By José Manuel Pallí
I have been frequently approached by people who want to know how they can best prepare for a post-Castro Cuba, especially with regard to property rights once held by their families or ancestors. Others, more recently, especially since Cuba facilitated the transfer of residential property in late 2011, ask me how to go about “buying properties” in Cuba. In most cases they are taken aback by my response to their queries, since I do not share the expectations most of them have about what the legal landscape in Cuba will look like years ahead.
It is not that I do not share their hopes with regard to the societal model they expect to see in a post-Castro Cuba — essentially identical to ours in the United States — but I am simply far from certain that such a societal model will be the one the Cuban people will freely choose to adopt. So the only advice I can give them is that which is based on Cuba’s present laws. That’s, by the way, an advice that citizens of those countries who maintain a normal relationship with Cuba can and should seek from the many well-trained colleagues of mine in the island. Unfortunately, this advice usually falls short from satisfying my prospective (until they hear me out) clients.
The legal concept Cuba will most likely apply to foreign real estate purchases in soon-to-be-built golf and marina complexes is the derecho de superficie.
A derecho de superficie is a derecho real over land that does not belong to its holder (the superficiario), but that the owner of the land in question concedes while retaining the title (dominio, or ownership) to the land itself. The superficiario is thus allowed to build and/or plant on the land while the laws acknowledge his own rights over the buildings or structures and plantations so emplaced as independent from the title holder or land-owner’s rights. Superficie rights are usually only temporary in nature. Once the superficie rights expire, when the term stipulated in its title (the grant or concession creating it) runs its course, or when it is otherwise extinguished, a reversion takes place and the owner of the land takes title to the buildings or improvements made on his land by the superficiario.
Over the past few years, the derecho de superficie has been enjoying a comeback in a number of countries — in Spain, in Argentina, even in China. And the Cuban Civil Code’s provisions on this topic are often cited as an example by those who urge their countries’ legislatures to make superficie rights part of their laws.
One of the reasons behind this resurge is intrinsically tied to societal models that, even if presently evolving (some faster than others), seek to keep the direct ownership of land in the hands of the state, such as Cuba.
There are indications that Cuba will resort to superficie rights as the lynchpin for an expected surge in foreign investment in Cuban real estate, especially in the development of touristic resorts and foreign retiree settlements. In July 2010, Cuba modified — through Decreto Ley 273/10 — those articles in its Civil Code that deal with the derecho de superficie, allowing the foreign superficiario — or an entity in which the foreign investor’s interests would participate — to build on state-owned land and to use and enjoy those improvements for the length of his/her rights. Cuba now even allows for the granting of such rights in perpetuity (to Cuban companies), for the construction of houses and apartments for tourists (Artículo 222, inciso 3, of the Cuban Civil Code).
My hope was to be able to include more precisions on this. Those precisions have been slow to come. A revision of Cuba’s Foreign Investment Law is still pending and is said to be imminent, which makes it very hard to determine the exact extent and limitations of the rights foreign superficiarios in Cuba could enjoy in the future. But I intend to give it a try.
It is a long-standing and universal rule of International Private Law (what we American lawyers call Conflict of Laws) that when you are dealing with real property, the governing laws that define and apply to real property rights are always those of the country where the real property in question is situated.
Cuba’s Constitution, in article 14, clearly delineates the limits to “buying properties” in Cuba, when it defines the concept of property as social property, as opposed to private property. It enshrines that concept of social property (or socialist property, if you wish) as the foundation of Cuba’s societal and economic model, and this concept of property underpins another key phrase found in the same article 14 of the Cuban Constitution: the principle of social distribution.
Even though Cuban Law recognizes certain forms of individually owned property (propiedad personal), this does not mean that when you buy a house from a Cuban individual, who can prove to you he owns that house, what you are buying is equivalent to what we call private property rights.
According to article 129.1 of the Cuban Civil Code, a property (or ownership) right in Cuba gives the individual person who holds it possession over the thing (bien) he or she owns, the right to use and enjoy that thing, and to dispose of it, pursuant to the socio-economic purpose such thing is destined to fulfill. And that socio-economic purpose is the one the Cuban Constitution defines — in the case of a housing unit it fulfills every Cuban’s constitutional right to housing — which is to say it is not the one we ascribe to private property rights (Cubans still cannot mortgage the houses they live permanently in, for instance).
