Law in Costa Rica from a foreign
Dirk Roger Rissel, LL.M.
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This is a loosely list of questions and answers
relating to the security interest law in Costa Rica from a foreign creditor´s
1. Where are security
The security interests are regulated in Book II, Title
VI (De la hipoteca y de la prenda) of the Civil Code of 1888, as reformed in
Articles 409 - 447. Book II, Title VII (Del Registro Público) of the Civil
Code governs the public registry for such interests in Articles 448 - 479.
Articles 530 - 581 of Costa Rica's Commercial Code of 1964 also govern
2. What types of security
interests are available to creditors in Costa Rica to guarantee the
performance of a principal obligation?
Three types of security interests have traditionally
been available to creditors in Costa Rica to guarantee the performance of a
a) Mortgage (hipoteca),
Articles 409 – 425 of the Civil Code
The Costa Rican mortgage only grants a security
interest in real property. It gives the creditor the right to bring about the
judicial sale of the mortgaged property.
b) Pledge or Chattel Mortgage
(prenda), Articles 441 – 447 of the Civil Code
The pledge functions like the real property mortgage,
but the object which is pledged cannot be real property. Property
traditionally covered by pledges includes: vehicles, machinery, bonds, stock
certificates, lease rights and mortgage bonds. Pledged property must be held
by the creditor or by a mutually agreed-upon third party.
c) Mortgage Bonds (cedulas
hipotecarias), Articles 426 – 440 of the Civil Code
Mortgage bonds are generally considered a form of real
property mortgage. However, they have a hybrid nature which combines a right
in real property and a negotiable instrument. They operate as a more agile
alternative to the common real property mortgage because of their ability to
Mortgages and pledges are considered to be "accessory" to a principal
obligation: once the obligation for which it is created terminates, the
mortgage's or pledge's legal effect terminates. Any person creating a mortgage
or pledge must own the property and be capable of disposing of it, or be a
representative legally authorized to do so.
3. Can a loan agreement be
created in a foreign currency?
A loan agreement can be created in any foreign
currency. Nevertheless, if an obligation has been characterized in foreign
currency, it can be paid in domestic currency (colones) at the option of the
debtor according to Article 48 of the Organizational Law of the Central Bank
of Costa Rica (Ley Orgánica del Banco Central). If the debtor pays a foreign
currency obligation in colones, the obligation's value is converted using the
average rate of exchange for the foreign currency calculated by the Costa
Rican Central Bank for the operations of its Currency Exchange Market. There
are no restrictions on the purchase and sale of foreign currency in the
Currency Exchange Market.
The Organizational Law of the Central Bank of Costa Rica provides exceptions
to the above rule. According to Article 49 of said law a debtor cannot
exercise the option to pay in colones in certain situations where the
obligation was incurred in a foreign currency, including "obligations and
contracts that must be paid from Costa Rica [to an entity] outside of the
country or vice versa," "operations and obligations made in foreign currency
with funds coming from abroad," payments to persons and entities domiciled
outside of Costa Rica for services rendered to Costa Rican persons and
entities, and obligations that are due to public institutions whose special
laws require payment in foreign currency. Since these exceptions were
established not so long ago, there is not much precedent related to their
interpretation. The legal department of the Central Bank has indicated that
the first exception above applies whenever a creditor's domicile is outside of
Costa Rica and that the reference to "funds coming from abroad" is meant to
apply to funds coming from public institutions which must register their loans
in the Central Bank.
4. What about the costs of
security interests which are registered?
To be enforceable, contracts must carry legal stamps
evidencing payment of taxes by the parties. In the case of security interests
that are registered, there is a significant cost in registration fees and
legal stamps, as well as Notary Public fees (for mortgages and mortgage bonds).
Such taxes are calculated according to the value of the transaction. Notarial
fees are 1.25 percent of the value of the transaction. A series of special
stamp duties apply at different rates depending on the type of transaction.
For instance a mortgage for greater than 5 years must carry different kinds of
stamps representing .004 percent, .002 percent, and .002 percent of its value
to satisfy all of the taxing entities.
A withholding tax of 15 percent is levied on general interest payments abroad.
However, interests payments and other types of financial expenses are excepted
from the withholding tax when they are made to foreign "financial institutions"
recognized by the Costa Rican Central Bank. The Tax Code also excepts interest
payments on loans made to Costa Rican companies for industrial, agricultural,
or ranching activities by foreign institutions "dedicated to such operations"
and recognized by the Central Bank as being "first-rate."
5. What are the requirements
for public registration of a security interest?
For public registration of a security interest, the
parties involved must be physical persons (foreign or national), domestic
corporations, duly-registered branches of foreign corporations or foreign
corporations with a duly-registered legal representative with sufficient
powers of attorney for the transaction.
It is not necessary to report or register a loan or security interest, the
enforcement of a loan or security interest, or any aspect of a transaction for
a related obligation to be enforceable between the parties. However, mortgage
and mortgage bonds must be created in a document recorded in a Notary Public's
Protocol Book and must be registered in the Public Registry to affect third
parties acquiring rights in good faith and to hold priority over common loans
and obligations and any subsequent transactions.
Pledge agreements need not be recorded in a Notary Public's Protocol Book, and
can be registered for the same purposes as a mortgage. Pledges that are
registered must cover identifiable property, such as vehicles and large
The Public Registry is located in San José and covers the entire country. Its
two sections relevant here are the Mortgage Registry (for mortgages and
mortgage bonds) and the General Chattel Mortgage Registry (for pledges).
