The Real Property Trust in Mexico

by Francisco Corrales

Reproduced with permission for the InterAm Database

National Law Center for Inter-American Free Trade

Introduction

This paper explores the creation and operation of the trust mechanism used in Mexico. Particular attention will be paid to its operation and application to foreign investment, as it applies to the ownership of real property.

The Players to the Deal:

At its most basic, a trust is a mechanism through which the Maker transfers ownership over property or rights over to a Trustee, who pursuant to instructions from the Maker, administers the property for the Beneficiary until the fulfillment of a stated objective, by agreement or by law.

The Maker:

The Maker is the party who creates the trust, transferring the property over to the Trustee and specifying what the purpose of the trust shall be. Often, the Maker will have ownership over the thing or right to be placed in trust, such as property to guarantee the performance of an obligation. However, with respect to foreign investment in Mexico through real property trusts, the Maker is the seller, who upon sale transfers of the property over to the Trustee for the Beneficiary buyer.

Mexican Law requires that the Maker of a trust be an individual or entity which is competent under Mexican law to effect the transfer of property or the rights thereto. Provided it is for a lawful end, and assuming the property is theirs to transfer, the Maker of the trust is given wide latitude for the construction of the trust. The Maker may designate and remove Beneficiaries and Trustees, and may name itself as the Beneficiary of the trust. The Maker may also reserve any or all rights of action that accrue by virtue of the Trustee's obligations. The options which the Maker chooses will be reflected in the agreement with the Trustee which creates the trust.

A Maker may extinguish the trust created when the right to do so is reserved, but is precluded from doing so in some instances, such as where the trust is classified as "irrevocable". Upon the extinguishing of the trust, the property or rights in trust revert back to the Maker, or its heirs, unless the purpose for the trust is accomplished, thereupon which it goes to the beneficiary.

2. The Trustee

In the operation of a trust, the Trustee is the party in whose care the property or rights are placed in. The Trustee is charged with the administering that which is placed in trust, as per the agreement with the Maker and operation of law.

The Trustee must be a financial institution duly authorized by the Federal government to engage in trust operations which are found in the Law of Credit Institutions. Federal government authorization consists of the discretionary approval of the Finance Ministry, which consults the Bank of Mexico and the National Banking Commission. Subject to the document creating the trust, if there is no acting Trustee, one must be appointed or the trust extinguishes. If their is no named Trustee in the document creating the trust, the Beneficiary must select one, or it is done by a judge in the property's jurisdiction.

Under Mexican law, a Trustee institution may execute, refuse to accept or be removed from the performance of its obligations. If undertaken, the Trustee is empowered with the rights and actions to administer the trust for the accomplishment of its purpose, subject to the terms and conditions of the trust agreement.

There are also several corresponding obligations on the Trustee in order to prevent abuse. The Trustee must adhere to the terms of the trust agreement and cannot resign as Trustee except for serious causes and only with the approval of a judge. The Trustee must exercise due care to preserve the property or rights in trust because it will be liable for any losses or damages due to its negligence.

On the institutional level, the authorized Trustee institution must carry out its trust operations by means of its Trustee representatives, which are themselves authorized by the Mexican government. The staff of the trust department may not operate in the rendering of other financial services or operate with the other departments of the Trustee institution. A Trustee may not be named as a Beneficiary in any trust that it oversees, or else it is nullified. The Trustee must also keep a separate accounting for each trust constituted and cannot use the property in trust to further any other ends than those specified in the trust agreement.

3. The Beneficiary:

The Beneficiary of a trust is the party who receives the benefit of the trust, either through the express wish of the Maker or the operation of the trust.

An individual or legal entity may be a beneficiary of the trust, provided that it possesses the legal capacity to enjoy the benefits of the trust under Mexican Law. In addition to those rights accorded the beneficiary by way of the trust agreement, the rights of a beneficiary include: the right to force the Trustee's compliance with the trust agreement; the right to attack the legal validity of any acts by the Trustee which are detrimental to the beneficiary, in bad faith or in excess of their Trustee powers, and the right to recover the property which was taken out of the trust. The recovered property goes back in trust.

