HAVANA 26 Abril (By José Manuel Pallí, Esq). Perhaps the most important question raised by Cuba’s new approach to foreign investment in real estate is the one related to the nature of the rights a foreign investor who develops real estate in Cuba — and those who purchase the residential units from the developer — can acquire over the land and the improvements built on it.
This is a question that cannot be answered simply by reading the new law and its companion documents. It requires placing the question squarely in the midst of the Cuban legal system as a whole, taking into account the very particular (and evolving) socio-economic model that legal system supports. But you do get, from just reading a number of articles or sections of the new law, a hint (and a strong one, in my humble view) of what the nature of those “property rights” may turn out to be.
As I noted in a previous column, Chapter VI of Cuba’s new foreign investment law (Ley 118/2014), which covers foreign investment in real estate, is couched in the same language found in Chapter VI of Ley 77/95, which the new law supersedes. The new Chapter VI has only one article (article 17), which is identical to article 16 in the old law but for the fact it omits a clause that used to ban foreign investment in the area of housing to be used by Cuban individuals who resided permanently in the island. The omission of that little clause is what appears to open that area of the Cuban economy to foreign capital.
The version of Chapter VI found in the old foreign investment law included two additional articles: one covering investments which consisted in plainly acquiring real estate as an entrepreneurial activity per se, which the law considered to be a form of direct foreign investment (article 17 of Ley 77/95); and another article related to the terms and conditions governing the acquisition and transfer of real estate, which the article said would be set in the document whereby the investment was approved by the Cuban authorities, and should conform to the property laws of Cuba (article 18 of Ley 77/95). The new Chapter VI contains one single article, the aforementioned article 17 (16 of the old law).
I do not read as much into the omission of the second of these two articles in the new Chapter VI as I do with regard to the restrictive clause omitted from the text of article 17 in the new law. It seems clear, from reading the procedures whereby approvals for foreign investment are obtained, that these approval documents are always used for purposes of fixing the terms and conditions to any foreign investment the Cuban government approves.
But I do wonder what the omission of an article similar to article 18 of the old law may mean in the context of the new law. Why choose to no longer characterize the acquisition of real estate for entrepreneurial purposes as foreign direct investment, if that is what the omission of old article 18 in the new law means? And my concern is not with the Cuban legal system itself, or with the way any of its laws are drafted; what I dread is the confusion they may create in the minds of those who tend to take for granted that what they understand to be the case is exactly what others should understand is the case. And that confusion can be lethal when you are dealing with property rights, especially when you believe there is, and can only be, but one conception (yours) of what property rights are.
Article 2 of Cuba’s new foreign investment law is a glossary (listing the definition of terms used in the law) that includes the definition of what “administrative concessions” are. It suggests that when a state-owned asset is to become part of an approved foreign investment, the title document the foreign investment venture gets is in the nature of an administrative concession, making it a title subject to an expiration date (con caracter temporal, reads article 2 (e)), and potentially restricted by contractual obligations the beneficiary of the concession agrees to, and not an outright conveyance of the title to the property in question.
Most Cuban lands are state-owned assets. So, when one reads in article 18.2 of the new law that the transfer (transmisión) to the Cuban investing side of the ownership or other property rights over state-owned assets, in order for the Cuban side to be able to contribute those rights into the foreign investment (“La transmisión a favor de los inversionistas nacionales de la propiedad o de otros derechos reales sobre bienes de propiedad estatal, para que sean aportados por aquellos…”), is done subject to the principles established under the Cuban constitution, it is important to be aware that the Cuban constitution does not understand or define ownership rights or derechos de propiedad the way we do in the United States.
Article 18.1 (d) seems to highlight this fact when it singles out usufruct and superficie rights among those the foreign investment concern can have over the land contributed by the Cuban investor. Both of those “property rights” or derechos reales — as rights directly exercisable over things, land included, are called in Civil Law parlance — are lesser in nature and in extent than what we in the United States call private property (or ownership) rights.
But this does not mean they are worthless; they can be extremely valuable, and yet fall short of being as strong as U.S. rights are. You just need to know what you are dealing with, without deluding yourself through wishful thinking.
The new foreign investment law may trigger a reaction similar to November 2011, when Cuba decided to facilitate the transfer of housing rights to third parties. Back then, many jumped to the conclusion that there was now an American-style real property market opening up in Cuba, without noticing that, under Cuban laws, a right to housing falls far short from what we in the United States call fee simple title over a house.
As was the case back then, the fact that neither the Cuban constitution nor its civil laws have changed and the concept of property rights remains in Cuba the one that befits a society built around socialist principles should be a good reason for caution. But so it is in China and in some other countries where property rights are as different from ours as Cuba’s are. Still, foreign investors in those countries crave for opportunities to invest in their real estate assets.
Two important things to take into account and be careful with: Before a parcel of state-owned land is approved for use in a foreign investment setting, it must first be placed in the hands of a Cuban national who is to be a party in the foreign investment; and the terms and conditions to which that parcel of land will be subject to (which will define what the foreign investor will be able to do and not do with it) are found in the document whereby the investment is approved by the Cuban authorities AND in the administrative concession that entitled the Cuban national investor with whatever rights it holds over the parcel.
One last point, and I know I am wearing you down, my esteemed reader:
Cuba’s foreign investment law defines three different vehicles (article 12 calls them modalidades, or modes) through which foreign investments can be made in Cuba, but suggests (in article 13.2) that for purposes of construction at risk (contratos a riesgo para la construcción) the choice may only be one: the international economic association contract, or contrato de asociación económica internacional (the other two modes are mixed-capital enterprises, or empresas mixtas, and enterprises — or investments — where only foreign capital participates empresa de capital totalmente extranjero, pursuant to article 13.1).
A contrato de asociación económica internacional is the only investment mode that Cuba assigns as the vehicle of choice for investments in certain areas of its economy, one of them the construction sector. Of course, construction is a rather broad concept, which may range from buildings in a real estate development for housing or touristic purposes to the construction of public works (like roads or port facilities). The glossary in this law does not define what it means by contrato a riesgo para la construcción. Another term that is not defined in the law is el patrimonio de la nación, which under article 20 is out of the reach of foreign capital.
Article 20 of Ley 118/2014 reads as follows: “The Cuban state will authorize foreign investments when they do not affect national security and defense, the patrimonio de la nación, or the environment.
By implying that foreign investments that “affect” (?) either category in this somewhat broad threesome will NOT be authorized, Cuba could easily reject a large number of proposals for foreign investment, using article 20 as a shield. And I don’t recall seeing a similar provision in Cuba’s predecessor to this new foreign investment law.
I am sorry, but you will not see me taking even a stab at translating patrimonio de la nación into English legalese, because that kind of translation is usually a way to expand an already existing confusion.
But if you look for an answer in Cuba’s Ley del Patrimonio Estatal (Decreto-Ley No 227/2002), you are not likely to find it there. My reading of this 2002 law — as always, I must point out I am not a Cuban lawyer, but just a lawyer who was born in Cuba, and it is from a Cuban lawyer who currently practices in the island that you should seek the answer to this and other Cuban legal questions — is that Cuba does not make a clear distinction between bienes de dominio público, propiedad estatal and patrimonio de la nación, all terms which are used in its foreign investment law to refer to state-owned assets that are contributed by the Cuban side into a foreign investment venture.
My next installment will deal with the disappointment of seeing that Cuba’s interference with labor relations between foreigners and locals remains basically unchanged.
José Manuel Pallí is president of Miami-based World Wide Title. He can be reached at email@example.com; you can find his blog at http://cubargiejoe.com