Mexico is composed of 31 states and Mexico City. The Federal Constitution enumerates the matters in which the Federal Congress is authorised to make laws. Matters not expressly delegated to the Congress are deemed as reserved to each state. The law applicable to real estate and its ownership is that of the place where the real estate is located.
In combinations involving corporations (ie, mergers, purchase of shares) or trusts, typically the General Law of Commercial Companies, the Commercial Code and, in some cases, the Stock Market Law are applicable, and the parties are free to choose the court with subject-matter jurisdiction.
In general terms, the main laws applicable to real estate transactions, depending on the value and nature of the transaction, are:
During the last 12 months, the real estate market has been impacted in Mexico, as in the rest of the world, by the COVID-19 pandemic, which resulted in restrictions on mobility and operation of all types of business. The main trend in the real estate market at the national level has been the slowdown in most real estate transactions, including leasing and acquisition of commercial and office space, mortgage transactions and the construction industry. On the other hand, the acquisition and rental of real estate for residential and industrial purposes saw some growth, interest rates decreased due to efforts made by the Bank of Mexico and the banking sector and, according to reports from market participants, real estate prices were not affected in the same proportion since, according to some experts, the real estate sector has once again been considered as a safe investment opportunity to safeguard capital.
The modification of the modality of many jobs to home-office (including the recent amendment to the Federal Labour Law to properly regulate the home-office as a work modality in Mexico), has implied and will definitely continue to imply, even after the pandemic, a modification in the use of office space in the country and the real estate-residential market, with some workers having the possibility of working from home or reducing their need to be present in the office at the times and with the frequency required before the pandemic.
In addition to the above, the restrictions imposed as a result of the pandemic affected the volume and speed of transactions considering, above all, the closing and limited operation of several authorities involved or usually related to the closing of real estate transactions, such as treasury offices, public registries, public notaries, etc. Although the pandemic pushed the digitisation of certain procedures and processes that previously required the physical presence or filing of physical documents and applications, this happened towards the end of the year.
During this period, the most significant deals have been related to the reconfiguration of industrial spaces as a result of the e-commerce boom that forced companies to rethink their supply chains and to acquire or expand their distribution centres.
New technologies have impacted all business sectors in Mexico and the real estate industry is no exception.
Investors in the sector have found new ways to invest thanks to the use of blockchain technology, decentralised finance ("DeFi") and proptech, which have allowed the expansion of potential acquisition portfolios, the creation of marketplaces where fractions of properties are acquired, and even mortgage debt has been fragmented. Furthermore, blockchain technology has been acknowledged by the real estate industry because it brings transparency to transactions, reducing risk and processing time. The real estate sector has even acknowledged the potential of blockchain technology to eliminate unnecessary costs for the acquirers in the not-too-distant future, such as expenses to obtain no liens certificates, formalisations before notaries public and registration on public property registries. The implementation of smart contracts and the strengthening of electronic commerce in the country has also had an effect on the way of doing business in the sector.
Lenders, specifically, have benefited from the implementation of new technologies through risk assessment allowing algorithmic processes and data analysis, while in the construction and development sector, contech has benefited the players through the introduction of collaborative software, improvements in financial management and, in general, reducing construction costs and making processes more efficient.
Considering that in March 2018 the Law to Regulate Financial Technology Institutions, also known as the Fintech Law, was published in Mexico, which gives these type of technologies a legal framework, and that the Mexican National Banking and Securities Commission (CNBV) has begun to grant the first authorisations to start operating in terms of the law, it is expected that there will be an increase in the number of technology companies that will seek to enter the market, including the real estate market. However, it is unlikely that, within the next 12 months, there will be a significant change in the way of doing business in the sector as a result of the use of these technologies.
The party with a parliamentary majority in Mexico City, Morena, has presented an initiative which seeks that, in the event of a health emergency such as the one caused by COVID-19, owners of commercial establishments may not terminate leases if tenants are unable to pay rent. Such initiative also restricts landlords to only demanding the partial payment of rent for the duration of such emergencies. There is no clarity at present regarding the possible approval of the relevant reform.
Mexican Civil Codes provide for several categories of property rights to be acquired: full ownership, usufruct (which is the real and temporary right to enjoy the property of others and, therefore, grants the right to receive all the fruits, whether natural, industrial or civil, produced by the property) and other minor rights, such as use or certain easements. In the case of infrastructure projects, other rights, such as rights of way or other types of easements for the construction of roads, gas pipelines, oil pipelines, etc, should also be considered. Furthermore, it is possible to enjoy any of the aforementioned rights through a trust as a beneficiary.
Another type of property provided in terms of the provisions of Article 27 of the Constitution and the Agrarian Law in Mexico is the ejidal property, which is subject to a special regime.
The law applicable to transfer of title, if the transfer is considered as a commercial act by the Commercial Code, is the Civil Code of the relevant state where the real estate is located. If at least one of the parties is a merchant (including real estate for industrial purposes, offices, retail and hotels), the applicable law would be the Commercial Code and the Civil Code of the relevant state where the real estate is located.
In combinations involving corporations (ie, mergers, the purchase of shares) or trusts, the law applicable to transfer of title is the Commercial Code, General Law of Commercial Companies, the Stock Market Law and the General Law of Securities and Credit Transactions.
For the transfer of title of agrarian property, the applicable law would be the Agrarian Law.
In Mexico, the legal forms of acquiring property are usucapion, accession, succession by reason of death and by transfer, whether onerous (such as a sale and purchase agreement) or gratuitous (such as a donation agreement). The most common way to acquire property is by entering one of the following agreements.
All transfers of title of real estate in Mexico are registered in the Public Registry of Property of the state where the real estate is located.
Protection of bad title is usually included in the purchase agreement as an indemnity. Although title insurance is available in Mexico, it is not common to purchase insurance to cover contractual liability as a result of breaches of the seller’s representations and warranties in an acquisition agreement. Typically, the indemnity is backed by an escrow holdback, a price adjustment or a combination of the two.
Buyers usually carry out real estate due diligence through their legal advisers. The matters usually involved in real estate due diligence are as follows.
