Buying Process - Real Estate Information

Purchasing Real Estate in Costa Rica

By Alvaro Carballo Pinto

A word of caution. When one of these annotations is found, extreme caution is advised.

Contents

About the Author
Foreword
Preface
The Legal System
Real Estate Records
Getting Professional Help
    Real Estate agents or brokers
    Attorneys and notaries
    Other professionals
Costs
The Purchase Process
Property in General
    Means of holding property
    Different property rights
    Titled and untitled property
Constitutional Protection of Private Property
Most Common Registered Liens and Encumbrances
    Liens
    Registered Mortgages
        Normal consensual mortgage
        Bond mortgage
        Considerations with reference to mortgage operations
        Judgment liens
    Unregistered Mortgages
        Legal mortgages or tax liens
Other Encumbrances
    Annotations.
    Easements.
    Leases.
    Water rights.
    Restrictions due to future roads or projected road expansions.
    Private roads converted into public roads.
    Zoning.
    Party walls
    Origin of title
    Squatters rights
    Mining code restrictions
    Ecological restrictions
    Construction restrictions
Special Cases
    Beachfront or Shoreline property
    Condominium property
Final Comments
Exhibit I
    Closing costs
Exhibit II
    Additional costs of mortgage
Exhibit III
    Check list
Some Common Real Estate Terms

About the Author

Alvaro Carballo-Pinto was born a Costa Rican. His family's ancestors can be traced in this country to the early 1800's. All his life he has been involved with real estate. He obtained his law degree from the University of Costa Rica School of Law, and his master's degree from the University of Miami School of Law.

He has been both a professor of Commercial and Real Estate Law. He served as Vice-Consul of Costa Rica in Miami, Florida, as legal counsel to the Free Zone Corporation, having drafted the original free zone law project. He also served as counsel to the Costa Rican Congress during its discussion and approval. He has also served as legal counsel to the Costa Rican Chamber of Agents of Foreign Companies, the Center for the Promotion of Exports and Investments, the Ministry of Natural Resources, Energy and Mines, and currently is legal counsel to the Costa Rican American Chamber of Commerce - AMCHAM.

Mr. Carballo has been a member of several commissions involved in planning for the economic development of Costa Rica, including the Trans-Isthmus Pipeline Commission, (Government of Costa Rica), Commission to study the Mining Code and its real estate effects, (Costa Rican Bar), Commission that drafted the law creating the Ministry of Natural Resources, Energy and Mines, and the Commission to create a High Technology Park in Costa Rica, among others.

Currently, he is a member of the Board of the Costa Rican American Chamber of Commerce - AMCHAM, and the Costa Rican Coalition of Development Initiatives - CINDE, an organization dedicated to further development and private investment in Costa Rica. He has been in the private practice of law for fifteen years and is a partner in the law firm of Carballo & Abogados.

Mr. Carballo is also co-author of "Investigation and Analysis to Further Development of the Draw Back Industry in Costa Rica", and "The Legal Structure Governing Foreign Investment in Costa Rica".

Foreword

The basic rights of all citizens in Costa Rica are respected by its society which has a well-developed tradition of democratic government. More importantly for foreigners, those same rights are extended in equal measure to all residents of the country. Few countries are so magnanimous in their treatment of foreign residents. This is the point my wife and I found most compelling in our decision to make our home in Costa Rica.

Unhappily, while this is true, the facts of life are that the differences in the legal system and ways of doing business in Costa Rica discriminate against those who do not understand them. Unfortunately, there are people who would use that lack of understanding to their advantage. Therefore, anyone wishing to make their home or otherwise invest in Costa Rica, faces a greater possibility of risk in their decision making process than they would in familiar circumstances.

My wife and I have been extraordinarily fortunate in our business dealings in Costa Rica. We have not had a single bad experience. Distressingly, some of our friends have not been so fortunate. We have been witness to several instances where good people fell on bad times because of misunderstandings or bad advice and/or unscrupulous operators -not necessarily Costa Ricans.

Several situations have made it clear to me that problems may develop not because the foreigners involved are either greedy or stupid, but rather because they "understood" something which was not true. A basic understanding of the Costa Rican system of property registration will solve many problems before they occur, and so will having a general idea of what is or is not part of a property development program. Infrastructure development in Costa Rica is usually far different from what we have known in our home countries. Problems with squatters and earthquakes are not issues we have normally experienced before.

It has become evident to me that people who wish to buy property in Costa Rica, for whatever reason, need some source of competent objective information. With certain exceptions, information is usually available if you know how to find it and have the time to do so. The difficulty comes from knowing where and how to look, interpreting the information obtained, and knowing whether it is reliable. Lamentably, most investors or home buyers rely on the same individuals promoting the investment to provide them with such information. This is a formula for disaster!

Obtaining reliable information from someone reputable who is not involved with the investment is a must. This guide is a good beginning to meet that need. It was written specifically to inform you about the process of purchasing land in Costa Rica. It will also help you understand the system and recognize its limitations as well as most of the risks you may face in making a property purchase here. It will not be everything you need, since you will still need competent help by specialized professionals and companies, but it should identify your needs better than you could otherwise.

This guide is simply the best source of information available on the subject of property investment in Costa Rica. You will find it easy to use and easy to understand. After reading it, you will probably develop a healthy skepticism, which will serve you well as you consider a property investment. My intention is not to overstate the problem; after all, my wife and I have our home here. My intention is to insure that you are able to have the same good luck we've had and enjoy your experience as much as we have. "COME ON IN, THE WATER'S FINE! " ... especially when you've had the right advice.

John F. McMerty
Brigadier General (Retired)
United States Air Force

Preface

This guide is intended to give its readers a general view of real estate transactions in Costa Rica. It is not a comprehensive treatise of Costa Rican real estate laws. No property transaction should be undertaken without the benefit of professional assistance.

The purchase of real estate is often one of the first transactions foreigners will undertake in Costa Rica. It can also be one of the most expensive. Taking the right steps in the beginning is the key to having it done right. Preventive medicine is the least costly and the most effective kind there is!

