Real Property Regulation:

General Requirements That Need to be Observed inInfrastructure Projects In Mexico
By Alejandro Lopez-Velarde
(Lopez Velarde, Heftye y Soria, S.C.)

Mexico has experienced dramatic legal changes since the last year of the De la Madrid administration1 through the present Fox administration. One of the main reasons was the effort to remove any possible barrier that could affect the private participation either national or foreign in infrastructure projects such as (i) power generation; (ii) natural gas; (iii) petroleum; (iv) petrochemicals; (v) satellite and other telecommunications; (vi) railroads; (vii) highways, among others.

The implementation of the above-mentioned infrastructure projects often begins with the purchase; and/or leasing; and/or expropriation of real estate.

Consequently, it is advisable to carry out a real estate due diligence in order to secure the interest of the potential investors. Without question, Mexico is one of the most regulated countries with regard to land the in the world. Infrastructure projects face not only the obligation to obtain the corresponding permits, concessions, authorizations, registrations, but also the necessity to carry out a due diligence in order to determine the ownership and limitation of possessor rights to real property and whether such property can be transferred, assigned or sold.
This article briefly summarizes the regulation applicable to real property in México and the timeframe involved for conducting a due diligence for an infrastructure project.

General Legal Framework Applicable to Real Property To understand the legal regime behind the regulation of real property in Mexico, it is necessary to consider a variety of existing federal, state and local laws and regulations. The most important legal ordinances applicable to real property are the followings:

A. Federal. (a) The Constitution; (b) the Commercial Code;3 (c) the Foreign Investment Law (“FIL”);4 (d) the General National Goods Law;5 (e) the Expropriation Law;6 (f) the Agrarian Law;7 (g) The Income Tax Law;8 (h) the applicable Federal environmental laws, among others.

B. State and Local. (a) the Civil Code; (b) the Local Urban Development Law and its Regulations; (c) the Notarial Law;9 (d) tax laws such as the real estate acquisition tax (“Impuesto sobre la Adquisición de Inmuebles”), and the property tax (“Impuesto Predial”); (e) the applicable State environmental laws, among others.
Due to the many legal provisions that have to be observed for transferring real property, landowners; authorities; and notary publics often do not follow all legal procedures for the transfer.
The Mexican Constitution The following general principles are established in the Mexican paramount law:

A. Ownership and Possession. The Mexican Constitution establishes in general terms the conditions applicable to the ownership and possession of land in Mexico. Thus, the Constitution dictates that the ownership of land and water within the national territory belongs originally to the Nation which has the right to transfer to the private sector the dominion of same establishing the private property regime. Further, the Mexican Nation has the right to impose to the private property regime the conditions established for the public interest.10

B. Ownership in the Restricted Zone. Article 27 Section I of the Constitution dictates that only Mexicans by birth or naturalization and Mexican corporations have the right to acquire ownership of land, water and their easements or to obtain concessions for the exploitation of mines or water. The Mexican State may grant the same rights to foreigners through theso-called “Calvo clause.” Under the Calvo clause, foreigners must consider themselves as nationals and agree not to invoke the protection of their governments.
In case of noncompliance with the Calvo clause, they may have to forfeit the property they have acquired to the nation. Irrespective of the Calvo Clause, the Mexican Constitution prohibits foreign ownership of real estate located in the so-called “Restricted Zone”, which includes all lands situated within 100 kilometres of the Mexican borders and 50 kilometres from its seacoasts.11
The purchase of the real property in Mexico by a foreign concern, is principally governed by the Foreign Investment Law and the Mexican Constitution.
C. Conflicts of Law. The Mexican Constitution establishes that real property shall be regulated by the legal ordinances where the property is physically located.12

Application of the Foreign Investment Law (“FIL”)
to the Purchase of Real Estate The purchase of the real property in México by a foreign concern, is principally governed by the FIL13 and the Mexican Constitution.14

