The purpose of this note is to: (i) inform about the transitional articles of the reforms approved by the Mexican Government to the Civil Code of the Federal District (now Mexico City, the “MX City Civil Code“) and the Mexico City Housing Law (the “MX City Housing Law“) (the “Reform“) with the aim of limiting rent increases and promoting the construction of housing for low-income groups in Mexico City; and (ii) provide an analysis of the functionality and applicability of the Reforms.
This Reform was published in the Mexico City Gazette (the “Gazette”) on August 28th, 2024, and became enforceable as of August 29th, 2024. For instance, this Reform is now binding. The Interested parties may access Publication in the Gazette. to review the details of the approved Reform.
Precedent
On August 23th, 2024, the Firm shared a note regarding the Reform, which had been approved but not yet published in the Gazette. In that note, the Firm outlined certain legal and economic considerations derived from the Reform.
On August 28th, 2024, the decree for the Reform was published in the Gazette. A review of this publication and the transitional articles of the publication decree raised certain additional considerations which are herein presented.
Analysis of the Reform
First, the decree to the Reform that had a major impact were (i) the amendment to Article 2448 D of the Civil Code of Mexico City limits the increase in rent for housing in Mexico City to the inflation reported by the Bank of Mexico in the previous year, which is actually published by the National Institute of Statistics and Geography (“INEGI”) and not by the Bank of Mexico, as stated in the Reform and; (ii) the creation of a lease contract registry, which was added in Article 2448.
Regarding point (i) on the application of the new law, the amendment to Article 2448 D of the Civil Code for the Federal District, which limits rent increases for housing properties to the inflation rate reported by the Bank of Mexico, presents two issues. Firstly, it does not establish in specific form whether this provision applies to all housing leases or only to new ones. However, given that Article 2448 D is a public policy provision, non-waivable and not subject to contrary agreement, it can be inferred that current housing leases with increases exceeding the reported inflation rate may be in violation of the law, potentially rendering them subject to annulment.
The rent increase limit for residential properties established by the Reform could potentially apply to existing contracts as of the date of its entry into force, based on the reference to the Isolated Thesis available at the link provided herein Thesis.
On the other hand, considering the principle of nonretroactivity of the law, outlined in Article 14 of the Political Constitution of the United Mexican States, which sets that no law shall have retroactive effect to the detriment of any person, landlords could also invoke this principle to prevent the application of the rent limitation contained in the new Reform; said principle is also supported by jurisprudence confirming the “Guarantee of Non-Retroactivity.” In conclusion, the validity of the rent increase clause could be contested in court, with reference to the Isolated Thesis available at the following link Thesis.
It is necessary to analyze on a case-by-case basis in order to determine whether the rent increase in contracts celebrated before the Reform are in effect as of the date the Reform takes effect.
Notwithstanding the foregoing, it will be necessary to wait for the Mexico City’s Government to confirm the process of applicability to comply with the lease’s registry.
We can find precedents in Comparative Law. For example, in Hoboken, New Jersey, USA, similar problems arose regarding accelerated rent increases, where a cap on rents was set based on the Consumer Price Index (CPI) reported the previous year or 5%, whichever was lower. Likewise, a housing fund was created to promote the construction of affordable housing for the lower class, funded through mandatory fees paid by landlords as a result of lease registration. However, many landlords argued that, in most cases, rent increases above the CPI or 5% were justified. After several discussions, the Government of Hoboken authorized landlords to seek approval from the Hoboken Board for a rent increase above the permitted limit. This approval is subject to certain requirements, such as being in compliance with the landlord’s registration fees, along with an additional fee for the increase authorization. Similarly, tenants can request a rent reduction from the board.
Secondly, the obligations under the new registry, introduced by subsection F in Article 2448, which creates a registry for residential lease contracts, however, do not specifically outline the consequences for landlords if they fail to register their lease agreement according to the deadlines.
However, it could be understood that, by not complying with a public order law and considering that the registration was included in the section of the MX City Civil Code, that establishes the formal requirements for housing lease contracts, the deficiency of such obligation could result in the relative invalidity of the lease, which could be sort out by carrying out the proper registration.
The deadlines established by the Reform of 30 (thirty) days for new leases or 90 (ninety) days for leases signed prior to the Reform of the Civil Code, do not distinguish between business days and calendar days. However, according with Article 74 of the Mexico City’s Administrative Procedure Law, these deadlines shall be considered business days.
Lastly, the Reform refers to the inflation reported by the Bank of Mexico. Considering that since 2011 the INEGI has been the competent authority to measure and publish inflation, the Reform would not be setting a valid benchmark for determining rent increases. This would make the reform inoperative due to the lack of an index to which housing rent increases are limited.
Constitutionality Issues of the Reform
The Reforms may be deemed illegal for the following reasons:
- The Reform sets a limit on rent increases using an index from the Bank of Mexico, rather than one published by INEGI. This could be unconstitutional if the Bank of Mexico’s index does not accurately reflect current economic conditions. This could result in outdated rent limits, unfairly affecting landlords.
- The requirement to register lease contracts with an administrative authority could be disproportionate if it imposes an excessive administrative burden without clear benefits for the parties. This may generate additional costs and unnecessary complications for the parties involved.
- Even if the rent increase limit were set by a competent authority, it could be unconstitutional by infringing on the landlord’s property rights and contractual freedom.
Additionally, disregarding items such as maintenance costs, building fees, and taxes could affect contractual fairness and affect the landlord’s fair compensation.
