The Impact of the Cuban Foreign Investment Act of 2014 on Foreign Real Estate Investments

December 2014Articles Business Insights: Cuba

Cuba’s National Assembly passed the Cuban Foreign Investment Act of 2014 earlier this year, authorizing foreign investment in all sectors other than health and education for its population and military institutions (with the exception of the military commercial system). Chapter 6 of the Act permits foreign investors to acquire ownership and other property rights over Cuban real estate. Specifically, Article 17 authorizes real estate investments and permits the ownership of real estate or other property rights, but such investments must be made by joint venture, international economic association agreement or totally owned foreign capital company. Investments can be for housing and buildings for private or tourist related purposes, housing or offices of foreign persons or real estate development for tourism purposes.

Real Estate as a Cuban Contribution to a Joint Venture

The law also contemplates the possibility of real estate as a contribution to a joint venture agreement between a foreign entity and a Cuban entity. Article 18.1(d) includes as contributions to capital, property rights over movable and immovable properties and other property rights thereon, including usufruct and surface rights.

The Cuban party’s contribution to the joint venture may be in the form of land, buildings, usufruct rights (the right to use the property for a certain period of time) and surface rights.

Usufruct Rights in Cuban Legislation

According to Cuban Civil Code (Law No. 59/87), the right of usufruct allows for the free enjoyment of the property of another, with the obligation to preserve its form and substance, unless the instrument constituting it or the law provides otherwise. The rights and obligations of the usufruct holder (usufructuary) are determined by the usufruct document.

The usufructuary is obligated to use the property in accordance with its purpose and may make such improvements, facilities or installations necessary for its adequate maintenance, conservation and enjoyment. Article 210 of the Cuban Civil Code establishes the right of usufruct is nontransferable and may be encumbered, unless the title provides otherwise.

Article 211 of Cuban Civil Code prescribes that the Cuban State may grant an usufruct state-owned property to individuals or corporations with the formalities provided under applicable law. When granting the right, the state may establish conditions different from those indicated in the Cuban Civil Code as long as they do not contravene the nature of the usufruct as an institution.

The Cuban State may authorize Cuban entities to contribute with the right of usufruct to the joint venture as long as the contribution meets the economic objectives of the state.

According to such code, a usufruct in favor of individuals may not exceed their lifetime. Usufruct granted in favor of corporations (including joint ventures) may not exceed the term of 25 years, but that term may be extended by an equal term at the request of the usufructuary made prior to its expiration date.

The consequence is that at the end of the usufruct, all of the improvements stay in the property without any compensation.

Surface Rights in Cuban Legislation

According to Article 218 of the Cuban Civil Code, the state may grant to natural or juridical persons surface rights over state-owned lands for the construction of housing or to carry out other types of construction. Surface rights may also be granted in order to use the land for other specifically determined activities, but they may not be granted over lands considered personal property (e.g., residences).

Surface rights may be granted gratuitously or in exchange for consideration. It is worth noting that the holder of a surface right becomes the owner of whatever is built on the land. However, Article 225 of such Code indicates that when the surface right terminates, the improvements or facilities built on the land revert in favor of the Cuban State, which is the owner of
the land.

The surface rights given to the Cuban partner, i.e., the Cuban party in a joint venture, may also represent a capital contribution, but if the surface right is given by the Cuban State directly to the joint venture, the joint venture will have to pay the value of the surface right to the Cuban State.

The state may grant surface rights to foreign developers to expand and facilitate the process by which foreign investors can promote international tourism, and the state provides legal certainty and guarantees to foreign investors in the Cuban real estate transactions. Pursuant to these modifications, the state can now grant surface rights for a period of up to 99 years, and if the rights were previously granted for a shorter period of time, the period could be extended to 99 years at the request of the holder of the right. In addition, the state may grant perpetual surface rights over state-owned land, prior payment of the value or price of the right, to Cuban companies or Cuban entities for the construction of tourism homes or apartments. Previously, surface rights could only be granted for a term not exceeding 50 years and could be extended for half of its original term at the request of the holder of the surface rights made before the date of the expiration. Surface rights are transferable, except when the law or the title document provides otherwise.

Cuban Laws Impacting Real Estate

After the promulgation of a prior Cuban Foreign Investment Act, 1995 (Law 77/1995), the demand for Cuban real estate investments exceeded the initial expectations of the state and required additional changes to the Cuban real estate legal regime. As a result, the Cuban Council of state approved several laws during the period from 1998 to 2007.

