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 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.
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 on 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 the 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 No. 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 No. 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 to 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 No. 833 of 1949 with amendments and modifications. It recognizes the necessity of cities and other populated areas to have minimum security, health, comfort and aesthetic 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 No. 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 No. 6043 of 1977, defines the Maritime Terrestrial Zone as part of the national patrimony, belonging to the state of Costa Rica, unalienable and un-renounceable. 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 with 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 No. 7764 of April/1998, this law has more than 190 articles divided into 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 to 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 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".
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 fingerprints.
- 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 paperwork 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 are 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 canceled.
Documents written or inserted into the Protocol book must be in the 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. Furthermore 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 (Codigo 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.
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 sometimes 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 No. 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 subsection 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 No. 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 the 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 into 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 registered 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 of 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 to 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 the 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 filed as an attachment to the main Deed.
f) The 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.