Frequently Asked Questions for Costa Rica Home Buyers

FREQUENTLY ASKED QUESTIONS WHEN PURCHASING PROPERTY IN COSTA RICA.

Are you intending to buy a property in Costa Rica but feel like you have many questions? There are different ways and several steps to be followed to acquire a property in Costa Rica. On this ‘frequently asked questions’ memo we intend to briefly answer the most frequently asked questions we´ve received from our clients during the last 25 years of our Real Estate Law practice.

1. Where and how are Costa Rican properties registered?

There is one sole National Registry located in the city of Zapote, San José. The National Registry is a public registry and it has a Real Estate Property Section where all titled properties are registered with an independent number (i.e. 6-155600-000). The first number identifies the province where the property is located, the second number refers to the property number, and the third number refers to the property right (since a property can be co-owned by more than 1 person), where 000 means that full ownership is held by one single owner. The Civil Code indicates that Ownership and Property include the rights of possession, use, transformation and disposal, defense, exclusion, and restitution, which to be effective before third parties, must be recorded before the National Registry. By means of said system, publicity is granted so that any third party can identify or verify who the recorded owner of a property is. To transfer a registered property, the recorded owner must appear before a Costa Rican Notary Public and grant a public conveyance deed which affidavit must be presented and recorded by the Notary Public before the National Registry.

Exceptions:

(A) Properties located within the restricted zone of the Maritime Terrestrial Zone (MTZ), which is a two hundred meters wide strip of land in the Pacific and Atlantic coasts, measured from the “pleamar ordinaria” which is an imaginary line located a several centimeters above the average sea level (considering low tides and high tides). The MTZ is comprised by two sections, the public zone (which covers the first fifty meters which are of public domain, normally corresponding to the area of the beach itself), and the restricted zone (which covers the remaining one hundred and fifty meters, same that can be possessed by means of a concession granted by the local Municipality and ratified by the Costa Rican Tourism Board, as long as the area of interest is not controlled by the Environmental Ministry due to presence of forest, wetland or mangrove). Said concessions over the restricted zone of the MTZ are registered in a different section of the National Registry called the Concessions` Registry, with a different independent registration number and are normally granted for a period of 20 years which can be renewed.

There are a few very special cases in which a property located within the restricted zone may have a registered title. Such cases need to be carefully analyzed case by case to double check the legality and validity of the title.

(B) There are also non-titled properties controlled by the “owner” under the concept of possession rights, which are not registered in the Property Section of the National Registry. To register those properties, a judicial process regulated by the Costa Rican law named “Ley de Informaciones Posesorias”, must be followed by those parties that by means of adverse possession seek title for their land. The above is possible as long as they comply with certain requirements, among them a minimum good faith possession of 10 years.

2. Can I acquire a property under my personal name, even being a foreigner?

Yes. However, a property can also be acquired and held through a Costa Rican company incorporated for said purpose. Purchasing and holding a property through a Costa Rican company is usuallyrecommended (even more for non-resident foreign buyers) to separate possible personal liabilities that may jeopardize the property, as well as to facilitate the closing procedure and future operating needs in relation with the management of the property, etc. A Costa Rican holding company may also be required by a foreigner to have access to certain public services.

Exception: In the case of properties located in the restricted zone of the MTZ, a foreigner can only be the beneficiary of 49% of the concession’s rights or 49% of the shares of the company holding the concession rights. There are some special rules only applicable to foreigners that have been legal, formal residents in Costa Rica for at least 5 years.

3. What is the procedure to be followed to acquire a property in Costa Rica?

The most recommendable course of action is the following:

I. Sign a Purchase and Sale Promissory Agreement or Option to Purchase Agreement, clearly stating the conditions to be fulfilled to proceed with the execution of the Conveyance Deed. In some specific cases due to complexity of the transaction or the negotiation process, before the execution of a Purchase and Sale Promissory Agreement or an Option to Purchase Agreement, a non-binding Letter of Intent LOI, or Memorandum of Understanding MOU may be signed for the parties to agree on the general terms and structure of the transaction. In most cases, within a few days after the signature of the Purchase and Sale Promissory Agreement or Option to Purchase Agreement, an escrow agreement will also be signed by the parties with a third-party escrow agent that will hold the earnest money deposit and potentially the rest of the purchase price.

