This country-specific Q&A provides an overview to real estate laws and regulations that may occur in Peru.
It will cover the most pertinent issues including ownership structures, restrictions, transfers, taxes and environmental contamination.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
The real estate market in Peru has evolved in recent years. This is due to the high levels of housing demand versus supply, as well as the boom years. Although there have been economic crises that have dragged the real estate and construction industries to decrease their growth levels between 2014 and 2016, dropping to 40%, in general, the real estate market has recovered in 2017 with a 7% rise, as reported by the Peruvian Chamber of Construction (CAPECO).
At the beginning of 2018, the forecast of the Peruvian Association of Real Estate Developers (ADI Peru) was that the sale of apartments in Lima for this year could increase by 20%. In January 2018, this growth was already noticeable with a rise of 13.92%. Also, trends in the Lima real estate market are expected to shift toward the construction of smaller apartments, because people prefer to live closer to their workplace to avoid having to travel long distances, as a result of transportation problems and lack of infrastructure. They also seek more urban spaces combining private and professional life, as well as commercial and leisure areas.
According to the vice-president of the Peruvian Association of Real Estate Companies (ASEI), the sale of apartments grew by 10% in the second quarter of 2018, compared to the previous quarter and more steadily than in the same period last year, because --among other factors-- the real estate industry was affected in 2017 by political uncertainty. However, according to ASEI, there are better prospects for the sector due to a forecast GDP growth of 3.8% and a reduced annual effective interest rate for mortgage loans.
In general, positive industry forecasts stem from Peru’s economic growth, the market demand for home ownership, constant and growing private investment in projects and certain government measures to boost it.
(Sources: El Comercio newspaper 05/15/2018 and 03/04/18 editions, Gestión newspaper 08/10/2018 edition and PQS Peru website 06/14/2018 publication).
How is ownership of real estate proved?
In Peru, the transfer of real property occurs with the sole obligation of the owner to convey the asset (Section 949 of the Civil Code), unless otherwise provided for or agreed. The law does not impose any minimum formal requirements on the sale of real estate and, therefore, ownership can be proven by any means.
Although filing with the Registrar is voluntary (it does not entail the creation of rights), it provides parties utmost protection on the basis of the presumption of knowledge since it ensures the enforceability of the right against all third parties, not only against the grantor.
In this connection, ownership rights over properties filed with Public Registries, are usually proven through their registration in the appropriate electronic entry.
Are there any restrictions on who can own real estate?
The Constitution states that, for reasons of national security, foreigners are banned from acquiring real estate located within 50 km from the national borders, except in cases of public need expressly declared by the Council of Ministers in accordance with the law.
What types of proprietary interests in real estate can be created?
In addition to ownership rights, the following may be created over real estate: (i) usufruct, which confers the power to temporarily use and enjoy another’s property, (ii) use and tenement, which allows to use a property, (iii) surface, which permits the surface owner to temporarily build a separate property on or under the ground surface, (iv) easement, which makes it possible to impose an encumbrance on the servient estate, for the benefit of the dominant estate; and (v) mortgage, which is a security interest created on immovable property to secure the payment of a debt.
The aforementioned are numerus clausus rights which are recognized in Peruvian civil legislation.
Is ownership of real estate and the buildings on it separate?
The general rule contained in the Civil Code establishes that everything that cannot be separated without destroying, damaging or altering the property is an integral part thereof and cannot be subject to unique rights based on the accessorium sequitur principle, according to which an accessory thing goes with the thing to which it is accessory or principal asset.
That said, a surface right allows the surface owner to own the construction built on or under the land which ownership is retained by the land owner. This right constitutes an exception to the accession rule. Likewise, the exclusive property and common property regime, applicable to condominium property, allows the owners of the exclusive units built above or below the land to own them without being exclusive owners of the land.
What are common ownership structures for ownership of commercial real estate?
The current commercial trend runs counter to the fragmentation of property. It is now usual for a person to retain title to a property while granting different rights over the commercial units to the direct user and dealing with the administration of the commercial complex, without prejudice to the possibility of detaching the commercial units located in a shopping center or office building. In the past, it was common for commercial units to be transferred, leaving the management of the commercial complex in the hands of the co-op board.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
In principle, the scope of the due diligence conducted prior to the acquisition of real estate will depend on the type of property and the purpose of the acquisition (e.g., land for the execution of a project or property built for a specific use).
The analysis of the property is carried out from three perspectives: legal, physical and urban.
The legal analysis includes a complete review of the titles and registry information, which will allow us to determine the identity of the owner, the legal description of the property, as well as to identify the charges and encumbrances. The process can become more complex if the property is not filed with the Public Registries or if the owner does not hold an ownership title that can be registered. Also, at the municipal level, the analysis includes checking whether taxes have been declared and paid and whether the certificate of construction has been issued to confirm that the property has the appropriate licenses; or if, otherwise, it needs to be regularized.
