By: Bianca Watts and Anthony R. Eaton, Esq.

Wilke, Fleury, Hoffelt, Gould & Birney, LLP

Sacramento, CA

          As the costs of doing business increase each year, many employers are looking for effective ways to ensure productivity among their employees, promote workplace safety and prevent chronic absenteeism.  Many employers, for example, require that employees returning from a medical  leave of absence undergo a “return-to-work” medical exam to ensure that the employee can safely perform his or her job functions.

          Generally, return-to-work medical exams are legal.  Employers can ask questions about the medical issues surrounding an employee’s disability or leave.  However, to comply with the Americans with Disabilities Act (“ADA”) and the Rehabilitation Act, the exams and disability-related inquiries must be limited in scope and narrowly tailored to evaluate whether the employee can perform the essential functions of the job.  The employer cannot use the employee’s medical leave as an excuse to make broad, intrusive disability-related inquiries or subject the employee to medical exams that have nothing to do with why the employee went out on medical leave.

An Example of What NOT To Do

         In Scott v. Napolitano, an employee suffered a number of physical injuries and psychological disorders that required him to take medical leave.  Over a period of six years the employee suffered sinusitis, an injury to his right arm and shoulder, and was diagnosed with depression, anxiety and work-related stress.  The employee’s supervisor became concerned that these health issues would impact his ability to perform the full range of his job duties and be trusted with his government issued side-arm.  The supervisor recommended that the employee complete a “fitness for duty” examination.

          Prior to the scheduled exam, the employee was asked to fill out a medical questionnaire by the examining physician.  Many of the questions were very broad and not limited to a specific time-frame.  For example, the employee was asked if he had ever been treated for a mental condition and to list all medications he was currently taking.  In addition to the questionnaire, the employee was required to sign a release that permitted any doctor, hospital or clinic to release all of the employee’s medical information to his employer.

          The employee refused to answer many of the questions in the medical questionnaire because he believed they violated his legal rights.  Further, the employee crossed out the language of the release and wrote that he would only authorize the release of the results of the upcoming “fitness for duty” exam, not any other personal medical records.  The employee was warned that he had 14 days to answer all of the questions and sign the full release.  When the employee did not comply, he was suspended for insubordination and was advised that he must answer the questions and sign the release.  The employee again refused and was terminated.  The employee sued, alleging the employer’s practices violated the ADA and the Rehabilitation Act.

          The court agreed with the employee and found that the questions in the medical questionnaire were impermissibly overbroad disability-related questions.  The court held that medical exams and inquiries cannot be required unless those exams and/or inquiries are shown to be job-related and consistent with business necessity.  A business necessity may include ensuring workplace safety or preventing excessive absences.  Further, once a business necessity is shown, the exam or inquiry cannot be any broader or more intrusive than needed for the employer to determine if the employee is currently able to perform the essential functions of his or her job.  For the most part, exams or inquiries related to the specific medical condition for which the employee took leave will be all that is warranted and should be limited to a specific time-frame.

Lessons for You

          Return-to-work medical exams or disability-related inquiries are permissible as long as you comply with the ADA and Rehabilitation Act.  Remember that these exams and inquiries must be driven by a business necessity, such as ensuring workplace safety.  Also, the exams or inquiries must be limited to determining whether the employee can currently perform his or her essential job duties.  Exams or inquiries not limited in time or tailored to the specific medical condition for which the employee took medical leave may violate the ADA and Rehabilitation Act and subject you to liability.

For more information on Wilke, Fleury, Hoffelt, Gould & Birney, LLP, visit the International Society of Primerus Law Firms or wilkefleury.com.

By: Frank E. Melton and Wendy E. Lane

Rutter Hobbs & Davidoff

Los Angeles, CA

The explosion in use of social media, both in and out of the workplace, has created exciting new opportunities and dangerous challenges for employers.

Many companies have embraced the use of new social media such as Facebook, LinkedIn, Twitter, and blogs to (1) host their own company sites; (2) encourage employees to actively promote their company, enhance business relationships, and foster the exchange of useful but non-confidential business information; (3) recruit, research and check references for potential new hires; and (4) investigate and terminate employees or to gain evidence to support a company’s claims or defenses in trade secret and other employment-related cases.

