| Important
information about the real estate laws in Costa Rica.
Disclaimer:
This paper intends to deliver a basic and comprehensive
assessment, of legal aspects incident to the possession
and ownership of real estate in Costa Rica, for information
purposes only and is not intended as a substitute to
professional counseling. The information hereunder is
intended but not promised to be exact and updated. A
dependable professional should be consulted before making
any decision.
I) Legal
Regulation of Real Estate Ownership:
The legal framework
containing the principles and norms that regulate the ownership
of real estate in Costa Rica, can be described as a pyramidal
body of laws, regulations, decrees and ordinances, some
of which derive from the 18th century, spread across specialized
institutions and government agencies. Please note that
a full and comprehensive analysis of this branch of law,
requires at least a whole book with the extensive amount
of information involved, which is of course out of the
scope of this paper, and therefore we shall take a general
look at the pyramid for the purpose of putting you into
what we can call a “functional perspective” of
the scenario.
a) The
Constitution:
As the
fundamental law of the country, the Constitution of Costa
Rica lays out the foundations of real estate laws in
Costa Rica and dates from 1949, but also based in the
earlier constitution from 1871. Under article 45 private
property “is inviolable; and nobody can be removed
from their property unless in force of public interest
legally proved, under previous indemnification according
to the law…”.
b) The
Civil Code:
This important
body of norms was drafted by a special international
commission of jurists created in 1882 under special Government
mandate, using the Napoleonic Code, the Civil Code Project
from Spain, the Mortgage Law of 1865, the Law of Succession
of 1881, and the Civil Law doctrine of French jurists
Aubry and Rau, as models and approved by Parliament entered
into force in 1888, to substitute the General Code of
1841 and to become the fundamental source of civil law
in the country. The Code has a preliminary Chapter and
four Sections.
Section
two of the Code deals with assets and the extension and
modification of ownership. Ten subsections regulate real
property: i. Assets and their classification, ii. Ownership,
iii. Rights to use of property, iv. Easements, v. Encumbrances
and limitations upon property, vi. Mortgage and lien
of property, vii. The Public Registry*, viii. Means of
acquisition of ownership, ix. Occupancy, and x. Accession;
and the remaining three subsections regulate will and
succession law: xi. Succession, xii. Legitimate succession,
and xiii. Testamentary succession (the will).
(* Also
named the National Registry, see below).
c)
Recordation of Documents in the Public Registry Law:
or Law
N°3883 of 1977, this is an ancillary act to Sub Section
vii. of the Civil Code, it defines the purpose of the
Public Registry as “to guarantee the security of
recorded assets and rights with respect to third parties.
This is to be achieved by the publicity of such assets
and rights. In reference to the processing of documents,
its purpose is to record them.”; it establishes
a centralized system for reception and processing of
documents, uniform recording criteria and due diligence
principles for document's recordation and user's appeals
of Registry decisions (ocursos); it also imposes a duty
upon the Registry on the creation, enhancement and supervision
of security mechanisms. It delegates further regulation
to the Public Registry Regulations, or Decree N°26771-J
of 1998, which sets and deals with resulting registration
technicalities.
d) The
Urban Code:
This codex
is a recollection of several laws, regulations and a
declaration, regulating land subdivision, urbanization,
development and related zoning and housing issues, which
are conventionally classified as: i. Planning and Zoning;
ii. Housing and Public Sector; iii. Construction and
Urbanization; iv. Public ways; and v. Urban Property.
We will briefly describe the most outstanding ones:
- Urban
Planning Law: or
Law N°4240 of 1968, revolves around a major concept
called “National Plan for Urban Development”,
assigns several functions to the National Housing
and Urban Institute (INVU), the Municipalities and
other government agencies particularly related with
the subject.
- Regulation
for the National Control of Land Subdivisions and
Urbanizations: This
is an INVU Ordinance from 1982, it has two important
definitions that trigger the whole chapter: "Land
Subdivision: the subdivision of any field with the
purpose to sell, transfer, negotiate, deliver, exploit
or use in a separate manner, the resulting parcels;
inclusive of judicial or non-judicial awards subdivisions,
localization of undivided rights and simple subdivisions
by owner…" and "Urbanization:
The subdivision and preparation of a field for urban
purposes through the opening of streets and the provision
of services." It sets a body of technical
standards and requirements that said land developments
must comply with. Under article II.2.1.5. there is
an exception to the rule for what the Regulation
defines as “Agricultural Parcels” ie.
parcels located in a qualified zone greater than
10 thousand square meters.