Costa Rica's civil law system of property transactions differs greatly from the common law system. It may seem complicated to many, but really it is not. Because of its unfamiliarity, however, foreigners can fall victims to its pitfalls.

This guide is intended to diminish some of the anxiety of purchasing real estate in a foreign country. It has also been written to make help available to those who wish to help themselves.

In the course of writing this guide I became aware of the need for an on-going source of objective reliable information for real estate investments in Costa Rica. In order to meet this need, I and several others have incorporated Propstdy S.A. which we intend will provide the services necessary for those who wish to invest in Costa Rican real estate. For further information you can contact Propstdy by faxing to (506) 55-4611 or writing to P.O. Box 10760-1000 San José Costa Rica.

I hope the information you find in this guide will help you count yourself among those many persons who live happily as property owners in this beautiful country.

I wish to specially thank Robert E. McBeath for demonstrating his patience while taking care of my innumerable grammatical errors as well as correcting my English. This guide would not have been possible without his help. I also wish to extend my gratitude to John McMerty who took the risk of writing a foreword to this guide, to Eduardo Valverde, my editor; and very specialy to Oscar Gallegos-Gurdián who taught me most of what I know of real estate law, and to many other persons who have had the patience and grace to provide their comments for this publication, and last but not least, to my wife, who lost countless hours of sleep while I wrote late into the night!

All comments which may help improve and add to this guide are welcome. Please address them to:

Purchasing Real Estate In Costa Rica
Fax: (506) 23-9151
Telephone: (506) 33-0186
P. O. Box 6997-1000
San José Costa Rica

The Legal System

Costa Rica has a Civil Law system, as opposed to a Common Law system, also referred to in the case of the United States as an Anglo-American law system.

Our country's original civil code, from which most of our other codes have in one way or another evolved, finds its origins in the Spanish Civil Code, which in turn derives from the French or Napoleonic Code. All these are based on Civil or Roman law.

Compared with the Anglo-American "Common Law" system, interpretation and application of the law under the "Civil Law" system is much more restricted. Precedent has little or no force and is used as clarification of the law only. There is less interpretation of the law by the judges. With one exception, the Constitutional Court or Constitutional Chamber of the Supreme Court, known as the "Sala Cuarta", jurisprudence is not compulsory.

For these reasons, foreigners are surprised to find that contracts in Costa Rica are not as comprehensive as they may be in their home countries. In Costa Rica, a contract covers only what the law does not mandate, while under the Common Law, contracts cover much more, since they have to allow for as little interpretation as possible.

Civil law is much more rigid, to the extent that form, in some cases, is equally or more important than substance. Many acts or documents will have no legal value, or differ as to their effect, if certain formalities required by the law have not been met. This is especially true in real estate transactions. Such transactions must be registered to have full legal effect, which means that they must be closed before a notary public fulfilling a series of steps required by law.

Real Estate Records

Under the Costa Rican system, public registries are of the utmost importance and value.

All properties, or fincas as they are technically called, are registered in the Property Section of the Registro Público under the Registro Nacional. Condominiums are the exception, since they are registered in a special section in the Registro Nacional called Horizontal Property (Propiedad Horizontal). In this section, property subject to condominium laws and regulations is registered under a general entry (mother property -finca madre) and each individual unit is registered separately finca filial as secondary fincas or subentries.

In the Registro under the property or condominium registry entries, one will find entries dealing with all registered liens, encumbrances, leases and other related entries with reference to a specific unit or property finca. From such entries one must go to the specific registries or sections where these liens, encumbrances, leases and other entries are registered, and in some cases microfilmed or scanned, in order to obtain detailed information about them.

Some of these registries or sections are:

(1) The mortgage section, hipotecas; where all mortgages subject to registration must be registered in order to affect a given property or finca.
(2) Bond mortgage section, cédulas hipotecarias.
(3) Microfilm, where all documents are microfilmed.*
(4) The Diario where documents, that are not yet registered or are partially registered, can be reviewed as to their content as summaries.
(5) Horizontal property, Propiedad Horizontal (Condominiums).
(6) Commercial Section Mercantil; where corporations are registered as well as other business associations and other business related matters.
(7) Persons, Personas; where individual powers of attorney may be found, and other kinds of juridical persons other than business associations.
(8) Plat or Plot Registry, Catastro; where lot maps are kept.
(9) Leases, arrendamientos.*

Theoretically, the Property Registry should show all liens, encumbrances and any related contracts affecting the property. Also, in most cases the Catastro (Plat Registry), also a part of the Registro Nacional (National Registry), will have a registered map or plat of the property showing its owner, reference to the registration in the property section, location, size, boundaries and, in some cases, updated ownership of surrounding properties.

The registered owner of a given property is therefore the legal owner of that property. Whereas only those liens or encumbrances registered under such property ought to have a claim against it, this does not always prove to be true. There are other liens or encumbrances either established by law (i.e., building restrictions and tax liens), or forthcoming from circumstances such as unregistered leases or possible future easements, as well as other possibilities, most of which will be explained in this guide.

Most people believe a simple property title study is enough. They will tell you this can be done in the Registro, since it should be possible to reach the original property entry which in some cases may be more than a hundred years old. Again, this is not always correct.

It would seem that title insurance is not necessary in Costa Rica, since once a thorough study has been made in the Registry, one should have nothing to fear and can purchase the property. This is true in most cases, but not in all. As title insurance is not currently available, one should pay special attention to have a thorough title search and property study.

Once you have purchased your property it will be registered. In order to ascertain that registration has taken place you may get the testimonio, or copy of the closing document with the seals showing its registration, or a certificate "certificación" from the registry showing registration in your name.

* Due to changes taking place in the Registry at this moment, the microfilm section will disappear in the near future, possibly being substituted for a scanning section. Other similar changes are being studied and may be adopted.

Getting Professional Help

Real Estate Agents or Brokers

You may already have a property in mind or may want to look for one. If the latter is the case you will make your first important decision: finding a real estate agent or broker, agente or corredor de bienes raíces.

Such an agent or broker will usually receive a commission from the seller of between 5% and 10% of the purchase price if the sale is closed.