Other companies view the ever-increasing level of use of social media as more of a liability than a business opportunity. For the past decade, employers have struggled to balance the benefits of employee use of e-mail, Internet “surfing,” instant messaging, and texting with the costs of employee downtime and risks to the company. The exponential growth of new forms of social media is viewed by some as distractions to employees, increasing legal and business risks to the company.

Legal and Business Dangers to Employers

Social media provides many ways to connect with friends and family, promote oneself personally and professionally, and have fun. However, employee use of social media also creates new potential legal liabilities and serious business issues for employers, such as employees’ defamation of co-workers or others; trade libel of employers or competitors; postings that embarrass or harm the employee, co-workers, or employers; improper disclosure of trade secrets or confidential/proprietary business information; and harassing or discriminatory communications.

Furthermore, a Federal Trade Commission guideline effective December 2009 creates liability for companies whose employees, with or without the company’s knowledge, publicly endorse or give testimonials about their employer’s services/products on social media sites without disclosing that they work for the company which they are “advertising.” Employers may similarly be liable under the federal Lanham Act for employees’ “false advertising” on such sites.

Employers can also face significant liabilities under state or federal employment law by improperly using information discovered on social media sites to terminate employees or decline to hire them. For example, if an employer learns through Facebook that an employee or applicant has a disability or other protected characteristic such as sexual orientation, ethnicity, or religious affiliation, it may face liability for discrimination if it fires or declines to hire the individual soon afterward. Employers may also face liability for taking adverse action against employees, without a legitimate business reason, based on information about the employee’s legal off-duty conduct made public through social media. California Labor Code Section 96(k) bars employers from terminating or disciplining employees for lawful off-duty conduct.

The challenges for employers and employees presented by social media use are compounded by the blurring of the line between business and personal communications. Employees may unintentionally or carelessly publicize information that should have been saved for a smaller audience. Social network postings can create a permanent record that may haunt individuals in job searches for years to come or cause business or legal problems for themselves or their employers. Even when certain privacy settings are used, there remains some risk of the information becoming public.

Recommended Actions for Employers

With the increasing pervasiveness of social media, we recommend that companies consider carefully the business, legal and HR issues raised and take steps to maximize business opportunities while minimizing potential risks.

As an important first step, employers should develop a social media policy, coordinating it with any existing policies on e-mail, Internet and electronic media usage, and codes of business conduct. The policies should include language reserving the company’s right to monitor employee use while at work or using company electronic devices, and while off-duty using the employee’s personal electronic devices where the employer’s business interests are implicated. This is especially important in California, where employees have a right of privacy under the California Constitution, and employers’ monitoring policies need to be published to employees to minimize their employees’ expectation of privacy. Federal laws, such as the Computer Fraud and Abuse Act, Stored Communications Act, and Electronic Communications Privacy Act, create additional employee privacy rights.

The focus of an employer’s social media policy will vary according to the company’s business needs and culture. Examples of issues, include:

• Requiring disclosure/approval of company-related content under certain circumstances.

• “Friending” of bosses, managers, subordinates and clients, whether of the same sex or opposite sex.

• Determining how much personal use of social media during work time, if any, is acceptable.

• Specifying uses of social media that violate company policy because they may create business problems or legal liability for the company.

• Emphasizing the use of common sense and good judgment as to what employees post or write when using social media, given that seemingly personal postings can have serious business implications.

For more info on Rutter Hobbs & Davidoff, visit the International Society of Primerus Law Firms or rutterhobbs.com.

By: Stephen K. Rush

Niesar & Vestal LLP

San Francisco, CA

Welcome to California: Watch Out For Those Speed Bumps!

California has some quirky laws that often surprise lawyers from other states who are involved in California-based transactions.  It is not always clear where some of our laws are going, or which direction a business person is meant to take.

To help you maneuver your way around these speed bumps, this series of articles explores some of the more unusual California laws that trip up or otherwise cause consternation to out-of-state attorneys involved in California transactions.

In previous months we looked at California usury laws, club memberships that could be treated as a securities offering, broker-dealer requirements for officers and directors who help their companies sell securities, real estate licensing for M&A practitioners, the unauthorized practice of law in California, the internal affairs doctrine, work for hire employment issues and contractual waivers of jury trial. 