- Law
of Constructions and its Regulations: This
is Decree N°833 of 1949 with amendments and modifications.
It recognizes the necessity of cities and other populated
areas to have minimum security, health, comfort and
esthetic levels in the public ways and constructions,
and delegates such regulation to the respective Municipality
where the land is located without prejudice to the
authority of other agencies.
- Regulation
of Condominium Ownership Law: or
Law N°7933 of 1999, this is the equivalent of the
Condominium Act in the US or Canada although much
simpler and generic. It defines the Condominium Property
Regime, its standards and requirements and procedures
for submission. It also establishes the rights and
duties of the owners and other due diligence issues.
e) Maritime
Terrestrial Zone Law and its Regulations:
Law N°6043
of 1977, defines the Maritime Terrestrial Zone as part
of the national patrimony, belonging to the state of
Costa Rica, unalienable and unrenounceable. It is subdivided
in Public Zone: a 50 meter strip of land counted from
the ordinary high tide and surface land during low tide
(conventionally known as the beach); and Restricted Zone:
constitutes the remaining 150 meters land strip or the
remaining surface in the islands. The Restricted Zone
is under the administration of the nearest Municipality
with the supervision of the Costa Rican Tourism Board
(I.C.T.).
- Concession: The
Restricted Zone can be granted in concession by the
Municipality in terms not less than five years and
not greater than 20 years, renewable indefinitely upon
request by the concessionaire, in accordance to this
Law except the exceptions thereto established. Concessions
in tourist areas require the approval of ICT and in
the other zones the approval of the Agrarian Development
Institute (I.D.A.), and always the Housing and Zoning
Institute (INVU) approval, both institutions cannot
deny the approval unless the concession violates the
Law.
- Concession
Title: The
land where concession is given is patrimony of the
Costa Rican State, the Municipality does not own
title to concessions, as Administrator they are responsible
for the enforcement of the Maritime Terrestrial Zone
Law, the development and use of the maritime terrestrial
zone, and they are custodians to zones where a concession
has not been granted.
- Under
article 47 there is a prohibition to grant concessions
to:
- foreigners who have less than five (5) years of legal residency in
the country.
- corporations with bearer shares.
- foreign entities (corporations or companies).
- domestic entities established by foreigners.
- entities which more than 50% of the shares or stock is owned by foreign
owners*. * Under article 47 entities owning a concession, or their
shareholders, cannot transfer or yield stock or shares to foreigners.
Any acts in breach of this provision are regarded to be null and void
by the Law. Note: The exposure resulting from article 47 can
be minimized to acceptable levels through the use of specially customized
entities like a Family Limited Partnership that a knowledgeable attorney
could produce.
f) The
Notary Code:
Law N°7764
of April/1998, this law has more than 190 articles divided
in chapters on Organization of Notarial Activity, the
Notary Function, Notarial Documents, Validity of Public
Instruments, Non Adversarial Legal Proceedings, Disciplinary
Regime of Notary Publics, and Miscellaneous Provisions,
it replaced the older and simpler Organic Law of Notarial
Activity with this more complex and regulated body of
norms. Commentators have agreed in the fact that it actually
revolutionized Notarial Activity and definitely enhanced
the Notary Public´s professional competence and responsibility.
It created the General Notary Board (Dirección General
de Notariado) as “a dependency of the Judicial
Branch … in order to organize adequately the notarial
activity and its supervision and control.”, furthermore
it introduced substantial reforms to a larger number
of Laws directly or indirectly related with Notarial
Activity and ownership rights (real rights) including
reforms to Law on Inscription of Documents in the Public
Registry, Law of Creation of the National Registry, Law
of the National Registry of Land Surveys, Law on Adverse
Possessions, Code of Commerce, Civil Code, Law of Public
Registry Tariffs, Civil Proceedings Code, Law of Taxes
on Real Estate Transfers, Municipal Code, and others,
setting higher standards of Notarial Activity in general.
