Pre-Construction Sale Agreements

Up until the third quarter of 2022, the inventory makeup in Los Cabos was 970 properties, where pre-construction inventory (554 units) on MLS exceeds physical inventory (416 units). Source: Dean Short, October 11, 2022, 2022 Q3 Real Estate Market Report, www.caborealestateservices.com

So with more pre-construction inventory in the area, the legal revision of pre-construction sale agreements is becoming a trend.

Whereas the Mexican legislation is fairly adequate for this type of real estate transactions from the civil and commercial standpoint, as of September 22, 2022 a new executive regulation became effective to protect customers of pre-construction projects.

The new executive regulation NOM-247-SE-2021 encompasses the latest guidelines for pre-construction transactions, as a result of an ongoing effort to protect customers since the Customer’s Protection Law was issued in 1992.

Unfortunately, most of the real estate developers in Los Cabos do not follow the customer’s protection guidelines for pre-construction projects, which lead clients to search for legal advice in the revision of their pre-construction purchase contracts.

These are the 5 most common legal highlights I have come across in the revision of multiple pre-construction agreements, from the customer’s protection perspective:

Completion Date for the Unit and the Project

Once the initial deposit has been paid, in my opinion the best payment structure for the remaining balance in a pre-construction deal, are subsequent payment installments condition to specific and verifiable completion stages of building, such as: breaking ground, foundation, roof, floor, carpentry, etc. and a final payment prior to closing.
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This allows buyers to verify the seller’s performance and contribute accordingly, or hold payment in case of delays in the construction calendar. Final payment prior to closing is an important incentive to ensure seller transfers ownership title to the buyer, according to the agreed terms.

Normally, the pre-construction contract will include as an exhibit the plot plan of the unit under construction. However, most of the times buyers and sellers do not include the description of the amenities and common areas of the project in the pre-construction agreement.

This could lead to confusions and misrepresentations in the future if the finished project is not consistent with the renders or brochures. The legal suggestion is to include a detailed description of the common areas and amenities featured in the project, including specific completion dates according to what is been offered by the sales team.

Completion Date for the Condominium Regime

The condominium regime is processed by the developer before the City and includes a detailed description of the project, including surface, measures and boundaries of each individual unit, common areas of the project, such as: gym, pool, club house, green areas, etc. and the Rules and Regulations that will govern the community with important provisions for HOA assemblies, assessments, homeowner’s rights and restrictions, among others.

The incorporation of the condo regime is essential to begin with the closing process and transfer title to the buyer, so it is important to establish a specific completion date for the seller in the pre-construction agreement.

Customized Features and Upgrades

“If it’s not in writing, it does not exist”. Any customized feature and/or upgrade agreed with the seller must be included in the pre-construction agreement in writing. Developers normally offer furniture, appliances or upgrade packages to the buyers that will be included as an exhibit to the pre-construction agreement.

If the purchase price includes a parking lot, garage, storage room or any additional element in or outside the Unit, it is important to include it in the pre-construction agreement.

Guarantee for the Unit and Fixtures

Normally the pre-construction agreement will include a one year guarantee as of the delivery date of the Unit to the buyer, for construction works, hydraulic, sanitary and electrical facilities, and there is no room with the seller for negotiation in these type of clauses.

However, it is important to know that according to the Customer’s Protection Law, buyers are entitled to a 5 year guarantee for structure deficiencies of the Unit; 3 year guarantee for waterproof; and, 1 year for any other issue in the Unit. This rule applies even if the developer does not want to include it in the pre-construction agreement and it cannot be waived by the parties.

Penalties in case of default

Usually, the pre-construction agreement will include a penalty of 20% of the total purchase price in case of buyer’s default, amount that will be retained by the seller and any remaining balance returned to the buyer. However, in case of seller’s default, pre-construction agreements normally only provide that the seller must return all amounts paid by the buyer and without any interest.

According to the Customer’s Protection regulations, the conventional penalty in case of default of any of the parties must be “reciprocal and equivalent”, meaning that if 20% of the purchase price applies to the buyer, same should apply to the seller. In reality, there is very little room for negotiation in these type of provisions, due to the fact that the seller usually encounters multiple challenges during the construction of the project that could result in his default.

Even if the pre-construction agreement does not include a conventional penalty in case of seller’s default, the Mexican Customer’s Protection Agency has the authority to award the buyer with a compensation of up to 30% of the purchase price in case of seller’s default, which ultimately allows to balance the relationship between buyers and developers of pre-construction projects.

A great tool to verify online the reputation of a seller is to consult the bureau of customer’s claims at:  https://burocomercial.profeco.gob.mx/ with the seller’s name.

If you need legal advice in the revision of a pre-construction agreement or legal representation in case of seller’s default, please contact me at jorge@calaw.com.mx or www.calaw.com.mx