Real Estate Title Protection in Mexico

New Rules

The North American Free Trade Agreement and the December 1993 passage of the new Foreign Investment Law in Mexico are causing U.S. developers, lenders, and investors to look more favorably at real estate investment in Mexico. The Foreign Investment Law liberalized foreign ownership in Mexican companies. It now allows direct foreign ownership of title to land in the restricted zone (50 km inland along the coast and 100 km along the border for commercial, industrial and hotel development, provided that foreign ownership is held through a Mexican corporation. Title to residential properties in the restricted zone can only be held by foreigners through a Mexican bank trust (fideicomiso). An initial bank trust term can be up to 50 years but it may be renewed upon expiration for another 50 years. With the increase in real estate activity, a not-so-foreign industry has emerged - title insurance on Mexico land.

The land registration, property recordation and title certification process in Mexico is good, a system very similar to the recording process used in the United States. The majority of Mexican states have multi-recording districts and each municipality has its own recording clerk.

Title Search

A title search in Mexico is usually done through a Mexican law firm. Underwriting requirements include a title history examination back to 1917, or to the sovereign of the land. The attorney verifies ownership and searches for liens, encumbrances and anything else that could affect the title. After the search is completed, the Mexican law firm prepares its legal opinion on the status of title. This includes the owner of record, easements, liens, restrictions and anything else pertinent to the property ownership, including all of the documents in the chain of title. The title examination process can normally be completed within 30 days. "Ejido" claims or expansions. Iabor liens, fideicomisos, property regularization and permitted use questions can pose different issues then those typically found in the U.S. However, any title defect or "hidden risk" (secret heir, misrepresentation, etc.) that can occur in the U.S. can also occur in Mexico.

The insurance underwriter examines the title opinion to determine the coverage to be issued by the title company. Commitments can be modified through endorsements and affirmative coverages with the underwriters' approval. The title company works closely with its customer and the customer's attorney to customize the policy.

Arbitration in U.S.

The policy is modeled after U.S. ALTA form policies. Usually the state of the insurer's domicile will govern the title insurance contract. Thus arbitration, if necessary, is handled in the U.S. under U.S. Iaw, rather than in Mexico. This may increase the comfort level of a U.S. purchaser or lender. The title commitment can be issued within 15 days of receipt of the legal opinion from Mexican counsel. The title policy will be issued immediately upon mutual agreement of the title company and the insured, simultaneously with recordation of the deed (escritura pública). There are no geographic or property-type restrictions on title policies issued on real estate in Mexico. In the majority of cases, insuring a property will cost about 1% of the value of the property.

Prudent Decision

Purchasing title insurance is a prudent decision. Without title insurance, if a title defect arises and the buyer suffers a financial loss it may be very difficult to recover such loss in a Mexican Court from anyone, no matter what the circumstances.

During the next several years, the title insurance industry will expand its importance in Mexico as development activity increases. This expansion will assist in the creation of a flourishing Mexican mortgage industry and a secondary mortgage market system similar to those in the U.S. Investors in mortgages will require the assurance that title to the real property backing the mortgage securities is valid and insured by a financially sound title insurance company. The availability of title insurance will help to increase the flow of foreign capital into the country and thus contribute to Mexico's economic expansion.

by Mitch Creekmore & Hector Barraza, Stewart Title Guaranty Company - Mexico Division, Houston.

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