Introduction

            Imagine that in 2005 you either lived in California or traveled to California on business or holiday with your family.  Being a lover of beautiful paintings, while in the Golden State you purchased a work of fine art by a local artist from a gallery for $5,000.   Then in 2010 you negotiate to sell the work to a buyer in California for $8,000, making a nice profit on your original investment.  Can you simply pocket all of the money and smile all the way to the bank?

            No.  Under California Civil Code § 986, you as the seller of the work of art are required to retain 5% of the resale price and to pay it over to the artist or the artist’s agent within 90 days of the sale.  If you are unable to locate the artist, you must pay the 5% royalty over to the California Arts Council.  In the event you fail to pay the artist or to remit the royalty to the Arts Council, the artist may bring an action against you for damages, with the prevailing party being entitled to reasonable attorney’s fees.  This action may be brought within three years after the sale or one year after the discovery of the sale, whichever is longer.

Discussion

            This right granted to artists or their heirs, in some jurisdictions, to receive a fee on the resale of their works of art is known as a droit de suite (French for “right to follow”).  The droit de suite was created in France in the 1920s and influenced by the sale after the First World War of Jean-Francois Millet’s famous 1858 painting, The Angelus.  The owner of the painting came away with a substantial profit while  Millet’s family lived in poverty.  The French law was also passed to assist the widows of artists killed in WWI.  Many countries have enacted some form of droit de suite and it is incorporated in Article 14ter of the Berne Convention for the Protection of Literary and Artistic Works.  The underlying premises in favor of the resale right are (i) that the value of works of fine art lies in the original work or in a limited edition, and not in the prospects of mass distribution under applicable copyright law, and (ii) that artists who typically sell their works at very low prices should be allowed to share in the increase in value upon resale.  There are certainly contrary viewpoints.  This right lasts only while the work of art is subject to copyright protection so there is no need to pay a royalty to the estates of Rembrandt, Raphael or Da Vinci. 

            California is apparently the only state in the United States to have enacted a form of droit de suite.  Under the statute “Artist” is defined as the person who creates a work of fine art and who, at the time of resale, is a citizen of the United States, or a resident of California who has resided there for a minimum of two years.  “Fine Art” is defined as an original painting, sculpture, or drawing, or an original work of art in glass.  But the law provides several limitations and protections.  Although upon the death of the artist the rights to the 5% royalty pass to the heirs, the rights expire 20 years after the death of the artist.  The artist cannot waive the right to receive the royalty unless there is a written contract for the seller to provide the artist with a royalty of greater than 5%.  However, the royalty obligation does not apply to any sale of fine art where the gross sales price is less than the purchase price paid by the seller.  So in the hypothetical above if the sales price is less than the $5,000 originally paid for the painting, no royalty would be due the artist.  Finally the royalty obligation does not apply to the resale of fine art for a gross sales price of less than $1,000.      

Conclusion

            The conditions under California that will trigger the seller’s obligation to pay the 5% resale fee are:

• The seller resides in California or
• The sale takes place in California and
• The artist resides in the U.S. or has resided in California for a minimum of 2 years and
• The resale price is greater than the original purchase price and the resale price is greater than $1,000 and
• If the artist is deceased, the death occurred less than 20 years earlier.

            The right of an artist to share in the resale of fine art has not found much favor in the U.S., Canada, New Zealand or Asia with the exception of the form of the right adopted in California.  This is unfortunate as visual artists should enjoy legal protections similar to what other artists enjoy.  Pursuant to the copyright laws in most countries, a license fee is paid to the author or artist when a piece of music or film is played.  The creative effort that an artist invests in a work of fine art should be acknowledged with an ongoing proprietary interest in the revenue when the work is sold.  More states should take California’s lead in protecting their indigenous artists.             

This article is intended to provide a general summary and should not be construed as a legal opinion nor a complete legal analysis of the subject matter.  Stephen Rush is an attorney at Niesar & Vestal LLP in San Francisco, a law firm specializing in business law, corporate finance and intellectual property law. 

For more information on Niesar & Vestal, please visit the International Society of Primerus Law Firms or www.nvlawllp.com.