In order
to put the foreign client into perspective on what the
Notary Public institution means in the Costa Rican legal
system, we can say that Notary Public´s competence and
responsibility is much more broader and higher than the
one of the Notary Public in the Common Law system, and
probably comparable to the rules regulating the Trustees
responsibility before the Trust Settler and Beneficiaries
under Common Law Trust Law. In general, the Notary Public
is a highly trained and qualified professional, who actually
ranks higher than a Law Attorney. In fact in order to
be a Notary Public it is required to be a fully licensed
Law Attorney but not vice versa.
Article
1 of the Notary Code defines Notarial Activity as “the
public function practiced privately … under which
the licensed officer (Notary Public) advises people about
the correct legal configuration of their will inside
the juridical acts or contracts and attests to the existence
of facts happening before him (her).” And article
2 defines the Notary Public as “… the
professional at Law, specialist in Notary Law and Law
of Recordation of Titles, licensed legally to practice
notarial activity”. Under article 6 of the
Code Notary Publics are obligated to “advise
properly those who request their services pursuant, to
the correct legal configuration and expression of their
will into their juridical acts”.
Functions:
The Notary
Code assigns to Notary Publics the following competence
amongst other faculties:
To receive
the expressions of the will of the parties requesting
it and to adequate them to the juridical order.
To inform
the concerned parties about the legal value and consequences
of their waivers and legal encumbrances affecting their
assets.
To attest
to facts happening in their presence.
To issue
the documents relating to their activity.
To file
and pursue the legal actions or proceedings authorized
by the Law.
To advise
on legal and notarial issues.
To perform
the Public Registry searches and verifications pertaining
to a transaction.
To process
the registration of recordable documents.
To authenticate
signatures or finger prints.
To issue
certification statements.
Other
functions assigned by the Law.
Non
Adversarial Legal Proceedings:
Under
Chapter VI and as an attempt to ease the critical
load of paper work that the local Court System has
to deal with in general, the Notary Code authorizes
a type of court proceedings called Non Adversarial
Legal Proceedings (Actividad Judicial No Contensiosa)
to be handled by a Notary Public, this type of proceeding
is defined as such court proceedings where there
is no actual conflicting positions between the parties
involved, inclusive of Succession with and without
a will (ab intestato), child adoptions, localization
of joint ownership rights, joint assets´ division,
property boundaries´ demarcation and fixation of
markers and assignment of payments to commercial
paper.
Notarial
Certification (fe pública):
In
order to execute his/her functions the Notary Public
is given a so called “notarial certification” power
which is defined under article 31 as “the
presumption that the statements of the Notary consisting
of public instruments and other documents authorized
by him [her] are true.” This means that
whatever the Notary states in a document has to be
treated and is valid as true by the Law and any public
authority unless specifically and legally proved
otherwise (iuris tantum presumption).
Protocol
Book (protocolo):
The
protocol book is defined as “the set of
books or volumes order chronologically and numbered,
in which the Notary must insert the public instruments
[notarized deeds] containing the respective acts,
contracts and juridical facts submitted to his [her]
authorization.” The protocol book actually
belongs to the Notary Board and once they are filled
they must be “returned” to the National
Archive for definite custody and access by the public.
Whatever is signed by the parties in the protocol
book is presumed to be true by the Law (iuris tantum
presumption). The Notary must issue a certified transcript
(testimonio) of the original deed (escritura matriz)
to the parties involved and then file a transcript
to the respective Registry with a notarial security
tag and a slip from the bank with the respective
transaction´s taxes and tariffs cancelled.
Language:
Documents
written or inserted into the Protocol book must be
in Spanish language, however under Article 72 of
the Notary Code, if there is a party who does not
understand fully Spanish, the Notary must act in
the presence of an Official Translator or a Translator
acceptable to all the parties involved. This requirement
can be waived by the Notary under his/her sole responsibility
is he/she knows the respective foreign language.
Further more under article 109 of the Notary Code
Notaries can certify their own translations of documents
in foreign languages; and under article 395 of the
Civil Proceedings Code (Código Procesal Civil) any
party can submit to a court process any document
in a foreign language by attaching to it a translation
by an official translator or by a translator appointed
by the respective court.