There may be several Beneficiaries to a trust, or none at all. When there are several beneficiaries, it is necessary that there be a decision reached by majority agreement in order to exercise those rights and decisions not contemplated by the trust agreement. Subject to the agreement creating the trust, the Beneficiary gets any remainder of the trust that is extinguished by the accomplishment of its purpose.

On The Legal Framework of the Mexican Trust:

A. Historical Background:

The Mexican trust began its development as a series of projects. It first appeared in Mexican law in 1926, in the General Law of Credit Institutions and Banking Establishments, with the features of the Anglo-Saxon trust used in Great Britain and the United States.

B. The Law of Credit Instruments and Credit Operations

The Law of Credit Instruments and Credit Operations was the first Federal legislation that addressed the component parts of the trust and how it functions. Under its provisions, all trusts are commercial acts in nature. A person may create a trust by will or through a public deed. A trust is required to have a definite purpose, which must be lawful. A trust meeting these two requirements will be presumed valid, even if there is no beneficiary named.

All trusts must be in writing, Any kind of property may be put in trust. Rights may also be placed in trust, except for those whose alienation are prohibited by law. If the trust involves real property, there is an obligation to register the trust in the Registry of Public Property, in order to become binding on third parties. In any event, trusts constituted through fraud enables a third party to attack its validity.

Trusts may extinguish for a variety of reasons: the purpose for their creation may either be accomplished or deemed impossible; the Maker of the trust may revoke it, when the right to do so is reserved; when no Trustee can be appointed; or on written agreement between the Trustee and Maker. When it extinguishes, the property or rights in trust revert back to the Maker of the Trust, or its heirs.

The Law of Credit Instruments and Credit Operations prohibits secret trusts, which can be attacked through the writing requirement, the constructive notice requirement, or the various obligations and duties imposed on the Trustee. The Law also prohibits transfers in perpetuity, limiting the term to any life in being or in conception at the time of the death of the Maker. The maximum term a trust may operate for is set at 30 years.

C. The Law of Credit Institutions

Under Mexican law, the Trustee must be a Mexican entity regulated by the Law of Credit Institutions, which states that only those Mexican credit institutions duly authorized by the Mexican government can engage in those trust operations mentioned in the Law of Instruments and Credit Operations, The Trustee credit institution will engage in these services only through its duly authorized representatives.

The Fideicomiso in the Foreign Investment Arena:

The evolution of the real property trust for foreign investment in Mexico is best explained by looking at the historical evolution and treatment of foreign investment in Mexico.

1. The Constitution of 1917

The Constitution of Mexico directly resulted from the Civil war that had been fought. One of the key tenets of the revolution was the desire for land ownership for the common man, which could only be effectuated through a redistribution of the land. It was in direct response to the perceived exploitation of the land and natural resources of Mexico by foreign elements, mostly from the United States, Great Britain and France and the failure of the benefits of that economic development to reach the common people. Consequently, the Constitution contained egalitarian provisions designed to promote social welfare for the Mexican people. The provisions for land ownership are contained in Article 27.

Article 27 begins by stating that original title to all lands and waters is vested in the nation of Mexico. The nation may transfer ownership rights to private persons and thereby create private property. Mexicans have the right to acquire ownership over real property in Mexico. Foreigners do not have the right to acquire property in Mexico, but may do so if the Mexican government so grants them. But in order to so qualify, Foreigners must agree to waive all protections of their home country and agree to Mexico's exclusive jurisdiction in all matters related to the acquisition. This is done through the execution of an affidavit agreement with the Foreign Ministry.

A final point on the Constitution: under no circumstances were foreigners allowed to acquire ownership rights over real property situated within 50 kilometers of the coastline and 100 kilometers from its national borders.

2. The Presidential Agreement of 1971:

The introduction of the trust mechanism into the area of foreign investment began in the administration of President Luis Echeverria. In the preceding years, foreign investment had gone through a case by case screening process to determine its approval.

Now, in order to develop Mexico's industrial and tourism infrastructure, the Ministry authorized duly certified Mexican financial institutions to acquire title to real property as trustee in the name of the beneficiary foreign investor, who acquired beneficiary rights to use and profit from the real property without constituting ownership rights.

In response to the Agreement, the Mexican banking sector began to set up offices in key industrial and tourist cities to offer fiduciary services.

