Real estate finance law in Mexico

Yes.

Yes.

In Mexican law, both land and buildings on the land are considered immovable property. A mortgage can cover both the land and any buildings or improvements on it. When a mortgage is taken over land, it typically includes any permanent structures or buildings as part of the collateral. There is no legal distinction between the two, therefore the land and the buildings are treated as a single immovable property unless otherwise specified.

The concept of mortgage certification, as known in common law jurisdictions, is not recognised under Mexican law. Instead, mortgages are formalised through a notarised and registered public deed that serves as the evidence of the mortgage.

The cost of a mortgage public deed typically includes notarial fees, registration fees and other administrative costs, which can vary based on the property’s location and value.

The underlying debt of a Mortgage can be assigned and transferred to another party, which transfers the mortgage rights as accessory to the underlying debt.

Second-ranking mortgage can be established in Mexico. The filing of the notarial deed of mortgage must be registered before the Public Registry of Property of the state where the property is located. The priority of mortgages is determined by the order of their registration. A separate deed is required for each mortgage, and the registration order of such deeds establishes the priority.

Typically, the transfer of mortgaged property in Mexico requires the lender’s consent. However it’s possible for the parties to agree otherwise, but the mortgage would remain with the ownership of the property, and the new owner would take on the responsibility of the secured debt.

In case of insolvency or bankruptcy, certain creditors are considered preferred and may take precedence over mortgage holders. Such preferred credits can be: 

• credits in favour of workers for unpaid wages or indemnities
• litigation costs for the defence or recovery of the guaranteed assets
• costs needed for the conservation or transfer of the assets.

Yes.

Yes, the landlord’s rights to receive rent can be pledged or assigned to a lender as security. It is also very common to create a trust so that the assigned rights are managed by a trustee. Such trusts are very common in project financing in order to create a bankruptcy remote vehicle.

Such transfer or assignment is commonly done through a pledge agreement or assignment of rights agreement, which must be formalised in writing and notarised to ensure its enforceability against third parties. Some types of pledge agreements must also be registered before the corresponding public registry.

Yes, it is possible. It will depend largely on the type of credit being granted by lenders in order to restrict withdrawal of additional funds until scheduled interest and capital repayments are made. In revolving credits, it is very common to contractually restrict the right to withdraw until certain interest or capital repayments are made.

Each state in Mexico has its own local legislation and public registries so such processes tend to change.

Notwithstanding, in general, both land ownership and security must be granted before a notary public and registered before the Public Registry of Property (Registro Público de la Propiedad), to make them enforceable against third parties.

However, if a security is granted over a movable property (such as a non-possessory pledge agreement over certain rights), this must be registered before the Sole Registry of Movable Guarantees.

It depends on each state. In general, registration has publicity effects which makes the corresponding act enforceable against third parties. In some states, registry provides declaratory rights, which means that if registration is not carried out, the act is null or void. 

In addition, registered securities have priority based on the order of registration. If a security is not registered, it will lose priority to any subsequent registered securities, potentially leaving the lender with a lower-ranking claim.

In Mexico, security, such as mortgages, must be executed through a public deed before a notary public. Afterwards the public deed must be filed for registration with the Public Registry of Property corresponding to the state on which the property is located.

The costs for executing and registration of a security include legal fees, notary fees, registration fees and administrative costs. Notary and registration fees are often based on a percentage of the secured amount or the property’s value, which varies by state and is generally calculated as a percentage of the property’s value or the amount of the secured obligation.

Yes, in Mexico, it is common for lenders to use a Security Trustee to hold a security. This is typically done through a guarantee trust (fideicomiso de garantía), where a trustee (a financial institution) holds and manages the security for the benefit of the creditors. This structure is often used to manage the security and its ownership for the duration of the corresponding debt that is being guaranteed by the guarantee trust.

If there is a modification to the lenders, the corresponding trust (fideicomiso) holding the security must be amended to record the substitution in lenders. There is usually no need to sign new security documents unless specifically required by the terms of the trust or other security agreements.

