I- Introduction

I have been a lawyer for the better part of the past 37 (now 39) years of my life, first trained as one in Argentina, where my classmates still call me “el cubano”, and later (since 1985) becoming a member of the Bar in Florida, where few believe me when I tell them I am as Cuban as they are.

If I have to single out one valuable lesson I have learned over the years I have spent acting as interpreter and bridge between the Civil and the Common Law systems, mostly in the area of property rights and international real estate transactions, that lesson would be to avoid falling into the confusion pitfall of trying to translate legal terms and concepts from one system into the language –or legalese- and “culture” prevailing in the other one.

That is why I have stayed away from using “Surface rights”¹⁾I have also seen them called “top-soil”, “land use” and even “very long lease” rights. and opted for sticking to the Spanish ‘Superficie” –which happens to match the name given to this right in its original version, under Roman Law- used in the Cuban Civil Code for this type of “derecho real” –here we go again- that is the central topic of my little essay.

I do not mean to write for lawyers, and I believe the topic of property rights in Cuba should be first considered from the perspective, the priorities and the needs of regular Cubans in the island (the proverbial “cubano de a pie”) and not those of investors. But this paper has to fit into what my colleagues in the panel and I have chosen as the general theme of our respective presentations, so I will try not to digress away from what I assume are (or will be) the main concerns of those who may eventually venture with their capital into Cuba.

What is a “derecho real”? A “derecho real” is a right that its holder can exercise directly over the thing (the land in our case) that is subject to it, without the intercession of anybody else ²⁾For example, there is no “landlord” to speak of in ‘superficie’ or usufruct situations, which is why they are not leaseholds, as some claim they are, not even “ground leases”. and to the exclusion of all other persons.

Where does the “derecho de superficie” fit into the realm of the “derechos reales”? It 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. ³⁾There are other theoretical explanations of the nature of “superficie” rights in Civil Law, but this one depicting the situation as coexistence or duality of rights is, in my humble opinion, the preferred one.
‘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”.

This “derecho de superficie” has a long history of rejections by the codifiers of the Civil Laws of several countries. This type of real property right –anchored in time and space, as so many Common Law purists love to say when describing their “estates in land”- has been shunned in many Civil Law jurisdictions where they see little value in conserving medieval legal institutions that fragment property rights into a mosaic. It was explicitly excluded ⁴⁾A long footnote to article 2503 of the Argentinian Civil Code is enlightening on this matter, and also helps distinguish the rationale that underlies property law in our Anglo-American legal system from that prevailing under Civil Law. or kept out of the Argentinian Civil Code (together with ‘enfiteusis’ rights and other rights which have an effect similar to the one long-leases have on land) by its drafter, Dalmacio Velez Sarsfield. He did so on grounds that having multiple rights over one single parcel of land is a source of permanent conflicts and claims that can impede the productive exploitation of said land and the free and agile transfer of title to it when, for example, at the death of the title-holder, the title or ownership right is divided among a number of heirs and the land itself cannot be divided due to the existence of the ‘superficie’ rights.

It was similarly kept out of the Spanish Civil Code that was applicable in Cuba until 1987, when the Cuban Revolution adopted a new Civil Code, which includes the “derecho de superficie” under articles 218 to 225.

Over the past few years, the “derecho de superficie” has been enjoying a comeback in the eyes of legislators 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. ⁵⁾This may come as a surprise to those who hold on to the often recited slogan / mantra that claims “There is no Law in Cuba” (“en Cuba no hay Derecho…”).

And one of the reasons behind this resurging 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 (the Cuban Civil Code bans the use of the “derecho de superficie” over lands -housing mostly- held as individual property or “propiedad personal”, apparently sharing the concerns of Velez and other jurists).

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 allowes for the granting of such rights in perpetuity (to Cuban companies), for the construction of houses and apartments for tourists (Artìculo 222, inciso 3, of the Cuban Civil Code).

My hope was to be able to include more precisions on this at the time I presented this paper. Those precisions have been slow to come –a revision of Cuba’s foreign investment law is still “pending” ⁶⁾There are signs it may be impending or imminent, but “imminent” in Cuba has a distinctive flavor that hardly compares to the meaning we assign to it. – 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.

Usufruct presents less of a challenge in terms of interpreting the Civil Law concept of “usufructo” –the right to use, enjoy and receive the benefits or profits from property that belongs to another- under the light of our Common Law, since we do have what are called “legal usufructs” –those created by operation of law- in our system.

Usufruct is the “derecho real” of choice under present day Cuban laws when the State wants to grant out public lands to those Cuban citizens and agricultural production cooperative associations who want to farm them. As in the case of the ‘derecho de superficie’, the State retains the title (the ownership) over the lands in question. But to date, it has not been used widely for ventures where foreign investment is involved (although it could be, under article 16, paragraph 2 of the Cuban Foreign Investment Law discussed below).

Both the “superficiario” and the usufructuary own a right that is exercised over the property of another –in re aliena- but even though both are usually limited in their duration, “superficie” rights can be granted to corporate entities for a longer period of time under present Cuban law than usufruct rights are. The ‘derecho de superficie’ has another key advantage over the ‘derecho de usufructo’: it is usually transferable to a third party, while the personal obligations owed by the usufructuary to the land owner tie the ‘derecho de ususfructo’ to the individual the land owner chose, and it is usually extinguished if said person dies or ceases to exist. Usufruct is further limited by the obligation of the usufructuary to –at the expiration of his usufruct rights- return possession of the land to its owner without having altered its substance (for example, if the land was agricultural land when the usufruct rights were created, it must remain agricultural land since changing its economic destiny would alter its substance).

II.- The “derecho de superficie” in Cuba

Over the years, 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. 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. And 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 –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 ⁷⁾My distinguished colleague, Lic. Marta Fernandez Martinez is arguably the preeminent Cuban authority on ‘superficie’ rights, having written extensively and with great clarity on this topic. -, which usually falls short from satisfying my prospective (until they hear me out) clients.

When the Cuban government decided to allow the relatively free transfer of rights over residential real estate in Cuba by way of Decreto Ley 288/11, in effect since November 2011, we all began hearing about people in Miami and elsewhere “buying properties” in Cuba, in many cases using relatives, friends and even lovers in the island as straw men (or women) in order to skirt the Cuban laws that restrict such purchases to those who both live in the island and mean to occupy those properties as their main residential units. Few seem to pause to ask themselves what sort of rights (and potential problems) they are “buying” into.

It is far fetched to speak of “buying properties” in Cuba if we do so assuming what we are doing is similar to buying properties in the United States. It is also questionable to assume that, under the laws presently in force in Cuba, anything resembling our own real estate markets (where most transactions, until recently at least, were financed), can flourish.