II. Due Diligence Period, which is basically a complete legal review to be performed during the Option or Promissory Agreement’s term to verify that there are no contingencies or problems related to the property, its title, constructions, legal access, zoning, property taxes, cadastral map, availability of public services such as water, electric, etc. In parallel to the legal due diligence, it is always advisable to consider carrying out a topographic check of the property on site, as well as an engineer`s home inspection for the cases of properties with constructions, and potentially a soil test to understand the stability of the terrain and the conditions of the same for future constructions. During the due diligence period, a Costa Rican company may also be incorporated to be used to purchase and hold the real estate property of interest. During the due diligence period, the earnest money deposit transferred by the buyer into the escrow account will normally be refundable to the buyer if negative due diligence results were confirmed by the buyer.

III. If positive due diligence results were confirmed by the buyer, sign a conveyance deed or public purchase and sale deed before a Notary Public, by means of which the transaction is legally and officially closed. As an alternative option, if the property to be acquired is owned by a company, a Share Transfer Agreement may be signed for the shares of the owner company to be transferred, instead of the conveyance deed. In this scenario, a due diligence over the company shall also be performed to verify the absence of contingencies for the company (such as debts, etc). In many cases this alternative may not be advisable due to the impossibility of detecting certain past circumstances which may cause the company to be potentially exposed to contingencies and/or obligations. A shares transfer may not be possible either if the selling entity also holds other assets of the seller not included on the transaction. It is important to take into consideration that even if the property is purchased through the acquisition of the shares of its holding company, the transaction is subject to the payment of transfer tax and fiscal stamps as per section 6 below.

IV. Once the conveyance deed is signed by the parties, and the transfer expenses, taxes and fees are paid, the respective Notary Public has the obligation of filing and recording said deed before the National Registry for the buyer to appear as the new recorded owner. Until the Conveyance deed is duly recorded, the acquisition will not be binding to third parties but only amongst the parties. of the deed. This is one of the main reasons why the Notary Public to be chosen needs to be a responsible and diligent professional. Well-structured law firms providing services under a structure of a “team of professionals” may give additional security to the parties. Additionally, this is a good reason for the purchaser to be the one appointing the Attorney and Notary Public who will be in charge of the deed of transfer and its corresponding recording process at the Registry, as the purchaser´s interests are not fully satisfied but until the recording process has been completed.

V. Finally, after the conveyance deed is duly recorded at the National Registry, it is important to report to the corresponding local government (Municipality), that the property has been transferred and if need be, to update its declared value (in accordance with the purchase price) for tax purposes. Several requirements need to be complied with to complete this process. The above is an important post-closing task to be achieved as every owner must pay annual land taxes and municipal services` charges to the local Municipality. Additionally, after the conveyance deed is duly recorded at the National Registry any existing public services such as water, electric, internet connections, etc. need to be transferred to the new owner. At Invicta Legal we offer assistance to our clients on all these post-closing tasks as well, if needed by the clients.

4. If I live outside the country, should my presence in Costa Rica be required for signing the conveyance deed or purchase and sale deed?

The presence of the buyer is not strictly necessary. If the buyer desires to acquire the property in his personal condition, then he/she can grant a special power of attorney before a Costa Rican notary public or Consulate to any third person he trusts, for him or her to sign the conveyance deed on his behalf. Please take note that this process may take several days or weeks hence it needs to be programmed way before the closing date. If a Costa Rican company is going to be used to acquire the property, the process will be easier and simpler. In this case, a proxy letter can be signed by the shareholders of the company, authorizing a third person also by means of a special power of attorney to execute the acquisition act on behalf of the company.

5. How can I check the status of my property?

The National Registry has the following web page http://www.rnpdigital.com/ where any person can check the status of his property, you just need to create a username to do so.