Most agents or brokers will have their own list of properties for sale. Such a list should not be confused with what you might know as listed properties. Some real estate agents or brokers have executed legal documents establishing their right to act as agents for the seller; most have not.

In Costa Rica not all persons acting as real estate agents or brokers are licensed. There are few regulations as to the process, and almost anyone can act as an agent or broker, although there are some very good agents and brokers with a long track record.

When you look for a real estate agent or broker, it is advisable to check his or her reputation. You can also check if he or she is a member of the Costa Rican Chamber of Real Estate Agents, Cámara Costarricense de Corredores de Bienes Raíces, or the Costa Rican American Chamber of Commerce - AMCHAM.

Remember: the agent or broker is paid a commission by the seller for the sale of the property, and therefore has a vested interest in the sale.

The real estate agent or broker has no legal obligation to you as a buyer other than helping reach an agreement between you and the seller. Needless to say, he must not misrepresent the property to you. Most will also act as intermediaries in the negotiation of the price and conditions of the purchase. Some will, on their own initiative, have studies made in the Registry in reference to the property. Very few will go beyond that point.

If possible, obtain written statements from real estate agents or brokers, or sellers, as to those special characteristics you want the land or house you are purchasing to have. It is surprising how statements differ when put in writing; it is also the only way to have legal recourse if such statements prove to be untrue.

Attorneys and Notaries

While you are looking for your property, or once you have found it, you will need an attorney, abogado.

Choosing your attorney is your second important decision.

Your attorney will be the person who will protect your interest during the negotiations and the closing.

The attorney will check the property's registration at the Registro, and inform you of its registered legal status, its owner, and which, if any, liens and encumbrances are registered or in the process of being registered against it. He will also advise you as to the conditions and clauses of the contract for sale.

When you reach the point of closing, the seller and buyer must select a notary, notario. The notary will be responsible for drafting and registering the purchase documents. Legally, the notary is working for both parties and should look after both parties' interests. In fact, this obligation is often not complied with, since the notary tends to be a trusted person of the party selecting the notary.

If you are paying in full upon closing, you, as the buyer, have the right, unless otherwise agreed, to select the notary. If your purchase is financed by the seller, he will have such right unless agreed differently. Selecting the notary may be the subject of negotiation. If nothing is agreed, the notary will be designated by the parties as stated, according to statutory provisions. If you are financing your purchase with a lending institution, the institution will want to designate the notary as a condition to the financing.

If you wish to select the notary, it is advisable that you make known your feelings to the seller during the negotiations. Another possibility is the use of two notaries in the closing deed, or a notary for the purchase and another for the mortgage if any, although this last case may be more expensive in stamp taxes, registry and notarial fees.

Notaries under Costa Rica's civil law system have much greater responsibilities than under common law. In Costa Rica, notaries must be attorneys before they are accepted by the Supreme Court to act as notaries. It is this Court that regulates notaries and their conduct.

Notaries are responsible for studying the property in the Registry and seeing that it does not have liens or encumbrances, or any other limitation registered or in process of being registered, of which the buyer does not have knowledge. The notary, in effect, makes the equivalent of a limited title search. Also, the notary will make sure the property you have selected is duly registered in the alleged owner's name and that such owner has the right to transfer title. If there are liens, encumbrances or any other restrictions registered, he must let you know so they are accepted in the closing contract.

The notary or notaries responsible for the closing must draft the purchase contract. The document will be incorporated into the notary's register, commonly known as a protocol book, protocolo, under a specific deed number for execution. Once signed, the notary is responsible for registering the purchase in the Registry as soon as possible. He may not be able to do so, and is not responsible for final registration, until all needed documents and monies are provided to him by the parties and his fees are paid in full.

In a normal transaction the documents needed are:

(1) A legible copy of the land tax impuesto territorial receipts paid up to the quarter (trimester) of the date of purchase, provided by the seller.
(2) A certificate constancia municipal, issued by the municipal authority of the Municipality where the property is located, stating that all taxes and fees for municipal payments are current., provided by the seller. An identical certificate as the aforementioned one, but for the buyer, provided by the buyer.
(3) Enough funds to pay all taxes and registration fees of the transaction. Usually provided in equal amounts by both parties.
(4) Full payment of notarial fees, usually provided in equal amounts by both parties.
(5) Other necessary authorizations needed to segregate a section of land from a property whenever this has not been done before the closing and is necessary to transfer the section you purchase; or to cancel a prior mortgage, lien or encumbrance, in order to transfer free of liens and encumbrances, or any other document or payment required due to prior transactions registered or in process that are not the responsibility of the notary, provided by the seller.
(6) Powers of attorney poderes, when needed, provided by the party acting with the powers; or other corporate documents.

The referred documents and monies are to be provided to the notary on or before the execution of the closing deed. If the notary is not provided with all the above, he is not responsible for finalizing the registration, although he is responsible for presenting the deed to the Registry if it has been executed. When one or several of the documents or monies are not given to the notary, or paid in full on time, it is within his right not to execute the deed. The notary must finalize registration once he has been provided with all such documents and monies.

There is relatively new legislation making it compulsory for all parties involved in registered transactions to be current with all their taxes. Since several different procedures have been adopted to comply with such requirement, some of the documents listed may vary and others may be added to the list. Refer to your attorney for an updated list within sufficient time before closing.

Presentation of the deed to the Registry, commonly referred to as the annotation, "anotación", will protect the buyer since he will have priority over those documents that might affect his rights, presented to the Registry after his.

Your attorney, if he is not also the notary, will review the deed and suggest those changes he may deem necessary to protect your interest and reflect clearly the intention of the parties.

Be aware that if you request a notary to prepare a deed for execution and then do not wish to do so because of reasons different than those in which the notary may be at fault, he has the right to collect from you a fee equivalent to 25% of the fee he would have collected if the document had been executed.

Other Professionals

It is a good practice to have other professionals or companies aide you in your decision, such as surveyors, engineers, appraisers, etc. Always make sure the property you are shown and the one you are given legal registration information about are the same. Always request a registered plot map plano catastrado.

We know only of Propstdy for comprehensive property studies in Costa Rica.