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. ⁸⁾Articulo 14 de la Constitución Cubana: “En la Republica de Cuba rige el sistema de economía basado en la propiedad socialista de todo el pueblo sobre los medios fundamentales de producción y en la supresión de la explotación del hombre por el hombre. También rige el principio de distribución socialista ‘de cada cual según su capacidad, a cada cual según su trabajo’. La ley establece las regulaciones que garantizan el efectivo cumplimiento de este principio”.

(The Republic of Cuba is ruled by an economic system based on the socialist nature of property where all the people (collectively) own the fundamental means of production, and on the elimination of man’s ability to exploit his fellow man. It is also ruled by the socialist principle of distribution ‘from each person according to that person’s abilities, to each person according to that person’s needs’. The law implements those regulations that guarantee the effective abidance with this principle.)

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. ⁹⁾Articulo 129.1 del Código Civil Cubano: “La propiedad confiere a su titular la posesión, uso, disfrute y disposición de los bienes, conforme a su destino socio- económico

”.

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” ¹⁰⁾Or “derechos sobre bienes”, as they are called in Book II of the Cuban Civil Code. in Cuba, including ‘superficie’ rights and usufruct.

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 superficie rights in Cuba 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” (or ‘titulo constitutivo’) of the ‘superficie’ rights, which in Cuba usually 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 ¹¹⁾By Decreto Ley 273/10 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 which 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. There is a clear need to undo the atomization or dispersion of Cuban rules of law affecting this and many other rights and legal topics, a need that is currently been addressed by the Cuban authorities.

Resolution 2/91 of the INAVI of January 14th, 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 ‘testaferros’ 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.

And that is perfectly fine, as long as those buyers fully understand what they are buying into. I can even see how, satisfying as it does the main tenets of what makes a “title” good enough for it to be “insured” by one of our title insurance underwriters, the buyer’s title as the new “owner” of the house will be deemed insurable -this is covered more extensively below, in the section about “title insurance”.

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 nineties); 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 “administrativization” (or 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 ‘titulo constitutivo” for the land in question) is the aforementioned authorization or “acuerdo” by Cuba’s cabinet and the resolution implementing it.

III.- Usufruct in Cuba

Having defined usufruct in our Introduction and described how it differs from ‘superficie’ rights, I wanted to assess the impact its use in Cuba has had –especially due to some of the recent measures taken by the Cuban government to incentivize agricultural production- but it seems too soon for a conclusive assessment.

But what should be pointed out since it may give us a hint about what to expect in other areas where Cuba is changing its socio-economic stance (even if tentatively and with the avowed purpose of going no further than adjusting its very particular brand of socialism), is the pace at which the reforms aimed at increasing agricultural production are taking place, including corrections to measures taken only recently.

In 2008 ¹²⁾Decreto Ley 259/2008 , the Cuban government began handing out unproductive state lands in usufruct to individuals and cooperative associations who agreed to farm them. These usufruct rights were granted for a maximum term of 10 years in the case of individuals (20 years in the case of cooperatives and state controlled entities), a term that can be extended for another 10 years if the usufructuary meets all his obligations. As it befits usufruct rights, the grantees are not allowed to transfer them, and the State retains title to the lands in question.

In 2011, the rights of individual usufructuaries who could show they had increased the lands’ productivity were strengthened, and the size of the parcels was increased fivefold, to 67 hectares (slightly over 165 acres) –the maximum size contemplated three years before was 13.4 (or 33 ½ acres). Usufructuaries are now also allowed to build a house on the premises. ¹³⁾The 2008 law forbid this, presumably because it is in the nature of usufruct that the usufructuary cannot alter the substance of the thing he possesses, having to return it to the owner when the term of the usufruct runs in the same state and conditions he received it. These “could” raise a question with regard to the kind of right the usufructuary holds over the house he builds on the land subject to usufruct; is it a ‘superficie’ right?

One of the most lucid, meticulous and unbiased observers of Cuba from the outside, Professor Carmelo Mesa Lago, suggests in his most recent book ¹⁴⁾“Cuba en la era de Raùl Castro” (Cuba in the Raul Castro era), published by Editorial Colibrì in Spain, an excellent analysis of the impact –and the shortcomings- of the socio-economic reforms Cuba is experimenting with. that even if it seems clear that when it comes to agricultural production the estate sector is losing ground to the usufructuaries and the small private farmers ¹⁵⁾The property rights of Farmers who privately owned small tracts of agricultural land back in 1959 are among the very few that “survived” the Cuban Revolution., the statistical information is still not sound enough to predict whether this approach will bring Cuba closer to the goal of been able to feed itself with its own resources.

IV.- “Title Insurability”

I suspect fewer readers of this paper are likely to have a thorough understanding of what title insurance is and why it is an “only in America” financial service than those who knew beforehand what usufruct and ‘superficie’ rights are all about. This despite the fact paying for title insurance is unavoidable for any one in the United States who buys a piece of real estate and finances his or her acquisition: we all pay for it (usually a fraction of a percentage point of the price we pay for the property) any time we get a loan for the purchase of a house or condo. And 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 (for the protection of the bank and its position as a secured creditor with a first shot at the asset we are buying in case we don’t repay its loan), we just do not ask many questions about it: we “know” we “need” it, and we just go ahead and pay for it.