The physical analysis refers to the technical part of the due diligence and is intended to verify that the actual facts regarding the area and buildings are consistent with those indicated in the registry entry; and that these are, in turn, consistent with municipal records. It also includes checking that there are no overlapping areas between the property in question and the adjoining ones. The physical analysis of the property usually requires field work, during which the verification of possession is recommended.
Finally, the urban analysis is important if there are plans to develop a real estate project, as it will be necessary to check whether the zoning and uses are consistent with the project; and whether this conforms to urban and building parameters (maximum height, setback, minimum areas, etc.).
What legal issues (if any) cannot be covered by usual legal due diligence?
All the aspects detailed in the previous answer should be covered. That said, it is worth mentioning that there are aspects that can complicate real estate due diligence; such as properties not filed with Public Registries, or properties the location of which makes the field technical verification difficult, due to distance, poor or null consolidation or wild geographic characteristics.
What is the usual process for transfer of commercial real estate?
As noted earlier, Peruvian law does not impose a formality on the transfer of real estate; except in the case of donations (free transfer), which requires a public deed, under penalty of nullity. Transfers for valuable consideration only require consensus between the parties to materialize (consensual system). Notwithstanding the foregoing, property transfers are generally made through a written contract, which is subsequently formalized through a public deed and filed with the Public Registries.
As we also pointed out, in accordance with the consensual transfer system, there is no obligation to register the real estate or the rights that may be created over them, including ownership rights; however, it is always advisable to register property and other rights, in order to ensure their enforceability against third parties and to enjoy the protection of the registry.
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Yes, it is common for the transfer of real estate ownership to take place as a consequence of the transfer of the owning company. In this case, the due diligence prior to the acquisition must also include the company subject to acquisition.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
Yes, the transfer of real estate ownership entails the transfer of the collection rights on the proceeds of the leases or other interests over them. However, it is suggested to immediately communicate the acquisition to the tenants so that the rents are paid directly to the new owner.
In addition, the tenant is suggested to file with the Public Registries any lease and usufruct interests, among others, so that these rights are enforceable and, therefore, compulsorily recognized and observed by the new property owner.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
In addition to those rights indicated in the answer to question 4, it is possible for the real estate owner to grant other rights, other than the rights recognized in Peruvian civil legislation within a closed list (numerus clausus), through the conclusion of contracts. The most common are lease agreements, whereby the owner of the property temporarily grants its use to a third party; and trusts, which enable the transfer of certain privileges on the property to a trustee, the legal ownership of the property remaining with the trustor.
As indicated in previous answers, although it is not mandatory, the registration of ownership rights generates protection and ensures enforceability against third parties.
Are split legal and beneficial ownership of real estate (i.e. trust structures) recognised
Yes, the surface right allows to separate (temporarily, up to for 99 years) the ownership of the land from the constructions. The surface right beneficiary can own the constructions built on and under the land, title to the land remaining with the creator of the right.
In addition, a trust agreement allows the transfer of certain privileges pertaining to the property to a trustee, legal ownership of the property remaining with the trustor.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
The property tax and municipal taxes levy the ownership and possession of real estate. The property tax is calculated on the value annually reported to the appropriate Municipality by the owner itself, whereas municipal taxes are calculated by the Municipality. The property tax is paid on an annual basis, while municipal taxes are monthly levies charged in relation to public services.
Furthermore, property transfers are subject to a municipal transfer tax known as alcabala that must be paid by the buyer. A 3% tax rate calculated on the sale price is applied, unless the value of the property reported to the appropriate Municipality (Property Tax Appraisal) is greater. The first 10 Tax Reference Units are not assessed (the value of the Tax Unit for 2018 is equivalent to approximately USD 1,250).
The first sale of properties by construction companies is not subject to the alcabala tax, except for the value of the land according to the tariff value. The Municipal Tax Act establishes other exceptions to the payment of the alcabala tax, such as:
- Transfers resulting from an inheritance or from an early termination of the contract prior to the payment of the price; and
- Acquisitions by certain entities, such as the central government, foreign governments, international organizations and religious entities.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
In principle, the terms and conditions of leases can be freely negotiated by the parties. However, there are some mandatory provisions under the Civil Code, such as:
- The term of the lease cannot exceed ten (10) years, with a limit of six (6) years if the owner is a public entity or lacks legal capacity.
- A receiver, liquidator and any other officially appointed administrator cannot be a tenant of any of the properties under their administration.