As provided before, real estate laws are different in each state. The following provisions apply for Mexico City and some states:

• tenants may not sublease or assign their rights and obligations without the consent of the landlord, unless otherwise agreed between the parties.

The lender can enforce its security through judicial or extrajudicial proceedings.

Under Mexican law, parties can choose a foreign jurisdiction to settle mortgage disputes, as well as an arbitral tribunal. However, the designation of foreign jurisdiction of arbitral tribunal may not be applied if they come in conflict with fundamental principles of Mexican law or public order or if the matter involves issues that are exclusively within the jurisdiction of Mexican courts.

Mexican law allows for the enforcement of foreign arbitral awards and judgements, but they are subject to review. Foreign judgements and arbitral awards may not be enforced if they are contrary to Mexican public order. Additionally, the Commercial Arbitration Law (Ley de Arbitraje Comercial) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), to which Mexico is a party, provide that foreign arbitral awards are enforceable in Mexico, subject to certain conditions such as proper notification and the opportunity for the parties to present their case.

In Mexico, the process for executing a mortgage can be categorised into judicial and extrajudicial proceedings.

Judicial

In a judicial execution process, if a borrower defaults on their mortgage, the lender can initiate a foreclosure by filing a lawsuit in the competent court. Following this, the court may order an appraisal of the property to determine its value. Once the ruling is final, the property will be auctioned off in a public sale, with the court setting the terms and conditions.

Extrajudicial

Under certain circumstances, the parties can provide an extrajudicial execution process, which will be applicable only when the security documents include such extrajudicial execution agreement allowing direct foreclosure without court involvement. In this case, the lender can proceed with the appraisal of the property under the terms provided in the corresponding agreement.

Additionally, securities deposited in a Security Trust can have a specific private execution process, where the trust agreement could establish the provisions for the lender to take possession of the property directly in the event of a default, bypassing court intervention altogether. Regarding a transfer of ownership to a third party, the security can be sold.

Also, it is possible for a secured party to appoint receivers or liquidators or request a judicial administrator. In general terms, their authorities are limited to preservation and management of the property until it is sold.

Under Mexican law, the lender is not automatically responsible for the maintenance and insurance of the real estate until said property is sold. It is common to include insurance obligations under loan agreements and/or security documents. It is also common for financial institutions to include the cost for insurance within the conditions of the mortgaged loans.

If the property is insured and is destroyed by fire or another in case of acts of God or force majeur events, the mortgage will subsist on the remains of the property, and the insurance value will be used to cover the debt. Lenders may ensure that insurance coverage remains active to protect the real estate until the sale proceedings are finalised.

Yes, there are several options of foreclosure in Mexico where the lender can obtain good title to the real estate in satisfaction of all or part of its debt. This arrangement generally requires mutual agreement between the lender and borrower.

On the other hand, judicial foreclosure does require a court order and the property will usually be sold at a public auction. The lender may take ownership of the property in satisfaction of the debt if no bids are received at the auction, if the value of what is owed is greater than the value of the property or by participating in a judicial auction and making the highest bid, but this also requires court approval.

Amongst other rights, the creditor may also agree with the debtor to have the property adjudicated at the price fixed when the debt is demanded, but not at the time the mortgage is constituted (this agreement cannot prejudice the rights of third parties).

No foreigner can acquire real estate properties on the “restricted zones” which are within 100 kilometres of Mexico’s borders and within 50 kilometres of coastlines. Such restriction can be circumvented by trusts and other legal strategies. If a security is held under a property located within such restricted zones to be enforced by foreign lenders, such lenders will not be able to directly own such properties in case of execution. 

There are two types of pledge agreements provided in Mexican legislation, ordinary pledge and non-possessory pledge agreements. Likewise, shares can be transferred to a guarantee trust as other means of incorporating a security over shares. 

Notwithstanding the above, shares are commonly provided as a security by means of an ordinary pledge agreement and so this chapter covers only provisions related to an ordinary share pledge agreement.