I have written extensively on the difference between our puerile land title recording system -which is the reason behind our “need” for title insurance- and the more developed and secure ones existing almost everywhere else in the world (a good place to begin reading on this topic if you are interested, or else if you need to fend off insomnia, is this link: http://www.cubastandard.com/2011/12/01/analysis-cubas-title-recording-system-part-1/, which will take you to others). Suffice to say that the title recording system Cuba had until 1959 was much better at achieving the main goal land title recording systems have, which is to provide legal certainty to real estate transactions, than anything we have ever experienced in the United States. 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 thirty 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 (and few industries are as fond of “easy” or low hanging fruit –“mango bajito” in Cuban- as is our title insurance industry). 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 in Section II 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 ours 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) will 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 –and might not- happen in Cuba. Mexico’s Constitution bans the direct ownership of real property by foreigners in areas adjacent to its coasts and its borders. ¹⁶⁾The lower house of the Mexican Federal Congress has just passed a proposal to change article 17 of the Mexican Constitution to allow foreigners to directly own residential property in the restricted zones, but the Senate has yet to approve it; it would be a ground shaking historical event if this turns into law and is confirmed by the legislatures in each of Mexico’s states. In the early seventies, foreigners were buying real property in Mexico through “testaferros” or straw men in a very similar way to what it 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 thirty 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. ¹⁷⁾The foreign beneficiary would instruct the trustee to sell and convey the title to a purchaser that could not be other than a Mexican national. Surprisingly, these type of arrangement where the foreign investor sells and keeps the realized value of the property he bought thirty years before has been described as a “long lease” by the most sophisticated in our media (and even by more than a few colleagues of mine). But even more surprisingly, the original 30 years limit placed on the investment and the structure imposed by the Mexican authorities to indirectly permit what their Constitution said could not be done directly was not a deterrent for many Americans who wanted to “own” real property in Mexico. This limit was later expanded to fifty years, renewable for another fifty. Still, over the past forty years or so, Americans have invested profusely in Mexico (as developers as well as consumers of Mexican real estate products), with little if any risks to fear ¹⁸⁾For over twenty years I issued thousands of title insurance policies on title to property situated in Mexico and, to the best of my knowledge, not one of the underwriters I was an agent for has ever lost a single penny on claims against those policies. from the somewhat confusing –in their minds, though crystal clear and carefully designed from a Mexican perspective- legal environment they found across the border. 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. ¹⁹⁾There was so much enthusiasm about China in our title insurance industry even before the Chinese Property Law was adopted five years ago, that a friend in the industry once told me his company (one of the largest among our title insurance underwriters) was about to introduce the “mortgage concept” in China…
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 –I cannot read Chinese, so I cannot myself translate the name China’s property law, in force since October 2007, gives to this rights- while the land continues to be owned by the State. ²⁰⁾One of the few well-versed commentators on this topic is Professor Patrick A. Randolph Jr. from Missouri, and he refers to them as “land use rights for construction”, while mentioning that the Chinese Property Law refers to them as a species of usufruct. But given the fact that China’s laws have historically been inspired by Civil Law, and since it looks, walks and quacks like a duck, I just feel I must stick to ‘superficie’ rights (usufruct is, in almost every place where it is legislated, intransferable, and the fact the Chinese recording system calls for separate recordation of the rights over the land and the rights over the improvements reinforces the ‘superficie’ flavor)… But whatever they 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.

V.- Suggestions (for the daring)

American business lawyers tend to look at their client’s real estate investments from a very particular way, tied to their own professional experiences in their country’s legal environment. They frequently have a laundry list of items to check and questions to ask that reflect that bias. They are also trained to see real estate transactions –and the laws in general- through an economics lens that replicates our views, and they assume that what works for us must work for everybody else.²¹⁾For instance, they assume that a steep escalation of property values measured by square foot is necessarily a good thing for an emerging economy, when most people and some governments in those countries tend to fret at the social convulsions real estate bubbles often cause. We are still experiencing the social costs of bursting bubbles as they affect those already invested in the real estate market at ground zero. The less visible but no less ominous effects of real estate bubbles are felt, while prices are still escalating, by those who are priced out of the market when housing prices become inaccessible due to lack of correspondence with their wage levels or purchasing power.

Some of the things they focus on also suggest that, as in the case of the title insurance industry, American lawyers will not shy away from advising their clients to invest in Cuban real estate. Despite the fact that under its present laws, the State will hold on to the title to the lands invested in (in a touristic development joint venture situation as well as, for now, in the case of individual purchases of real property by foreigners) the cash flow generated by such ventures and the benefits of enjoying a residence in Cuba at the individual investor level may make those investments worth the trouble. ²²⁾Foreign investors in Cuba are allowed to repatriate 100 % of their after tax profits (article 8, paragraph (a) of Cuba’s Foreign Investment Law).

Assuming the foreign investor gets ‘superficie’ rights over state owned land for the funds it invests in Cuba, there are some precautions he may want to take:

1. Make sure the title documents (in all likelihood an administrative resolution implementing the decision of the Cuban authorities approving the investment) do not negate the transferability of the ‘superficie’ rights.

2. Negotiate for the inclusion of a ‘pacto de equidad’ (an agreement by the Cuban State to indemnify for the value added to its land by the “superficiario” in case a reversion takes place). ²³⁾It would be ideal to find a way to negotiate so as to completely rule out a reversion in cases of perpetual ‘superficie rights’, but absent new regulations it is not clear this can be achieved in Cuba today. And even without an indemnity agreement of this nature, ‘superficie rights’ of a sufficient length (say, 99 years) could be deemed long enough to attract most real estate investors, giving them ample time to recover their investment and obtain a handsome return on it.

3. Negotiate for a flexible term in which to begin building the improvements and engaging in the activities the ‘superficie’ rights call for to avoid a revocation of said rights by the State due to the inactivity of the superficiario”.

4. Make sure the grant or concession document says the State must collaborate with the “superficiario” and not impede his activities (building and others) on the land, including any re-building the “superficiario” is entitled to do in case the structures he emplaces in the premises are destroyed during the term of his ‘superficie’ rights.

5. Ask for a reaffirmation in the “title document” of the State’s obligation to respond in case someone else tries to evict the “superficiario” from the land (an equivalent to our warranties of title).

6. When negotiating the price for your rights as “superficiario” consider, among other items, the relocation costs of those presently on the land (in case the land is not already vacant) and the infrastructure costs your activities may incur (what we call impact fees). ²⁴⁾Some claim that the “real estate market” for foreigners that evolved in Cuba during the “special period” of the nineties was short-lived because of unforeseen infrastructure (and social inequality) costs.

In the unlikely event that our hypothetical foreign investor has to deal with usufruct rights as part of a real estate investment in Cuba, the one thing he should make sure of is that the document through which those rights are conceded by the Cuban State makes clear that the extension of those rights (for a second term of 20 years if the usufructuary is a “persona juridica” or corporation) is not conditioned other than by the fulfillment by the usufructuary of his obligations under the concession (say, producing a certain crop, or planting on a minimum area of the land). He may also want to give himself as much flexibility as possible when negotiating with the Cuban State the terms and conditions for the usufruct rights, so as not to fall captive to a single type of exploitation that, should he alter it, may result in his not been able to return the land in the same conditions he received it: he should try to keep his options open, but that goal must be made part of the negotiating process and be clearly stated in the language of the administrative resolution approving the usufruct grant (the title document).

VI.- Conclusion

The centrality of property rights is evident in all the different societal models in the world. We all have a right to believe in our own societal model and the framework it provides for property rights. Many will also feel they have the right to claim that their socio-economic design is the only viable, the only capable of fostering development and economic growth, the only one which satisfies the cravings of unfettered human nature. We in the United States mostly feel that way.

But then, other societies may dispute our feelings and beliefs. What is more, their own national experiences may disprove our feelings and beliefs. For instance, China passed its current Property Law (described in Section IV above) in 2007, a law that was first discussed among Chinese lawmakers fourteen years before (Raùl Castro’s “cosmetic reforms” seem to be moving at the speed of light when compared to this); during those fourteen years the Chinese economy grew to six times what it was, and the average income for urban Chinese increased fivefold. All these happened with weak and ill-defined property rights and in a society that barely resembles ours.