If possible find individuals with a track record. Be sure to have references with respect to these professionals. Try not to use those proposed by the seller or broker.

Costs

If you use an attorney, either because you wanted him to advise you while looking for the property, or because the seller selected the notary and you wish to have additional advice, he will charge you a fee for his services. This fee is in addition to the notarial fees collected upon closing.

It is best to agree on this fee at the beginning of the attorney-client relationship. It can be a fixed amount, a percentage of the transaction price, an hourly fee, or a combination of these. It is advisable to ask for a quote at the beginning, and have your agreement in writing, as this will eliminate the possibility of future misunderstandings.

As stated, in addition to legal fees, when closing takes place, notarial fees must also be paid for the notarization and registration of the closing. Notarial fees have a fixed rate established by executive decree. As of today, for real estate transactions the rate is 1.50% of the first one million colones of the price of the transaction, and thereafter an additional 1.25% of the remainder of the agreed price. You must also add to that cost a 3% property transfer tax, stamp taxes and Registry fees, (See Exhibit I), a total of approximately 5.28% of the price. (For mortgage costs see Exhibit II.)

The buyer (or seller) need not have both an attorney and a notary, since as previously stated, notaries have both titles. It is advisable to have both, or request additional advice from the same person, since notarial work only includes advising on, drafting, and registration of the final closing deed.

Having an attorney early in the process will allow you to know what is the real legal status of the property you wish to purchase and have advice available when options or other pre-closing legal documents are to be executed. In many cases, in order to eliminate possible future problems, it is also advisable to have additional studies made.

A common practice, which should be avoided, is to state a lower purchase price in the closing deed than the true agreed price. This is done in order to pay less transfer tax and tax stamps upon closing, allowing also for a lower valuation for land tax purposes thereafter. This practice, aside from being illegal, may be considered as tax fraud by the tax authorities, hamper the buyers' right to claim for damages, as well as create problems for the accounting of the transactions in the buyers' records.

If the price stated in the transfer deed is lower than the registered price, at the time of presentation to the Registry, additional taxes will have to be paid and the notary has the right to collect his fees based on the increased value. Declared values in the closing deed are never diminished.

The Purchase Process

Once you have found a property you will want to know its legal status. If you already have an attorney he will make a Registry study to determine the status.

If all is well you can either go ahead with negotiations with the seller and agree on price and closing conditions, or take additional steps to assure yourself that the property is what you want. Some of these steps may include those necessary to discover other possible nonregistered restrictions, and assure yourself that all your needs (e.g. sewer, water, electricity, etc.) are supplied in the area where you are purchasing (for a list, see Exhibit III).

It is advisable not to rely only on the oral statements of the seller or any intermediary. You should request written evidence of their statements. If you wish, you can also obtain an independent appraisal. The appraised value is usually only a reference, and may not reflect the actual value of the property.

If an option is to be signed, do not offer more money than is strictly necessary. Options are usually not registered and if not complied with have to be taken through a lengthy court process to have them honored. If you wish to register the option against the property, be aware it may be expensive, but is the most common way to insure the option will be honored. It is prudent to have your own legal counsel available for options and other related pre-closing documents.

It is also an excellent practice to allow yourself and your attorney ample time between the moment you make the decision to purchase and the closing. Use this time to check the property thoroughly. Always make sure the property you see is the one you are buying. Ask for a plot map; if one is not available or you have doubts as to its exactness, have a new one made. If necessary, get professional help from a surveyor or property research company.

Once all matters of concern are agreed in principle, you will need a notary (or notaries) who will study the property in the Registry, draft the closing deed, and execute it by signing it with the parties. All deeds are in Spanish. If you do not speak Spanish fluently, you have the right to have an interpreter present, who can be the same notary, and to have the deed reflect the fact that it was translated and explained to you in your native language. The notary has the obligation to allow for the interpretation. The interpreter will be an additional cost for you and is not included in the notarial fees.

Upon execution, the notary has the obligation to present an original copy of the deed as soon as possible to the Registry, so that it is annotated against the property. This is very important, since if another sale of the same property were to be annotated before yours, the first one would have priority and you would find yourself with the only alternative of suing the seller for fraud.

Once your deed is registered, you have the right to obtain proof of registration, usually the original copy of the deed, testimonio, duly registered. The registration seals must be visible on the copy; they will have the relevant information as to where the transactions are registered.

Your property will have a folio real number showing you are the owner. Anyone can obtain a copy of the folio real at the Registry. The folio real is a public record. Also available are computerized registry statements, which are not legal certificates, but show what is registered. An independent notary can also certify your property ownership. If you are in doubt it is advisable that you make sure registration has taken place.

If your purchase is not fully registered and is only annotated, you most probably will have problems transferring the property afterwards. You will have to finalize registration before a new transfer can be registered.

Property in General

Means of Holding Property

Property can be owned individually, jointly, in trust, as household property, or in the name of corporations, or a combination of these. It can be owned and held either by one or more individuals or in the name of one or more companies.

For reasons pertaining to limitation of liabilities and estate planning, the most common and advantageous way to own property in Costa Rica is through a corporation. Costa Rican corporations can have all issued stock owned by one individual. Share sale income, if not part of normal business, is not taxable. There is no capital gains tax in Costa Rica. Share sales pay no transfer tax.

Different Property Rights

Property rights differ depending on the kind of title and ownership. Our Constitution grants foreigners the same rights as property owners that nationals have, with few exceptions, one being ownership of beachfront property leases. Others are specially titled property, with transfer restrictions. (see Other Encumbrances, Origin of Title.)

One can have full property rights, or restricted ones.

Joint property can be physically localized upon the land or be a percentage of all the property. Property may also be under condominium ownership.

In the case of certain beachfront property or other government owned lands, it can be held (not owned) through a concession, granted by the government. These concessions are sometimes thought to be leases because these holdings are referred to commonly as leases, arrendamientos, although technically they are not.

Private property can also be held by lease, by usage agreements, as a squatter, de facto occupant, or occupant with permission from owner without rent payment, as well as in several other ways.

Property owned and held in different ways is regulated by different statutes. For specifics on these subjects you should refer to competent attorneys.