The changes made in Cuba in November 2011 were made exclusively to its Housing laws, and neither the Cuban Constitution nor the Civil Code has been changed. Therefore, the scheme of things described in the preceding paragraphs has not changed one bit, and it applies to all the different derechos reales in Cuba, including superficie rights.
The Cuban Civil Code does not tell us a lot about the nature, characteristics and practical effects of superficie rights in Cuba. It suggests only the state can grant superficie rights — with the exception raised in article 220 below — to both natural and juridical persons (article 218.1); that superficie rights can be granted not just for housing but for other purposes too (article 218.2); and that a derecho de superficie can be either gratuitous or onerous (in which case the payment of the price, or of a first installment, appears to be a pre-requisite for its existence).
Under article 223, superficie rights are transferrable unless the law or the title document that creates them says they are not. This means they can be inherited by the heirs of the superficiario (Resolution 2/91 of the National Housing Institute, below, confirms this).
Article 220 of the Cuban Civil Code allows an agricultural cooperative association to grant superficie rights to its members over land owned by the cooperative but solely for the member to build his house on it.
The duration of the superficie rights, the type of buildings or structures to be built by the superficiario, and the kind of activity or business contemplated are all to be found in the title document (título constitutivo) of the superficie rights,which in Cuba means an administrative decision implemented by a resolution issued by an agency of the state (article 221).
The Cuban Civil Code originally stated, under article 222, that the maximum term for superficie rights was 50 years, a term that could be extended by half the time originally conceded if the superficiario requested an extension before the term expired. Article 222 was modified in 2010 and it now allows for the concession of superficie rights for up to 99 years, as well as the conveyance by the state (the word used is entregar, which suggests it is not just a concession) of superficie rights in perpetuity over state owned lands to national enterprises or business entities (“a empresas o sociedades mercantiles nacionales”) for the building of houses and apartments destined for tourists. Whether these tourists (presumably foreign) will be able to acquire any rights such as derechos reales over the houses and apartments so built is the kind of precision that I expected Cuban laws and regulations to have provided by now but that the pending reform to the Cuban Foreign Investment Law keeps on hold.
It is usual in present-day Cuba to resort to Special Laws to expand or restrict those rights legislated in its General or Basic Laws, such as the Civil Code. The Cuban Housing Law and the resolutions issued by the National Housing Institute or Instituto Nacional de la Vivienda (INAVI) do go a little more in depth into certain aspects of superficie rights, but since these laws and regulations are essentially and specifically concerned with housing rights for Cubans, they can give us only a hint as to what may be in store if the rights future foreign investors may eventually be able to acquire in Cuba are in the nature of superficie rights.
Resolution 2/91 of the INAVI of Jan. 14, 1991 already regulated the Derecho Perpetuo de Superficie, or superficie rights issued in perpetuity, to those who need a parcel of state-owned land on which to build their house. Cuban housing laws are aimed at mitigating the housing needs of the less affluent classes. In these cases, there is no reversion to the owner of the land — the Cuban state — of the house built on the premises by the superficiario. Many of the housing units that are changing hands in Cuba these days, whether among Cubans with a legitimate housing need, or in transactions involving investors using straw men while seeking a return from what they see as Cuba’s incipient residential real estate market, are likely to be grounded on state grants or concessions of the nature I just described. The owner/seller will show the buyer his or her title, in most cases a resolution from the INAVI naming him as “owner” of that house, and the recording data showing said title was properly recorded.
The Cuban Foreign Investment Law (CFIL), Decreto Ley 77/1995, which is very similar to those of other less developed countries, has relatively few articles specifically addressing foreign real estate investments.