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 US$350 million development proposed by the UK firm Esencia (led by the younger brother of the MacDonald clan chief in Scotland) to be built in 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 a 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.

José Manuel Pallì
President
World Wide Title

jpalli@wwti.net

Presented at the 9th CRI Conference on Cuban and Cuban-American Studies – May 23rd to 25th, 2013

For many years, I have avoided advising anyone about how to navigate the turbulent waters of what are known as the OFAC rules and regulations which are supposed to tell us all US subjects what we can and cannot do in interacting with Cuba and its people.

And I have avoided them because I have always found them devoid of much sense, and even antithetical to what most lawyers I know and respect would consider “good law”, especially if, before calling a law “good” we need to see behind it a couple of elements that have always been absent, in my humble opinion, from these OFAC rules for Cuba: that “good” laws reflect the guiding principles of the society enacting them, and that a wide majority of the members of that society effectively support them.

Having said that, it is obvious that these rules and regulations about interacting with Cuba, whether good or bad law, are part of the laws of the Unites States of America and, as an American lawyer and citizen, I am subject to them. So even if I may choose to avoid them in my law practice, I cannot ignore them. There is a new set of rules in force since mid January.

There are several levels on which the new rules are likely to have an impact, beginning with the biggest potential impact, which I see as that on the banking ties between the two countries. And the biggest impact in this regard is not even the direct consequence of the these new rules, but rather of the eventual dropping of Cuba from the list of States sponsoring terrorism where it has been capriciously kept for years, against the sense of a plurality of the institutions the US charges with protecting the Homeland against terrorist acts. We do not know yet whether Cuba will be dropped from that list, but unless that happens, I don’t see many banks, American or foreign, daring to do business with Cuba and risking the kind of sanctions the US recently imposed on several banks (the latest example of this came just a few hours before the historic announcements made December 17^th, 2014).

Besides, the US embargo (or blockade, as Cubans call it) against Cuba is still in place, and is likely to remain in place for some time. Without its removal, it is hard to conceive a “normal” relationship between Cuba and the US, which is exactly the point the Cuban side has been making at those meetings, bi-national and international, held recently. And they are absolutely right in making that point. Even after Cuba is dropped from the terrorism sponsoring countries’ list –which should happen before the America`s Summit to be held in Panama- it is ludicrous to think any re-established diplomatic ties will entail a normal relationship between the two nations.

The answer to the key question for an American national (or someone who is a legal resident in the US, which residency also makes him a “US subject” under the OFAC rules) interested in investing in Cuba remains mostly the same: NO, you cannot! US source investment in Cuba remains severely restricted unless Congress takes action, which it may or may not do, but is unlikely to anytime soon.

Trading with Cuba remains an obstacle course except for certain products (agricultural and medical) and equipment (telecommunications equipment mostly) that the US has exported to Cuba for some time already, but now building materials for the use of private Cuban individuals and farm equipment are also allowed as exports to the island. The new rules also contemplate the importing to the US of products made by private enterprises (all of them of a small size) in Cuba, and the change in the terms of trade –the elimination of the “cash in advance” requirement- should also facilitate matters in this area, although only slightly. Will this be enough to significantly increase the trade between Cuba and the US? Time will tell. The fact American businesses exporting the few goods they are authorized to export to Cuba remain barred from extending credit to their buyer in the island makes me think the overall impact will be slight. But the new environment does make the arguments of the pro-embargo crowd even sillier and flimsier than they have historically been –their main argument is that “Cuba never pays its debts”, as if that should be a concern for any other than the US exporter in question-, not that this crowd has ever been averse to silly and flimsy arguments; on the contrary, they seem to crave for them.

Sending, bringing and spending money in Cuba by US subjects is likely to flourish under the new rules, and that alone should have a very strong impact on the living standards of many Cubans in the island, as well as a in the growth of all categories or segments of the slowly but surely advancing Cuban private sector.

Switching to another level carrying far less potential impact on the relationship between the two countries, but important for its potential impact on Cuban society and on individuals and families, the new rules and regulations expand the ability of US subjects to travel to Cuba. This is, in my view, the element in Cuba related restrictions that is the most inimical to the guiding principles of our nation: telling ‘Americans’ they cannot travel to Cuba. Cuban-Americans, for many years, have been treated differently than other fellow Americans when it comes to travel to Cuba. This distinction is been eroded somewhat under the new rules, and the freedom to travel granted to Cuban-Americans since President Obama took office remains solidly in place, since many in the proudly recalcitrant crowd that wants to keep the embargo in place, the members of the so called Cuban-American delegation to Congress among them, in a dazzling moral pirouette, now claim they have “always” been in favor of family visits. These very same guys supported rules that restricted Cuban-Americans with family in Cuba to one visit every three years. But this is Miami of course, where memories are short and hypocrisy runs wild.

And the joker in this “new” game, as usual, will be what will the Cuban government do, how it will react to President Obama’s door opening act. Will they respond in kind? How much will they be willing to open up their own society and help enhance and widen the salutary effects the US government’s move could have in Cuba, for the benefit of the Cuban people? I am afraid that as long as the embargo remains in place, the response from the Cuban side will be slow and anything but bold.

That’s why our new Cuban-American leitmotif should be “No Embargo, no Problem”, and our battle cry “Free Cuba from US Politics” once and for all.

Many moons ago, I was invited to participate in a venture to promote the use of title insurance –a financial product or service almost no other country in the world had ever found any use for –internationally, in Mexico and beyond. I made a good living off that venture for a long time, but one of the most frustrating things I had to endure was my inability to explain to my mostly American title insurance clients who bought real estate in Mexico, their American lawyers, and even American pundits, the nuances that made acquiring property rights in Mexico so different from, but still so similar to what we were used to hereabout (and even safer, from a legal certainty standpoint). And that frustration arose, mainly, from my audience’s insistence in assimilating Mexican legal concepts (grounded in Civil Law) to our own Common Law rooted ones –which led them, for example, to call the rights a foreign purchaser acquires as a trust beneficiary in a Mexican bank trust (a Fideicomiso) leasehold rights. This fable persists to this day, together with the one that tells about Mexico lacking a proper recording system –when what they have is, conceptually at least, far better than ours.

So it came as no surprise that so many of us, Americans and Cuban-Americans alike, seem to be baffled by what the new Cuban law in effect since November 10 (Decreto Ley 288) means. Despite the well established fact that the Cuban Revolution was, in great measure, a revolution conceived and made by lawyers, we in Miami long ago decided there is no Law in Cuba (en Cuba no hay Derecho), a prejudice that is likely to make the generalized confusion worst than that affecting our perception of Mexican real property law. And it is a prejudice that, together with its corollary –there are no “real” lawyers in Cuba- dilutes even further our ability to properly understand these recent changes to Cuban law, which are the result of internal pressures subtly channeled through my colleagues in the legal profession in Cuba.