Of the aforementioned aspects, some have been impacted by the sanitary and administrative measures imposed by both federal and local governments as a result of the COVID-19 pandemic. For example, the closing or limited operation of certain public offices that issue documents, such as the Public Registries of Property in charge of issuing no lien certificates, the Public Registries of Commerce in charge of issuing mercantile folios, the treasury offices responsible for issuing certificates of non-debt of real estate taxes, as well as the authorities and individuals in charge of issuing certificates of non-debt of certain utilities, etc. This, together with the closing of several private offices, has limited or delayed the possibility of proceeding with the review of several documents, such as agreements, related to real estate transactions and the limitation of other activities considered as non-essential, such as the preparation of phases I and II in environmental matters.
The most common representations and warranties agreed in sale and purchase agreements are related to the seller faculties, legitimate ownership of the real estate, non-existence of liens or limitations affecting the real estate (including archaeological limitations), no pending payments (including due to tax matters), no environmental or land-use issues, no permits and no agrarian backgrounds.
Where the ownership will be acquired through combinations involving corporations (mergers or purchase of shares), typical M&A representations and warranties are usually included.
The main areas of law to which an investor must pay attention when acquiring real estate are tax aspects (mainly determined by the Federal Tax Code, the Income Tax Law and local real estate acquisition provisions), environmental aspects, urban development and construction limitations and guidelines, and limitations imposed on the use of the real estate, eg, in terms of leasing, especially for residential purposes, those limitations imposed by the laws of the state where the real estate is located.
While it is usual to include in the purchase agreements that the seller will be held responsible and guarantees environmental liability in favour of the purchaser, the latter, as owner, will also be responsible before the environmental authority for the environmental status of the land and its remediation.
In terms of the provisions of the constitution, the municipalities in Mexico are the entities authorised to regulate zoning and planning matters following guidelines set forth by the Federal Congress and the states. Thus, to determine the land use of specific real estate, it is necessary to analyse the applicable laws (zoning and planning). At the federal level, the applicable provisions might be found in the National Development Plan, at the state level in the State Partial Development Plans, and at the municipal level in the Municipal Development Plans, the Urban Development Plans that determine the main land-use of the urban centres and, sometimes, the Detailed Plans. To confirm the land use of a given real property, the purchaser must request the land-use zoning certificate from the seller and the relevant land-use licence issued by the competent authority.
In environmental matters, there are General Ecological Partial Plans at the federal level that regulate the use of land to protect the environment and promote sustainable development, the State Ecological Partial Plans and, sometimes, sectorial programmes for agricultural, territorial and urban development and in matters related to protected natural areas. Additionally, there are ecological reserves that include areas for the protection of various plant and animal species. These reserves, in legal terms, limit human action.
It is not common to enter into specific development agreements with the relevant public authorities to facilitate a project but it may happen if the authority is interested in a specific project because of its size or its impact on urban development.
The Mexican government is authorised, both at the federal and local levels, to expropriate the property of individuals for public utility purposes. Causes of public utility include, among others:
The expropriation procedure begins with a declaration of public utility by the authority, which must be published in the Federal Official Gazette and, where appropriate, in a local newspaper, and the owners of the property and rights to be affected will be personally notified in order to respect their right to due process. If applicable, after the process of filing evidence and allegations, the judge will issue the corresponding resolution and, subsequently, the Federal Executive will decree the relevant expropriation, which will be published again in the Federal Official Gazette. The pertinent decree, jointly with the appraisal in which the amount of the compensation will be fixed, will be notified to the interested parties, who may then go to court. The price set forth as compensation will be equal to the commercial value of the property and, in no circumstances, may it be less than the fiscal value shown in the cadastral or collection offices. Once the expropriation has been decreed, the authority is authorised to occupy the property immediately. The applicable law, ie, the Expropriation Law, also provides for the existence of temporary occupation, total or partial, and the simple limitation of ownership rights, which may be decreed for reasons of public utility.
National Law on Ownership Extinction
The National Law on Ownership Extinction regulates the extinction of ownership in favour of the state through the federal government and the states, as appropriate. In terms of the provisions of the law, the product, instrument or material object of some of the following crimes can be subject to extinction of ownership: crimes provided under the Federal Law against Organised Crime, kidnapping, crimes involving hydrocarbons, oil and petrochemicals, crimes against health, human trafficking, crimes involving acts of corruption, concealment, crimes committed by public servants, theft of vehicles, those contemplated in the Federal Criminal Code with respect to operations with resources of illicit origin, and extortion.
If real estate is acquired through a direct purchase of assets, various taxes and rights must be paid, namely:
Certain deductions are available (ie, proven cost of acquisition, certain investments in construction, improvements and extensions, notary expenses and commissions, and mediations, among others).
Finally, there are registration fees that the purchaser must pay to the public registry and for obtaining certificates or certifications (no liens certificates, no tax debts certificate, etc) prior to the closing.
The taxes to be paid are withheld by the notary public before whom the transaction is formalised when the seller is an individual or foreign tax resident.
If a purchase is performed through share acquisition, only income tax will be generated.
In principle, foreigners can acquire real estate in Mexico, with the exception of those properties located within the restricted zone, which is a 100 km-wide strip along the border and a 50 km-wide strip inland from the beaches. However, foreigners may participate with 100% of the equity of corporations, which may acquire real estate all over the country, including in the restricted zone, provided in this case that the property will not be used for residential purposes, unless the property is built or acquired for resale to the public.
A foreigner can also own property located in the restricted zone through a trust, by holding beneficiary rights, which will grant to the beneficiary practically all the benefits of an owner.
Acquisitions of commercial real estate are generally financed by a loan facility whose terms and conditions will depend on the creditworthiness of the borrower and the collateral available.
There are different financing options for the acquisition of large real estate portfolios or companies holding real estate. In addition to a loan facility with collateral (mortgage, pledge, etc), other options include acquiring the seller’s debts or swapping shares, depending on the transaction and the parties involved.