By: Dennis L. Monroe

Monroe Moxness Berg PA

Minneapolis, MN

I have always believed and written that franchisors should play an active role in helping their franchisees. Franchisors historically seem to take three basic approaches when dealing with their franchisees:

1. “Ignore the Problem.” The first approach (which was common for many years) is for franchisors to ignore the situation and believe it is the franchisees’ problem. This approach may have been plausible in the past when poor performance was due to franchisee operational inadequacies. However, today many franchisees are in trouble because of old and tired systems where the franchisor has not taken an active role in trying to reposition the franchise as well as the general overall economic decline.

2. “No Prisoner Approach.” The “no prisoner” approach is when the franchisor goes after franchisees with a vengeance when they are unable to meet their development obligations, cannot come up with the money for appropriate remodels, and are behind in their franchise royalty or advertising payments. This approach has been noticeable as reflected in the recent increase in litigation across many systems, particularly in QSR.

3. “Pro-Active.” The third approach is a pro-active approach whereby the franchisor recognizes cooperation is the key to preserving a franchise system. While everyone has to do their part, in many cases some of the elements for the franchisees are truly outside their control and need to be looked at on a more global basis and solutions found that fit both the franchisor and franchisee.

The most interesting thing I’ve seen is franchisors addressing the franchisee’s inability to develop and fulfill their development obligations. A good share of the franchisors I work with have been pro-active by going to the franchise community to either suspend development obligations for a period of one to two years or re-negotiate development agreements to meet the needs of both the franchisee and franchisor. If the franchisees are able to develop, in many cases franchisors are providing incentives for this development. These incentives normally are in the way of royalty relief or a suspension of the royalties for a period of one to three years.

As I’ve written in the past, many franchisors are taking a very aggressive approach to providing dollars for development. Some of the approaches franchisors have taken are:

• Direct loans;

• Enhancements (meaning guaranties or some type of re-marketing arrangement with lenders who provide funding for the franchise system);

• Credits (against the royalties);

• Providing financing planning tools (such as business plans and credit evaluations on the franchisor);

• Assisting in lease negotiations; and

• Becoming obligated on a secondary basis under certain leases.

These franchisor efforts have all been great help for franchisee development.

As to troubled situations, there are three major issues causing stress in the franchise world: (1) inadequate cash flow to satisfy fixed obligations; (2) remodel obligations dictated by the franchisor; and (3) the inability to close stores. Let’s address each of these issues individually:

1. Inadequate cash flow. In many cases, the lenders in today’s market are willing to work with stressed franchisees by doing a restructure, lengthening amortizations, putting a portion of the debt on non-accrual, or even forgiving a portion of the debt. However, lenders and even landlords view the franchisor’s participation as a key component of any type of workout plan. I have seen a number of franchisors who have participated in franchisees’ workout by deferring royalties, forgiving past due royalties or even allowing the royalties to be paid under a waterfalls approach (where they will only be paid if there is an adequate cash flow after some minimum level of debt service).

2. Remodel obligations. Franchisor remodel obligations or the required purchase of new equipment can put a lot of stress on the franchisees. On the other hand, franchisors are caught between a rock and a hard place. They’ve seen their system’s sales erode; and they realize that in order to re-establish their brands, significant capital improvements are probably necessary along with an image change and new equipment. This all may be true but unfortunately, many franchisors have become almost myopic and have told the franchisees that they have no choice but to comply with the capital improvements. Sometimes franchisors have tried to implement these changes through operating procedures (which legally is somewhat suspect) or by enforcing general requirements under the Franchise Agreement. Remodels and improvements are an important part of the franchise world but if franchisors insist on these steps, they need to provide financing for the franchisees.

More importantly, the franchisors have to show the franchisees that there will be a return on these capital investments. It is important for the franchisor to show through the capital expenditures on their corporate stores the effect of these proposed changes. They need to put their money where their mouth is before they expect franchisees to make these changes. Unfortunately, some franchisors have forced this issue and have begun to commence litigation against non-complying franchisees.