Significantly, in spite of the constitutional prohibition to foreign ownership of property in the “Restricted Zone”, the FIL establishes that Mexican corporations with foreign exclusion clauses, may acquire real property in the “Restricted Zone” for business purposes, provided the foreign investors have:
(i) agreed to the inclusion of the “Calvo clause” in the charter of incorporation of the Mexican company; (ii) the real estate is acquired for non-residential purposes; and (iii) the acquisition is recorded with the Ministry of Foreign Affairs.15 In addition, foreign persons and corporations as well as Mexican corporations, in the absence of foreign exclusion clauses, may indirectly acquire real estate in the “Restricted Zone”, for residential purposes, through a trust arrangement.16
The approval of the Ministry of Foreign Affairs is required for foreign investors or corporations to acquire beneficial rights to land under a trust in the Restricted Zone. However, fiduciaries are not required
to obtain authorization of the acquisition of property outside the Restricted Zone, even when the beneficiary is a foreign individual or corporation.17
In consideration of a foreign applicant’s request to purchase property, the Ministry of Foreign Affairs will review the same in view of the requirements dictated by the FIL. By law, applications must be ruled
upon within 30 business days from the date of submission.
In the case of applications to purchase real estate for non-residential purposes, the same must be resolved within 15 business days; otherwise the corresponding permit shall be deemed approved.18

In connection with the development of an infrastructure project such as pipelines, highways, railroads, LNG terminals, petrochemical plants, which includes the construction of the corresponding facilities,
the following general parameters of the FIL must be observed: (i) Corporations comprised of 100 percent foreign ownership engaging in the construction industry and public works are allowed;19 and (ii) apart from the foreign investment considerations, the construction sector must comply with technical standards imposed by the corresponding public agency.

Expropriation Law

The Expropriation Law states that the consideration for the expropriation of property will be based on the property’s fair market value and shall be paid within one year following its condemnation; further, such payment may be made in kind (i.e. property).
Agreements and Due Diligence Issues During the execution of an infrastructure project, private investors shall execute different agreements in order to establish their transmission lines; rails;
petrochemical plants; pipelines; industrial parks. The most frequent agreements are: (i) Purchase and sale agreements with the private sector either commercial, industrial or individuals or corporations; (ii) public
agreements when the property is owned by the Mexican government; or (iii) agrarian agreements when the property is subject to the agrarian regime as communal or ejido.

Related to the legal parameters cited above which govern the conditions under which the Mexican company or foreign person may own real estate, there are a variety of due diligence related issues which warrant
strict attention once the foreign person or the Mexican company is legally postured to acquire the land.

Any private investor interested in the purchase of property in Mexico shall undertake the following measures prior to consummation of the purchase:

(i) A physical inspection of the land, including a survey by a registered Mexican surveyor, to verify themetes and bounds of the property and to confirm that no easements, rights-of-way or other encumbrances affect the real estate.

(ii) A chain of title search, at the Public Registry of Property where the real estate is located, extending at least 30-years, to ensure that there are no irregularities in the continuum of ownership which could limit or otherwise compromise the seller’s ownership interest.

(iii) The obtainment of a “Certificate of Absence of Liens”, issued by the Public Registry of Property where the real estate is located, verifying that the property is not subject to any liens, legal judgments or other encumbrances.In addition, it is important to review all notarial instruments affecting the real estate, including: public instruments, deeds, contracts, guarantees, mortgages, pledges, easements, rights-of-way and the like to ensure that the property is not subject to any third party interest.

(iv) Verification from the Municipal Treasury for the Municipality where the property is located that the property tax (“impuesto predial”) for the land has been paid by the owner.

(v) A search to confirm that no “expropriation orders” affect the property.21

(vi) Verification that the land has been zoned (“uso del suelo”) for the uses contemplated by the purchaser.

(vii) Confirmation that the property is not subject to any “ejido” or communal property rights, including copies of any agreements entered into with “ejidatarios” regarding the transfer of title and the use of farmland.
Further, if warranted, a review of the minutes of the ejidatarios” meetings authorizing the transfer of the community use” (“uso común”) of the agricultural land and the corresponding opinion issued by the General Agrarian Attorney for such effect.

(viii) Ascertaining whether the property has been appraised by a registered appraiser.