Cuban Property Registry

Cuba inherited from its Spanish colonizers a highly efficient property registry system. Cuba’s decision to institutionalize that property registry system promises to guarantee the chain in title and the recognition of all the property rights that affect all Cubans and foreign investors.

The Cuban registry provides transparency to the real estate investment process by keeping records of all real estate transactions. The Registry also provides additional records to foreign investors and prior owners of Cuban real estate (Americans and Cuban exiles) whose properties have been affected by prior expropriations or confiscations.

Currently, interested parties may be able to search the registry for the following documents:

  • Declarations of expropriations and confiscations of properties in favor of the Cuban State
  • Transfers of state-owned-properties to Cuban companies
  • Joint ventures or individuals (foreign or nationals)
  • Rights of usufruct, surface rights, leasing agreements or other real estate contracts
  • Warranty deeds
  • Notary documents
  • Judicial decisions affecting a real estate property
  • Recorded mortgages or other recorded encumbrances, assessments and declarations

Cuban Mortgage Legislation

The revival of the real estate mortgage as a vehicle for the development of the Cuban real estate market is a pending issue in the opening of Cuban real estate to foreign investors.

The laws promulgated after the Cuban Revolution of 1959 limited and almost eliminated the mortgage institution from the Cuban legislation. As a result, the

Cuban Civil Code of 1987 only recognizes the ship and aircraft mortgage institution. The old and obsolete Spanish Mortgage Law of 1893, which is the only existing mortgage law in Cuba, is practically a dead letter.

After the promulgation of the above mentioned Law No. 7711995, foreign investors demanded more flexibility in the real estate investment process. At the same time, real estate lenders demanded more guarantees and security to finance real estate projects. As a result, the Cuban Council of State brought to life the possibility of executing and recording mortgages in Cuba. It is worth noting that one of the purposes of Decree Law No. 214/2000 was to allow foreign financial institutions the possibility of financing real estate investments in Cuba.

The Cuban Structuring Mortgage Law recognizes the mortgage institution as a guaranty to the fulfillment of the contractual obligations and the payment of obligations and debts. Cuba limited the ability to mortgage real estate properties only to corporations or other economic entities registered in Cuba. According to Cuban law, all companies created in Cuba are considered Cuban corporations regardless of the nationality of its shareholders.

Article 2 of such Decree Law prescribes that the legal regime of mortgages in Cuba is based on the still-in-force Mortgage Law of 1893 and its complementary regulations. The “old” Spanish Mortgage Law acquired validity in the new Cuban foreign investment strategy.

It is clear that Decree Law No. 214/2000 was aimed at promoting external financing, and Cuban financial institutions or mixed financial entities (joint ventures) are not excluded from financing real estate properties in Cuba.

It should be noted that the first special provision of Decree Law No. 214/2000 demands that any filling of a mortgage in Cuba requires prior and express authorization of the Cuban Executive Committee of the Council of Ministers (CECM).

The second special provision of the Decree Law No. 214/2000 establishes that the Cuban State has a preference right to acquire mortgage titles by paying its value in the event the mortgage holder (lender or intermediary) decides to sell, assign or transfer the mortgages.

As a result, the Cuban State reserves its right of first refusal and option to purchase mortgages. If the Cuban law provides that the state has a preferential acquisition right, it is understood that such right includes both the right of pre-emption and of retraction. According to the Cuban Civil Code, the right of retraction may not be exercised by a person who, having been notified of the proposed sale, did not exercise the right of pre-emption.

In case where the transfer of a real estate right requires the prior authorization of the state and, at the same time, the state is granted a right of pre-emption with respect to such property right, the term to exercise such right is calculated from the moment that authorization request has been filed.

The third special provision indicates that the solution of disputes derived from the registration or execution of any mortgage in Cuba are determined in accordance with the Cuban Civil Procedure Law (the LPCALE or Law 7/77). The Economic Chamber of Cuban Popular Tribunal has jurisdiction over any mortgage dispute related to foreign investment companies as prescribed in Decree Law 223/2001 (Jurisdiction of the Economic Chamber of the Provincial Tribunals of Popular Power in Cuba). Such Decree Law was later replaced by Decree Law 241 of 2006 (Modified Cuban Civil Procedure Law).

Conclusions

Cuban foreign investment legislation provides that foreign investors may acquire ownership and other property rights over Cuban real estate. However, there is still a lack of a comprehensive Cuban real state law addressing condominium, cooperative (co-ops), timeshares, residential mortgages, liens, titles and other property issues.

View the entire issue (pdf)