A commercial real estate investor who is borrowing funds, typically creates or enters the securities requested by lenders. Lenders usually request mortgages, trusts, shares pledges, FF&E pledges (furniture, fixtures and equipment), cash deposits for a certain period of interest or principal payments.
Lock boxes, trusts or other forms of cash control may also be requested by the lender. Depending on the nature and function of the real estate, the borrower may create reserves for maintenance, insurance and improvements.
The most common equity financing provisions include the following:
There are no restrictions on granting securities over real estate to foreign lenders.
The acquisition of real estate by foreign lenders as a consequence of an enforced mortgage, could be restricted considering the real estate location and its use.
The granting of security over real estate does not cause taxes, it is only necessary to pay notary public fees for the formalisation of the security and registration fees to the Public Registry of Property. Notary public fees and registration fees usually vary from state to state, depending on the value of the property. Enforcement of a security over real estate will result in the same taxes as in its acquisition (see 2.10 Taxes Applicable to a Transaction).
There are no special legal rules or requirements that must be complied with before an entity can give valid security over its real estate assets. In order to grant valid securities, a corporation must comply with the regulations included in its by-laws, including avoiding ultra vires acts.
Typically, real estate collateral is structured through mortgages or security trusts and the formalities/procedures vary for each of them. In the event of default by the borrower, the lender must initiate a foreclosure legal procedure in the case of a mortgage, while securities granted through trusts will follow the rules set forth in the relevant trust agreement.
Where other creditors of the borrower are secured by the same asset, the priority of the security granted to the lender is usually evidenced in the document through which it was granted and the judge will order that the other creditors be notified of the existence of the lawsuit or procedure so that they may appear.
Where the borrower has other creditors, Mexican law gives priority to the mortgagee or guaranteed trustee over other creditors, to collect with the secured asset or trust estate.
It is possible for existing secured debt to become subordinated to newly created debt by agreement of all the parties involved. Furthermore, there are certain legal obligations which have preference in relation to pending debt or pending securities, such as taxes and labour obligations, under certain circumstances and with certain limitations.
A lender holding or enforcing security over real estate cannot be held liable under environmental laws for any pollution of the real estate if it did not cause it. In terms of the provisions of the Federal Environmental Liability Law, the individual or legal entity which, through its action or omission, directly or indirectly damages the environment, shall be liable and must repair the damage, or where repair is not possible, shall be liable for environmental compensation.
Security interests created by a borrower in favour of a lender cannot be considered as void just because the borrower becomes insolvent. Mexican law only provides that securities granted by the borrower affecting its creditors might be considered void, at the request of the creditors, if this results in the borrower's insolvency and the claim is prior to the relevant granting.
Agreements normally provide a substitute index in case of non-availability of the LIBOR. If such alternative index is not provided, legal interest rates (ie, 6% pursuant to the Commercial Code) will be applicable.
In Mexico, municipalities are the entities authorised to regulate planning and zoning matters, following certain guidelines established by the Federal Congress and the states. At the federal level, the applicable provisions might be found in the National Development Plan; at the state level in the State Partial Development Plans; and at the municipal level in the Municipal Development Plans, the Urban Development Plans that determine the main land-use of the urban centres and, sometimes, the Detailed Plans. In addition, see the environmental provisions in 2.8 Permitted Uses of Real Estate under Zoning or Planning Law.
For legislative and government controls typically applicable to the design, appearance and method of construction of new buildings or refurbishment of existing buildings, see 2.8 Permitted Uses of Real Estate under Zoning or Planning Law and construction regulations. In addition, various aspects, modalities and limitations regarding the construction and refurbishing of existing properties are usually included in the provisions that regulate fraccionamientos or condominiums, such condominiums being regulated by local laws.
In relation to the regulation of the development and designated use of individual parcels of real estate, refer to 2.8 Permitted Uses of Real Estate under Zoning or Planning Law.
The most common requirements provided by the plans in the above-mentioned section include the protection and good use of natural resources, the correct implementation of services, integration with the environment, and the inhabitants' sense that the place "belongs". On the other hand, the most common legal restrictions provided by said ordinances are the prohibition of urbanisation in certain areas, the surfaces that must be left free of construction, and restricted areas due to railway facilities, drinking water, drainage, electricity, telecommunications and roads.
It should be noted that, depending on the applicable provisions, it will be determined which authority must participate, usually municipal or state authorities. However, for some projects, especially those developed in coastal areas or those involving archaeological sites or historical monuments, the participation of federal authorities such as the Ministry of the Environment and Federal Resources (SEMARNAT), the National Institute of Anthropology and History (INAH), etc, is required.
Local Licences and Permits
In order to be legally entitled to develop a new project and to carry out a major refurbishment, it is necessary to obtain, at a local level, a construction licence to be able to build, extend, modify, repair, install, demolish, dismantle a work or installation, put up walls and excavate. Also, in certain cases, building permits for historical monuments and archaeological zones are required from the authorities.
Third-Party Objections and Approval
Considering that the regulation of construction matters is the responsibility of each state, it is necessary to analyse local construction regulations to determine the rights of third parties to object to construction projects. In principle, it is the obligation of the developer to arrange insurance covering civil liability for damages. Furthermore, in certain projects, an Environmental Impact Authorisation is required, involving third parties and, in some cases, neighbours, or a public consultation procedure is initiated. Finally, third parties can file appeals against the issuance of construction licences.
In the case of environmentally sensitive infrastructure projects, which may include pipelines, the community may be part of the process to get the project approved through a public consultation.
An appeal for review is available against the refusal to grant a construction licence for any type of work, orders for demolition, repair or vacancy or other decisions arising from construction regulations. Likewise, nullity and amparo proceedings may be initiated. Depending on the authority, it is also common for various procedures to be initiated, in the event that a new project is not approved.
Agreements with the authorities or with utility suppliers are usually required in the following areas:
In some cases where the projects have certain density or requirements, the developer might enter into agreements with the authorities to build certain infrastructure, which may include treatment plants, roads, energy infrastructure, etc, and then have said infrastructure assigned or transferred to the municipality.