Yes.

No, because the incorporation of a share pledge requires the physical delivery of the share titles to the pledgee and therefore no other ordinary pledge can be incorporated over the same shares. Notwithstanding, different legal strategies can be considered to create a security that could create something similar to a second ranking security. Case-by-case analysis is required for such purposes.

A share pledge is perfected by executing an ordinary share pledge agreement. For stock companies (sociedades anónimas), the mechanisms for registering and perfecting security over shares are:

• endorsing the share certificates and delivering them to the lender 
• recording such pledge on the shareholders’ registry book.

Failure to register the share pledge in the shareholders’ registry book may affect its validity and opposability before third parties.

Executing a pledge over shares must be made through a pledge agreement, which must be signed and notarised. Additionally, the mechanisms for registering and perfecting such security must be carried out (see above).

These costs can range from a fixed fee to a percentage of the secured value, depending on the complexity and amount involved.

The share certificate must be endorsed in guarantee in favour of the pledgee and physically delivered to such pledgee, who will keep the share certificate in its possession until the pledge has been terminated.

The lender can enforce a pledge over shares through judicial proceedings or an extrajudicial process previously agreed by the parties in the corresponding pledge agreement.

Pledged shares can be sold to a third party by a pledgor as long as the pledgee provides written consent to such sale.

While Mexican law doesn’t establish the necessity for the appointment of receivers, liquidators can be appointed in certain insolvency or restructuring situations, with authorities granted by court order or the terms of the pledge agreement, for management of the pledge shares through the foreclosure proceedings.

The pledge can be enforced through an extrajudicial sale procedure that does not involve the Mexican courts. This must be subject to the terms in the security agreement. If the pledge agreement includes provisions for extrajudicial enforcement, the lender may sell the shares privately, without the need for public auction under the terms of the extrajudicial agreement. Otherwise, if the pledge agreement does not establish the extrajudicial enforcement, court involvement is always required.

Enforcement through judicial procedure is initiated by means of a foreclosure lawsuit filed by the lender. This process is usually expedited in the case of pledge shares, since they are considered receivables under Mexican law.

In the case of a judicial procedure, shares are sold through an auction process. However, it is also possible for a judge to award the pledged shares to the lender if he/she agrees the debt equals or exceeds the value of the shares.

Loans from shareholders can be subordinated by agreement. This is typically done through a subordination agreement where the shareholders agree that their loans will be repaid only after the secured obligations have been satisfied.

It is customary for such loans to be waived or written off contractually as part of the enforcement of a share pledge in the event of default. The terms of subordination and waiver should be clearly documented in the relevant agreements to ensure enforceability. 

It is important to note that, in Mexico, the applicable legislation lease agreements of real estate properties may vary from state to state based on the property’s location.

Residential

The lease length for residential properties is usually 1 year and they are usually renewed. 

Retail

For retail properties, the lease length can usually range from 1-5 years.

Commercial/Industrial

The lease length depends a lot on the line of business, but they rarely have the duration of a residential lease, being usually 3-10 years.

The maximum and minimum lengths vary in each state. In Mexico City, the lease length for residential properties cannot be less than 1 year.

For commercial or industrial properties, the lease length cannot exceed 20 years.

In Mexico, the statutory controls and obligations governing the renewal and termination of leases are primarily regulated by the Civil Codes of each state, which contain specific provisions affecting both landlords and tenants.

Residential

For residential properties, the local legislation of some states provide tenants the right to extend the first year’s lease, even without the landlord’s consent, as long as the tenant is current with rent payments.

For Mexico City, if a lease has lasted more than 3 years, the tenant has the right to be preferred over other interested parties for a new lease under the same terms and conditions offered to a new potential tenant.

In those agreements that extend over 1 year and that continue with an undefined term, any party may terminate the lease by giving written notice to the other party with at least 30 days of anticipation to the expected termination. For those agreements with an express term, a simple confirmation by tenant or landlord that they do not wish to continue the lease is sufficient for its termination on the agreed term.

