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| Mortages
and Trust
By Harriet Murray
August 10, 2003 |
The sale of properties between persons
and companies can be of several types: purchase and
sale (the most usual), donation, inheritance, or an
award from a lawful auction of properties held under
a guaranty mortgage.
Procedures over these properties
are subject to recording before a Notary Public. In
order for a transaction to be valid, there must be a
public deed issued before an officer, called a Notary
Public.
A Notary is a lawyer who is given
the authority to attest documents, and before whom operations
regarding properties can be validly carried out. Additionally,
other acts are carried out before a Notary, such as
last wills, incorporation of companies, the conferring
of powers of attorney or company representation, etc.
To be a Notary, one must be a lawyer
and hold an authorization (patent), granted to a specific
number of persons by the Government of each of the States
of the Mexican Republic. Local or state laws specific
to their power and responsibility govern notaries.
The Notary Public holds a patent
issued by the State Government, which allows him to
act. Notaries are advisors to the parties in the operations
authorized under their signature, and they draw-up the
corresponding documents. These documents must be recorded
in a special book, which is authorized for such purpose,
called a protocol. One of the most important jobs of
a Notary is to sign documents and affix his seal of
authorization. Documents issued before a Notary Public
are public documents that are valid (since no-one can
object to their validity), and can be officially certified
when registered in Public Registers such as that of
Property (real estate), or Commerce (corporations).
Once the Notary has determined that
the person who is going to transfer a property is the
rightful owner or the owner's representative with sufficient
rights to do so, he asks the Public Property Register
to advise him as to the status of the property from
their records. This report will tell him who owns the
property, the location, surface area and boundaries
of the property, and whether it is subject to any encumbrances,
such as mortgage or seizure, or any limitation of ownership
(as, for example, an easement).
By law, Notaries are responsible
for and in charge of paying taxes and recording real
estate transactions. Notaries must calculate taxes and
collect these amounts in order to pay the respective
tax offices.
Any owner who sells or transfers
a property by any means is bound by law to warranty
the title and right of possession. If for any reason
the acquirer of the property loses his ownership, whoever
sold or transferred the property to him must pay the
price, legal expenses and, in the case of bad faith,
damages. The law provides that warranty of title and
right of possession is held by everyone who transfers
(disposes of) an asset.
A mortgage on property is governed
under State Civil Codes. It is defined as "collateral
established on property not delivered to the creditor,
and which entitles the latter, in the event of failure
to comply with the guaranteed obligation, to be paid
with the value of the property, in the degree of preference
established by law.” When property is conveyed
to another person (by purchase/sale, inheritance or
auction under seizure), the property remains subject
to the established mortgage.
The establishment of a mortgage must
take place by means of a public deed issued before a
Notary. Only the owner of the property, or someone,
who holds power of representation of the owner for this
purpose, can establish the mortgage. The mortgage must
indicate the creditor in whose favor it is granted,
the obligation guaranteed, the amount in which the mortgage
is granted, and the interest and term.
Mortgages must be recorded in the
Public Property Register where the mortgaged property
is located, as a public deed under which they are established.
Once the mortgagor has complied with the guaranteed
obligation or paid the credit, the creditor will cancel
the mortgage under a public deed issued before a Notary.
The notarial document of cancellation is recorded in
the Public Property Register.
Other means exist under the Civil
Code, aside from the mortgage, to guarantee rights in
connection with property. These are treated as forms
of a purchase/sale.
a) Purchase/sale by installments
is where the buyer pays the agreed upon sales price
in periodic installments. A clause within the mortgage
will state that failure on the part of the buyer to
make one or several payments will result in the purchase/sale
being rescinded or canceled. This so-called "rescission"
clause must be recorded in the Public Property Register
to make anyone interested in buying this property aware
that an amount is owed on the price and failure to pay
could result in cancellation of the sale. In these cases
the buyer, even while owing part of the price, already
owns the property.
b) The other form regulated by the
Civil Code is the so-called "purchase/sale with
reservation of dominion". The seller does not transfer
ownership, even though he delivers the property to the
buyer. In these cases, the buyer is not the owner and
cannot sell, mortgage or carry out any operation as
owner until he has paid the seller the total purchase
price. This type of purchase/sale is recorded in the
Public Property Register, also.
In the two preceding cases, once
the buyer pays the whole price, a public deed is issued
before a Notary Public to cancel, in the first case
the so-called "rescinding" clause and, in
the second, the reservation of dominion, in the Public
Property Register.
Trusts
Trusts are governed by the General
Law on Credit Instruments and Operations and the Credit
Operations Law, which are federal laws applicable to
all of Mexico. This legal instrument has its origins
in the Anglo-Saxon trust.
Under a trust, a person called the
trust founder appropriates certain assets for a lawful
purpose into a trust institution. The person receiving
the profit or benefit from this operation is called
the trust beneficiary. In Mexico only credit institutions
(banks) can be trustees. However, the trust founder
and the trust beneficiary can be the same person.
There is a very common guaranty trust
in which the trust founder, as debtor, allots a certain
asset to become a guaranty to a trustee, to the benefit
of the creditor, who is the trust beneficiary. In this
type of guaranty trust, if the debtor defaults, the
trustee (bank) sells the asset given in guaranty and
pays the creditor, by means of a procedure agreed to
under the trust itself.
A trust can also be used for the
administration of assets entrusted to the trustee, in
order for the latter to deliver the profits to the trust
beneficiary. For example, some shares of a stock company
are placed in trust in order for the bank (trustee)
to exercise the rights, collect dividends, etc. This
trust is also common in wills. Upon the death of the
trust founder, amounts of money are established which
become proceeds that are delivered periodically to minor
children.
A trust is used in many types of
real estate transactions. An owner my encumber land
on which a group of houses or condominium is built.
The owner instructs the trustee to sell each of the
houses or condominiums individually out of the trust.
Under transfer of ownership trusts,
the owner of the asset is the trust institution and
the trust beneficiary is only entitled to instruct the
trustee to take certain actions within the purpose of
the trust. The trust beneficiary may transfer the asset
to himself or to a third party. He may also mortgage
the property or change the property use, such as to
a condominium.
A property trust is the trust in
which foreigners may acquire the rights to enjoy and
use properties in the so-called restricted area: beaches
and borders. These rights acquired by a foreigner are
very broad. Properties within this trust can be used
for tourist, residential, industrial or dwelling purposes.
Provisions governing these operations are contained
in the Foreign Investments Law and Regulations.
The rights of the trust beneficiary
can be transmitted by title of purchase/sale, donation,
or inheritance, etc.
This article is based upon legal
opinions, current practices and my personal experiences
in the Puerto Vallarta-Bahia de Banderas areas. I recommend
that each potential buyer conduct his own due diligence
and review. Information for this article has also been
provided by Ricardo Barraza y Asociados and Maria O’Connor.
HARRIET MURRAY
Harriet
Murray, Broker
For additional information on properties for sale or
lease within the bay, please call or e-mail me at: harriet@casasandvillas.com
Thanks and until next week.
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