Relevant aspects of real estate leasing in Panama
I – Introduction
Before the end of last year 2020, on the 16th of November, 2020, Law 179 of November 16, 2020, better known as the Real Estate Leasing Law, was enacted to foster the reactivation of the construction of housing projects and to provide a new financing model to interested parties
In keeping with the above, we were involved in advising to what extent the development of the national economy requires, among other things, a system of financing of goods to promote investment which may be more accessible to Panamanian companies and individuals particularly to medium and small companies. The financial leasing system approved by Law 179 of the 16th of November, 2020 was born in a totally necessary manner to foster investment in these areas.
II – Definition and relevant aspects
Law 179 of the 16th of November, 2020 conceives financial leasing as an operation by means of which a financial lessor, as indicated by the financial lessee, enters into a contract under which the latter acquires the right of use and enjoyment of a real estate property through the payment of rent for a defined term, at the end of which the lessee may exercise an option to purchase the leased real estate property and the sums of money paid as lease payments under this figure will at the end be applied to the purchase price of the property, hence the denomination of “financial leasing”.
This alternative, as mentioned by the Minister of Housing, is aimed mainly at young people who “are not buying houses to settle down” and constitutes an important option for them to acquire real estate without having to pay the down payments currently required by banks in Panama, which generally ranges between five (5) and ten (10) percent of the total value of the property, which may be an important obstacle for the acquisition of the first home for many oung Panamanians.
The Real Estate Leasing contract, as conceived in the applicable legal regulations, is a typical, bilateral, onerous, and formal contract, since numeral 1 of Article 7 of Law 179, requires that this type of contract be in writing.
Additionally, we must explain that one of the most relevant characteristics that defines and makes the real estate leasing different from an ordinary real estate lease and different from the real estate purchase and sale contract with financing by a mortgage loan, is that the sum paid as lease payments under this figure will be applied to the purchase price of the real estate.
Article 7, numeral 11 of Law 179 of 2020, stipulates that the term of the lease contract must not be less than five (5) years.
III – Other important provisions
There are other important provisions in Law 179 of 2020, such as the following:
– Subrogation: Unless otherwise agreed, the financial lessee will be subrogated in the rights of the financial lessor against the builder and/or third parties (Article 9).
– Not Applicable: Law 93 of 1973 (General Leasing Law) and Civil Code (see Article 15 of Law 179 of 2020).
– Nullity: Financial leasing of real estate previously encumbered by domain limitations is prohibited, except in the case of an express exception in the terms set forth in Article 8 of Law 179 of 2020.
– Restriction on encumbrances: Once the contract has been executed, the financial lessor may not encumber or transfer the leased property without the written consent of the lessee.
– Executive Merit: The financial leasing contract has executive merit, and an executive action may be initiated to collect the lease payments according to the provisions of Article 20 of Law 179 of 2020.
Liability for damages: The Law establishes that the lessee is liable for damages caused to third parties during the leasing period.
– Governing entity: The Superintendence of Banks of Panama is the governing entity in matters of financial leasing of real estate.
IV – Legal entities who may act as financial lessors
The legal entities authorized under the Law as financial lessors are the following:
1. Banks.
2. Trust companies.
3. Financial companies (Law 7 of 1990 and Law 42 of 2001).
Banks and trust companies may act as financial lessors by operation of the law and without any type of registration or additional license, but the companies included in numeral 3 may engage in the activity of financial leasing of real estate only if they obtain the respective authorization for such activity by complying with the conditions established by Law 179 of 2020 and its regulations.
V – Types of Real Estate Leasing
Law 179 of 2020 provides for two types of real estate leasing:
Direct: In this, the financial lessor acts in its own name as owner of the property and authorized person.
Indirect: The ownership of a property is transferred in a fiduciary capacity to a third party who acts under the mandate of an indirect financial lessor (numeral 4 of Article 4 of Law 179 of 2020).
VI – Benefits of Real Estate Leasing in Panama
In addition to the definitions, particularities and characteristics of this type of leasing, we must mention the prerogatives and/or benefits of this Law to make it more attractive and more able to fulfill its purpose of reactivation of a sector of the economy, as follows:
The items subject to a real estate leasing contract may not be seized or attached by third parties against the financial lessee (the lifting of the seizure is made viable by means of an incident – Article 23).
The Goods and Services Transfer Tax, as per the Spanish acronym” “ITBMS”, and deductible expenses: Rents paid under real estate leasing will not be taxed with the Goods and Services Transfer Tax (ITBMS being its Spanish acronym) for a period of 5 years, to be counted as from the date when Law 179 of 2020 entered in force and effect. In addition, expenses are deductible for the lessor (maintenance expenses and premiums) and interest is deductible for the lessee.
The Special Fund for Compensation of Interest(FECI being its Spanish acronym) consists of a surcharge of 1% per annum on loans over $5,000 made by a bank or financial entity under the following rules for real estate leasing:
– Totally exempted if the operation is for agricultural purposes, main housing, non-profit entities, and public sector.
– Other purposes: exempted during the first 10 years of operation.
– It is not exempted when the operation is for the construction or the development of real estate projects.
Exempt from Real Estate Transfer Tax (ITBI being its Spanish acronym)”: when it is for the first sale. The same exemption shall apply if at the end of the term of the lease contract, the real estate is transferred to the lessee or to a successor beneficiary. It does not apply when it is going to be transferred to a third party at the end of the real estate leasing operation.
VII – Normative, Informative and Bibliographical References.
- Law 179 of November 16, 2020.
- Law 93 of October 4, 1973.
- Political Constitution of the Republic of Panama.
- Sole Text of Law 22 of June 27, 2006, ordained by Law 153 of May 8, 2020.
- Government web – http://infojuridica.procuraduria-admon.gob.pa/