3. Store Closures. I’ve seen a tremendous amount of issues lately with store closures. Many franchise systems are very mature and have a number of units that should be closed. But franchisors, particularly if they are publically traded, are under tremendous pressure to keep the number of franchise units at a constant level and actually show some type of unit growth. Closure of units does not seem to play into the franchisor’s public relations with the investment world. This being said, the franchisors have to allow reasonable closures and also allow these reasonable closures without a significant payment by the franchisee. The reason these stores need to be closed is that they are losing money. When a franchisor asks for some type of payment (which we call “liquidated damages” and is normally computed by a discounted stream of royalty which would have been received if the stores had stayed open), the franchisor is taking a very short-sided approach. If the store is truly losing money or if there are other extenuating circumstances (like excessive rents), the franchisor needs to allow the franchisee to close that store. The franchisor should focus on working together with the franchisee and possibly relocating the store or making efforts to mitigate the negative publicity. The franchisor should not focus on trying to collect a closure fee.

Franchisors need to be part of the solution for a troubled system. Some other creative franchisor solutions are to buy back troubled units from the franchisee (thus protecting creditors, both secured and unsecured); enter into joint venture agreements, or provide capital to the franchisee for certain turn-arounds. Franchisors have, at times, helped to assist franchisee credit issues for system-wide vendors and stood behind vendor payments until the franchisee can get back on its feet. A number of franchisors have provided operational support and helped negotiate with landlords for rent reduction; and in general, found ways to enhance the franchisees’ store level profitability.

I encourage every franchisor to take an enlightened approach to all aspects of the franchisee/franchisor relationship. This approach includes everything from development to royalty payments to store closures to remodels to capital expenditures. When the franchisor works together with its franchisees, most can all endure this continued economic slowdown.

For more information on Monroe Moxness Berg, visit the International Society of Primerus Law Firms or mmblawfirm.com.

By: Dr. Márk PÁNDI

Füsthy & Mányai Law Office

Budapest, Hungary

Protection of Consumers against General Terms and Conditions

As all over the world the big global companies especially in the sectors of utility services, public transport, telecommunication industry etc. often use general terms and conditions in their business relationship with customers also in Hungary. Therefore protection of these customers stands in the core of civil law regime. The goal of this protection is that unfair terms are not used in contracts concluded with consumers by a seller or supplier and that if, nevertheless, such terms are still used, they will not bind the consumer and the contract will continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair provisions.

According to Section 209 of the Civil Code a standard contract condition or a contractual term of a consumer contract which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith and honesty, it causes a significant and unjustified imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. For the purposes of the Civil Code consumer means any person who is a party to a contract concluded for reasons other than economic or professional activities.

Section 209/A of the Civil Code sets forth that an unfair contractual term that has been incorporated into the contract as a standard contract condition may be contested by the injured party. Moreover, under Section 209/B a contractual term that has been incorporated into the contract as a standard contract condition may also be contested in the court of by an organization described in specific other legislation. The court may declare the unfair term null and void in favor of all of the parties with which the party imposing the condition has a contractual relationship.

This article is dedicated to the analysis of challenging general terms and conditions by specifically authorized organizations (actio popularis or claim of public interests). Among others, the public prosecutor’s office, the minister, the notary, the social organizations enhancing consumer protection rights etc. belong to these special organizations.

Background

The category of unfair general terms and conditions were enacted into the Civil Code in 1997, and then amended creating a new structure since 2006, mostly based on Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. The annex to the Directive contains a non-exhaustive list of terms that may be regarded unfair. A similar list can be found in Hungarian law, too. As a matter of fact, a very important difference can be discovered between the term consumer used in the Directive and in the Hungarian Civil Code. The definition of Hungarian term is described in the above paragraph showing that not only individuals can be interpreted as consumers. On the other hand, for the purposes of the Directive consumer means any natural person who in contracts covered by the Directive is acting for purposes which are outside his trade, business or profession. Still, the wider meaning of the term consumer in Hungarian legislation is absolutely in harmony with the Directive because the latter expressly allows that member states may adopt or retain the most stringent provisions compatible with the Treaty establishing the European Economic Community, in the area covered by the Directive, to ensure a maximum degree of protection for the consumer.

Recent Guidelines of the Hungarian High Court

The High Court elaborated some guidelines to be followed by lower courts in its sense when talking about an actio popularis to factors should first be examined by the courts: whether or not the legal action (i) is introduced by authorized organizations and (ii) challenges the validity of general terms and conditions used in consumer contracts. If the answer is yes to both questions, the courts should take into consideration the following aspects.

