Purchasing Property in Costa Rica: Creating a Comprehensive Purchase Agreement

The Right Way to Make a Purchase Agreement

A well-structured purchase agreement is crucial when buying property in Costa Rica. It serves as a legal road map from the initial offer to the final deed transfer. To ensure a smooth transaction, it’s essential to include specific elements that protect both the buyer and the seller.

1. Making an Offer

Before you enter into a purchase agreement, it is essential to make a well-considered offer. Costa Rica is currently a buyer’s market, so there is room for negotiation.

• Negotiating the Price:
  Never pay the asking price outright. You can often negotiate to lower the price by at least 5%. Even if real estate agents in Costa Rica are not accustomed to formal written offers, it is crucial to document your offer in writing to establish a clear record of the terms proposed.
• Legal Review of the Offer:
  Always have your attorney review the written offer before sending it to the seller. A poorly drafted offer can bind you to unfavorable terms, such as a short closing date that does not allow for thorough due diligence.
  
  

2. Signing the Purchase Agreement

Once the offer is accepted, the next step is to sign the purchase agreement. This document formalizes the terms agreed upon and acts as a guide to finalizing the property transfer.

Key Elements of the Purchase Agreement:

a) Identification of Parties:

• Clearly identify both the seller and the buyer.
• Include full legal names, identification numbers (such as passport or residency ID), and addresses.
• If the property is owned by a corporation, specify the corporate name, ID number, and details of the authorized representative.

b) Property Description:

• Include a comprehensive description of the property, covering:
  • Survey number (plano catastrado).
  • Property ID (folio real).
  • Exact location and size.
  • Description of any existing structures, including size and condition.
  • Details of any easements, rights of way, or restrictions on use.
  • Whether the property is in a protected area, such as the Maritime Zone (ZMT).

c) Price and Payment Terms:

• Clearly state the purchase price in Costa Rican colones (CRC) or US dollars (USD), as well as the method of payment.
• Avoid indicating a lower price to reduce transfer taxes, as this constitutes tax fraud. Always report the actual purchase price.
• Specify the amount of earnest money (typically not more than 20% of the purchase price) and how it will be held in escrow.
• Detail the payment schedule, including the initial deposit, intermediate payments (if any), and the final balance at closing.
• Specify if any payments will be contingent upon the fulfillment of conditions, such as completing due diligence.

d) Closing Costs:

• Outline who is responsible for closing costs, including:
  • Notary fees.
  • Transfer taxes (typically 1.5% of the property value).
  • Registration fees.
  • Escrow fees.
  • Any other administrative costs.
• Clarify whether costs are split equally or paid entirely by one party.

3.  Due Diligence Period

The due diligence period allows the buyer to verify the property’s legal and physical status. The agreement should specify:

• The length of the due diligence period (usually between 30 to 60 days).
• The buyer’s right to withdraw from the agreement if the property does not meet legal or structural standards.
• Conditions under which the earnest money will be refunded if the purchase is canceled.

Due Diligence Should Include:

• Verification of property title and chain of ownership.
• Checking for liens, encumbrances, or legal disputes.
• Inspection of building permits and compliance with zoning regulations.
• Structural inspection to assess the condition of buildings.
• Verification of utility availability (water, electricity, sewage).
• Environmental assessments, especially in rural or protected areas.
• Confirmation that property taxes are up to date.
• Investigation into any ongoing disputes or claims.

4. Contingencies and Conditions

It is prudent to include clauses that protect your interests. Examples of contingencies may include:

• Financing contingency (purchase is dependent on securing a mortgage).
• Inspection contingency (purchase is dependent on the property passing inspection).
• Legal clearance contingency (purchase is subject to a clean title).
• Zoning contingency (property use matches your intended purpose).

5. Closing Process

The closing marks the finalization of the property transfer. The agreement should outline:

• Closing Date: The date when the deed will be signed and ownership transferred.
• Location: The place where the closing will take place, typically at the notary’s office.
• Parties Present: Ensure both buyer and seller (or their legal representatives) are present.
• Release of Funds: Specify that the escrow agent will release the funds to the seller once the notary records the deed.
• Documentation: The notary will draft the deed, which must be signed by both parties. Ensure the deed includes:
  • Legal description of the property.
  • Names of both buyer and seller.
  • Payment acknowledgment.
  • Confirmation of legal compliance.
• Post-Closing Actions:
  • Register the deed with the National Registry.
  • Update tax records with the new ownership information.

6. Dispute Resolution and Governing Law

• Include a clause specifying that Costa Rican law governs the agreement.
• Designate how disputes will be resolved (e.g., mediation or arbitration) and the jurisdiction where disputes will be handled.
• Specify the language of the contract (English, Spanish, or both) and how discrepancies will be resolved.

7. Special Considerations:

• If the property is owned by a corporation, the agreement should address the transfer of shares, including:
  • Approval from the shareholders.
  • Transfer of the share registry book.
  • Issuance of new stock certificates.
• If the property is in the Maritime Zone, the agreement should clarify the leasing terms and municipal approvals.

Final Thoughts

A comprehensive purchase agreement is fundamental to ensure a secure real estate transaction in Costa Rica. By including these essential elements, you can protect your investment and minimize the risk of legal complications. Always seek the guidance of a qualified attorney familiar with Costa Rican property law to draft and review the purchase agreement.