Costa Rican Mortgages and Financing

Find out about how mortgages and financing in Costa Rica works.

Learn about ways you can finance the purchase of a home or business. Also, ways you can invest profitably by making loans secured by real property.

Here you will find your protection under the law as a borrower or lender and the legal forms loans can take.

Mortgages and Financing in Costa Rica

Disclaimer: This paper intends to deliver a basic and comprehensive assessment, of general and basic legal aspects incident to the secured interest on real estate in Costa Rica, for information purposes only and is not intended as a substitute for 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.

The security interest is defined for the purpose of this summary as creditor's security for the payment or performance of a debtor's obligation. There are different options for securing a loan between a lender and a borrower; we will briefly assess their characteristics and advantages.

The Mortgage:

The mortgage contract is regulated by articles 409 to 425 of the Civil Code of Costa Rica from the year 1888. Under the mortgage contract the Borrower imposes an encumbrance against a real property to the order of the Lender, for example, a first-degree mortgage, affecting and subjecting the property and its title to the payment or performance of the Borrower's obligation, and therefore agreeing to the property being foreclosed upon Borrower's default.

Structure: The typical mortgage contract identifies the Borrower and Lender, states the financial elements of the operation: sum lent or principal, interests whether current and/or arrears, schedule of payment of both principal and interests, establishes the mortgage encumbrance against a real estate property and acknowledges certain waivers from the Borrower regarding an eventual enforcement of the Mortgage Contract by Lender.

Recordation: The Mortgage Contract has to be granted and signed in a Notarized Deed (escritura p?blica) drafted and authorised by a Notary Public in the protocol book, the signatures of the Borrower and the owner of the real estate property encumbered are necessary, unlike the signature of the Lender, for the constitution of the Mortgage Contract. Once signed, a notarized transcript of the Mortgage Contract has to be filled in the Public Registry: Real Estate Department and must be recorded. A Public Registry Recordation Fee of approximately 0.3% to 0.4% of the mortgage sum is to be paid in order to get the Mortgage Contract recorded. Once filed a Registrar will review the document and its regulatory compliance, and then either request any amendment or enhancement from the notary public or the parties or record it in the title as an encumbrance to the title. Once filed, it is possible to obtain certified scanned copies of the document by the Public Registry.

Enforcement: In the event that the Debtor defaults, the Lender is entitled to enforce the mortgage through a judicial action established under special section articles 629 to 673 of the Civil Procedure Code of Costa Rica entitled "Procesos Ejecutivos" which are summary judicial procedures. The Lender must file a writ stating to the judge the default situation and soliciting a date for the foreclosure. The writ must be accompanied by an official copy of the mortgage contract, a title report of the property showing the mortgage attachment and the required legal stamps. The judge will assess the documents and if rendered accurate, a preliminary judgment resolution is issued to: notify the debtor of the action; designate a date and terms for the foreclosure sale; and state the owed amount for the foreclosure (usually it is the principal). This notification will inform the debtor that he has a limited period of time to respond challenging the right of the lender to foreclose. There are only three admissible defenses: payment of the principal; forgery of the document; or statute of limitation on the mortgage contract. Finally, the judge orders the court clerk to publish the official announcement of the foreclosure in the Judicial Bulletin ("Edicto de Remate").

Foreclosure: An auction at the desk of the respective courthouse, at the time and date published in the Edicto, is held. If the process has been normal, the foreclosure is effective immediately after the auction. Bidders must show up on time and deposit 10% of the principal in order to participate in the auction. The balance of the foreclosure process is due upon confirmation of the foreclosure by a judicial order. If the debtor files a motion with defenses, the foreclosure takes place, but under a stay ("Efecto Suspensivo") and will become effective after the judge rules on the defense motions filed by the debtor. If the debtor participates in the foreclosure sale, he/she always has preference over third-party bidders. If there are no bidders, the Lender must ask for a second date for another auction under the same terms, and if there is no bidding on the second date, the Judge awards the property to the Lender.

Conclusion: The mortgage contract has been the traditional instrument to secure the interest of the Lender, used in Costa Rica for over one hundred years, and even today by the great majority of commercial parties, including banks and money lenders. It can be qualified as a traditional and safe instrument to secure a financial transaction. Some commentators have criticised though, the fact that it triggers the real estate transfer tax in a purchase transaction (2,5% of the stated priced in the Notarized Transfer Deed), which can be burdensome; especially on transactions with higher sums involved. Another argument are the enforcement judicial actions that usually involve longer terms and legal fees.

The Secured Interest Trust:

The trust in general is regulated by articles 633 to 662 of the Code of Commerce of Costa Rica dated from year 1964. Under 633 the trust is defined as Trust Concept: the Settlor transfers to the Trustee the ownership of assets or rights; the Trustee is obligated to use them for the performance of legal purposes previously established in the Trust Act.  Furthermore under 634, the Code establishes "The assets in trust become an autonomous estate separated for the purposes of the trust." A Secured Interest Trust, is therefore a special purpose trust, into which the ownership of stock of a holding entity (such as a corporation or a limited liability company) is transferred in an irrevocable manner by the Settlor to one or more Trustees, for the accomplishment of a specific purpose: the subsequent transfer by the Trustee of the ownership of the stock, by executing the irrevocable instructions, to the Beneficiary of the Trust, pursuant to the earlier of two possible scenarios: the Buyer performing the obligation; or, the Buyer defaulting the obligation, in which case the Beneficiary of the trust will be the Seller and/or Buyer, depending in their respective equity participation.