In the statements of claim it is not the invalidity of the contract but the invalidity of the unfair terms of the contract attacked should be requested to be declared null and void by the court.

If the party contracting with the customer has modified or overruled the terms in question before the judgment of the court is rendered that does not exclude the substantive examination of the invalidity. The adequate and effective protection of the customers’ rights requires that passing a judgment affecting any and all consumers could not be obstructed such a way.

The courts do not have to insist on merely the facts and reasons put forward by the plaintiff introducing the actio popularis. A term of the contract may also be ruled unfair and null and void upon the evidence obtained by the courts ex officio, even in the course of the proceedings at second instance.

The courts should not apply the general legal consequences of invalidity laid down in Section 237 of the Civil Code (restoration of the state of affairs having existed prior to the conclusion of the contract or if the state of affairs having existed prior to the conclusion of the contract cannot be restored, the court shall declare the contract valid for the period up to the date of judgment), but the special legal consequences of Section 209/B of the Civil Code. (The court may declare the unfair term null and void in favor of all of the parties with which the party imposing the condition has a contractual relationship.) An unfair term cannot be declared valid by substituting a new term determined by the court.

The legal consequences to be applied in case of determination of unfairness are listed in Section 209/B (1)-(4) of the Civil Code with mandatory nature adjusting them to the given development phase of the unfair term concerned.

The courts can only order publishing an announcement on the invalidity if such petition was included in the statement of claim. In this case the judgment shall contain the wording drawn up by the court.

Remarkable Examples of Court Practice

BH2006.19: A general contractual term is unfair if it sets forth that the contractor shall be entitled to the commission fee even if the real estate is purchased by a party other than the potential buyer mediated by the contractor.

BH2007.46: A general term of a property insurance contract stipulating that the purchase value of the property in new condition will be paid only if the purchase of replacement in new condition has taken place is unfair.

BH2009.323: The unfairness of a contractual term has to be examined uniquely within the framework of the very legal transaction. 

BH2010.70: A union syndicating consumer protection organizations is not entitled to introduce a claim in public interest if its charter does not contain among its goals the direct protection of consumer interests but only syndicating those organizations which operate in order to protect consumer interests.

For more info on Füsthy & Mányai Law Office, please visit the International Society of Primerus Law Firms or fusthylawoffice.hu.

By: Jorge Ojeda

Cacheaux Cavazos & Newton

Monterrey, Mexico 

The Mexican real estate has been a dynamic area of the Mexican economy. The legal regime applicable to foreign investment in Mexican real estate is an important consideration, especially with respect to restrictions and requirements that could apply to investors participating in this segment of the economy. In Mexico, foreign investment is defined as: (i) participation by foreign investors (individuals or entities) in the capital of Mexican companies; (ii) investment carried out by Mexican companies with a majority of foreign investment; and (iii) participation by foreign investors in the activities or actions set forth in applicable Mexican law. 

Private ownership of real property in Mexico and the Restricted Zone.

Private ownership of real property in Mexico is a constitutional right ordained in the first paragraph of Article 27 of the Mexican Constitution.  Such right to acquire real property extends to foreigners, with certain additional restrictions, so long as the foreign investors agree to be bound by a Calvo Clause, pursuant to which the foreign investors agree to be considered as Mexicans with respect to said property, and not to invoke the diplomatic protection of their countries of origin with respect to their real property rights.  Despite the requirement of agreeing to be bound by the Calvo Clause, it is important to note that Mexico has entered into a broad network of international treaties and agreements protecting the rights of foreign investors. 

Foreign investors may not acquire direct ownership (real rights) in real property located in the so-called Restricted Zone, which consists of a strip of land 100 kilometers from the land border and 50 kilometers inland from the sea; however, in certain cases, foreign investors may obtain rights through a trust (personal rights) into which legal title of real property located in the Restricted Zone has been transferred. 

Ownership by private parties of real property in Mexico does not allow such owners to freely take advantage of subsurface resources, all of which belong to the Mexican state, which may grant to private parties, whether Mexican or foreign, the use and enjoyment of such resources in conformity with applicable law, such as the National Waters Law and the Mining Law, among others.

Real property subject to Ejidal or Comunal ownership.

