Purchasing Property in Costa Rica: Conducting Due Diligence

One of the most critical steps in purchasing real estate in Costa Rica is conducting thorough due diligence. The Due Diligence Period (DDP) is essential to identify and address any substantial legal, structural, or environmental issues related to the property. This process helps protect your investment and ensures that the property you plan to purchase is legally sound and free from potential disputes.

Purpose of Due Diligence

The primary goal of due diligence is to verify the property’s legal status, physical condition, and suitability for your intended use. It allows you to assess whether the property has clear title, is free from liens or encumbrances, and complies with all local regulations. Failing to conduct due diligence can lead to costly legal disputes or the loss of your investment.

The Due Diligence Checklist

The following checklist outlines the critical items your attorney should investigate during the DDP:

a) Property Registration and Identification:

• Verification of Registration:
  • Ensure the property is properly registered with the National Registry (Registro Nacional).
  • Verify the legal description and ensure it matches the physical property.
• Property ID (Folio Real):
  • Confirm that the property has a valid identification number.
  • Cross-check the ID with official property records.
• Survey (Plano Catastrado):
  • The property must have a registered and up-to-date survey (cadastral map) approved by the local municipality.
  • The survey should accurately reflect the boundaries and size of the property.
  • Verify that the survey matches the property’s physical characteristics.

b) Title Search and Ownership Verification:

• Chain of Title:
  • Trace the ownership history to ensure a clean chain of title, confirming that the seller is the legitimate owner.
• Title Deed (Escritura Pública):
  • Review the most recent deed for accuracy and completeness.
• Encumbrances and Liens:
  • Investigate whether the property has any mortgages, liens, or encumbrances recorded against it.
• Encroachments:
  • Verify that there are no boundary disputes or neighboring structures encroaching on the property.
• Pending Litigation:
  • Check for any ongoing legal disputes or claims involving the property.
• Restrictive Covenants:
  • Be aware of any limitations on the property’s use, especially in gated communities or condominiums.

c) Zoning and Land Use Regulations:

• Building Permits:
  • Ensure that any existing structures have the necessary building permits and meet zoning regulations.
• Zoning Classification:
  • Confirm that the property’s zoning aligns with your intended use (e.g., residential, commercial, agricultural).
• Land Use Restrictions:
  • Verify whether the property falls within protected areas or has environmental restrictions.

d) Environmental and Physical Inspections:

• Water Availability:
  • Confirm that the property has a legal water source, such as a municipal connection or a registered well.
  • Ensure that water rights are documented and transferred with the property.
• Structural Inspection:
  • Hire a qualified inspector to assess the physical condition of existing buildings.
  • Check for structural integrity, roof conditions, plumbing, and electrical systems.
• Seismic and Flood Risks:
  • Evaluate whether the property is in a high-risk area for natural disasters.
• Soil Testing:
  • Conduct soil analysis if you plan to build, as some regions in Costa Rica have problematic soils (e.g., clay or unstable terrain).

e) Financial and Tax Compliance:

• Tax Verification:
  • Check that all property taxes are current and there are no outstanding debts.
• Municipal Fees:
  • Verify whether local fees for garbage collection or maintenance are paid up to date.
• Corporate Ownership:
  • If the property is held by a corporation, verify that the corporation is in good standing with the Tax Authority and the National Registry.
• Transfer Tax:
  • Be aware that the transfer tax is typically 1.5% of the property’s registered value.
• Capital Gains Tax:
  • Understand whether the transaction triggers any capital gains tax obligations.

f) Utility and Service Verification:

• Electricity and Water Connections:
  • Ensure that utility connections are legal and registered in the current owner’s name.
• Sewage and Waste Management:
  • Confirm the presence of proper sewage disposal systems.
• Telecommunications Access:
  • Verify the availability of internet and phone services, particularly in remote areas.

g) Corporate and Legal Standing:

If the property is owned by a corporation, check the following:

• Corporate Documents:
  • Obtain the articles of incorporation, shareholder registry, and meeting minutes.
• Authorized Signatories:
  • Verify who has legal authority to sell the property on behalf of the corporation.
• Outstanding Liabilities:
  • Check for any debts or legal obligations tied to the corporation.
• Corporate Veil Piercing Risk:
  • Be aware that Costa Rican courts may pierce the corporate veil if the entity is deemed a facade to shield personal assets.

h) Condominium and HOA Considerations:

If the property is within a condominium or gated community:

• HOA Fees:
  • Confirm the current fee structure and whether payments are up to date.
• Community Bylaws:
  • Review the regulations and restrictions governing property use.
• Common Area Maintenance:
  • Ensure that maintenance fees are reasonable and that common areas are well maintained.

Reporting and Documenting Findings

After conducting due diligence, your attorney should compile a detailed report outlining:

• The findings related to title, ownership, and encumbrances.
• Inspection results and the condition of existing structures.
• Zoning compliance and land use restrictions.
• Any potential legal issues or pending disputes.
• Recommendations for addressing any concerns identified.

Final Decision: Proceed or Renegotiate

If the due diligence uncovers issues, you may:

• Renegotiate the Purchase Price:
  • Use the findings as leverage to reduce the price or request repairs.
• Include Remediation Clauses:
  • Add provisions that require the seller to resolve issues before closing.
• Withdraw from the Purchase:
  • If the issues are too severe, it may be prudent to walk away.
• Finalize the Purchase:
  • If no issues are found, proceed to finalize the purchase agreement and move towards closing.

Final Thoughts

Due diligence is not just a legal formality—it is an essential process to ensure your investment in Costa Rican real estate is sound. Hiring an experienced local attorney familiar with property law is critical to conducting thorough due diligence. By carefully examining every aspect of the property and its legal standing, you can avoid potential pitfalls and secure your investment with confidence.