[Note: The 1971 Agreement was Repealed by the 1989 Regulations to the Foreign Investment Law]

3. The Law to Promote Mexican Investment and Regulate Foreign Investment:

In 1973, Mexico enacted its first legislation attempting to comprehensively address foreign investment. The Law limited foreign participation in the management and control of an enterprise to the percentage of its capital contribution, and in any event to 49%. Foreign investment was prohibited in a variety of sectors. which were reserved for participation by Mexican investment.

To continue the controlled development of select areas of its infrastructure with foreign capital, Mexico allowed foreign investment to acquire the rights to the use and profits from real property located along the border and coastline of Mexico by means of the irrevocable trust held through a duly certified Mexican financial institution . The purpose of the trust had to be commercial or industrial in nature and no ownership rights were acquired. In order that the Trustee institution could purchase the property for the Beneficiary foreign buyer, authorization by Mexico was needed beforehand in the form of a permit by the Foreign Ministry. The National Commission on Foreign Investment was created to coordinate participation among the government ministries, which consulted the Foreign Ministry on granting authorization. Upon authorization the property was purchased by the fiduciary institution which issued nontransferable certificate(s) of participation to the beneficiary foreign investor, whose rights could last up to a maximum of 30 years. The transaction had to be registered with the National Registry of Foreign Investments.

[Note: The 1973 Foreign Investment Law was repealed by the 1993 Foreign Investment Law]

4. Regulation to The Law to Promote Mexican Investment and Regulate Foreign Investment:

Mexico was in its sixth year of economic reform when President Salinas issued the Foreign Investment Regulations. These regulations were issued in supplement of the 1973 Foreign Investment Law and are still in force. The major change is its provision which allows for up to 100% foreign investment in a newly created Mexican company which operates in certain sectors left unclassified by the 1973 Foreign Investment Law, upon meeting six conditions.

The Regulations address foreign acquisition of Real Property in Mexico and the requisite authorization process . The 100 km/ 50 km strip of land is now called the Restricted Zone. Foreign investors are given guidance as to what are the industrial and tourist purposes permitting the acquisition of rights in this zone. They also clarify the rights of use and profit that the beneficiary foreign investor acquires through the required trust. One year before expiration of the 30 year term, when the parties to and the terms of the original trust agreement are the same, application for a new 30 year trust over the same real property may be made, with automatic approval from the Foreign Ministry.

The registration process for real property trusts is also clarified. Registry of real property trusts is made in Section III of the National Registry of Foreign Investments by the Trustee institution within 60 days after the creation of the trust or the acquisition of rights by the Beneficiary Foreign investor. The information required for proper registration and the time within which it should be furnished is also clarified.

[Note: The 1989 Regulations were repealed by the 1993 Foreign Investment Law in areas which contradict it]

5. The North American Free Trade Agreement:

The agreement, which went into force on January 1st, 1994, makes Mexico, Canada and the United States the largest trading bloc in the world. The NAFTA covers among other things: tariffs, rules of origin, standards and dispute settlement procedures.

In the area of foreign investment, the three parties agree to give each other's investors and their investments the better of the treatment they give to their Most Favored trading partner or the same treatment as they do their own nationals. This would have allowed Canadian and American Investors the ability to circumvent the trust requirement and acquire ownership rights over real property in the Restricted Zone since it is given to Mexicans by right. However, Mexico negotiated a reservation from these provisions, maintaining the Constitution's Article 27 prohibition on direct title for foreigners in the Restricted Zone.

The threshold requirements for review from the National Commission on Foreign Investment have also been adjusted for American and Canadian interests: for the years 1994-96, the threshold level to trigger review is at $US 25 Million; for the years 1997-99, it is 50 Million; 2000-2002, 75 Million; and after 2003, the level is set at 150 Million.

6. The Foreign Investment Law:

On December 27, 1993, Mexico enacted a new comprehensive law dealing with its treatment of foreign investment. The Foreign Investment Law was signed by President Carlos Salinas and printed in the Official Government Daily the same day the NAFTA and its implementing legislation was adopted by the United States, the final partner to do so. The provisions detail Mexico's policy of opening itself up to foreign investment to foster its development and bring itself more into the world economy. Its basic contrast with the Foreign Investment Law of 1973 is simple: rather than prohibiting foreign investment as a general rule and carving out exceptions where foreign investment may be made, the Law opens Mexico to foreign investment as a general rule and carves out exceptions where foreign investment is either prohibited or regulated.