Titled and Untitled Property

All property registered under the Costa Rican civil law system is titled property. Untitled property can not be registered. The ownership of untitled property is uncertain. It is true that possession is important, but not until the property is titled will there be certainty as to the legal ownership of the land. Even when possession is apparent, it may not be legal possession. It is possible to purchase the rights to possess untitled property, but this entails a substantial risk since there is no way to know if the seller is the legal owner of such rights and can legally transfer them. There is a court proceeding, información posesoria, which allows, in most cases, a legal possessor of land who has been either in possession uninterruptedly for ten years, or who has acquired the rights to such ten-year possession, to title and register the land.

If land has been recently titled, there is a special three-year period when third parties not involved in the titling process may go into court and assert a claim to a superior right to the property. After such period, a claim is possible but is more difficult. The statute of limitations for such a claim is ten years.

A word of caution! Stay away from untitled property. This is one of the areas of real estate transactions where I have seen many problems. No matter what you are told, there is no sure way to establish legal ownership of untitled land. For a secure transaction, land must be legally titled and registered in the National Registry!

Constitutional Protection of Private Property

Traditionally, Costa Rica has protected private property, one of the pillars of its democracy. Not even in the worst times of Latin America, when the generalized trend was to expropriate the property of foreigners was Costa Rica a part of such practice. There have been some expropriations in the past, and some have not been paid even today, but this is the exception and not the rule. With our new Constitutional amendments and the Sala Cuarta, it is difficult for such a thing to happen nowadays.

Article 45 of our Constitution provides for protection to private property. No one can be deprived of his property if it is not for a justified public interest legally proven, in which case the person must be previously and justly compensated.

Limitations to property and property rights can only be enacted if the law establishing them is approved by the vote of two-thirds of the legislature. All other restrictions are unconstitutional and can be taken to Constitutional Court to be declared as such.

In Costa Rica, after a constitutional amendment that took effect in October 1989, it is relatively easy and inexpensive, compared to other countries, to file a constitutional case and in most cases stop the Government from taking property before just compensation is paid.

Due to the constitutional procedure now available, we can safely say that private property is well-protected in Costa Rica. Problems arising from expropriations, although few in the past, are not the general rule.

Most Common Registered Liens and Encumbrances

Liens

A Lien is a charge, hold, claim, or encumbrance upon the property of another, as security for a debt or charge. It is not a title to property, but rather a charge upon it; the term connotes the right which the law gives to have a debt satisfied out of the property, by the sale of the property if necessary.

There are several different kinds of liens in Costa Rica; among them are Consensual Mortgages, Bond Mortgages, Legal Mortgages Tax Liens.

Registered Mortgages

These will be checked by your lawyer and the notary of the transaction. Usually upon your request, they will be explained to you as to their cause and effects. Mortgages normally are:

Normal Consensual Mortgage. Hipoteca Común. This mortgage is a security for a loan. If the loan is not paid, the property is sold through the court and the amount and costs of execution are paid from the proceeds. It can be executed even if it is only annotated against the property; it need not be fully registered to have full legal effects. Title to this kind of mortgage can be assigned, but such transfer will have the same or similar costs as a new mortgage. If the amount owed is not fully covered by the proceeds from the sale of the property once the mortgage is executed, the creditor can claim from the debtor the unpaid balance of the debt.

Bond Mortgage. Cédula Hipotecaria This kind of mortgage is under a document form. The legal owner of such document has the right to collect a certain amount from the debtor and if it is not paid, he has the right to auction the property through the court and pay himself with the proceeds.

It differs from a normal consensual mortgage because the ownership of a bond mortgage can be transferred by simple endorsement of the document of title, and it can be used over and over again to secure loans or other transactions without the necessity of registering a mortgage every time a guarantee for a secured transaction is needed. Also if the sale proceeds of a bond mortgage are not enough to pay off the secured debt, the creditor can not go after the debtor for the unpaid balance.

A word of caution: due to the fact that in past years inflation in Costa Rica has been high and bond mortgages must be registered for a fixed amount, having a life of ten years, often the property's market value is much greater than the bond mortgage amount. Because of this, some people may not want to use their bond mortgages as security due to the small amount of the market price of the property that the bond mortgage represents.

Mortgages Considerations. Mortgages may have been agreed to in such a way that some fixtures not normally considered as part of the mortgage are included under the mortgage. Since mortgages have to be annotated or registered against the property to affect it, these conditions should be found during the title search. (Goods attached to the soil, machinery, trailers without their wheels, etc., are examples of such fixtures.)

Some mortgage agreements restrict certain rights of the owner of the property, mostly prohibiting transferring or encumbering the property for a given period. For the same reasons stated, such limitations or restrictions should be found in a good Registry study.

Also chattel mortgages can be imposed upon crops or goods found on a property that shows free and clear title in the Registro. This is common in coffee farms where the crop, the chattel, has been mortgaged to the local coffee miller to finance the coffee operation. This can also be the case for future crops. Such chattel mortgages will not be found registered against the property, but may be found in other sections of the National Registry (Chattel Mortgage Registry).

Judgment Liens. These liens are annotated upon the property to which they refer. They are court ordered when the property is attached, or when the right of ownership, use, or any other rights pertaining to the property are being questioned in court. Depending on the kind of court case they refer to, they can go from minor matters to a loss of the property.

Unregistered Mortgages

Legal Mortgages or Tax Liens. These liens are established by law, usually for non-payment of national or municipal taxes or transfer taxes.