The first caveat when it comes to assessing the significance of the recent adjustments to Cuban Housing laws –and that is all that Decreto Ley 288 does- is that they are far from heralding the advent of our kind of private property rights for Cubans in the island.

Cuban property rights remain socialist to the core, whether we are discussing housing units or other assets. Cuban law has for years strictly defined its citizens’ constitutionally guaranteed rights to housing as propiedad personal over one “permanently occupied” place of abode, a definition that remains intact under the new rules and which falls short from granting Cubans in the island what we call private property rights.

Cuban substantive property law remains unaltered. Decreto Ley 288 modifies a few articles in Chapter Five of the Cuban Housing Law (Ley General de la Vivienda) -which sets the rules whereby the rights Cubans have over their housing units are governed- but neither Cuba’s Constitution’s treatment of property rights nor its Civil Code’s provisions on that subject have been even air-brushed.

Nor is a wider opening to foreign real estate investment in Cuba foretold by these recent changes. Some “cubanologists” think such an opening could happen soon. But when it does happen, it is likely to be on Cuba’s terms, as was the case in China, where foreign purchasers of real estate seem to be trampling over each other to take advantage of the investing opportunities despite the fact that Chinese property rights law and most other institutions do not rate up to what we may consider “investment grade”. The conversion of some recreational or vacation homes –apparently exempted from the “permanently occupied” requirement that characterizes the socialist propiedad personal over housing- into bed and breakfast operations may now be facilitated. But the right to own one vacation home is a right Cubans in the island already had, and such conversions were already viable under the cautious process of opening to private entrepreneurship Cuba has been engaged in for years, in many cases financed by relatives abroad.

Mortgaging your real property to milk your equity and spend it on consumer goods remains an unmitigated sin for Cubans, who are still subject to an old maxim laid down by one of the authors of Cuba’s first housing law, “Housing is to live in, not to live from” (La vivienda es para vivir en ella, no para vivir de ella).

Consequently, it is kind of early to predict the development of any meaningful real estate market in Cuba as a result of these adjustments to the Cuban Housing Law. Which is not to say that the changes made are inconsequential for Cubans in the island.

Over the past few days, more than one journalist has asked me when exactly did Cuba ban the sale and purchase of real property. It turns out Cuba never did so as specifically as my friends in the media would like to report. Castro did curtail Cubans’ rights to sell or convey their housing unit by limiting them to a single possible buyer under the law, which gave the Cuban State a right of first refusal (at prices presumably set by the oh so quaint “Ministry of Pricing”, the façade of which, close to Santo Domingo square in Havana, is one of my favorite picture spots), and you needed an administrative authorization from your neighborhood’s Municipal Housing Bureau for all exchanges or permutas- but the Cuban Constitution -in article 21- and the Housing Law both allowed Cubans to dispose of (disponer) or sell (vender) their housing units, even if under the aforementioned constraints.

Now, Cubans will be able to sell their housing units to another natural person (which rules out corporations, the “most favored persons” under “our” rule of law) or exchange them for profit, without the need to seek permission from the authorities. The only administrative requirements under the new rules are: you need to document the conveyance before a Civil Law Notary, and the notary must have proof that the title to the housing rights you are conveying has been recorded at the Registro de la Propiedad before he / she authorizes the conveyance document. These two requirements make a lot of sense, since Cuba has been trying to rebuild the excellent recording system it had back in 1959 – which was far better than anything we have ever had in the US, where we are still looking for lost mortgage notes, or even the ones Mexico has- and Civil Law notaries (the real notaries, not our fifty robo-signatures a minute variety) are far more useful –for fraud prevention, among other things- than the overrated annual World Bank Doing Business Reports would ever acknowledge.

Cubans will now have to pay transfer and inheritance taxes, previously exempted, when a housing unit changes hands.

The payments made in these newly authorized transactions have to go through one of three banks (Banco Metropolitano S.A., Banco Popular de Ahorro y Banco de Crédito y Comercio) authorized to date by Cuba’s Central Bank (Banco Central de Cuba) and this has raised the alarm of some, Yoani Sanchez’ -the bright and insightful blogger, one of the keenest observers of Cuban daily life- included. Before the Central Bank issues the certified check (cheque de gerencia) the procedure calls for, the payor –the buyer of the housing unit or the party to the exchange or permuta who has to add money to his part of the bargain- must first open a bank account, vouching for the legality of the funds so deposited (licitud, is the word used in Central Bank Resolution 85/2011, which seems to point to the origin of the funds) and to be used in the purchase or exchange, mirroring our Patriot Act. Cuba’s legislators often play tit for tat with ours.

There are still some vital things Cubans will not be able to accomplish under the new rules. For instance, you still cannot inherit housing rights from your relatives in Cuba if you have left the island for good. The new rules apply to Cuban residents only, whether national or foreign. On the other hand, a foreigner residing in the island can now openly purchase a house (if he intends to “permanently occupy it” while in Cuba) from a Cuban individual, which may prove a bonanza for those Cubans who plan to join us in Miami any time soon: they are now able, because of the recent changes, to sell the house they own –or the object of their housing rights, to be more precise- before they leave.

Overall, these are significant changes that should improve the average Cuban’s life standard, and they should be encouraged, not down played by those this side of the Florida strait who sadly see every little conquest by the Cuban people under its present rulers as a setback to their dreams of a “free Cuba”.

But the socialist model is still pretty much the rule of law in Cuba.

We may even benefit from looking at these changes as part of an ongoing evolution of property rights now playing on screens worldwide, including our own multiplexes. Maybe we should go back to our own business and keep watching over our own vaunted property rights, imperiled, as ever, by the often greedy and overreaching institutions we have. The latest bright idea from our financial brain trusts –now apparently discarded- of charging us for the use of our own money through a bank issued debit card should confirm our need to be watchful. I am certain after this last round of playing “Simple Dimon Says”, and after shelling out the money awarded to plaintiffs in the class action suits over “debit re-sequencing” (yet another fancy name for “stealing from their customers”) the true leaders of the “free World” will reward themselves for their business acumen by adding a million or two to their year end bonuses. Because these guys do know how to take care of their property rights… Maybe we should send them all packing to Cuba if what we want to see there is “change we can believe in”.