Article 16, paragraph 1, authorizes foreign investment in real estate, through ownership or through the exercise of other derechos reales, which encompasses superficie rights. Paragraph 2 then lists the purposes or ends foreign real estate investments must have in order to be allowed under Cuban laws: residential units and buildings meant for natural persons who are not permanent residents in Cuba (this triggered the Cuban “real estate market spring” of the 1990s); residential units or office space meant for foreign juridical persons or entities; and touristic developments or resorts. It appears not to allow foreign investment in support of one of the most critical social problems Cuba has: meeting the housing needs of the Cuban people.
Article 5 of the CFIL guarantees the protection of the Cuban state to foreign investments when they are attacked by third parties alleging a legally sound claim against them pursuant to Cuban laws and before a Cuban court, an indication that in those foreign investments involving real estate, a foreign investor could look to the Cuban state in case of an adverse claim against real estate assets which are part of the foreign investment.
Under Article 21, paragraph 2(f), you must have an authorization issued by the Executive Committee of the Council of Ministers (Comité Ejecutivo del Consejo de Ministros) in order to make a foreign investment involving the conveyance of state-owned assets or any kind of real estate the Cuban state holds title to. One of the forces driving the recent “flexibilization” of Cubans’ housing rights was my Cuban colleagues’ complaint about the excessive bureaucratization of Cuban Law, and some voices are beginning to be heard raising the same issue with regard to foreign investments. The “title document” in any foreign investment where real estate is involved (the título constitutivo for the land in question) is the aforementioned authorization or acuerdo by Cuba’s cabinet and the resolution implementing it.
And what about the stance title insurance may take vis-a-vis Cuban superficie rights?
Title insurance is unavoidable for anyone in the United States who buys a piece of real estate and finances his or her acquisition. Still, since we see it as just a small portion of the transactional or closing costs and we are told the bank will not lend us the funds unless we buy a title insurance policy, we just do not ask many questions about it.
The title recording system Cuba had until 1959 was much better than any U.S. system we have experienced at achieving the main goal land title recording systems have, which is to provide legal certainty to real-estate transactions. We rely on our courts of law to solve title problems, whereas most other countries rely on solid recording systems and other safeguards (such as Civil Law notaries) to prevent lawsuits over titles.
Title insurance needs title documents that describe the land (or real property) sufficiently to identify it, that are recorded — thus traceable in a search — and that, in the case of the conveyance to the person whose “title” is to be insured (the buyer, the mortgagee, the holder of superficie rights in a prospective Cuban scenario), are recordable so as to make its insured parties the title holders of record.
Cuba has spent the last couple of decades working in all these areas: improving its land title recording system (depleted by a number of “revolutionary” measures over the first 30-some years of the Cuban Revolution) and its cadaster (working on the very poor quality of the legal and physical descriptions for lots and premises of all kind that has plagued Cuban real estate conveyances for years) and enhancing the quality and completeness of its “title documents” (mostly issued through administrative acts by housing authorities or agrarian reform bureaucrats) through a resurging notarial profession.
So assuming Cuba succeeds in its ongoing efforts to revamp and re-start the pre-revolutionary land title recording system it inherited from Spain, our title insurance industry may have it easy when the time comes to navigate title chains in Cuba. Cuba is bound to be an attractive playground for title insurers because of the controversy about what to do with those pre-revolutionary owners whose properties were expropriated, confiscated or deemed abandoned by the Cuban government, a controversy that, in all likelihood, will have a collective political solution. This is not to say that title insurance underwriters will boldly take on the risks associated with the prior owners; they will almost certainly exclude that risk from primary coverage and leave it open to insurance via an endorsement expanding coverage (for an additional fee, of course), provided the steps are taken and all the underwriter’s requirements are met that appear to have eliminated or sufficiently mitigated said risk.
So would a title insurance underwriter insure Cuban housing rights anchored by superficie rights as described above?
My answer is it will, or at least it should. They claim to be doing it in the People’s Republic of China, and Chinese real property rights are no more similar to U.S. rights than Cuban real property rights are. But they are “real” enough for the industry to make money amid a frenzy of eager buyers (many of them foreigners) and resales that keep Chinese real estate prices bubbling despite governmental efforts to keep them down.