(ix) Verifying that there are no concessions granted by the federal government regarding the use of the land, waters or other resources.

(x) Determining what infrastructure exists for the property in terms of electrical substations and related infrastructure, water and gas lines accessing the property, as well as assessing the availability and cost of the
required KVA (electricity), water/sewer and gas.

(xi) Ascertaining whether the nature of the development of the property and future activities on the same will only require the filing of an environmental “preventive report” (“informe preventivo”) or the more detailed “environmental impact statement” with the Secretariat
of the Environment, Natural Resources and Fisheries (“SEMARNAT”).

(xii) Confirming that the seller’s legal representative has a notarized power of attorney for “acts of domain”, in order to sell the property.

(xiii) Obtainment of any blueprints for the property.

(xiv) Reviewing a certified copy of the seller’s public instrument containing its charter of incorporation and bylaws.

(xv) Undertaking an environmental audit of the property, prior to closing on the same. In addition to the foregoing due diligence inquiries,
it is advisable that the purchaser of land in México execute a “Promise To Purchase Real Estate Agreement”, allowing at least 30-days from the date of execution until the closing date. This interim period is used to undertake the due diligence measures listed above, so that if the buyer determines that the property is undesirable, it may withdraw from the transaction with little or no penalty.

The Effect of NAFTA, in Investment Terms Essentially, Chapter 11 and the corresponding annexes, establish the following principles which must
be observed by NAFTA countries:22
Infrastructure projects require a careful review of the applicable real estate legal ordinances in order to secure the interest of investors.

(i) National Treatment. A NAFTA country shall deal no less favorably with investors from another NAFTA party than it would deal with its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other investment disposition.23 In Mexico, national treatment is granted to foreign investors in almost all economic activities and corporations with the exception of those economic activities reserved for the State, Mexicans, Mexican corporations and those economic activities where the FIL dictates specific percentages of foreign investment or which require a
favorable resolution from the CNIE to exceed the prescribed investment percentage.

(ii) Most Favored Nation Treatment. Each NAFTA party shall accord to investors of the others, treatment no less favorable than it confers, in like circumstances, to investors of any other NAFTA party or to a non party with respect to the establishment, acquisition,expansion, management, conduct, operation and sale or other investment disposition.24

(iii) Performance Requirements. Under NAFTA, a list of prohibited performance requirements as conditions for investment is established; including among others, the following activities: (a) mandatory exports of a given percentage of goods or services; (b) minimum domestic content requirements; (c) preferences for domestic sourcing; (d) production process favoritism; and (e) imposed transfers of technology.25 Moreover, the prohibited practices apply to non-NAFTA countries as well as to the United States, Canada and Mexico. Thus,
for example, Mexico and Canada may no longer require an investor to export to the United States, to limit imports of components from the United States or to buy.

Conclusion

Infrastructure projects require a careful review of the applicable real estate legal ordinances in order to secure the interest of investors. The lion’s share of this work involves land acquisitions; lease arrangements;
sale and buy back transactions; expropriation orders and litigation, etc. Further, due diligence measures are typically important elements of any real estate transaction. In this regard, it is advisable that any investor
undertakes such inspections of the subject property as would be commensurate with a U. S. survey (i.e., ALTA, etc.) with an acknowledgment of the federal, state and local laws and regulations.

1 With President Miguel de la Madrid, in 1983, México began the process of reforming its import substitutionoriented economy to an open market economy by opening up to foreign competition.

2 Article 28 paragraph IV of the Mexican Constitution establishes the so-called strategic areas which are exclusively reserved for the State, and of course, represent the areas most resistant to liberalization. Moreover, the Constitution and the Foreign Investment Law (“FIL”) dictate that further
activities set forth in the laws issued by Congress should also be considered strategic areas. As a result, investors in infrastructure projects will have to observe the applicable law related to their investment activity in order to see if their activity is not subject to specific regulations. See Mex. Constitución Política de los Estados Unidos Mexicanos (Political Constitution of the United Status of Mexico) [hereinafter cited as “Constitution” or “Const.”] pub’d in the Diario Oficial (“D.O.”) Feb. 5, 1917, Art. 28 paragraph IV.