For the past twenty years I have participated in a number of efforts –and witnessed some others- geared towards the promotion of title insurance outside the United States, the country where this product/service was ‘born” and where it has become an all but essential component of real estate financing. Those efforts have been relatively fruitful in some countries where the legal and cultural environment is similar to that of the United States (countries where the Common Law system predominates, such as Canada or the United Kingdom). But within the Civil Law world –the countries where the Civil Law system prevails- the efforts to promote title “insurance” are going nowhere. It is true that, in those civil law countries where there is a perceptible flow of US source investment into their real estate markets –such as México, or several countries in Central America where retirees and pensioners from the United States seek a better quality of life for their golden years-, American buyers of real estate occasionally¹⁾In a conversation –in July 2006- with one of the largest builders of houses and condominiums in Panama, which presently sells over sixty percent of its inventory to foreign buyers, its sales manager assured us that, in a recent experiment, only 1 out of 600 foreigners who were offered title insurance chose to purchase it.
ask for title insurance (which is issued, in most cases, directly from the US by an American title insurance underwriter). But outside of the English speaking world, no country’s real property market has been penetrated by title insurance, a product or service which the public at large has not even heard of, in most cases.²⁾México, where one of the four largest title insurance underwriters sought and obtained regulatory clearance to issue home-grown policies –through a local subsidiary-, is a case in point. If you visit the web-page of the Asociación Mexicana de Instituciones de Seguros –http://www.amis.com.mx- you will find no reference to seguro de titulación or title insurance. And what little advertising for title insurance you will find is going to be directed to the foreign investors (specially in the beaches and resort towns). Which is not surprising, since the Mexican Insurance industry seems not to consider title insurance an insurance product

-but rather an American fad-, and the same happens in other countries.

There are a few reasons behind this failure to capture foreign markets, but none of them looms larger than our lack of imagination, which leads us to try to impose a product like this one with the argument that, if it works for us in the US –where it plays a big role in the world’s most solid and fluid housing finance market- it should work everywhere else. This is a false premise, and the title insurance industry’s persistence on it –mainly because of what some of the underwriters see as a successful experience in Canada- has prevented the development of a “civilized’ version of its product (one that is attuned to the culture and to the legal system of civil law countries).

But despite all this, at times it seems as if our title insurance industry is satisfied with the pace of their “international’ expansion and with the reception its product receives overseas. And a week seldom goes by without one of the large underwriters announcing the opening of new offices abroad (in Poland, in Turkey, in Spain), to the delight, it seems, of its stock-holders and of those who believe that, in today’s world, the worth of a company is judged by its ability to globalize itself. And even if not a single Pole or Mexican may show any interest in title insurance, as long as there is an American investor willing to buy it in the process of purchasing local real estate, the international expansion is justified.³⁾One of the reasons why American investors –specially the more sophisticated ones- often buy title insurance in Mexico is their belief that a title insurance policy may be helpful in case they need to leave their investment position; in other words, they use it as part of their exit strategy. And this makes a lot of sense, particularly if you anticipate that the exit door could be through another American investor. Title insurance has also been used effectively in the international arena in a similar way –as a sales tool- for the resale of rights for which there is not a very fluid market, such as time shares.

The whys and wherefores of title insurance.

In the United States of America we have no concept of Registral Law (Derecho Registral) nor of  Notarial Law (Derecho Notarial), the two fields of the Law which, in the civil law system, combine to provide a framework or safety net for assuring legal certainty in real estate transactions. And we do not have this safety net  simply because we do not care to have it.⁴⁾There is no reason why we could not have a registration of rights system (registro de derechos) in the United States, as they have in Germanyand in Spain(as well as in Cuba, before Castro). A registration of rights system is more advanced than the registration of documents system we have, since it strives for perfection in order to better protect the rights of third parties who rely on the information contained in the public records. The common law culture should not be an obstacle for such an upgrade: the United Kingdom has implemented a registration of rights system very similar to the one Germany has. In the United States we do not even have an homogenous national recording system ( the public records in each state, sometimes in each county, have their own peculiarities), and the RESPA (the Real Estate Settlement Procedures Act), in its original version passed by Congress in 1976, had a Section XIII which extended an invitation to all the key players in the real estate market to jointly design a model geographically based recording system that could serve as the baseline for the development of a uniform public records system for the Nation. The studies and plans fostered by the HUD through this invitation may have been sleeping in the drawer of some Washington D.C.bureaucrat for the past thirty years. Mexico, a country whose political organization –a true federation of states- is similar to that of the United States of America, has also generated a great diversity of registries or recording systems amongst its thirty two estates (entidades federativas), but is a lot closer to finding the consensus needed for adopting a national uniform system for the registration and publicity of property rights.

The American public records system does effectively publicize those documents that may have an impact on property rights. But since those documents are not produced by a notary who also reviews other relevant documents in the chain of titles (there is no calificación notarial), and our registrars (or clerks of court) give only a cursory look to the documents they are asked to record (there is no calificaión registral), the function of assuring legal certainty in real estate transactions is left to the title insurance industry, which will indemnify those who suffer the consequences of a failure of title (and who have been provident enough to buy a title insurance policy). The key function of what civil law countries call theRegistro Público de la Propiedad is thus virtually privatized through the title insurance industry, which, methodically and on a daily basis, duplicates in its title plants, the information filed with the public records system in each jurisdiction.⁵⁾A title plant is nothing more than the systematic ordering of the recorded information –lifting the documents from the public records, where they are filed and indexed according to the parties’ names- pursuant to a geographical criteria, creating a parcel index, which is much easier to use than the grantor grantee index found in the public records system. In the civil law world, such a geographically based recording technique is known as folio real, and it is precisely what the Germans and the Spaniards use.

The growth of the title insurance industry in the United States was driven by the huge expansion of the real estate (or housing) financing business. As a general rule, American banks will simply not lend money to someone purchasing real property unless the borrower obtains (and pays) for a title insurance policy. This policy will assure the lender that if, when his mortgage loan ends up in foreclosure –or at any other time while the loan is outstanding-, another party shows it has a better right (not disclosed and excepted in the policy) to the property securing the loan, the title insurance underwriter will indemnify the insured lender.

Every now and then, the politicians, those in charge of fostering the availability of affordable housing, and those charged with regulating the insurance business, both at the local and the national level, come together and decide to rock the boat of the title insurance industry, questioning its role, its commercial practices and its prices –in this Summer of 2006 we happen to be going through one of those cycles⁶⁾In April 2006, a subcommittee of the House Committee on Financial Services held hearings to investigate the inner workings of the title insurance industry, and its interaction with other key players in the real estate market Concurrently –and over the past few months-, the Insurance commissioners in a number of states launched their own investigations, focusing on the degree of competitiveness within the industry, its pricing structure, etc, and some substantial fines have already been applied at the time this is written, although, at the end of the day, good sense prevails (induced, perhaps, by the industry’s excellent lobby), and the value of this product and the key role it plays as a lubricant for the real estate financing system is –implicitly, at least- acknowledged. Invariably, however, each time we go through one of these exercises, the title insurance industry insists that all it needs to do is to better educate a general public that simply does not understand title insurance, or worst, misunderstands it.