Failure to comply with the restrictions on development and designated use are sanctioned by each state or municipality depending on the location of the real estate and on the relevant violation. Sanctions usually include the temporary suspension of the project, cancellation of the authorisations granted, closure of the project, fines, and arrest for up to 36 hours.
The most common vehicles for acquiring real estate in Mexico are commercial companies and the most frequently used are the stock company (sociedad anónima) and the limited liability company or LLC (sociedad de responsabilidad limitada), both of variable capital. These are the most widely used forms because they have perfect patrimonial autonomy.
The Stock Company
The stock company is composed of shareholders whose liabilities are limited to the amount of their contributions. Its capital is represented by negotiable certificates and it is the only form of corporation whose shares may be traded on the stock exchange.
The LLC is composed of partners whose liabilities are also limited to the amount of their contributions. For the transfer of equity and the admission of new partners, the consent of the partners representing the majority of the capital stock is necessary. LLCs are often used by US residents because they can be treated as transparent entities for US tax purposes.
Another vehicle widely used in Mexico to acquire real estate is the FIBRA (REIT), which is typically used because it is considered a tax pass-through entity and it allows more flexible structuring of real estate combinations than may be achieved through a corporation. However, because of recent changes to the tax laws, certain tax benefits previously available to all FIBRAs are now limited to publicly traded FIBRAs. FIBRAs are investment vehicles listed on the Mexican Stock Exchange (BMV) for the acquisition and construction of real estate for leasing. Trust certificates are offered to the general public through a public offering in the stock market. Holders of trust certificates issued by a FIBRA will be entitled to receive dividends at least once a year for at least 95% of the result of the immediately preceding fiscal year.
Other structures currently used for these types of transactions include real estate investment companies (SIBRAs), development capital certificates (CKDs) and investment project fiduciary securitisation certificates (CERPIs).
Mexican companies must be incorporated before a notary public or a commercially authorised person (corredor público). All of the constituent shareholders or partners (minimum two), or attorneys acting on their behalf, must be present upon the incorporation of the company. For the incorporation, it is necessary to:
The by-laws containing all the above information may be drafted either by a lawyer or by the same notary public or commercially authorised person (corredor público) who will incorporate the company.
To constitute a FIBRA, the parties must have at least 70% of their assets invested in real estate, be engaged in the purchase or construction of real estate to be leased, and distribute among the holders at least 95% of the tax result of the previous year.
SIBRAs operate in a similar manner to FIBRAs; however, they are commercial companies incorporated under Mexican law instead of trusts. As with FIBRAs, real estate developers receive some tax benefits for using a SIBRA as a financing and structuring mechanism for their project.
CKDs are securities that are issued through an irrevocable trust. Initial patrimony is formed with the proceeds of the placement and is used to invest in or to finance Mexican companies, either directly or indirectly, through various investment vehicles. CKDs are designed to allow the flow of resources to finance projects that consume resources in the short term and later generate long-term flows.
CERPIs are similar to CKDs; however, only qualified investors can own CERPIs.
For the stock company there is no mandatory minimum capital stock provided by law. Therefore, the initial minimum capital stock is determined by the shareholders upon incorporation of the company.
For the limited liability company, there is also no mandatory minimum capital stock provided by law. The capital stock of the company will be divided into equity memberships, each of which must represent at least MXN1 or a multiple of said amount.
Stock Companies and LLCs
The obligations of a stock company are imposed on the directors by law and by the company's by-laws. The directors are jointly liable with the company for compliance with legal and statutory requirements in relation to the dividends paid to shareholders; for the existence and maintenance of the system of accounting, control, recording, filing or reporting required by law; for the faithful execution of the resolutions of the general meeting of shareholders; and for the creation of the reserve fund required by law. Some others special liabilities are provided by law.
In an LLC, managers are liable for the appropriate use of the company's funds and, in general, for the correct administration of the company. They are also personally liable, jointly with the company, for the accuracy of the data contained in the partners' register of the company.
In general terms, company's officers will be at least one director (who, in such a case, will act as sole administrator). Furthermore, stock companies shall designate one or more internal auditors. Directors or employees of a company cannot be internal auditors for that company. LLCs are not obliged by law to designate an internal auditor but this may be required in their by-laws.
As to FIBRAs, they must comply with certain standards of corporate governance and best practices among the shareholders, the investor, the management and technical committee, like all companies listed on the Mexican Stock Exchange (BMV).
In Mexico, there is no annual fee/tax for the simple existence of a company, therefore, the annual compliance costs of entities are very variable. Since companies are subject to periodic compliance with administrative and tax requirements, the maintenance cost will depend on the nature, complexity, volume and frequency of the transactions and operations carried out.
Mexican civil law recognises four arrangements that allow a person to occupy and use a real property for a limited period of time, without buying it outright:
Mexican civil law recognises only one type of lease agreement, although specific rules are provided in the federal and state civil codes, depending on the purpose or location of the leased premises (residential, rural or urban properties).
Rentals and lease terms are usually freely negotiable, however, there are certain legal provisions within the regulation provided by the federal and state civil codes that are binding and non-negotiable/waivable, since they are considered as public interest provisions. These are usually provisions applicable to premises leased for residential purposes, although certain state civil codes may also provide broader restrictions. Review and where necessary, revision, of the set of rules provided by the applicable state civil code is always recommended.
Although there have been attempts to pass certain amendments to the provisions applicable to residential leases, the government has not so far enacted any legislation directly affecting leases. However, it should be noted that federal and state civil codes already contain legal provisions applicable to the case of impediment of the use of leased premises. Such provisions might be considered as applicable to commercial leases when the leased premises cannot be operated due to a force majeure (and government restrictions arising from the COVID-19 pandemic might be considered as such). By way of example, provisions of Article 2431 of the Federal Civil Code, applicable also to commercial leases, provide that if by reason of an Act of God or force majeure the tenant is totally prevented from using the leased premises, no rent shall be due while the impediment lasts, and if such impediment lasts more than two months, the tenant may request the termination of the agreement. Other similar provisions are included in the civil codes of the various states of Mexico.