3 See Mex. Código de Comercio (Comercial Code), pub’d inD.O. Sep 15, 1889.

4 See Mex. Ley de Inversión Extranjera (Foreign Investment Law), [hereinafter cited as “FIL”], pub’d in D.O. Dec. 27, 1993.

5 See Mex. Ley General de Bienes Nacionales (General National Goods Law); pub’d in D.O. May 20, 2004.

6 See Mex. Ley de Expropiación (Expropriation Law), pub’d in D.O. Dec. 22, 1993.

7 See Mex. Ley Agraria (Agrarian Law), pub’d in D.O. Feb. 26, 1992.

8 See Mex. Ley del Impuesto Sobre la Renta (Income Tax Law) , pub’d in D.O. Jan. 1, 2002.

9 Pursuant to the Mexican law, notaries are required to authenticate real property transactions charging high fees which are not completely familiar for foreign investors.

10 See Const. Art. 27.

11 Id. Art. 27(I). The nationalistic perspective of the Mexican Constitution is a product of its history. Mexican history shows economic exploitation, intervention and colonialization by foreigners. These events led the constitutional Congress to lay the foundation for México’s strong anti-foreigner Constitution drafted in 1917. Later, Under NAFTA, Mexico has committed itself, for the first time, to resolve foreign investment disputes through a prescribed arbitration mechanism. components from a domestically sourced supplier instead of a United States owned firm.26

(iv) Expropriation And Compensation. The expropriation of property will be based as established in the Mexican Expropriation Law. In other words, based on property’s fair market value and payable within one
year following its condemnation.27

(v) Dispute Settlement. Under NAFTA, Mexico has committed itself, for the first time, to resolve foreign investment disputes through a prescribed arbitration mechanism.28

(vi) Movement of Currency. Not only Mexico, but also the United States and Canada under NAFTA, committed not to impose barriers on the repatriation of capital, except when: (a) the host country has problems
with its balance of payment and the program is approved by the International Monetary Fund; (b) the corporation declares bankruptcy; or (c) the corporation or the investor is bound to comply with a judicial order.29

(vii) Transparency In Economic Activities. In general, for any economic activity which falls outside the restricted categories mentioned in the Constitution and the FIL, foreign investment shall be liberally allowed in
the Mexican economy—even in expanding or manufacturing new product lines or entering new economic activities.more rules were added to Article 27 of the Constitution. “[R]egulations to Section I of Article 27, enacted in 1925, limited foreign equity ownership to a maximum of fifty percent. This enactment limited foreign equity in Mexican businesses, and consequently made majority ownership by any foreigner illegal.
Generally the idea was to limit foreign ownership by making the controls more and more detailed and restrictive. Thus, Mexico began to use regulations to its Constitution as a tool for implementing further control over foreign involvement.” SeeJesús Silva & Richard K. Dunn. A Free Trade Agreement Between the United States and Mexico: The Right Choice, 27 San Diego L. Rev. 937, 952 (1990). In 1971 President Echeverría authorized the Ministry of Foreign Affairs (“Secretaría de
Relaciones Exteriores”) or (“SRE”) to issue permits to credit institutions to act as fiduciaries for foreigners in the ownership of real estate in the Restricted Zone. “The main considerations for limiting complete foreign ownership were the attitudes of the original Constitutional congress to defend the country’s sovereignty, and the federal government’s unavoidable duty to preserve the integrity of the nation’s territory.” Id. At
952-953.

12 See Mex. Const. Art. 121 (II). This provision is also established in the federal and local Civil Codes of the Mexican States. See for instance Civil Code for the Federal District, Art. 13 (III).

