PUERTO RICO Law and Practice Contributed by: Antonio Santos, Donald Hull and Paola Canino, Pietrantoni Mendez & Alvarez LLC
more than USD5 million, the parties are free to negoti - ate the notarial tariff, but the tariff in those cases will never be less than USD25,000. 3.5 Legal Requirements Before an Entity Can Give Valid Security There are no special legal rules or requirements (such as “financial assistance” or “corporate benefit” rules) applicable in Puerto Rico that must be complied with in order for a debtor to give a valid lien over real estate assets. However, third parties granting security for the benefit of others must account for fraudulent transfer and fraudulent conveyance challenges that may be available under the Puerto Rican Civil Code and US federal bankruptcy statutes. If successful, these chal - lenges may result in the lender’s loss of its security over the real estate assets. 3.6 Formalities When a Borrower Is in Default Under Puerto Rican law, a real property mortgage is not duly constituted or effective unless it has been recorded in the Registry of Property. Therefore, before enforcement of a real property mortgage lien is sought, the secured party should confirm that the mortgage has in fact been recorded in the land records. Priority among real property liens is generally determined on the basis of the order of filing of the corresponding lien instruments in the Registry of Property. However, there is a statutory preferential lien for unpaid property taxes that takes precedence. Enforcement of a real property mortgage lien in Puer - to Rico is accomplished pursuant to a judicial pro - ceeding filed in the local court corresponding to the jurisdiction where the mortgaged property is located. Alternatively, if federal jurisdictional requirements are met, the foreclosure action may also be brought in the United States District Court for the District of Puerto Rico. As the judicial foreclosure proceeding is an ordinary civil action, it includes all of the different stages of legal actions set forth in the Rules of Civil Procedure (including the filing of a complaint, discovery, trial, etc). With regard to enforcement of a mortgage lien on real property that is the principal residence of the debtor, the lender and the debtor are first required to participate in compulsory mediation proceedings
for the purpose of attempting to reach an agreement that would permit the debtor to retain ownership and possession of the residence. However, the mediation proceedings do not oblige the parties to reach such an agreement, and often cause delays in completion of foreclosure of the mortgage lien. 3.7 Subordinating Existing Debt to Newly Created Debt Under Puerto Rican law, existing secured debt may be subordinated to newly created debt by agreement among the parties. There is also a statutory, preferred lien for unpaid real property taxes, to which a mort - gage lien will always be subordinate. It is also impor - tant to point out that the United States Bankruptcy Code applies in Puerto Rico and that US bankruptcy courts have broad discretion, under certain circum - stances, to subordinate the claims of competing lien- holders. 3.8 Lenders’ Liability Under Environmental Laws A lender holding or enforcing a lien on real property in Puerto Rico may be liable under environmental laws if it exercises sufficient control over the contaminated property and/or the owner of the property so as to be deemed responsible for the environmental condition of the property. 3.9 Effects of a Borrower Becoming Insolvent As a general rule, insolvency alone will not void a secu - rity interest in real estate under Puerto Rico law. How - ever, if a borrower grants a lien when it is insolvent and does not receive equivalent value in exchange, the lien may be voided or set aside under the fraudulent transfer provisions of the Puerto Rican Civil Code or the fraudulent conveyance provisions of the United
States Bankruptcy Code. 3.10 Taxes on Loans
In Puerto Rico, there are no rules, regulations or requirements compelling lenders or borrowers to pay any recording or similar taxes in connection with mort - gage loans or mezzanine loans related to real estate.
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