This essay, although addressed to my colleagues in the Americas –most of them “civil lawyers”- and bent on explaining title insurance to them, is also a humble attempt to help my brethren in the title insurance industry in their educational efforts to clarify and dispel a number of misconceptions, insofar as they have had an impact on “international” title “insurance”.

What is title insurance?

Contrary to what is the norm in the case of all other insurance products which protect the insured party against the occurrence of future and somewhat uncertain events (what in most all civil law countries’ insurance laws is described as a “riesgo futuro e incierto”), title insurance does not look forward, but backwards, and protects the insured party against defects or limitations in the insured title that could put into question the validity, solidity or priority of his rights over a specific piece of property.

The eventuality or contingency that triggers the insurer’s obligations under the title insurance policy is the manifestation –usually through the adverse claim of a third party- of such defects or limitations bearing on the insured title; but title insurance only covers them if they already existed at the time the policy was issued but were not detected in the title examination process that precedes the issuance of the policy. Defects or limitations that are caused or created subsequent to the date of policy are not within the scope of the title insurance coverage.

This is why questions abound as to the “insurance” nature of this product that only covers pre-existing risks, which, on top of it, must have survived an exhaustive investigation of the chain of titles that supports the insured title. The goal of title insurance is to eliminate risks.⁷⁾ In my early years trying to convert Mexican real estate developers into the benefits of title insurance, we frequently dealt with title problems that had remained uncorrected for years (and which had not impeded a number of “uninsured” conveyances) with a zeal that always led our Mexican clients –faced with our request to cure the defect before we issued our policy- to ask: “Why do you call what you are selling ‘insurance’ if it does not cover this trifling?”, not to take them on. It does protect against certain risks that are often all but undetectable through the examination of the records –forgery, fraud, incapacity⁸⁾The brand new (2006) American Land Title Association forms do a good job of emphasizing this –in items 2(a) and 9 on the face of the jacket for the ALTA loan policy form, for instance- by expanding the list of affirmative coverages to fourteen (where there were only five in the older forms).- but it does not cover defects that result from acts or events that take place after the policy is issued.

But that is also why title insurers charge a one time premium –this often comes as a pleasant surprise to those who are negotiating for an insurance product they barely know anything about- which you need not renew periodically as you must do in the case of the traditional insurance lines –like property, casualty, health, etc. And when statistics show that, in the case of most other lines of insurance, over eighty percent of the premium money is used for paying claims, title insurance underwriters historically destine only about six percent of the premium money for those purposes, which is even more surprising in the midst of a society as prone to litigate as America’s is.⁹⁾This huge –and frequently criticized- disparity between title insurance and other lines of insurance may only be apparent, and it can be explained by the fact that, unlike in other lines of insurance, the majority of expenses for title insurance –the title examination, the curing of existing defects, some services related to the closing of the real estate transaction, among others- are incurred prior to the policy being issued. But the source of this “problem” is found in a title insurance industry that insists in identifying as “insurance” a financial product or service that has nothing in common with the traditional insurance products. The problem is only magnified when the industry “explains” that what the premium really pays for is the underwriting skills –the search and curative work done prior to issuing each policy- while tying the very same premium to ever escalating property prices.

The day will arrive when the industry itself will come to terms with a stark reality: title insurance is not “insurance”. And this day may be getting closer as a result of the industry’s dabbling with international markets.¹⁰⁾The underwriter which, after a long and strenuous process before the Mexican insurance regulators (which regulators had previously told one of its competitors that they did not see any “insurance” in title insurance), “domesticized” itself in México, accepted to have title insurance treated as one more line among the damages (daños) insurance category. As a result of this very unusual and all but compelled regulation –at the behest of the American title insurance underwriter- title insurance in Mexico is subjected to an incomprehensible strait-jacket, and the one and only local underwriter has to comply with four different reserve requirements that have no correlation with the kind of risks covered by title insurance. Chances are that title insurance will then be defined as a financial product or service (a guarantee?) that facilitates and accelerates traffic in the real estate market, particularly in those real estate markets mature enough to sustain a large volume of secured financing.

Title insurance and real estate financing

The policies issued for the benefit of mortgagees (loan policies) vouch for the validity and perfection of the security interest, as well as its priority over other encumbrances. At the same time, the loan policy does what an owners policy –issued for the protection of those who purchase a piece of real property- does: it warrants the solidity of the title to the land offered as security, as vested, in the case of a loan policy, in the mortgagor.

The national mortgage market in the United States of America grew exponentially in the years following World War II, driven by a Federal Government resolutely in pursuit of accessible and affordable housing for all Americans. Title insurance played an important role in that rapid growth due to its ability to homogenize title risks (at a National level), and it was a factor in the inducement of private banks towards lending against real property (making them more comfortable), bringing down the cost of the loans and opening the road for the securitization of mortgages in a secondary market.¹¹⁾The example of this ever growing and unique American mortgage market was, for a long time, the best argument for those who wanted to promote title insurance outside its natural habitat. It was also the best tool to defend  title insurance from its harshest critics –specially the Spanish Registrars, and the civil law notaries (the Notariado Latino) in general-. But over the past five years, financial institutions in Spain have generated twice as many mortgages as they did at the turn of the Century (a  volume of six hundred thousand million euros), and without title insurance, as my colleagues in Spain tirelessly remind me.

The securitization of mortgages is still incipient in Spain. But contrary to the expectations of many in the title insurance industry, countries like Argentina and México have been able to place mortgage backed securities in some of the most sophisticated financial markets in the World –even in the United States- without the enhancement of title insurance and with the blessing of the large credit rating companies. This debunks the “logic” behind the “what works for us should work for everybody else” approach, and should strengthen the hand of those in the industry (and even outside of it) who advocate for a redesign of this typically American –almost parochially so- product to adjust it into “something” –which should not be called “insurance”- that responds to the perceived needs, risks and circumstances of each foreign market.

What Civil Law critics of title insurance say

Civil Law criticism of title insurance is mostly centered on two main issues:

(1)   Title insurance is criticized because it increases the costs of real estate transactions¹²⁾This argument about the allegedly higher transactional costs in a legal environment where title insurance is used can only be addressed by a comparison between the transactional (or closing) costs of a real estate financed transaction in the US -one where a policy of title insurance is issued- and the transactional costs in countries where there is no title insurance. And this is not an easy comparison to make, because both, civil law notaries’ fees (aranceles notariales) and the rates by which the title insurance premium fees are calculated, tend to vary from one jurisdiction to another. But the highest rates applicable to title insurance in the United States today –in those estates where title insurance is more expensive- rarely exceed 0,750% of the loan amount (this should include the policy and the title search), and this, on the average, seldom amounts to more than between twenty and twenty five percent of total closing costs.