Mortgages and mortgage bonds can only be registered if the underlying real
property is registered in the Property Registry.
6. To what extent does
publicity of registered securities exist?
Both the Mortgage Registry and the General Chattel
Mortgage Registry are public registries so that any person can access the
information recorded in them. However, the parties need only include the most
basic terms of an agreement establishing a security interest when registering
it (i.e., parties, price, place of payment, interest rates, etc.). Information
recorded in a Notary Public's Protocol Book is available to the public at the
National Archives, where it is updated on a periodical basis.
7. Is it necessary to be
registered or otherwise qualified as a lender?
In general, a lender is not required to be registered
or otherwise qualified in Costa Rica to make a loan, receive a security
interest, or enforce the loan or security interest. However, several
requirements, including registry with the General Superintendency of Financial
Institutions (Superintendencia General de Entidades Financieras), are imposed
if the activities performed by the lender involve receiving funds from the
public on a regular basis and resemble "financial intermediation" as defined
by the Organizational Law of the Central Bank of 1995.
8. Can the contracts be made
in a foreign language?
In general, contracts which are enforceable in Costa
Rica may be in any language, provided the parties involved understand their
content. However, instruments that must be recorded in a Notary Public's
Protocol Book or in the Public Registry must be in Spanish. If any of the
parties do not speak Spanish, the Notary must attest that either he or she
speaks a language understood by the non-Spanish speaker and translated the
document or that another translator did so. All adhesion contracts must also
be in Spanish. All non-Spanish documents being enforced in a Costa Rican court
must be officially translated into Spanish by a translator appointed by the
Ministry of Foreign Affairs.
A Costa Rican Notary Public must authenticate signatures on private documents
creating a pledge, or else the signatures must be made before 2 witnesses.
9. What about mortgages in
Mortgages in foreign currencies have been allowed by a
Constitucional Court decision. The requirement of an authorization for a
mortgage in a foreign currency has been declared unconstitutional by the
Constitucional Court (vote N° 27-95 of January 5, 1995, published in the
Boletín Judicial N° 22 of January 31, 1995). Nevertheless the debtor retains
by law the right to pay in local currency at the current real value of the
foreign currency specified in the mortgage.
10. What are the requirements
for mortgages or mortgage bonds constituted outside of Costa Rica?
Mortgages or mortgage bonds constituted outside of
Costa Rica must be recorded by a Costa Rican Consul, acting as a Notary
Public. Pledges created in private documents signed abroad may be
authenticated by a foreign Notary Public, whose signature must then be
authenticated by the Costa Rican Consul and then by the Costa Rican Ministry
of Foreign Affairs. Costa Rica does not accept apostilles.
11. Do loans secured with
registered mortgages, pledges or mortgage bonds have priority against the
mortgaged or pledged property?
Under normal circumstances, loans secured with
registered mortgages, pledges or mortgage bonds have absolute payment priority
against the mortgaged or pledged property. Nevertheless, if the debtor is an
insolvent entity involved in commerce which has been declared bankrupt or a
private individual subject to a "creditors' meeting," which is similar to
bankruptcy, the payment of taxes owed to the national and local governments
corresponding to the year prior to such declaration shall have priority over
12. Is it possible to submit
a loan agreement to foreign law?
There is no general principle prohibiting the
submission of a loan agreement to foreign law.
13. Will rulings by a foreign
court with respect to real estate matters be recognized and enforced in Costa
According to Article 47 Section 1) of the Code of
Civil Procedure matters related to real property located in Costa Rica are
under the "exclusive competence" of Costa Rican courts. Under Costa Rican law,
Costa Rican courts will not accept any ruling by a foreign court with respect
to matters over which they hold exclusive competence.
14. How does the creditor
enforce his “executive title”?
When a creditor has an "executive title," in which
there is an obligation to pay a specific liquid amount on demand, the creditor
has the right to initiate an "executive procedure." Executive procedures are
regulated by Book III of the Code of Civil Procedure. In the "simple executive
procedure," where the creditor has no secured interest, the creditor files an
action against all "seizeable" property of the debtor. Costa Rican law
establishes two types of special executive procedures for the enforcement of a
mortgage or pledge.
Generally, in both types of special executive
procedures, the debtor has waived the procedural formalities of the executive
procedure. Such a waiver permits the creditor to skip the first, evidentiary
stage of the procedure and directly initiate the enforcement of the security
interest with a court auction of the underlying property. In special
procedures, there is no need to previously seize the goods given as security
in order to auction them, but such a seizure may be ordered at any time during
the procedure if it is requested by the interested party. In the case of
mortgages and mortgage bonds, the waiver must be made in the document in which
they were created (in the Notary Public's Protocol Book). For pledges, such a
waiver is automatically assumed to have been granted.
Under Costa Rican law, it is generally not possible to
take possession of the property subject to a security interest without the
approval of a court. Such property also cannot be sold or negotiated, as it
continues to be considered to belong to the debtor, regardless of any mortgage
or pledge. If the debtor does not comply with its obligations, the creditor
may initiate a special executive procedure leading to a court auction. The
Commercial Code provides that in the case of default on pledges only, the
debtor can waive its right to judicial procedures in the pledge contract and
authorize the creditor to put the pledged goods up for auction through a "sworn
broker." The creditor is always paid from the proceeds of the auction,
depending on its priority with respect to any other creditors.