6. How much expenses, taxes and legal fees would I have to pay for the acquisition of a property?

By law, every acquisition of a property must pay the following registry rights:

• Registry: 5 colones for each 1000 colones of the purchase price;
• Agrarian: 1.5 colones for each 1000 colones of the purchase price;
• Municipal: 2 colones for each 1000 colones of the purchase price;
• Fiscal: a maximum of 625 colones;
• Bar Association: a maximum of 55.000 colones;
• Archive: 20 colones.

In addition, a transfer tax of 1.5% of the purchase price must be paid in favor of the National Registry. Regarding the legal/notary fees for a property transfer, our Law Firm charges based on the Law demanded, Costa Rican Bar Association rates. The closing fees for a real estate transaction will depend on the amount of the purchase price and will vary from 1% for “bigger transactions” to 1.25% for “mid-size transactions”, or 1.5% for “smaller deals”. Real Estate transactions with a very low purchase and sale price may be subject to a slightly higher closing fee percentage. The level of complexity of the transaction may also generate some variations on the above referred percentages. Such rates are established by the Costa Rican Bar Association.

7. If I live outside the country, how can I transfer the funds to Costa Rica for the acquisition of the property?

By means of an international wire transfer, the funds can be received in Costa Rica by registered escrow companies, who will keep under custody the funds and provide escrow services. Our law firm has excellent business relations with all these escrow companies and will contact you with any of them, if necessary. Wire transfers from the buyer’s account to the seller’s account may also be carried out in certain cases but will need special coordination on the closing for everything to occur almost at the same time. (Sellers may not feel comfortable signing the closing documents without having a bank confirmation that the wire transfer has been completed and buyers shouldn’t send the purchase price to the seller’s account before the closing documents have been signed.) Some sellers may accept to sign the closing documents including a clause stating that the validity of the deed and the transfer of the property are subject to the effective receipt of seller`s net of the sales price on the bank account instructed by the seller in writing before closing. Please keep in mind that any bank account provided for a wire transfer needs to be carefully reviewed, including bank account number, receiving bank and beneficiary. Ideally, a phone confirmation or whatsapp confirmation of the wire transfer information received by email should be made just to avoid the risk of internet fraud or phishing. Any last minute instruction to change the bank account and beneficiary where the payment shall be made needs to be seen as a yellow flag and should trigger a doublecheck.

8. Where and how should I pay municipal land taxes and eventually urban services?

Before the respective Local Government or Municipality. Land taxes correspond to 0.25% per year which are calculated over the recorded value of the property. Please note that normally in urban districts or certain areas with urban development, some urban services are provided, such as garbage collection and maintenance services, which payment is normally included in the taxes bill. These taxes need to be paid every three months but may also be paid for 6 or 12 months in advance if the property owner wishes to do so for simplicity purposes. Some Municipalities will apply a discount to property owners paying for the full year in advance.

At Invicta Legal we assist clients with their Municipal payments if expressly requested. Please take note that every property owner needs to proactively keep track and take care of Land taxes and urban services `payments, their dates, amounts, etc. The Municipality will not necessarily send a communication to each and every owner indicating the amount owed or the date of payment, but upon lack of payment will start charging interests and could start a foreclosure process over the property.

We hope that this memo is useful to better understand the process of purchasing properties in Costa Rica and feeling safe while doing a real estate investment in our country. We have always believed that it is nice and pleasant for a foreign investor to understand exactly (even on the technical elements) what she/he is doing and keep certain level of control on her/his overseas investments miles away from home.At Invicta Legal we are looking forward to providing you professional and efficient legal services. Each client is attended by a team supervised by one of the partners to guarantee top quality service. We have also created an important network with many other professionals such as architects, builders, accountants, appraisers, escrow agents, topographers, etc, that may be useful for our clients.

Alberto Sáenz & the Invicta Legal team.
Founding Partner
Contact me at: Alberto.Saenz@invicta.legal
Read about our Law Firm at: http://www.Invicta.legal

RE/MAX WE SELL PARADISE has been serving clients for over 13 years – our extensive knowledge and experience, together with a diverse staff and all the benefits of a global corporation, make us a trusted partner for all of your real estate related needs.