The main sources of real estate law are the following:
The real estate sector has not been immune to the COVID-19 crisis, being strongly affected mainly during the first three months of the mandatory social isolation decreed by the government (March, April and May 2020), due to the impossibility of continuing the execution of construction projects and visiting and displaying properties, which caused a sharp contraction in demand. Likewise, the closure of notaries, Public Records and other government services necessary to carrying out transactions, had the sector practically paralysed.
However, the adverse impact of the pandemic on the real estate sector was offset by the investment decisions of certain agents in the economy (people or companies with medium to high assets) who knew how to take advantage of the situation to acquire real estate, considering it a relatively safe alternative investment.
At the end of May 2020, within the framework of a programme for the resumption of economic activities, the government authorised the resumption of real estate projects and the progressive reopening of notaries and other government offices, all with limited capacity. Despite the new restrictions on social mobility imposed at the beginning of 2021, the execution of real estate projects was not restricted again, and neither was the functioning of notaries public and government offices, who as a result of the pandemic have accelerated the digitalisation and virtualisation of the paperwork, which has had a very positive effect.
According to the information provided by real estate developers, although there was a slight drop in the value of land, the price per square metre currently remains stable. Likewise, although the volume of operations during the start of the immobilisation restrictions fell sharply, as of May 2020 a recovery of the sector was observed, which has been maintained to date.
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 of proptech and different events have been held, in which the main real estate investors have participated, in order to discuss 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, however, 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 and the “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 taken up on the scale 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 No 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.
Agreement between the Parties
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.
Registering a Transfer
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.
Offices and hotels
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 office. 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 protective of those who register their rights. This is sustained on the high barriers to 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.
Records of the Property
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 Effects of COVID-19
During the months of March, April and May 2020, the Public Records offices did not serve the public as a result of the social and mandatory immobilisation ordered by the government. During this time, diligent buyers could not access archived titles and the documents that showed the registration of the old transfers of a property (contracts, judicial parts, administrative decisions, plans). For this reason, acquisitions of property were paralysed during those months.
As of the end of May 2020, when the service in the Public Records offices was restarted, buyers and their lawyers had to accept the delay caused by the backlog of work and reduction of capacity. However, over the months, the virtualising and digitising of procedures have been quite a positive advance for the real estate due diligence process.
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 the case of eviction, which could prevent the transferred property from being allocated for the purpose for which it was acquired or 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 level of sanitation to which the seller is bound, which generates the obligation to pay the value of the property, interest, expenses, benefits 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, this has generated in investors a particular 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 Report No 085‐2019 – SUNAT/7T0000 and Report No 097‐2019 – SUNAT/7T0000 from SUNAT, which indicate that the acquirer of an asset is jointly and severally bound by the tax obligations of the seller of said asset, when the transfer – for the seller – implies a significant impact to its potential capacity to generate future economic benefits.
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 the 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 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.
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 not expected to pay this tax are expressly established in Articles 27 and 28 of the Municipal Taxation Law.
It should be noted that when it comes from the first sale of a 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 by 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 (Foreign Investment Risk Review Modernisation Act). However, Peruvian investments must also comply with the regulations approved by the CFIUS (Committee on Foreign Investment in the United States).
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 2020, one Peruvian Tax Unit (UIT) was equal to PEN4,300.
Notarial payments are not considered to be 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 becomes the owner of the property, as a consequence of the execution of its right, 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.
Suspension of Obligations
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.
Period of Suspicion
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 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. 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, certain administrative procedures are required to obtain the rights to develop a new project or complete a major remodelling.
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, certain motions 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:
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 tenant must be an entity that is 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.
It should be noted that in relation to the COVID-19 pandemic, the government did not dictate any measures regarding leases, leaving the parties concerned to decide whether to renegotiate or maintain the terms of their existing contracts.
A lease agreement can be fixed for a maximum term of ten years. If the lessor is a public entity or incapacitated person, the maximum limit of the 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.
As a result of COVID-19, the parties involved in drawing up leases have been more diligent in incorporating a force majeure clause, to avoid the effects of a possible breach of contract. In several cases it has even been agreed to regulate the specific consequences of a new situation of social and mandatory immobilisation due to the pandemic.
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.
No specific regulation has been issued on the leases of particular categories as a result of the COVID-19 pandemic.
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. 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.
Future Break Clause
Additionally, it is recommended to incorporate a future break clause (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 subletting 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.
This issue does not apply in Peru.
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, takes 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. It is required that the tenant declares in the contract its express agreement for the purposes of the aforementioned law and that, at least, the signatures of the parties are notarised. The duration of Special Process in usual judicial practice is from 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 property (up to four months).
For the purposes of applying 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.
It should be noted that the government has not implemented any restrictions or measures regarding the eviction of tenants due to the COVID-19 pandemic.
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 for design and construction 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, any of which may be 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 tax; or the acquisition of a company or business group that incorporates a 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 an individual who is going to make a payment in favour of another 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.