Furthermore, in some state civil codes the “unforeseeability theory” is acknowledged, the spirit of which is to seek a balance between the mutual obligations undertaken by the parties in the event that there are extraordinary national events, impossible to foresee, that make the obligations of one of the parties more onerous. In such a case, the affected party may take action to have the balance between the obligations restored, under certain conditions and circumstances.
From a general perspective, the length of a lease term is freely negotiable, however, it must be taken into account that federal and state civil codes may contain provisions for minimum and maximum terms. For example, the minimum term of a lease agreement of a real property for residential purposes, pursuant to the Civil Code for Mexico City, is one year for both parties, and may be extended at the tenant’s will for up to one more year, under certain circumstances. Lease of real properties destined for commerce and industry, under the same code, cannot exceed 20 years. Landlords and tenants may freely determine if a term is binding or not, and may even agree on penalties to be paid if the binding term is breached by any party.
General rules contained in the federal and state civil codes establish that the landlord is liable for defects in the leased property that may prevent the use thereof, even if the landlord was not aware of these defects or they occurred during the lease term, provided that they are not a consequence of the tenant’s negligence. On the other hand, the tenant is responsible for minor repairs required for use of the leased property. Standard provisions are that the landlord must maintain the structure of the property and carry the extraordinary maintenance thereof, while the ordinary maintenance is usually the responsibility of the tenant who must return the property the way it was when the tenant moved in, except for the ordinary wear and tear arising from its use. Also, in this case, the parties may freely negotiate the allocation of responsibilities associated with maintenance.
Frequency of rental payments may be freely determined by the parties. The standard is payment on a monthly basis.
Finally, in relation to COVID-19 issues, refer to 6.3 Regulation of Rents or Lease Terms.
Mexican civil law does not provide binding or automatic updates of rentals and matters can be freely negotiated by the parties. The standard is that rent is updated on a yearly basis by applying the same percentage increase as the National Consumer Price Index published in the Federal Official Gazette by the National Institute of Statistics and Geography (plus some additional points, in certain cases). In lease agreements of premises located in commercial malls, it may be agreed that the tenant must pay a variable rent (in addition to, or instead of, the monthly fixed rent), calculated as a percentage of the net sales performed by the tenant.
This matter is freely negotiable by the parties. The standard is that an agreed percentage increase will be applied to the monthly rent in force at the end of the agreed period (usually on a yearly basis, although semi-annual increases are also possible, but less frequent).
VAT is payable on the rental of real properties for commercial purposes. Rents payable under lease agreements for residential purposes are not subject to VAT , although VAT is applicable to rental for residential purposes when the leased premises include furniture.
It is customary to pay the first month's rent in advance, plus payment of a security deposit (usually one or two months' rent) to be kept by the landlord as a guarantee of duly compliance by the tenant of its obligations under the agreement. In commercial leases (mainly those of commercial malls), the landlord (or previous tenant) may also request a one-time payment of goodwill or key money, the amount of which usually depends on the standards and success of the mall.
Costs and expenses associated with maintenance and repair of (common) areas used by several tenants are usually charged to and paid by same tenants to the landlord or to the manager of the building or mall, as the case may be, as "condominium quotas" or common area maintenance fees. Condominium or mall regulations usually establish the way such quotas are allocated among the co-owners/users of the common areas. Leases of premises located in commercial malls may also provide for payment of a certain amount or percentage of the rent as advertising/marketing fees. Such fees and quotas are usually payable on a monthly basis.
Utilities and telecommunications that serve a property occupied by several tenants are usually paid on a pro rata basis and reflected in the condominium quotas or common area maintenance fees the tenant eventually pays to the landlord or directly to the manager of the condominium or mall.
There is no provision in the federal or state civil codes on this matter. Tenants are usually required to take out an insurance policy covering civil liability and fire, the latter being a tenant’s liability under the federal and state civil codes. Insurance coverage for the property of the leased premises is usually taken out by the landlord. However, in commercial and industrial leases, the tenant may also sometimes be held responsible for taking out and paying insurance coverage for the property including, among others, the risk of earthquake and flood. Insurance coverage of the common areas is usually included in the condominium quota or common area maintenance fees charged to the tenant.
Pursuant to the federal and state civil codes, the tenant must use the leased property only for the agreed use or pursuant to the nature and destination thereof. Violation of such provision is grounds for termination of the agreement by the landlord. Lease agreements usually contain such provision and also specify that use of the leased premises must be in accordance with the permitted use of land corresponding to the leased property.
Pursuant to the federal and state civil codes, the tenant may not vary the form of the leased property without the express consent of the landlord. If such provision is breached, the tenant will be held responsible for restoring the leased property to its original state and for paying the damages caused to the landlord. Usually improvements are paid by the tenant, however, legal provisions establish that the landlord must pay for them if it authorised the tenant to perform them and committed to pay for them, or if they are useful or urgent improvements.
Premises to be used for commercial, industrial, office or retail purposes, are generally subject to the same set of rules. The federal and state civil codes contain a specific set of rules for residential and rural properties.
As previously mentioned, no specific COVID-19 legislation has been enacted. In addition to what was discussed in 6.3 Regulation of Rents or Lease Terms regarding the "unforeseeability theory", it should be noted that judicial criteria have established that such a theory is not applicable to acts entered into between traders (commercial acts), and therefore, its application to commercial leases might be challenged.
The Law on Commercial Insolvency (Ley de Concursos Mercantiles) provides that a tenant's commercial insolvency does not terminate a lease agreement. However, the conciliator appointed for the insolvency procedure may opt to terminate the agreement, in which case, the compensation agreed in the lease must be paid to the landlord or, failing that, an indemnity equal to three months' rent, for early termination.
The forms of security most commonly requested by landlords to ensure tenants' compliance with their obligations under lease agreements are:
As a general rule, a tenant is not entitled to continue occupying the leased property after the termination of the lease agreement, and the landlord is entitled to enforce eviction. However, if the tenant keeps occupying the property without opposition by the landlord, the lease agreement will continue for an undetermined period of time. In such a case, either party will be able to terminate the agreement at any time by giving 30 days' written notice to the other party in the case of residential property. Prior notice of one year is required in the case of rural, commercial or industrial properties.