Liability:
Notary
Publics are responsible for any failure to perform
their professional obligations and duties as well
for the violation of Laws and regulations under disciplinary,
civil and criminal liability. Disciplinary liability
is handled through the Notary Board Proceedings for
Complaints (Queja Notarial), civil and criminal liability
are declared by the respective and competent court.
Under the Code a special Notarial Guarantee Fund
has been created for the provision of funds to cover
resulting damages to clients.
Finally
but not least under article 167 is established the
obligation of the Notary to issue an official receipt
(factura timbrada) to every client for sums of money
received, properly outlining notary fees from transfer
taxes and tariffs. The Notaries must take an oath
under which they “vow
under the most sacred of their convictions to respect
the public order of the Republic of Costa Rica and
to practice Notarial Activity in a spirit and conscience
of full integrity, honesty and objectiveness.”
g)
Notary Fees, Transfer Taxes, Legal Stamps and Registry
Tariffs:
Every
real estate transaction involves the payment by the
parties involved of Notary Fees, Transfer Tax, Legal
Stamps and Tariffs. These sums are set by a wide
range of specific Laws, Decrees and Directives from
several different official authorities, due upon
filing of the notary transcript in the Public Registry,
and they are subject to change some times as court
case law, enactment of legislation or government
decrees vary them.
The
value used as a base for the payment of these sums
is the purchase price of the transaction, however
Law N°6999 Real Estate Transfers Tax operates under
the concept of the sum designated by the parties
in the transaction document, which is a rather discretional
and optional situation upon the transaction party/taxpayer
and very distinct from the imperative imposition
situation in which the “fair market valuation” method
places the transaction/taxpayer under the United
States Internal Revenue Code respective sub section
on Real Estate transfer tax. In other words the transaction
parties are free to stipulate a property price in
the notarized conveyance deed for the purposes of
its recording at the Property Registry. This sum
designated by the parties may be substituted by the
property fiscal value in the Registry of Property
Value transferred to the Property Registry by the
General Revenue Administration of Costa Rica under
the Notary Code. This means that the transfer taxes
and tariffs will be paid under either notarized conveyance
deed price or Registry value in the records whatever
is higher.
Real
Estate Transfer Tax is 1.5% of property value plus
about 1% on Registry Tariffs and Legal Tax Stamps
(timbres legales). The Notary Public´s fees have
been set at approximately 1.25% of the actual purchase
price by Decree N°20307-J from April 4th 1991. These
are minimum fees though and their purpose is to set
a minimum fee that the Notary Public must charge
for the transactions. The parties may negotiate a
higher sum for fees depending on transaction complexity
and due diligence required to record the transcript.
It is common practice that the parties, seller and
buyer split the transaction´s costs half and a half.
The Notary´s fees have priority over the transaction´s
taxes and tariffs. These expenses should be paid
in advance to the Notary Public or at transaction
closing.
Lawyer
Melvin Rojas Ugalde publishes periodically an updated
synthesis of applicable fees, taxes, tariffs and
legal tax stamps for legal and notarial services
in Spanish language called “Calculation Sheet
for Lawyers´ and Notaries´ Fees. Registry Tariffs,
Legal Tax Stamps and Others” (Tablas, Temas
y Cálculos sobre Honorarios de Abogados y Notarios,
Derechos de Registro, Timbres, Impuestos y Otros).
Note: Be
aware that fee rates are a traditional area of competition,
but competent professional service means more than
just price. Looking at legal service fees as the
only determinant in selecting consulting and representation
services, is not adequate as the only criteria; quality
of service from initial assessment, set up and right
through to post-establishment after-care - is critical
to ensure on-going client security and satisfaction.
This becomes even more important as exposure and
waste result from transactions not handled properly,
or where litigation management has to be taken in
account. It's no use saving a few hundred dollars
on fees only to find out that the service is deficient
when its quality is really put to the test.
