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Friday, March 9, 2012

Investing in Mexican Real Estate: Outlook, Framework and Special Considerations (Part 5)

A. Preliminary Agreement

1. Forms of Preliminary Agreements

Due to the complexities of the deed, the parties will often enter into a binding preliminary agreement that (a) sets the basic terms of the transaction (i.e. purchase price, subject matter and time for closing), (b) provides seller with a period of time to provide all documents necessary for the closing (i.e., certificate of no lien, tax receipts, receipts evidencing no outstanding utilities, and a current valuation of the property for tax purposes), (c) provides the purchaser with a period of time to obtain financing and/or to schedule the required payments, and (d) demands payment of a deposit or initial payment (receipt of initial payments may be considered a taxable event; thus, tax advise should be obtained prior to entering into acceptance of an initial payment).

The most common forms of preliminary agreements are (a) the promissory agreement and (b) the purchase and sale agreement without transfer of ownership.

a. Promissory Agreement

The general conception is that “buyer and seller [shall] execute a private promissory agreement (contrato de promesa de compraventa), which is similar to a purchase agreement in the United States. It is a binding agreement whereby the seller and buyer agree to execute a future agreement for the transfer of the property, after a certain due diligence period has elapsed, provided the buyer does not encounter any red flags or unacceptable conditions in the meantime.”[i] The Arizona Department of Real Estate, in its publication titled “Buying Real Estate in Mexico (A Consumers Guide)”, states that the promissory agreement “is the single most important document in the purchase process as it will set forth the terms and conditions of the transaction”[ii]

However, the Mexican Supreme Court has ruled that, in some instances, a promissory agreement constitutes a final contract of sale. This raises the question of whether the use of a promissory agreement is appropriate under the circumstances. To make such a determination, it is critical to understand the nature of the promissory agreement and the legal consequences that may result from its use. These two issues will be addressed in following posts.

[i] Buying real estate in Mexico has become easier. Esther Zaidman. The National Law Journal. March 2008.

[ii] Arizona Department of Real Estate. Buying Real Estate in Mexico (A Consumers Guide), p20.