The tenant may not sublet the leased property or a portion thereof, or assign the tenant’s rights, without the consent of the landlord. If the tenant breaches this rule, it will be jointly liable with the subtenant for damages. If the landlord, without fair reason, objects to the sublease that the tenant rightfully asks for, the tenant may enforce the termination of the agreement.
Pursuant to the federal and state civil codes, a landlord is entitled to terminate a lease in the following cases:
On the other hand, a tenant is entitled to terminate a lease:
The parties may also agree on events of default different from or in addition to those provided by the law.
The civil codes of the various states generally require that lease agreements must be made in writing.
The federal and state civil codes may provide certain registration requirements. The Civil Code for Mexico City, for example, establishes that lease agreements of real property must be recorded in the Public Registry of Property, when a term longer than six years is agreed, or when advance payments of more than three years of rent are made.
The landlord is entitled to terminate the lease agreement and to start a procedure to enforce eviction when a termination cause provided by law or the lease agreement, occurs. The duration of the eviction process may vary, depending on the peculiarity of the case, but on average it may last from one to two years.
No COVID-19 eviction moratoriums or related restrictions were implemented by the government during the pandemic caused by COVID-19.
Expropriation of the leased property for public utility and judicial sale are grounds for termination. The landlord and tenant are entitled to receive an indemnification by the competent authority. The landlord will be indemnified in accordance with the expropriation decree. The tenant will be indemnified with an amount of six months' rent (provided it has occupied the property for more than one year) as well as with the value of the improvements made during the last six months, provided they were needed.
The most common structures used in Mexico to price construction projects are:
Unit-Price Construction Agreements
Under the structure of the unit-price construction agreement, the parties agree on a price per construction unit and the total value of the contract will be the sum of the units for the value of the unit. Each unit must also include a value that clearly represents the value of the contractor’s remuneration. Under this system, the client will generally require from the contractor the preparation of a list of units and values consisting of a list of the work units and the value of each of them.
Lump-Sum Construction Agreements
Under the structure of the lump-sum construction agreement, the contractor receives only and exclusively the fixed price set in the contract, regardless of the expenses incurred during the execution of the project. In this way, the client significantly reduces the risks that may arise during the execution of the project as a result of changes in the price of the products or services being hired, since the entire risk of the work is borne by the contractor until delivery. This means that the contractor has included in the lump sum price everything necessary to perform and complete the construction work according to the project, and agrees that no extra items or costs shall be incurred, except for those resulting from modifications and/or extensions authorised by the client.
Refundable Costs Construction Agreements
Under the structure of the refundable costs sum construction agreement, the price that the contractor receives will be that resulting from the expenses assumed in the execution of the project plus a profit.
The vast majority of Mexican construction contracts include a clause that allows the parties involved in the contract to modify the terms relating to the work to be performed and the price. Through this clause, the client has the right to modify the quantities of work indicated in the contract, the quality of the materials used in the work, the dimensions or size of the work, or the times in which the work must be executed. Likewise, the obligation of the contractor to comply with the order variationsdelivered by the client is stipulated, along with the consequent variation of the construction project price.
In Mexico, different methods are used to assign responsibility for the design and construction of a project.
The above-mentioned responsibilities are typically allocated in specific responsibility and indemnification clauses within the construction contract, by means of which, the contractor agrees to indemnify and hold the client, as well as its indemnified parties from any damage, claim, liability, obligation, loss, action, administrative proceeding, complaint, expenses, interest, fines and costs (including reasonable attorneys’ costs and expenses), in connection with the construction agreement, including the design and engineering, the construction work derived from any mis-statement or non-compliance with any statement, guarantee or obligation included in the construction agreement and its exhibits.
In Mexico, several devices are used to manage construction risk on a construction project. The most common ones are: (i) bonds; (ii) insurance; and (iii) guarantee fund; to cover any contractors' responsibility and contingencies such as construction defects.
Typically, a contractor grants the following bonds in almost all types of construction agreements.
Typically, the contractor takes out the following: civil liability insurance for damages to the client, to the construction works and third parties in their property and personal damages, and, in general, any risk inherent to the construction works, including constructions adjacent or within the construction site, including, but not limited to, personal damages and death, basic coverage for activities and real estate, subsoil installations, welding works, loading and unloading activities, demolition, machines used for work, foundations, propping and other works, sudden and unforeseeable pollution. The insurance policy usually covers gross liability, design errors, employers' liability, and damage to property.
From the amounts to be paid by the client to the contractor, the client usually withholds about 5% of the total amount of each invoice, until they have accrued a guarantee fund equivalent to 5% of the construction works price, in order to guarantee compliance with the obligations of the contractor under the construction agreement.
The guarantee fund is typically used by clients to correct any defect, responsibility or claim against the contractor that may result from the construction agreement, including, but not limited to, the payment of liquidated damages of the agreement or in the event that the contractor fails to comply with any obligation established in the agreement, such as, fines, penalties or any amount used to guarantee hidden defects or defects of the construction works.
There is also the possibility of limiting the contractor's liability or capping it at a certain amount, dependent on the project and the specific negotiations.
Parties are allowed to agree that the owner is entitled to monetary compensation if certain milestones and completion dates are not achieved. The mechanisms usually used to manage this risk on a construction project in Mexico are penalties and bonds, including advance payment bonds (guarantee supplied by the party receiving an advance payment, to the party advancing the payment) and performance bonds (surety bond issued by an insurance company, or a bank guarantee on the satisfactory completion of a project by a contractor).
The most common ways for owners to seek to guarantee a contractor's performance of a project, is to obtain performance bonds, including advance payment bonds and performance bonds. However, letters of credit, parent guarantees and escrow accounts are also customary.
Contractors and/or designers cannot lien or otherwise encumber a property in the event of non-payment.
