The development of real estate projects, including hotels and master planned communities in Los Cabos and other places in Mexico, commonly requires financing by banks and other institutional lenders. This article presents an overview of some key aspects that cross-border lenders should consider when lending and taking security in Mexico.
The main parties to a real estate loan transaction in Mexico are the lender and the borrower. There may be more than one of each and also one or more guarantors. The lender typically takes security over real property by way of a security trust or a mortgage and may also require taking security over the borrower’s shares or equity interests through a security trust or pledge. Personal property, including accounts receivable, intellectual property, equipment and inventory are often encumbered through a security trust or non-possessory pledge. While Mexico does not have a general usury statute, the Mexican courts have found some exorbitant interest rates to amount to usury and have resolved to reduce the corresponding interest based on several factors. As a general rule, lenders are not required to be registered or licensed by any governmental entity in Mexico to lend to local borrowers or to take security in Mexico. Further, there are currently no exchange controls in Mexico and payments of interest to foreign lenders are generally subject to withholding tax at a rate that generally varies from 4.9 percent to 35 percent.
Basic Loan Documentation
Loans are evidenced by a loan agreement with standard provisions, including representations and warranties by the borrower, affirmative and negative covenants and the events of default that authorize the lender to demand payment of the loan and foreclose against security or take other enforcement action. In cross-border loans involving U.S.-based lenders, the loan agreement is often governed by the laws of New York or California. Each drawdown is normally documented by means of a promissory note (pagaré) governed by Mexican law, which in case of default allows a lender to initiate a commercial summary proceeding against the borrower and seek the attachment of assets under such expedited procedure. The Mexico collateral documents must be governed by Mexican law and must comply with local formalities, including notarization and recordation.
Mortgage vs. Security Trust
Under either a mortgage or a security trust, the borrower typically retains the right to possess, use and operate the real property while the loan is not in default. The borrower also usually maintains the ability to sign contracts for the sale of units or lots being developed subject to certain approvals from the lender. The mortgage or security trust will identify events of default consistent with those specified in the loan agreement and will describe the actions the lender may take after default, including the right to foreclose on the collateral through the procedures contemplated by law.
One of the principal differences between a mortgage and a security trust is the foreclosure mechanism in case of default. A mortgage is enforced through a special mortgage procedure followed before the courts of the jurisdiction where the real property is located, and this procedure can take several months especially if the borrower challenges the foreclosure. In contrast, under a security trust, the lender has the option to foreclose through a non-judicial procedure under which the trustee —a Mexican financial institution— can sell the property through an out-of-court auction. Another significant difference is that in case of insolvency of the borrower, under a mortgage the encumbered assets continue to be owned by the borrower and the lender is deemed a secured creditor with priority over other creditors subject to limited exceptions. In a security trust, in turn, title to the collateral is actually conveyed by the borrower to the trustee and, thus, in case of insolvency of the borrower, the collateral does not form part of the borrower’s estate.
Recording, Fees, Costs and Expenses
A mortgage or security trust must be notarized and recorded with the local public property registry. Notary fees and recordation dues vary from state to state and are often expensive and calculated as a percentage of the secured obligations subject to a cap on recordation dues in some states. There are no documentary taxes or stamp duties in Mexico and acquisition taxes and value added taxes are assessed upon foreclosure.
The provision of security by a Mexican subsidiary of a borrower should be carefully structured to ensure that the subsidiary receives a corporate benefit or adequate consideration, otherwise the security can be considered void in case of insolvency.
Enforcement of Foreign Judgments
A foreign judgment is enforceable in Mexico if it meets a number of substantive and procedural requirements, including that the judgment is final and non-appealable, that the judgment does not contravene public policy of Mexico and that the defendant is properly served. Service of process by mail is not recognized in Mexico and might defeat enforcing a judgment. A lender typically requires a borrower to appoint a U.S.-based process agent to receive notices under the loan documents and to grant an irrevocable power of attorney to such process agent for said purposes.
Finally, it is worth noting that self-help remedies, like taking ownership of collateral in lieu of foreclosure without following the applicable statutory judicial or non-judicial procedure, are generally not enforceable in Mexico as a result of constitutional due process rights.