By José Manuel Pallí*
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 jpalli@wwti.net; you can find his blog at http://cubargiejoe.com
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