Local laws determine the requirements that must be met in order to inhabit a project after its construction. For example, in Mexico City it is necessary to obtain authorisation for the use and occupation of the construction for which it is necessary to present the construction licence, the construction logbook in which the progress of the executed works is registered and endorsed by an expert, and photographic reports, among others. Furthermore, it should be noted that the properties must comply with regulations on safety, evacuation routes, and civil protection, among others.
If real estate is acquired through the direct purchase of real estate, various taxes and rights must be paid, including value added tax (VAT) on the value of the construction (unless it is a residence), which is paid by the purchaser and is calculated at a rate of 16%.
The most common method used to defer transfer liability is by contributing real estate that the trustors make to the trust and that will not be considered a sale for tax purposes, in accordance with the provisions of Article 14 of the Federal Tax Code, if they reserve the right to reverse the ownership of the real estate in their favour.
In relation to private estate, there are no federal or local occupation taxes but payment of fees, licences and permits might be required.
The taxes to be paid are withheld by the notary public before whom the transaction is formalised if the seller is not tax-resident in Mexico.
Rental income from real estate is taxed in Mexico, through income tax and value added tax, in certain cases. This is paid by the landlord. Some exceptions provided by law include the property tax.
Owners of real estate in Mexico are entitled to carry out tax depreciation of fixed assets, including land and buildings and deduction of some concepts of the income tax to be paid upon the income gained from its sale, such as the proven cost of acquisition, certain investments in construction, improvements and extensions, notary expenses, and commissions and mediations.
Cannabis Legalisation in Mexico – Investment Opportunities in Agrarian Land
Mexico is on track to become a large marijuana market for a variety of reasons. On 9 March 2021, the Mexican Chamber of Deputies passed a Bill approving the Federal Law for the Regulation of Cannabis (FLRC), as well as the amendment to several provisions of the General Health Law and the Federal Penal Code. The FLRC regulates, among others, the recreational use of cannabis by adults (18 and over), as well as its cultivation and commercialisation (subject to obtaining appropriate licences). At the time of writing this article, final approvals from the senate and the president, who has expressed support for legalisation and making this a new area of economic opportunity in the country, are still pending. Mexico will join Canada and Uruguay in a small, yet growing, list of countries in the American continent that have legalised marijuana. According to specialists, Mexico's geographic location and climate make the country a particularly good place to invest in this market.
With a population of over 125 million people, Mexico is set to become one of the world's largest legal consumer markets of cannabis and its derivatives, and various opportunities in the real estate sector will come with this, including the acquisition and exploitation of land for cultivation and production of cannabis. The legalisation of marijuana in other countries has already started to impact their real estate industry. In the US, those states (15 at present) where medicinal and recreational use of marijuana has been legalised for more than three years, have seen an increase in the demand for commercial properties – specifically, 21% of such states have seen an increase in the demand for land, 42% for storage space, and 27% have seen an increase in the demand for retail space, according to a report issued by the (US) National Association of Realtors.
Accordingly, Mexico will possibly have an increase in the demand for land suitable for the legal cultivation and production of cannabis, and hence, an increase in the demand for agrarian land, such as ejidos. The Centre of Studies for Sustainable Rural Development (Mexico) revealed that ejidos and communal property (both subject to the agrarian system) currently represents 52% of the total national surface, and the Bill of the FLRC explained that, during a period of no less than five years following its implementation, at least 25% of the cultivation licences should preferably be granted to farmers or ejidos in the municipalities in which the federal, state and municipal governments have previously carried out tasks to eradicate plantations of cannabis. Consequently, land subject to the agrarian system, such as ejidos, will most definitely play an important role in the real estate shift resulting from the new regulations.
National and foreign investors will be able to participate in the production and commercialisation of cannabis through different legal strategies, including the use and exploitation or acquisition of agrarian land.
A Brief Overview of Ejidos
To further outline the potential opportunities and strategies of investment to arise from these new regulations, it is important to explain briefly what an ejido is and the special treatment of agrarian land in Mexico's legal framework.
An ejido is a legal entity mainly composed of Mexican agrarian workers with an initial estate of land granted by the government for its communal use and exploitation, subject, of course, to the provisions of the law. It is composed of a Meeting (Asamblea) of the people that have ownership rights in the land of the ejido, known as ejidatarios; an Ejido Representatives Board (Comisariado Ejidal); and a Surveillance Board (Consejo de Vigilancia).
Ejido land is not considered private property; it is subject to a unique system regulated by the Agrarian Law and there are special restrictions and procedures for the transfer of property, its use and exploitation. The land of ejidos is classified into three different types:
Each type has different restrictions and procedures for its acquisition or granting of use and exploitation.
Investing in cannabis through agrarian land
Even when the Agrarian Law allows for the transfer of ejido property, such land may only be purchased once a long, complex and time-consuming process of privatisation of said agrarian land has been completed; however, the law also provides for other mechanisms which would allow contribution of the land for investment purposes without transferring actual domain and thus, going through the time-consuming process of converting the land to private property, or else allowing the project to commence and be developed while at the same time completing the process to privatise said ejido lands.
Subject to the special aspects of each transaction, such arrangements may involve, among others, merchandise purchase agreements, granting of use and exploitation rights, or the contribution of the use and enjoyment rights associated with the land to a company created for such purposes, depending on the cannabis-related activities investors choose to participate in, and the licence they seek to obtain.
The FLRC provides four available licences for commercial purposes:
However, only one type of licence may be obtained by an individual or entity, so for instance, the holder of a cultivation licence may not obtain a sale licence. Such restriction extends to their partners, shareholders, subsidiaries, relatives, and spouses. Consequently, investors must first decide which activity they will invest in, seek to obtain the corresponding licence, and choose their investment strategy or commercial structure.
Any corporate framework will have to be carefully crafted so as to comply with applicable elements of the agrarian and civil codes, as well as the FLRC.
The following are general descriptions of some of the alternatives that may be used to participate in the cannabis market through the use of ejido property.