If property taxes, transfer taxes, or other taxes have not been paid in time, the property against which those taxes were assessed becomes legal security for payment. This is true even when the owner is no longer the same as when the taxes were not paid. Under this case we find:

1.-Road tax: Detalle de Caminos. Should appear on the municipal certificate showing taxes owed. Usually unregistered.
2.-Transfer tax: Impuesto de Traspaso. Evident only when a pending transfer is annotated against the property.*
3.-Land tax: Impuesto Territorial. Usually unregistered. Applied on land and constructions on the land as well as other improvements. This tax is annual and is an amount equivalent to the registered value multiplied by 0.3% to 1.17%. It is paid in quarterly installments.*
4.-University and Charity stamp tax, Timbre Universitario y de Beneficiencia. Although some properties might still show these pending taxes, they are no longer important as they have long since been abrogated and the ten year statute of limitations has gone by in all pending cases.
5.-Luxury home tax. Impuesto a las Construcciones de Lujo.Homes of a value higher than an amount stated by the luxury tax law must pay an annual tax. Such amount is currently colones 5,000,000 but may vary every year. Value excludes land value and only constructions are considered for this tax. *

* Currently there are proposals in our legislature to modify these taxes. Transfer tax could be diminished to 1%, land tax to a rate not yet determined. Luxury home tax could be abolished. These changes are subject to congressional approval.

Other Encumbrances

An encumbrance is a right to, interest in, or legal liability upon real property which does not prohibit passing title to the land but which diminishes its value. Encumbrances include easements, leases, privileges, restrictions of use, homestead privileges, etc.

Annotations. Anotaciones. An annotation is not an encumbrance by itself, but is a sign that something is in the process of being registered against the property. Once an annotation is found against the property, it should be studied carefully in order to establish the right or rights being registered.

Easements. Servidumbres. An easement is a right created by an express or implied agreement, of one owner of land to make lawful and beneficial use of the land of another, not inconsistent with any other uses already being made of the land.

Easements should be registered in order to affect third parties (i.e., a buyer). Though rare, certain properties could have an easement right against them, even though it is not registered. This may be because another property has acquired the right to such easement through its use over a period of time, but the easement has not yet been granted by a court.

Easements are of different kinds. They may be apparent or nonapparent. Apparent ones can be seen if you are on the property, such as electric lines, water canals, private roads (rights of way), windows with rights of air and light, etc. Non-apparent ones are more difficult to see, such as underground pipes, non-apparent rights of way, etc. Since they are mostly all registered with the exceptions mentioned, the effects on the property are easily determined.

A word of caution. In some instances the description of the easement or its conditions are not those in reality being practiced on site. Since easements can legally change by practice through time, it is wise to make sure that both are the same and that in those cases where they are not, a solution to the problem is reached before you purchase.

Leases. Arrendamientos. A lease is an agreement by which a property owner or holder turns over use of the property to another, usually for a given period of time, for consideration commonly called rent.

In Costa Rica you will find two different kinds of leaseholds. One is referred to as urban leasehold contrato de inquilinato and the other as the common leasehold arrendamiento civil. Each kind of leasehold has its own law applicable to it.

In the first case (inquilinato), the tenant is fully protected by a statute applicable to urban property leased for housing, office space, industrial or commercial purposes ley de inquilinato. Under the Ley de Inquilinato or inquilinato, as it is called, for short, it is almost impossible to evict a tenant.

Eviction, with few exceptions, can not take place as long as the tenant pays his rent on time and complies with certain very basic obligations. If there is no agreement as to increases in rent in the lease contract, increases can only happen every five years, with the intervention of a judicial authority, if the landlord and the tenant are not able to reach an agreement.

Exceptions to the eviction rule are: (a) when the owner is going to use the property for his own personal or immediate family use, and can prove that neither he nor his family has lived in a house of their own in the near past; or (b) when the building leased is to be rebuilt or refurbished, in which case the evicted tenant has a priority to lease in the new building; (c) when tenant does not pay rent.

Other similarly onerous obligations are imposed by statute on the landlord under this kind of leasehold and can not be contractually waived by the tenant. Property rights are limited because of lease contracts; and their effects on the property must be well known before a closing is executed.

These leases need not be registered to affect the property. The only way to determine whether they exist is by physically inspecting the property and questioning the person that has possession. Currently legislation is being discused to amend this law.

The second kind of leasehold, the civil lease, is more of a contractual lease in which the parties agree freely to their contractual obligations. They are regulated by the civil code, and are very much restricted to what is said in the contract. This kind of lease is normally found in farms and other agricultural property not leased for residential, industrial or commercial purposes. These may also be registered or not.

Unregistered leases are common in Costa Rica. Most leases are not registered against the property.

A word of caution! It is wise to have all tenants evicted before the purchase of the property takes place. If not, one may find himself in court for a long time, without being able to use the purchased property other than leasing it to the tenant already there.

Water Rights. According to the local Water Laws Ley de Aguas, all property below other property must give right of way to waters coming from a higher property. Also based upon the same law, restrictions as to construction lines near water ways, rights of way to clean or inspect water ways, restrictions as to what can be cut next to waterways, etc., may be found registered against the property.

Restrictions Due to Future Roads or Projected Road Expansions. Restricciones a la construccion por congelaminetos para caminos. Restrictions of this kind may be found registered against the property. Most of these restrictions will not be found when the title search is performed since they are not registered.

To obtain the construction line and other similar types of limitations, both the governmental authorities in charge of transport as well as the municipal authorities must be consulted. Some of these restrictions may be unconstitutional, but until declared as such will remain in force

Private Roads converted into Public Roads. Caminos Privados convertidos en Públicos. According to the Public Roads Law, Ley de Caminos Públicos, if a private road is left open to public use for more than a year such road is then considered to be a public road and cannot be closed to public use. The owner of the land may lose his right to own and use that part of it on which the road stands. In our opinion, this article of the law is unconstitutional. As this guide is being written, this issue is before the Constitutional Court, and time will let us know if we should worry any further because of this statute. In most cases, such a circumstance will not be registered against the property.

Zoning. Zonificación. Although the current zoning law has been in effect since 1974, it has only begun to be enforced in recent years. Zoning restrictions are not registered against the property and must be researched separately.

A word of caution! Pay special attention to zoning!

Party Walls. Medianeras. Party walls are those walls where both property owners have a right to a part of the same wall. This is more common in old properties. If party walls are encountered, one should remember that they are subject to certain special legislation found in the Civil Code. Condominium property is different from the law of party walls.

Origin of Title. Titles have different origins. Some are several hundred years old . These titles were granted by the King of Spain, and in some cases include beachfront property up to where the water reaches the horse's midriff while in the sea.