The Mexican legal system recognizes and protects certain real property for the benefit of the Mexican people that is subject to the ejidal or communal property ownership regime.  As of today, approximately 52.7% of Mexico’s territory is subject to one of these types of property ownership.[1] 

Foreigners may not own land subject to ejido or communal ownership regimes, but may lease such properties for productive activities.  In the case of ejido land, if one complies with certain requirements, it is possible for private parties, including foreigners, to acquire legal title of said property, although it is important to carefully and adequately review these types of projects. 

Foreign investment in real property located outside the Restricted Zone.

Foreign investors (individuals or entities) may acquire direct, fee simple title ownership of land located outside the Restricted Zone, for which they must obtain a permit from the Mexican Department of Foreign Relations (Secretaría de Relaciones Exteriores or “SRE”), the application for which will include an agreement by the foreign investor to abide by the Calvo Clause.  The simple presentation of a waiver of agreement to the Calvo Clause applies if the foreigner is a citizen of a country with which Mexico maintains diplomatic relations. 

In the case of a Mexican entity with a clause admitting foreign investors, such entity may acquire direct, fee simple title in Mexican real estate located outside the Restricted Zone without any restrictions except those related to agricultural, ranching or forestry lands to be discussed below. 

Foreign investment in real property located within the Restricted Zone.

Foreign investors (individuals or entities) must enter into a trust to be able to acquire beneficial trust rights in real property located within the Restricted Zone. 

In a real property trust agreement, a party known as the trustor, or settler, transfers to a financial institution (Mexican bank) legal title to real property for the benefit of a foreign trust beneficiary, who receives the right to use and enjoy the real property, including the fruits, production and income derived from same.  The duration of these trusts is generally 50 years, and may be renewed; in case of a sale the trust beneficiary will receive the corresponding proceeds.

Mexican entities with a clause in their bylaws admitting foreign investors may acquire fee simple title of real property located within the Restricted Zone, provided they provide notice of such acquisition prior to closing.  However, a trust is required when the use of the real property is residential, which is a very limited concept that does not include tourism projects, time shares, real estate development for sale to third parties, among others.

Foreign investment in agricultural, ranching or forestry land.

Mexican entities with a clause in their bylaws admitting foreign investors may own agricultural, ranching or forestry land; however, such entities must issue a special series of shares known as “T” shares, representing capital invested by the foreign investor in the land or assets being acquired. 

Foreign investors may not participate at a level greater than 49% in a corporation’s series “T” corporate capital.  The Foreign Investment Law allows participation at a greater level through a concept known as “neutral investment,” even though practically speaking the Mexican Department of the Economy (Secretaría de Economía) does not issue such authorizations.

Tax aspects related to real property in Mexico.

In regard to income taxes, income derived from leasing and selling real property located in Mexican territory is subject to taxation in Mexico.   

Income from leasing real property located in Mexico owned by foreign investors is subject to an income tax of 25%, without any deduction, and for the sale of real property by foreign investors, such investor has an option of paying 25% of the sales price, without any deduction, or applying a 30% rate to the profit realized from the sale, provided one complies with applicable fiscal requirements. 

Mexico has entered into a wide range of international tax treaties in order to avoid double taxation, and from such treaties it is possible to obtain certain tax benefits. 

In regard to the value added tax (Impuesto al Valor Agregado of “IVA”), a transfer of real property without improvements is not subject to such tax; however, improvements are subject to a value added tax rate of 16%, except in cases of a transfer of improvements to be utilized for primary residential (homestead) purposes.

Acquisitions of real property in Mexico are subject to the Real Property Acquisition Tax (Impuesto Sobre Adquisición de Inmuebles, or “ISAI”), which as a general rule is between 2 and 3.5% of the value of the real property, depending on the location of such property, with the purchaser usually assuming the obligation to pay registration fees (Derechos de Registro) concerning the recording of the purchaser’s deed, which generally do not exceed 1% of the value of the transaction. 

Property taxes (impuesto predial) in Mexico are determined by local authorities, and are generally low, equal to approximately 1% of the property’s appraised value as registered with the local tax assessing office (catastro).

For more information on Cacheaux Cavazos & Newton, please visit the International Society of Primerus Law Firms or ccn-law.com.