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Monday, March 12, 2012

Investing in Mexican Real Estate: Outlook, Framework and Special Considerations (Part 6)

i. Nature of the Promissory Agreement

A promissory agreement is a contract pursuant to which one or more persons agree, in writing, to execute, within a certain defined timeframe, another contract (e.g., the land sale contract). The promissory agreement may only give rise to an obligation to perform, and never to an obligation to deliver. Thus, in stricto sensu, a promissory agreement will only give rise to a duty to execute the promised contract and will not create in either party the duty to deliver the property or pay the agreed price.

To be valid, ...

... the law requires the promissory agreement to be in writing, subject to a definite and certain term, and to set forth the terms of the promised contract. Hence, to ensure the validity of the contract, lawyers or lay persons drafting the promissory agreement must include an adequate description of the property, the agreed price and form of payment, and specify the time for closing, among other provisions.

The problem most frequently overlooked is that under Mexican law “there is a sale where one party has agreed to transfer ownership to a certain property or right, and the other party has in turn agreed to pay, with money, a certain price.” Further, the Mexican Federal Civil Code provides that, “as a general rule, a sale is valid and enforceable between the parties when they have agreed as to the subject matter and its price, even if the former has not been delivered or the latter paid.” Consequently, a lawyer trying to include the terms required to make the promissory agreement valid may be transforming this agreement into the final purchase and sale agreement unwittingly (because the promissory agreement will most likely include price and a description of the subject matter).

It would appear that the simple solution is to label the agreement as a “promissory agreement,” and to state clearly that such agreement is to be interpreted solely as a promissory agreement and in no way to be considered the final purchase and sale agreement. However, “a contract should be interpreted by looking at the literal meaning of its clauses and not by the name that the parties gave to the contract.” Thus, even where the parties called their contract a “promissory agreement” and express their intent that it should be treated as such, it may be interpreted by a court as an executed purchase and sale agreement.

In fact, while some courts have ruled that the promissory agreement and the purchase agreement should be distinguished because in the former the obligation created is the future execution of an agreement, and in the latter there is a transfer of money and conveyance (which is, in a court’s opinion, a substantive difference), other courts have ruled that “the expressions ‘I promise to sell’ and ‘I promise to buy’ are synonyms of ‘I buy’ and ‘I sell’, because when there is an agreement as to subject matter and price, we are in the presence of a purchase and sale agreement, not a promissory one, since when the two promises of buy and sell meet, thus determining subject matter and price, there is a meeting of the minds which leads to the formation of a purchase and sale agreement because the required elements are met” “… If the parties entered into a bilateral promissory agreement […] and both the promissory buyer and the promissory seller agreed on the subject matter and price […], it is evident that such conditions gave rise to a purchase and sale agreement and not to a promissory one, as there was a meeting of the minds which led to the formation of a purchase and sale agreement, as the required elements were duly met, giving either party the right to require from the other party the satisfaction of all necessary formalities for the purchase and sale agreement to be properly executed.” Consequently, “when a promise to sell contract has the elements which belong to the definite transaction, such as the way in which the price is to be paid or how the subject matter is to be delivered, we are no longer dealing with a promise to sell contract because the agreement is not to enter into a future contract; in fact, the final purchase and sale agreement is being executed.”

The legal consequences that may derive from the use of promissory agreements will be discussed in following posts.