13 The FIL went into effect in late December 1993, replacing (i) the Law to Promote Mexican Investment and to Regulate Foreign Investment (See Mex. Ley para Promover la Inversión Mexicana y Regular la Inversión Extranjera, [hereinafter cited as “1973 FIL“], pub’d in D.O. Mar. 9, 1973); (ii) the Organic Act of Section I, Article 27 of the Constitution (See Mex. Ley Orgánica de la Fracción I del Artículo 27 Constitucional, pub’d in D.O. Jan 21, 1926); (iii) the Act establishing the
transitory need to obtain permits for the acquisition of goods by foreigners and for the incorporation or modification of Mexican corporations having or which may have foreign partners (See Mex. Decreto que establece la necesidad transitoria de obtener permiso para adquisición de bienes a extranjeros y para la constitución o modificación de sociedades mexicanas que tengan o tuvieren socios extranjeros, pub’d in D.O. July 7, 1944); and (iv) Articles 46 and 47 of the Federal Weapons and Explosives Law and all the legal, regulatory and administrative provisions of a general nature contrary to the FIL (See FIL Arts. First, second – fourth transitories). The Regulation to the Law to Promote Mexican Investment and to Regulate Foreign Investment (“1989 FIL Regulation”) was replaced on 1998 with the promulgation of the new Regulation to the Foreign Investment Law. See Mex. Reglamento de la Ley de Inversión Extranjera y del Registro Nacional de Inversiones Extranjeras, pub’d in D.O. Sep. 8, 1998.

14 See Const, Art. 27 section I.

15 The arguments presented to the Mexican Congress for establishing these new rules for the Restricted Zone were that during the last three decades, a great deal of foreign investment has been allocated in the Restricted Zone through the form of trust and complicated stock ownership schemes. As a result, the uncertainty of not having clear title to land scared many potential investors away. Article 27 Section I
of the Constitution expressly restrict investment to only Mexicans or Mexicans corporations but it does not prohibit Mexican corporations with foreign exclusion clauses. See FIL, Arts. 10, 11.

16 The 1973 FIL established in its article 18 that the only way to obtain real property in the Restricted Zone was through the trust mechanism. The Ministry of Foreign Affairs was empowered to grant authorization to credit institutions as fiduciaries in the domain of real estate destined for industrial and tourist activities. As can be seen, the FIL opened the possibility to acquire direct real property through Mexican subsidiaries in any economic activity. See 1973 FIL, Art. 18; 1989 FIL Regulation, Art. 12; FIL, Art. 10. Although the Mexican Constitution is the supreme law of the land, its apparent inconsistencies with certain provisions of the FIL does not void the language of the latter. Indeed, the provisions of the FIL concerning foreign investment are in practice, treated similarly to an amendment to the constitutional mandates; thus, the FIL’s language vis-aforeign investment is fully operative, despite apparent contradictions with the Mexican Constitution. The term of the trust was increased. Now, it is fifty years and is renewable at the request of the interested party. See FIL, Arts. 13, eleventh transitory; 1973 FIL, Art. 20.

17 See FIL, Art. 11.

18 Id. Art. 14.

19 Before January 1, 1999, Mexican corporations having up to 49 percent foreign investment might have participatewithout further requirements. However if the foreign participation was higher, a favorable resolution of the National Foreign Investment Commission (“CNIE”) was required.
See FIL, Art. 9 Transitory.

20 See Expropriation Law, Arts. 3-5, 9-10, 20-21.

21 “Expropriation Orders” are synonymous with eminent domain proceedings whereby the government obtains private property for government use.

22 See North American Free Trade Agreement [hereinafter cited as “NAFTA”] pub’d in D.O. Dec. 20,
1993. Art. 1139.

23 Id. Art. 1102.

24 Id. Arts. 1103, 1105.

25 Id. Art. 1106.

26 See FIL, Art. 29.

27 See NAFTA, Art. 1110.

28 Id. Arts. 1115-1138.

29 Id. Art. 1109.

Mr. Alejandro López-Velarde is a Partner in the law firm Lopez Velarde, Heftye y Soria, S.C. in the Mexico City office. He was an in-house counsel for the Human Relations and Administrative corporate Division of Pemex (Petróleos Mexicanos) from 1988-1992. He was a visiting attorney with Baker & Botts, L.L.P. in Houston, Texas from 1992-
1994.
WorldTrade Executive, Inc.
Vol. 15, No. 5. March 15, 2005