In the area of Real Property, the Law gives Foreign Investment the right to acquire ownership rights over real property in the Restricted Zone, provided three basic conditions are met: (1) it must be for nonresidential purposes, (2) it must be through the vehicle of a Mexican company and (3) the transaction must be registered with the Ministry of Foreign Relations. Acquisition of real property by a Mexican company with foreign investment for purposes deemed residential must be undertaken through a trust mechanism through an authorized Credit Institution. Foreign Ministry permission is required for the institution to acquire the land. The trust gives the Mexican company, as beneficiary, the rights to the use and profit from the land, without acquiring ownership rights.

If the foreign investor chooses to make the investment itself, for whatever purpose, a trust mechanism through a certified Credit Institution is required, with permission form the Foreign Relations Ministry needed for the institution to acquire the real property as Trustee. The trust gives the Beneficiary foreign investor the rights to the use and profit from the land without acquiring ownership rights.

As mentioned, registration with the Foreign Ministry is accomplished through the National Registry of Foreign Investments. All trusts involving real property in the Restricted Zone must be registered in Section 3 of the Registry. It is the duty of the Trustee institution to register the acquisition with the National Registry of Foreign Investments within 40 business days after the occurrence of a triggering event. The information required for proper registration is also clarified. When the registration requirements have been met, the National Registry of Foreign Investments must issue a certificate of registration. The registration is subject to an annual renewal by the Ministry of Foreign Relations.

The trusts created under these provisions are good for up to 50 years , an extension of the 30 year terms allowed in the 1973 Foreign Investment Law and the General Law of Credit Instruments and Credit Operations. They may be renewed for up to another 50 years at the request of an interested party.

This new legal framework gives the foreign investor the ability to acquire ownership rights over real property located in the Restricted Zone, while giving Mexico the ability to regulate its development via jurisdiction over the nationals making the investment The Ministry of Foreign Relations is given the lead role in the regulation of foreign investment. For example, all parties (Mexicans and foreigners) need Ministry authorization to constitute a Mexican company and during this process, the newly created entity much choose 1 of 2 options: adoption of the Exclusion of Foreigners Clause or the execution of the Art 27 Calvo agreement. Foreigners who regularly operate in Mexico and Mexican companies with foreign investment must also register with the Ministry's National Registry of Foreign Investments. Existing Mexican companies need Ministry permission to change their Exclusion of Foreigners Clause . Presumably, upon the admission of foreign investment, the company must then make the Article 27 agreement in order to acquire real property or rights thereto in Mexico. The Ministry reserves the right to verify compliance on any matter associated with the trust permits.

The Law has prescribed time limits for the Ministry of Foreign Relations. The permit for the credit institution to acquire title to the land as Trustee must be granted or denied within 30 business days of the application or it is deemed automatically granted. The registration of the acquisition into the National Registry of Foreign Investments must be within 15 business days of its application for registration or it is deemed automatically granted.

The Law also prescribes sanctions for the contravention of its provisions. Anyone involved in an effort to transfer ownership rights over to foreign investment in violation of the relevant provisions of the Law may be subject to fines from the Ministry of Commerce and Industrial Development up to the amount of the transaction, in addition to possible civil and criminal penalties.

Conclusion:

Two years after entry into force of the NAFTA and one year after the economic crisis brought on by the peso devaluation, Mexico finds itself in the midst of an economic crisis. The administration of President Ernesto Zedillo finds itself in the midst of a difficult paradox: on the one hand, a weak peso proves favorable for Mexico's export industry, earning hard currency, yet makes domestic savings impossible, which is needed to lower Mexico's interest rates. Foreign capital will be needed for the recovery.

Having learned its lessons in the past year as to the speed with which foreign portfolio investment can leave the country, Mexico will be promoting foreign direct investment, one tenet of which is the acquisition of Real Property. And with the majority of foreign investment along the borders and coasts of Mexico, foreign investors must be made aware of the real property trust in order to properly plan a foreign investment strategy.