Many titles have been registered by a judicial titling process known as Información Posesoria. Through this process, the court establishes that a person has exercised possession of a section of land, publicly, peacefully, and as the owner, for more than ten consecutive years, or has acquired such rights from someone with such possession.

Also, good faith is required (bona fide possession). This means that the person or persons exercising the possession do not know of any other person with a better right to the section of land in possession. It also implies that the possessors do so believing they are the rightful owners of the land.

There are several different processes regulated by different laws. These laws and regulations have changed over time. This short explanation will be limited to current application of actual amended laws and regulations.

When land is registered by means of an Información Posesoria, depending on which procedure is applied, it might have transfer restrictions, easements to maintain water rights, forestry restrictions, and public road restrictions.

Generally, the process consists of a request by the possessor, accompanied by a map or plat of the lot to be registered. Notice of the Información Posesoria is made to all neighbors. A publication of the request, stating a period of time for rightful interested parties to present opposing claims, is made in the national gazette. If no opposing claims are made, or if those made are rejected, the judge hears three witnesses that support the possessors' demand that he has had uninterrupted, public, peaceful possession as owner of the land. Finally, an on-site inspection of the land is made by the judge, and if no problems are found, title is granted and a writ is issued to the Public Registry, Land Section, to register the land in the name of the possessor.

There is a validation period of three years before title becomes final. Title can still be contested for a period of ten years after registration takes place, by any party with a better right to the land. This last seldom happens

Squatters Rights. Unattended property is an open invitation for squatters. There have been cases in which "guards," hired by the owner and left to look after the property, have taken advantage of the circumstances to claim squatter rights. It is advisable to have a contract clearly stating the nature of the possession of the property left with someone in charge.

Possession is a mayor issue in squatters' rights matters. Once squatters have taken possession of a property, judicial intervention is required.

If judicial actions take place during the first three months after the squatters have taken possession of the property, the procedure to oust the squatters is a relatively simple one compared with those that must be undertaken thereafter.

If the squatters have been more than three months but less than one year on the property, the ouster procedure is somewhat more complicated and time consuming, but the effects in comparison are not so negative, and squatters improvements to the property do not have to be reimbursed to the squatters.

In those cases in which the squatters have been on the property for more than one year, but less than ten years, the property is still salvageable, although ouster procedures may last years. All improvements made to the property have to be reimbursed to the squatters before they can be ousted. This last usually entails intervention from governmental authorities, the Instituto de Desarrollo Agrario, known as IDA.

A property owner's idea as to squatters' improvements and a court's idea may be quite different. Improvements are investments in the property; technically, they could even make the property lose value from a general real estate view. Typically, the erection of huts, the planting of trees and other plants, even elimination of original forest, are considered improvements. The legal owner may find the property ruined, in his view, but still have to pay for improvements.

Facing such a case, it is advisable to negotiate with the squatters rather than spend a long time in court. In a good negotiation, one may be better off paying an amount up front than having the court decide the final indemnification, notwithstanding the fact that the owner will also have to cover legal costs and fees.

When squatters have been in possession of the property for ten years or more, it is most probable that they have obtained legal right of title to it, although this is not an absolute rule.

In all cases it is advisable to look for legal assistance the moment a possible takeover by squatters is suspected or has occurred.

Mining Code Restrictions. Ownership of a property grants the owner property rights in the topsoil but not the subsoil. All minerals are government owned. The Costa Rican Mining Code establishes the authority to grant an exploration or exploitation permit on third party registered property. These concessions will not appear in a Public Registry study. This law also allows for easements to be imposed on third party property whose owner does not allow concessionaires to exercise their mining exploration or exploitation rights. In the case of easements, when finally granted, these will be registered in the Registro Público. For this reason they are usually negotiated with the legitimate owner before enforcing them by administrative or judicial means. Compensation must be paid to the property's landowner for restricting its use in this manner.

Ecological Restrictions. Costa Rica is trying to preserve its natural forests and other resources. To that purpose there is a substantial body of law being issued.

There are several different types of restrictions applicable to property for ecological and conservation purposes. These go from absolute preserves that are public property where, supposedly, everything must be maintained in its natural state, even restricting visits through National Parks, biological preserves, protective or buffer zones, forestry reserves, to non-restricted areas. If your property is in a buffer zone or forestry reserve, you will most likely find these restrictions. No one can own property in National Parks. Limited use is allowed in some of these areas.

In all cases cutting a tree in Costa Rica requires a permit, no matter where it may be. Any use of mineral, spring, or river water must also be by means of a permit granted by the corresponding authorities. Non-compliance with these laws and regulations may entail severe penalties, and in some cases even jail terms. Water rights or concessions are obtained usually from the Servicio Nacional de Electricidad and tree-cutting permits from the Dirección General Forestal.

Construction Restrictions. Construction or renovation of buildings may be restricted in several different ways. They may have been declared historical sites. They may be close to airports. Also, certain parts of a property or building may have restrictions or prohibitions due to future road expansions. In this last case, if a waiver to collect indemnification for improvements is given in favor of the Government, authorities may grant permits for building or improvements. Keep in mind that if such waiver is executed, the authorities can, thereafter, destroy or purchase the building or land, and the construction of improvements will not be taken into account for indemnification purposes.

Special Cases

Beachfront or Shoreline Property

In Costa Rica, you can find very few cases in which shoreline property is titled and is for private use. These cases are those involving rights registered in colonial times, and certain urban property next to the sea. The rest of the first 200 meters above high tide is public land, the use and administration of which is controlled by the local government, Municipalidad. After the 200 meter zone it can be privately held and titled.

Most shoreline property can only be leased. The first 200 meters are regulated by a law called the Ley sobre la Zona Marítimo-Terrestre. (Shoreline Zone Law). Of those 200 meters measured from the tide's highest point, the first 50 are public and can not be used for anything else than the publics'use. Nothing private can be built in such area. The remaining 150 meters can be leased for private use. Certain buildings are allowed in this second area, but these will revert to the municipalities (local Governments) at the termination of the lease if such lease is not extended or canceled, although improvements must be paid for in almost all cases. Islands are also subject to this statute.

