Cuba's derechos de superficie Are they 'real' property rights?

Analysis: Cuba's derechos de superficie: Are they 'real' property rights?
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.

http://www.cubastandard.com/2013/05/24/analysis-cubas-derechos-de-superficie-are-they-real-property-rights/