Commercial/Industrial

On commercial or industrial lease agreements, tenants do not have an automatic right to renewal unless stipulated in the lease agreement. Renewal provisions are generally included as a right of first refusal or a renegotiation clause, or renewal of such lease agreement under pre-agreed conditions.

In those agreements with an undefined term, any party may terminate the lease by giving written notice to the other party with at least 1 year before the expected termination.

Yes, the tenant can request rescission of the lease if the landlord fails to make necessary repairs or if the property becomes uninhabitable due to defects or vices. In addition an agreement can end in case of acts of God or force majeur that prevent the tenant from using the leased property.

If the landlord is in compliance with its obligations and the tenant terminates a lease agreement without grounds, the tenant may be liable for damages and lost profits or for the payment of the contractual penalty (usually the rent owed for the remainder of the lease term).

Yes, tenants have the right to remain in the property under the same lease terms if the landlord does not oppose their continued occupation after the lease term has expired.

Additionally, in some cases – as in Mexico City – if a lease has lasted more than 3 years, the tenant has the right to be preferred over other interested parties for the purchase of the property, if the tenant is up-to-date with its obligations.

Rental income is typically receivable monthly, and the rent must be paid from the day the tenant receives the property. In Mexico City the rent has to be paid per elapsed month unless otherwise agreed. In some other states, the rent is usually paid in advance unless otherwise agreed.

For Mexico City, the periodicity of rent reviews for commercial and industrial properties is not explicitly stated in law, but it is common practice to review rents annually.

For residential properties in Mexico City, rent can only be reviewed annually.  

The basis of rent review is typically tied to inflation or the national consumer price index (CPI), especially for residential properties.

For commercial and industrial leases, if the rents are in USD, it is customary that the rent is adjusted annually considering the US CPI. For rents in MXN, it is common to use the national CPI.

Commercial/Industrial

In the case of commercial or industrial properties, there are no express provisions in the law limiting the increase in rent. 

Residential

For residential properties, rent increases in some states – as in Mexico City – are indeed subject to statutory control. In Mexico City the increase cannot exceed the inflation rate reported by the Bank of Mexico for the previous year.

The tenant is responsible for minor repairs and maintenance of the property, while the landlord is responsible for major repairs and ensuring the property is in a habitable condition.

For commercial and industrial leases, the parties usually negotiate different approaches to repair, maintenance and tenant improvements.

The landlord is responsible for external maintenance, decoration and repair to ensure the property remains in a habitable condition except for normal wear and tear.

The landlord is responsible for structural repairs to maintain the property’s safety and functionality, unless the damage to the property is caused by tenant.

The legislation does not explicitly state who is responsible for insurance. For residential leases, it is common practice for the landlord to insure the property, while the tenant may insure their personal belongings. For commercial and industrial, it will strongly depend on the commercial aspects of the lease.

No VAT is incurred on residential properties without furniture.

For commercial or industrial leases, VAT on rent is paid by the tenant.

The landlord is typically responsible for property taxes and rates.

The tenant is responsible for utility bills and other services they use.

The landlord can recoup certain outgoings through maintenance and management costs, especially in commercial and industrial leases.

Yes, the terms of leases and contracts are recognised and enforceable under Mexican law. The law provides a legal framework for lease agreements, and disputes are resolved based on these provisions and relevant case law.

While there is no strict requirement for appraisals to be conducted by regulated entities, courts prefer registered appraisers before Mexican entities.

It is possible for an environmental professional to be appointed to conduct various investigations and prepare reports. It is not customary practice in small residential purchases but is highly advisable for large residential, commercial or industrial developments.

If the lender only holds or enforces a mortgage over real estate, it is not possible for it to become liable in respect of past or present breaches of environmental laws. However, if due to the enforcement proceedings the lender becomes the legitimate owner of the real estate, it can be liable for present or past breaches in environmental law.