Municipalities are the entities in charge of granting concessions (leases) within the shoreline zone, through a process regulated by the Ley sobre la Zona Marítimo-Terrestre.

These concessions or leases are granted for five to twenty year terms. Once the concession (lease) has been approved, it is registered in a special Concession Registry in the Public Registry. A yearly fee must be paid to the municipality for the duration of the lease to keep it current. Failure to pay may terminate the lease and constructions on it may be lost..

There are certain restrictions for foreigners when holding these leases. If the lease is held personally, foreigners must first have five years of legal residence in Costa Rica. If a company has title of the lease, it can not have more than 50% foreign ownership.

The National Geographic Institute, Instituto Geográfico Nacional, is the entity in charge of the demarkation of the maritime zone. If the zone is not marked and a development plan has not been drafted and approved, the authorities are, in many cases, unable to grant building permits for development of the area.

There are other kinds of leases in shoreline zones. Because they are not so common we will not address them here.

If your intention is to purchase beachfront property, it is advisable that you have good legal counsel before agreeing to any transaction.

Condominium Property

Condominiums are becoming more and more fashionable in Costa Rica.

Condominium property has a special status. It is registered in the "Horizontal Property Section" of the Registro Público. Condominium properties have a main farm, finca madre, and sub farms, fincas filiales. The main farm is the general registration of the entire condominium. Each sub farm is a unit of the condominium.

When a unit is purchased, the owner must submit to the condominium regulations in the deed by which the purchase takes place. Condominium regulations establish the rules by which the condominium is managed and how issues pertaining to relations between the unit owners are to be handled. Knowing and understanding condominium regulations is of utmost importance when purchasing condominium units.

Some condominiums have restrictions as to pets, or social and business activities. Also, in almost all condominiums a monthly maintenance fee must be paid. This fee can usually be increased when a majority of the condo unit owners are agreeable. When purchasing a condominium, it is wise to have a certificate issued by the appointed manager stating that no past condominium fees are unpaid and all are current. When monies are owed, the unit becomes collateral for the collection of the debt, which is a privileged debt. Therefore the unit must be free and clear of such debts before purchase takes place.

Condo units can be mortgaged as any other kind of property. In Costa Rica condominiums are a relatively new solution to maintenance costs, social areas and security. Lately, we are also seeing conversions, that is, older buildings being renovated and subjected to condominium laws and regulations. In many cases regulations do not cover most conflict areas and may be amended as these defects are found out by the unit holders.

Restrictions explained in other parts of this guide may also apply to condominiums.

Final Comments

Our best advice is to examine your property carefully, always take your time before closing. Use reputable specialized professionals to help you. If you wish to be sure, you may want additional studies of the property done. Although cost is always a consideration, if you have to spend an additional amount on security, this will undoubtfully outweigh the cost of buying a property with problems, in some cases so severe, you can lose your investment and more.

We hope you have made good use of this guide and that it has been able to give you the information that makes the difference.

Enjoy this beautiful country, and cherish your piece of Costa Rica as our fathers and grandfathers have done with theirs, and have in mind they were once foreigners, too!

Exhibit I

Closing Costs

Exhibit II

Additional costs of mortgage

Exhibit III

Check List for Registered Properties

( ) 1. Registered legal status of the property

( ) 2. Plot map

( ) 3. Area and location

( ) 4. Possession of property

( ) 5. Services

( ) A. Electricity

( ) B. Water

( ) C. Telephone

( ) D. Cable TV

( ) E. Municipal services

( ) F. Health

( ) G. Groceries and pharmacy

( ) H. Fire station

( ) 6. Unregistered restrictions or dangers.

( ) A. Leases

( ) B. Construction limitations

( ) C. Pledges against crops

( ) D. Municipal taxes and services

( ) E. Property taxes

( ) F. Possible future easements

( ) G. Zoning

( ) H. Flood zones

( ) I. Behavior of land during earthquakes

( ) J. Future roads

( ) K. Extractions of minerals if any

( ) L. Past use of land due to health hazards

( ) M. Volcanic zones

( ) N. Seismic zones

( ) O. Ecological restrictions

( ) a. National Parks or Indian Reservations

( ) b. Protected forestry area

( ) P. Activities close to the property that may produce problems:

( ) a. Pig or chicken farms

( ) b. Polluting industries

( ) c. Mineral extractions

( ) d. Establishments visited by quantities of people or vehicles

( ) e. Trains

( ) f. Roads with heavy traffic

( ) g. Airports

( ) h. Stadiums

( ) i. Rivers (specially streams collecting coffee wastes)

( ) j. High voltage lines

( ) 7. Price

( ) A. Appraisals

( ) B. Local area market

( ) 8. Engineering considerations

( ) A. Soil tests

( ) B. Electric system condition

( ) C. Water and sewage

( ) D. Structural condition

( ) E. Termites

( ) F. Roof condition

Some Common Real Estate Terms

Spanish - English

Abogado - Attorney

Alquiler - Rent

Arrendamiento - Lease

Avalúo - Appraisal

Certificación - Certificate*

Comprador - Purchaser, Buyer

Corredor - Real estate agent, Broker

Costo - Cost

Depósito - Deposit

Depósito de confianza - Escrow*

Escritura Notarial - contract

Escritura de compraventa - Notarial purchase contract

Fideicomiso - Trust

Finca - Farm, Property

Firma de escritura de compraventa - Closing*

Gastos - Expenses

Hipoteca - Mortgage

Impuestos - Taxes

Impuesto de traspaso - Transfer tax

Notario - Notary

Opción de compra - Purchase option

Plazo - Duration, Time term

Precio - Price

Propiedad - Property, Track of land

Registro - Registry

Sociedad - Corporation

Testimonio - Copy of the escritura sent to the registry for registration.*

Timbres or Timbres fiscales - Stamp taxes

Topógrafo - Surveyor

Traspaso - Transfer

Vendedor - Seller

* These translations are not exact, there is no exact translation in this case

Please contact the author to obtain professional Costa Rica real estate legal advice.

Copyright Alvaro Carballo-Pinto 1994 San José Costa Rica

Note: The above information is not to be used for any other purpose other than private study, research, criticism or review. Thank you.