II)
Due Diligence Processing of Real Estate Transactions
in Costa Rica:
These
are the set of steps and proceedings that must be
taken and performed in order to close a real estate
transaction and to have it be properly regisered
at the Property Registry. We will use the chronological
order method for our purpose.
a)
Title Search:
Property
titles are recorded under an automated title registration
system called “Matrícula de Folio Real”,
this is a composite number with one (1) digit for
the province, six (6) digits for the property number
and three (3) digits for joint ownership rights.
By searching this number is possible to obtain an
official Title Report (informe registral). This Report
displays the property's location, nature, boundaries,
surface area, survey number, owner's ID number, date
of closing and recording, preceding origination of
the property, and an outline of restrictions, limitations,
encumbrances or attachments against the property.
Therefore any claim or pretension against a real
estate property must be recorded in the Registry
under the Registral Publicity principle in order
to be binding upon third parties.
Registral
Publicity: This
principle arises under articles 267, 268, 455,
456 and 457 of the Civil Code and it established
the registration of acts and contracts in the Public
Registry (as an attachment to a property title)
as a legal requirement for them to be binding upon
third parties. Otherwise the buyer who buys a property
with its title as is in the Registry is presumed
to have purchased it in good faith (bona fides)
and shall not be liable before third parties with
non recorded claims against the property.
b)
Daily Data: (Citas de Diario):
Each
end every document ever filed to the Registry is
assigned an individual electronic daily number for
its identification. Since documents are microfilmed
or scanned it is then possible to obtain an official
copy of the original document from the Registry by
knowing those numbers. So if there is an encumbrance
or attachment against the title, it will bear the
Daily Data numbers next to it for its proper identification
and reproduction.
c)
Notarized Property Conveyance Deed (Escritura Notarial
de Traspaso de Propiedad):
This
is the document required by the law (under article
450 of the Civil Code) in order to convey real estate
property. It is a property transaction contract drafted
by the Notary Public in the Protocol Book containing
a full identification of the parties involved, a
full description of the property and the transaction
details and stipulations (purchase price, easements,
mortgages or other details of legal relevance). The
deed must be signed by the parties and then by the
Notary. An official transcript (testimonio) is then
issued by the Notary for recordation purposes. This
transcript must have the Notary´s security tag, raised
seal, signature and must be printed in a special
security paper. Transfer taxes, legal stamps and
fees are paid at Banco de Costa Rica (designated
bank for the Public Registry) and an official bank
slip is attached to the transcript in order to evidence
such payment.
d)
Recordation of the Deed (inscripción de la escritura):
The
Notary Public must then file the transcript in the
Daily of the Registry. The transcript is scanned
and then assigned to the respective Registrar under
a rotation system, for its qualification and recordation.
The Registrar will read and study the content of
the document. If it has 100% compliance with the
technical requirements for its recording the Registrar
will record it. If the document does not meet all
of technical requirements the Registrar types such “defects” in
the computer system (libro de defectos) and in the
transcript and returns it to the Notary´s file in
the Registry for its subsequent amendment and refiling
until definite registration.
e)
Amendment Process (subsanación de defectos):
This
is the means by which the Notary remedies any missing
information in the Deed or any incorrect data pursuant
to its compliance with technical recording criteria.
There are two types of amendments: i. Notarized
Footnote (razón notarial): this is a footnote
in the transcript that the Notary Public is authorized
to add to the document in order to comply with the
technical criteria, in regards to a defect of form
(for example a wrong boundary description or lack
of payment of legal stamps or tax) in the document,
and it does not modify the content (subject matter)
of the transaction. ii. Addenda to the Deed (escritura
adicional): This is an additional addendum to
the original deed necessary as a result of a defect
of content (a subject matter defect like wrong property
number or a different owner as the seller or an invalid
power of attorney). It must be signed by all the
parties involved and filled as an attachment to the
main Deed.
f)
Term for recordation:
The
term for recording varies often depending on: defects
in the deed, complexity of the document, the Notary
Public’s pursuit of the recording process,
registrar assigned to qualify and record the deed,
and the computer system at the Registry. Normally,
the process lasts 6 to 10 weeks. Once the document
is recorded the Registrar attaches a record sheet
with the title number, owner’s name and his/her
signature. A title report is then obtainable as well
displaying the new title with the new property owner.
Contributed by Lic. José Juan
Sánchez Chavarría, LL. M
http://www.firstam.com/
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