(2)   Title insurance is also criticized because it is not capable of satisfying the true needs and expectations of those who are victimized by title defects, because all it does is indemnify the insured party with money (in case of a total or partial loss0 when that party’s expectation –specially in other cultures- is to remain as the owner and occupant of his dwelling, for example. In other words, the beneficiary of a title insurance policy gets some degree of economic certainty, but legal certainty is not enhanced by title insurance.¹³⁾The purists of Registral Law –and of civil law, in general- cling to this argument which, rather than decry title insurance, blandishes it. It is precisely in search of economic certainty that the financial markets in the United States resort to title insurance. And  it is the quest for  economic certainty as well that motivates those who invest in real property in foreign countries when they seek the protection of a title insurance policy: an economic certainty that is only a phone call away, by ringing up a title insurance company that they know to be solvent. The prudent investors who opt for using title insurance do not need to concern themselves with the solvency of the foreign recording system operators or that of the particular civil law notary who prepared their deeds, nor about establishing these parties’ negligence through litigation in a foreign court of law. The importance of that economic certainty  for many of those American investors who purchase land in México, for instance, is further revealed by their reluctance to buy title insurance from Mexican subsidiaries of American title insurance underwriters, even id they are re-insured by the latter: in most cases, they ask for a policy issued directly by the American underwriter, in the United States, and subject to US laws.

The true needs and expectations of an insured owner may, occasionally, be colored by culture –in some cases, people may feel more attached to a house or an heirloom than in others- but title insurance goes beyond the provision of economic certainty: the protection afforded by a title insurance policy is not limited to an insurer’s eventual duty to indemnify. A title insurance policy is, indeed, an indemnity contract between the company issuing it and a named beneficiary, but once the company is notified by the beneficiary of the existence of a loss caused by an adverse claim questioning the legality of the insured title, the obligations of the title insurance underwriter are as follows:

1.- To indemnify the beneficiary for the loss he has suffered –up to the amount of insurance shown in the policy, to the extent the loss is not due to a title problem that the policy has listed as an excepted from its coverage;

2.- The underwriter also has a duty to defend the beneficiary –at the company’s expense- in any court procedure where the validity and priority of the beneficiary’s rights over the property and his titles are questioned;   and, when feasible

3.- Eliminate or correct the encumbrance or defect bearing on the insured title.

The restoration of the policy’s named beneficiary in the full exercise of his rights over the property is frequently the only valid option, if the title in question is to keep its marketability. And it is precisely in that concept of marketability of the land title where we find the key for the success of title insurance as an all but essential lubricant for the smooth functioning of the real property market in the United States.

A title insurance policy does not warrant that a given land title is perfect; it does not even call the insured title good. It calls it marketable, meaning that is has no defects that would justify its rejection by a reasonable buyer, and the title insurance underwriter is ready to back that assessment up to the amount covered under the policy. It is in this aspect of title insurance that we begin to discern a little more clearly the role it plays as a risk distribution mechanism: despite its vocation towards the elimination of all risks –by detecting and curing all title defects before the policy is issued-, title insurance selects those defects that should not compromise marketability and insure them, thus making the land title in question acceptable to the market.

Conclusion

To argue, as some in the civil law world do, that title insurance is a booby trap, or a racket, entails the assumption that the financial markets in the United States are neither sophisticated nor refined, and that free lunches are consistently served –two of the largest title insurance underwriters go back more than one hundred years.

It is true that it is a line of business where, as it happens in most fields, there are practices that defy common sense. Take, for example, the title insurance industry’s insistence in issuing a “new” policy –charging a new “insurance” premium for it- every time a debtor decides to renegotiate or refinance his mortgage at a lower interest rate (in some cases, this means issuing a new policy, insuring the title to the same property that secures the “same” credit that was covered by a policy issued only a few weeks ago). Over the past five years, the title insurance industry has seen its revenues vastly enhanced by these transactions called “refis”. But the market itself, sooner or later, finds a way to correct these nonsensical practices, and the premium rates applicable to “refis” have come down sharply. ¹⁴⁾This is an area where Spaniards can also claim their system clobbers title insurance, at least from the consumer’s perspective. Since 1994,Spain has a “Ley de subrogación y modificación de préstamos hipotecarios” –Law # 2 / 1994- by means of which the mortgage debtor can -without needing to obtain the creditor’s consent- move for an improvement in the loan’s financial terms (when the rates are lower, and once a year only) while the mortgage preserves its rank or priority.

It is also true that the international projection of title insurance, which could be hoped to help clarify the differences between the way real estate transactions are conducted in the United States and in other countries, has thus far failed in this regard. In the United States, there seems to be a very negative perception of the risks run by real estate investors south of the Rio Grande. Though this is not a well founded assessment, it is often strengthened by newspapers and other media,¹⁵⁾This negative image is fed by a series of prejudices and delusions which, after years of repetition, have become part of the folklore on the northern side of the border. For instance, the rights of a property owner, which Mexican law (and civil law in general) calls dominio, is frequently identified with fee simple ownership, a common law concept which, though similar, is far from being identical to dominio. In  another example of misinformation, you will often read that the rights a foreign investor holds through a fideicomiso en zona erstringida (the Mexican Federal Constitution, in article 27, bars foreign “direct” ownership of lands close to the country’s coast-line and its international borders) are no more than leasehold rights (a complete fallacy), or that the trustee in such a structure (which must be a Mexican bank) warrants the quality of the title to the property placed in trust for the benefit of the foreigner (when in fact, the deeds whereby these trusts or fideicomisos are settled specifically deny the existence of any such warranties from the bank). Another false claim that is frequently made (and this one has even found its way into some of the international risk rating companies Investors Reports) is that Mexico’s land title recording system is a replica of the Australian Torrens System (there are as many recording systems and techniques in Mexico as there are states, but none of them follows Torrens). And there are plenty more. and the title insurance industry has occasionally contributed to it (more out of ignorance than out of guile). There may be some within the industry that enjoy –and thrive in- this type of disinformation; after all, the purchase of any line of insurance is driven by fear, and sometimes by confusion. But credibility has few stronger enemies than exaggeration, and this is a product in search of credibility.

There are, of course, title problems in México -and in every country in Latin America-, just as there are title problems in the United States and everywhere else. But, in order for it to be credible, a product that resembles the oddly named title insurance, and which is able to play, in Mexico, a similar role to the one played by title insurance in the US

-helping and accelerating the growth of housing finance- should be solidly grounded in Mexico’s needs, and designed so as to assimilate and absorb typically Mexican title risks, as perceived by the Mexican real estate and financial markets. The same designing job should be undertaken in other foreign countries, in the context of different cultures, and seeking the consensus of all the key players in those foreign real estate markets.