Without having a clear picture as to what the long-expected changes in the rules under which foreign real estate investors (developers and consumers) operate will look like, it is hard to say what role title insurance might play in Cuba. But, again, given the fact that their initial market will likely be made almost exclusively of American buyers of real property — they are the only ones who are “familiar” with title insurance — it is hard to see how American title insurance providers may miss the boat to Cuba once it becomes legal under American law to get on that boat.
The experience with foreign direct investment on real estate in Mexico is a good reference point for purposes of projecting what might happen in Cuba. Mexico’s constitution bans the direct ownership of real property by foreigners in areas adjacent to its coasts and its borders. In the early 1970s, foreigners were buying real property in Mexico through straw men in a very similar way to what is said to be happening in Cuba today. Mexico modified its foreign investment law so as to channel these investments through fideicomisos, a type of trust where a Mexican bank holds title as the trustee for the benefit of a foreign investor beneficiary.
Originally, these fideicomisos had a limited duration of 30 years and, at the end of that term, the foreign beneficiary had to transfer its interest in the property to a party that, by definition, could not be a foreign national. This limit was later expanded to 50 years, renewable for another 50. Still, over the past 40 years or so, Americans have invested profusely in Mexico (developers as well as consumers of Mexican real estate products), with little if any risks to fear from the somewhat confusing legal environment they found across the border. For over 20 years, I issued thousands of title insurance policies on Mexican real estate and, as far as I can tell, my American underwriters never lost a penny on claims (there were none) against any of those policies. Only the violence that has gripped certain areas of Mexico in the last decade has been able to slow down the pace of such investments.
China is another good example of what to expect in Cuba, title insurance-wise. In China, neither the foreign investors nor the locals can have a right of ownership over the land they build upon. What they buy into is something akin to a superficie right, while the land continues to be owned by the state. But whatever those rights are, there is a generalized perception that they are valuable and marketable, which is why China has the ebullient real estate market it has.
“Real estate purchasers” in China cannot hold the land vacant for long, nor can they transfer their rights before they have substantially completed the improvements they commit to emplace on the land. But once the improvements are completed, they can sell (though neither the original owner of this right nor its transferee can alter the use assigned to the land in the “title document”), devise, lease and even mortgage their superficie rights over them (which is more than they can do in Cuba, under its presents laws and regulations) subject to the duration of its term (70 years maximum — though ”automatically” renewable — for residential purposes in China, and from 40 to 50 years for diverse industrial and commercial purposes, which the state “can” extend). I am not aware of the existence of perpetual superficie rights in China that a foreigner can buy into, so here the advantage may go to Cuba, depending on what the still pending regulations and amendments to its laws may say. The reversion back to the state seems inevitable in China, without any provision I am aware of that implies any indemnity to be paid for the value of the improvements or structures built by the superficiario upon the land, and yet, everyone seems to want to own a piece of the Chinese real estate market.
Of course, what no title insurance policy will ever do is insure for you a property right that is any better than the one your seller or source had, which is why it is so important that every buyer (in Cuba, in Mexico, in China or anywhere else) fully understands the nature and the extent of the rights he or she is buying into.
Cuba is said to have recently given the go-ahead to a touristic development project involving foreign investment in real estate (which includes the first of several golf courses to be built in the island) that has been in the works for over seven years now. The Carbonera Club, a $350 million development proposed by UK-based Esencia to be built on a 420-acre site near Varadero, will offer luxurious life in a gated community with close to 650 apartments and villas. The developers claim “foreigners will be able to buy property there”, but, again, few precisions are given as to exactly what kind of property.
Legal and regulatory changes may be coming soon, though, including the long talked about revamping of Cuba’s Foreign Investment Law.
So it may be time to take a more realistic tack when navigating the Cuban laws regarding property rights, and not just dismiss them outright on grounds that they do not meet our expectations. Ultimately, it will be up to the Cuban people to freely decide what kind of real property rights they want for themselves and for those foreign investors who may want to invest in Cuban real estate.
This is the abbreviated version of a paper José Manuel Pallí, President of Miami-based World Wide Title, gave at the CRI conference of Cuban and Cuban American Studies at Florida International University. Pallí can be reached a jpalli@wwti.net.