The typical conditions for leases of commercial premises are as follows:
- Term: the above information must be considered;
- Rent adjustment: it is common to include an annual increase of around 3%;
- Authorization to sublet: the tenant must be authorized by the owner to sublet the units;
- Insurance: Clauses are usually included on insurance policies that cover destruction of or damage to the leased units;
- Repairs: Unless otherwise agreed, the owner is required to make the necessary repairs during the term of the lease. If the necessary repairs are urgent, the tenant must make them and the owner will reimburse them.
- Maintenance: the maintenance cost is usually assumed by the tenant, unless otherwise agreed.
- As of August 2014, when Law 30201 came into force, it is possible and advisable for the landlord to incorporate an advance acceptance clause that establishes the possibility of yielding in advance to a future eviction claim due to contract expiration or lack of payment, provided that the signatures on the contract have been authenticated by a Notary Public or Justice of the Peace.
How are use, planning and zoning restrictions on real estate regulated?
The zoning and authorized uses are regulated at the municipal, provincial and district levels, through urban development plans. These plans approve land zoning, uses and compatibility (rural and urban), building design parameters, among others. One of the most important regulations in this regard is the Regulations on Territorial Conditioning and Sustainable Urban Development, approved by Supreme Decree No. 022-2016-VIVIENDA.
It should be noted that properties that are considered as protected natural areas under Law 26834 and its regulations approved by Supreme Decree No. 038-2001-AG, and/or as national cultural heritage under Law 28296 and its regulations approved by Supreme Decree No. 011-2006-ED, have specific restrictions and require the implementation of protection measures.
Who can be liable for environmental contamination on real estate?
Pursuant to the Cost Internalization Principle and Environmental Liability Principle established in the General Environmental Act (Law 28611), the agent who uses or exploits an asset or carries out an activity and, as a result, causes degradation to the environment and its components, the quality of life, the health or assets of one or more individuals, is required to adopt measures for its restoration, rehabilitation or reparation, as appropriate, and assume all the costs related to prevention, mitigation, surveillance and monitoring of such activity.
In this regard, the polluter is always liable for environmental contamination and clean-up, regardless of whether the polluter is the occupier or owner of the real estate. Thus, a real estate buyer is not liable for investigation and clean-up of contamination caused to the land.
Without prejudice to the above, environmental liability, responsibility or risk for contamination can be contractually transferred to a third party in the real estate sale agreement. However, this would be legally binding only on the parties to the contract.
Is expropriation of real estate possible?
Yes, Section 70 of the Political Constitution of Peru establishes that the State may expropriate real estate for national security or public necessity reasons established by law, in exchange for the payment of fair price.
Legislative Decree No. 1192 regulates the expropriation procedure, stating that it must be expressly authorized by a law enacted by Congress and can only be carried out in favor of the State.
Fair compensation includes the assessed commercial value of the property determined by the Ministry of Housing, and the proven damages suffered by the owner.
Is it possible to create mortgages over real estate and how are these protected and enforced?
Yes. Mortgages can be granted by the owner over real estate and are formalized by public deed. They are valid provided that they are filed with the Public Registry.
Are there material costs associated with the creation of mortgages over real estate?
Yes. Notarial fees must be assumed for the execution of the public deed and the payment of the registry fees for the filing of the mortgage with the Public Registries.
Considering the private nature of notarial fees, they are not fixed, but rather usually depend on the property value and the tax amount. Registration fees are calculated on the basis of (approximately) USD 0.23 for each USD 300 of the value of the lien (applicable to acts amounting to a maximum value of up to USD 10,500) and S/. 0.45 for each USD 300 of the lien value (applicable to acts amounting to a value greater than USD 10,500), plus a rating fee of (approximately) USD 10.
Is it possible to create a trust structure for mortgage security over real estate?
It is possible to transfer a mortgage security to a trust, thus becoming part of the trust estate.
Also, it is not unusual that, in addition to creating a mortgage security to guarantee the performance of certain obligations, the same encumbered property is transferred to a guarantee trust, thus creating a dual security interest over the same property.
What is the main legislation relating to commercial real estate ownership?
Peruvian real estate provisions are quite fragmented across different laws. The main rules are contained in the Constitution of 1993 and the Civil Code of 1984.
The use of land is regulated primarily by the Regulations on Territorial Conditioning and Sustainable Urban Development, approved by Supreme Decree No. 022-2016-VIVIENDA. The construction process is mainly regulated by the “Law on the Regularization of Buildings, the Procedure to Apply for Certificates of Construction and the Regime of Real Estate Units under Exclusive and Common Property”, enacted by Law No. 27157, the “Ownership Rights and Land Regularization Act”, enacted by Law No. 29090, and Legislative Decree No. 1037, which promotes private investment in housing projects of social interest to improve the economic competitiveness of cities.
Other important regulations include the Income Tax Act, approved by Supreme Decree No. 179-2004-EF, and the Municipal Taxation Act, approved by Supreme Decree No. 156-2004-EF.