Transfer of common use lands to a special purpose vehicle
The Agrarian Law allows the ownership of common use lands to be transferred by the ejido to companies where the ejido is a shareholder or partner for the development of a specific commercial enterprise. To that end, investors generally create a special purpose vehicle (SPV), a Mexican company in which the investors and the ejido are partners or shareholders, the sole purpose of which is to participate in those activities authorised by the FLRC, subject to previously obtaining the corresponding cannabis licence.
The transfer of ownership of common use lands entails a complex process similar to privatisation, including approval of transfer by the Meeting, and the requirement that the ejido's equity participation in the company must be at least equal to the reference price of the land set by an appraisal.
Foreign investors should be aware that, pursuant to the FLRC, the participation of foreign capital in entities that hold a cannabis licence for commercial purposes is limited to 20% and that the use of an SPV or existing entity is mandatory for foreigners, as individuals applying for a licence must be Mexican nationals. However, there are sophisticated and serious traders in Mexico with whom foreign investors may establish joint ventures.
Granting of use and exploitation rights (usufructo) of parcelled land
The Agrarian Law also allows ejidatarios to enter into commercial relationships with investors. In this case, the use and exploitation rights over parcelled land can be transferred directly to said investors or companies where the ejidatario is a shareholder or partner, also for the development of a specific commercial enterprise. Under this scenario, the ejidatario does not need any government approval, or that of the ejido’s Meeting, to the extent that the contribution mechanism is legal.
Investors may also enter into contracts with the ejido or the ejidatario to obtain the use and exploitation rights of agrarian land for the cultivation of cannabis. One way would be through a sharecropping agreement, whereby the SPV would receive from the ejido or the ejidatario the right to use and exploit the land during a specific term, and the parties would distribute the products of the harvest according to the terms and conditions of the agreement, providing the SPV does not receive less than 40% of the product, pursuant to the provisions of the Federal Civil Code, which will need to be revised against local civil codes to verify any possible percentage variations. Another approach would be through a lease, where the ejido or ejidatario grants the outright use of the land to the SPV, without the need to distribute the harvest among the parties. Once again, the corresponding cultivation licence would need to be obtained in advance.
Foreign investment limitations and O&M agreements
Foreign investment in legal entities that own agrarian land is initially limited to 49%. Such percentage may be increased when there is specific approval by the Ministry of Economy, but the excess capital must be represented by “neutral stock”. The Foreign Investment Law (FIL) stipulates that it will be regarded as “neutral” when the investments are represented by shares without voting rights or with limited corporate rights, provided that prior approval has been obtained from the Ministry and when “it is applicable”.
The language in the FIL is vague and allows corporate structures to be implemented making it possible for there to be negative control by foreign investors, but the spirit of the FIL is that Mexican investors must participate in the capital of legal entities that acquire agrarian land and must have a majority of the voting stock. The actual day-to-day management is not restricted to being carried out by the foreign investor or by someone appointed by the foreign investor.
Operation and management agreements (O&M) are not regulated, so this allows for an appropriate operating structure to be implemented.
Investors may also seek to exclusively obtain from the ejido or ejidatario the cannabis products for their subsequent transformation, or to obtain them from the transformation licensee for later sale or export and import. For such purpose, the structure commonly used implies that the ejido or ejidatario will receive a loan from the investors for the development of the project and will commit to repay the loan with the price to be paid for the product (cannabis) sold to such investors. The ejido or ejidatario are only authorised, however, to constitute use rights (usufructo) as collateral for the loan, which is a structure now commonly used for the exploitation of other agrarian products. The referred merchandise agreement would further grant the investor exclusivity rights over the products obtained by the ejido and/or the ejidatario, as the case may be.
Direct purchase of agrarian land (parcels)
Finally, investors may choose to purchase parcelled land for cannabis cultivation and production. As previously mentioned, this may involve a long and complex process of converting the land from agrarian property to private property. Parcels within the ejido are initially owned by the ejido, so through the privatisation process, the land is first assigned and transferred to particular ejidatarios who would then become full owners of their parcels and, at such time, would be legally entitled to commence the privatisation process to convert the land from the social regime of the ejido to a full ordinary private property, and thus thereafter, be able to sell the same to the investors. Such process involves specific steps, including demarcation and assignment of parcels within the ejido, the ejido Meeting's assistance and specific approval, and administrative procedures before the National Agrarian Registry, among others.
The majority of parcelled land must first be properly marked and assigned to ejidatarios. Such requirement may be critical for a transaction if it has not been completed prior to the time of the desired acquisition; the participation of advisers and experts is therefore recommended to expedite time processes.
A call for the meeting of ejidatarios must be sent to all ejidatarios, and the Agrarian Attorney (Procuraduría Agraria) must be notified in order for the latter to render its opinion regarding demarcation and assignment of parcels, and to verify compliance with all relevant provisions. In the first call, at least 75% of the ejidatarios must be present to consider the meeting legally installed, and in the second or subsequent calls, 50% plus one ejidatario are required to be present. If not properly conducted and prepared, such requirement may present a hindrance, as ejidos are generally composed of a great number of ejidatarios.
In the meeting, if legally installed, two thirds of the present ejidatarios must vote in favour to approve the transfer. These are only some of the steps to legally purchase parcelled land – the agrarian law provides several other requirements, including recording procedures in both the National Agrarian Registry and the Public Registry of Property, in addition to the right of first refusal of family members, other ejidatarios and other prior users of the land, to acquire said parcels in the event of the first sale thereof, even if the parcel had long since been privatised. The minimum purchase price is determined by the National Assets Appraisal Commission or by a licensed bank. Overall, investors should be aware that the process for outright acquisition is usually slow, and consider alternative ways to enter the cannabis market.
Once they have chosen their investment path in this new and regulated sector, investors will need to seek experienced and specialised real estate-corporate legal counsel that can provide an effective and tested legal framework to mitigate risks and deliver prompt solutions in the challenges to come with the emerging cannabis market. An established counsel will be able to use thoroughly verified legal documents and strategies to give investors certainty and cost-effective results based on known market standards in the United States and Canada. Even if the actual functioning of the cannabis market is yet to be determined, investors should be completely covered in all other legal aspects, from extensive due diligence to post-closing matters, whether they are investing in either agrarian or private property.