Structure: The structure of a trust set up for the purpose of securing a financial operation such as a loan, is rather more complex than a simple mortgage contract with some strategic advantages that we will see in the conclusion of this part.

  1. Settlor or Grantor: are the Lender and Borrower of the money, who transfer the totality of the stock of the Holding Entity that owns the real estate asset (a house, a condo, an apartment or else) to the Trustee, in strict consistency with the Trust Governing Instrument?s terms and conditions (hereby "the Agreement").
  2. Agreement: The Agreement identifies the parties, the Holding Entity, the property and the purchase price, sets the loan sum, method and schedule for payments, interests, penalties and a default provision, issues an irrevocable stock power of attorney to the Trustee, and any other relevant terms such as force majeure, provision to cure, duress, liquidated damages, arbitration and others. Under the default provision, the Agreement commissions the Trustee to take over the control of the Holding Entity and its property and sell it in the market at a price not less than the sum of the loan. Proceeds from the sale are to be distributed between the Borrower and Lender proportionately to their equity over the financing operation, thus if the Borrower defaults at 50% of payment schedule, the Borrower gets 50% from the proceeds and the Lender gets 50%.
  3. The Trustee or Co-Trustees: Is one or more individuals, who receive the stock of the Holding Entity in trust, for the purpose of its custody, holding and eventual transfer to the Buyer if Buyer performs the obligation, or to a third Buyer of Lender under a Borrower default scenario. The Trustee is bound by the Agreement and has the obligation to act as a "good father of the family" in respect to the assets in the trust. Typically the trustee will be one or more attorneys at law with qualified knowledge of trust and real property law.
  4. Holding Entity: It's a corporation (Sociedad Anonima) or Limited Liability Company (Sociedad Limitada) incorporated in Costa Rica and used as a vehicle to hold the property purchased by the Borrower from the Seller. Since the transaction implies 3 parties a Seller selling the property, a Buyer buying the property (also named here Borrower), and a Lender lending money to the Buyer, the Holding Entity will be customized to keep the property locked under a trusted environment, thus securing the equity and the interests of the Lender. The Buyer is appointed as a director of the Holding Entity for administrative purposes, but the Trustee controls it within the provisions of the Agreement. Upon full completion of payment of the loan by Buyer, the Trustee conveys to the Buyer ownership and control of the Holding Entity by executing the Irrevocable Stock Power of Attorney. In a default scenario, the Trustee takes control and performs a sale of the property to a third buyer, then distributes the proceeds accordingly.
  5. - Irrevocable Stock Power of Attorney: It's the mandate by which the Settlors of the Agreement convey power and authority to the Trustee to determine over the stock of the Holding Company.

Recordation: The Agreement is in the form of a private document signed by the parties and ratified in the minutes of the Holding Entity. The property is transferred from Seller to the Holding Entity free and clear and at a nominal price thus minimizing the real estate transfer tax impact.

Enforcement: Since the control is yielded to the Trustee, the enforcement procedure of an eventual default scenario implies the simple sale of the property to a third buyer and the distribution of the proceeds accordingly between Lender and Borrower.

Optional: The versatility of the trust concept, allows for a full range of contractual options that the parties can agree upon to achieve specific results, for example: estate planning solutions to secure continuity and non-disturbance in case one of the party dies, tax deferral strategies in order to defer the taxation date or move to lower tax brackets, asset protection planning in order to insulate the equity from future plaintiffs and other sophisticated techniques.

Conclusion: The Secured Interest Trust concept is as safe as the mortgage contract, more complex in terms of documentation and set up, but more versatile, more economical and with a simpler enforcement resource.

Retro purchase Contract:

This is a contract by which the Borrower sells to the Lender the property or assets, with a promise from the Lender to sell it back to the Borrower upon full payment of the loan. This figure, though very safe for the Lender, has been repealed by Debtors through litigation in Costa Rica and therefore is not enforceable in court.

Mortgage Bond:(Cédula Hipotecaria)

Regulated by sections 426 to 440 of the Civil Code. This is a mortgage obligation that the owner of a real estate property issues against the property before the Public Registry and is represented by a Title issued by the Registry. This title is treated as a security by the Costa Rican legislation, and therefore can be transferred by endorsement and can be issued to the bearer. Similar to the Mortgage Contract as far as enforcement.

Bill of Exchange and Promissory Note:

These are commercial papers with a certain degree of recognition by procedural law, (so called "títulos ejecutivos" under Costa Rican procedural legislation), used generally in commercial transactions between traders and business people with a certain degree of trust and credibility. Are not subject to recordation procedure necessarily which makes them fit for dynamic transactions. Since their enforcement is not directly bound to a real estate property their level of security is lower than the mortgage or trust agreement.

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