the central district, are competent for the approval of urban feasibility and building licences, in accordance with the provisions set forth in the Organic Law of Municipalities, Law No 27972. Furthermore, it is necessary to note that, although there is a general law applicable nationwide with regard to urban feasibility and building licences, ie, Law No 29090, in practice, not all municipalities have complied in adjusting their standards to meet all the requirements of the national legal framework; therefore, it would be wise to verify the municipal standards of the land on which the project is expected to be executed.