Property Rights and Foreign Investment in Costa Rica
by Marie C. Wold - Revised January 1998 by Steve Olson
and Jose M. Quiros
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Introduction
Costa Rica previously granted generous incentives to
foreign nationals wishing to become residents. The attraction of its
beautiful coasts and the warmth of the people, together with numerous
scams, has unfortunately led many Americans to make unwise and
ill-investigated real estate investments.
Like in the US, a title research and a title
insurance should be part of any property transaction, especially in
rural areas and recent developments.
(note from Webpro)
The following is a brief synopsis from the US Embassy
designed to provide a prospective investor with the necessary
information for a more thorough investigation of property rights in
Costa Rica.
Purchasing Property
When purchasing property in Costa Rica, proper registration of the
property, and not the deed itself, is of the utmost importance
(Carballo, 1995). Simply because an individual may have a seemingly
"legal" title to a property in his/her name, does not
necessarily mean that he/she is the legal owner. Like anywhere else in
the world, there are scam artists who attempt (sometimes successfully)
to sell the same property numerous times. It is therefore necessary to
conduct a thorough investigation of a prospective piece of property as
outlined below.
Costa Rica has a Civil Law system rather than a Common Law system.
The practical differentiation between the two systems is that Civil Law
is much more rigid than Common Law, making the procedure frequently more
important than the substance. Such a distinction is of utmost concem
when purchasing property, for the letter of the law must be followed
precisely when registering property in order to obtain the full legal
title (Carballo, 1993).
All property is registered at a central
depository called the Registro Puiblico, and it is there that one
should begin the title search for a parcel of land. The title must be
checked for any liens or encumbrances, of which there are often scores.
Alvaro Carballo, a Costa Rican real estate attorney, has compiled a
comprehensive check list of items that should be verified before a
purchase.
This list is published in his book, Purchasing Real Estate
in Costa Rica: A Guidebook (Carballo, 1993). If the initial
background check is flawed and a problem later arises, one could
unwittingly lose possession of property thought to be legally owned.
Title guaranty services are now available through Stewart Title Guaranty
Company, based in San Jose.
Stewart Title advertises escrow and title
guaranty services to protect the consumer throughout the process of
acquiring land, and to indemnify him/her for losses that may be
incurred. Stewart Title is a 105-year-old U.S. company based in Houston,
Texas, with over 3,500 offices in the U.S. and abroad.
The trick to buying property in Costa Rica is to reconcile the actual
property with the two documents that legally define a property. The
first is the escritura, which is the title document that
describes how the property is recorded in the Registro in words;
the second is the catastro map, which is the plat map of the
property that is on file.
The problem with defining a property arises
from the fact that the escrititra may not correspond with either the catastro
or a physical survey of the property. Such a discrepancy is due to
the fact that when a transfer of property takes place, the transaction
may not have been recorded on the catastro, since a change in one
does not automatically require a change in the other (McMerty, 1995). It
should also not be assumed that the catastro map accurately
depicts the property itself. It is therefore necessary that an
independent topographical study be conducted in order to verify the
property boundaries.
Any discrepancies within the two legal documents
and the land itself must be resolved before purchasing. Such
investigations may be a bit daunting, not to mention confusing, for the
foreign investor. Due to the intricacies of resolving such issues,
retired Brigadier General McMerty and Alvaro Carballo founded PropData,
a companv that offers property title investigations, legal support and
financial information. PropData is to date the only known company of its
kind of Costa Rica (McMerty, 1995).
A reputable, diligent attorney should take care of the technical
procedures involved with a title transfer, but such attentiveness must
not be taken for granted. Prospective buyers should beware. They must
monitor and understand what is being done, as well as what is not being
done. It is therefore worth mentioning the documentation needed for the
closing:
A notary must be present at the closing. In Costa Rica, notaries are
attomeys accepted by the Supreme Court.
Many single-home investors will be faced with the choice of whether
to buy a preexisting structure or a plot of land on which to build a
house. While there are a myriad of minor impediments that must be
scrupulously attended to, most of which are outside the scope of this
paper, a few points are worth mentioning as they may alter a buyer's
decision.
The law requires that all applications for construction
permits be presented by an architect licensed by the Costa Rican
Association of Engineers and Architects. Utilizing a certified architect
can be extremely costly as well as cumbersome (Puleo, 1995).
Furthermore, construction companies in Costa Rica are not bonded,
thereby greatly increasing an investor's risk.
Before building a house
one would be well advised to speak to numerous individuals who have
previously built in order to gain an understanding of the reality of the
construction process, such as constant delays, necessary personal
supervision, and cost overruns.
Establishing Residency
It is necessary to qualify for and establish legal residency if one
plans to live in Costa Rica for an extended period of time. To this end,
Costa Rica offers several alternatives for legal residency: a pensionado
(pensioner), a rentista (a foreigner with a guaranteed income),
an investor, a relative of a resident, or one with a foreign government
assignments or an international mission (Lawrence Publication, 1995).
The pensionados and rentistas program has historically
been the easiest method of establishing temporary residency in Costa
Rica. Keep in mind when receiving advice from current pensionados and
rentistas who have been residing in Costa Rica since before 1992,
that the laws governing such residency status have changed. In 1992, the
legislature revoked the tax exemption laws that allowed pensionados and
rentistas to bring all of their possessions into the country duty
free. Under the current law, these groups are no longer exempt and must
pay import taxes of up to 100 percent on their belongings.
To quality for the pensionado status, one must fulfill three
basic requirements: (1) prove that one eams at least $600.00 per month
from a qualified pension or retirement account or from Social Security,
(2) change at least $500.00 per month into colones, and (3) live in
Costa Rica for at least four months out of the year. In order to quality
for rentista status, one must fulfill three similar requirements:
(1) prove that one has outside investments that will guarantee $1,000.00
income per month for five years, (2) change at least $1,000.00 a month
into colones, and (3) live in Costa Rica for at lease six months out of
the year. Neither pensionados nor rentistas pay taxes on
money eamed outside of Costa Rica.
Pensionados
and rentistas have restrictions as well as
rights in Costa Rica. While either may set up their own business, as
discussed below under the investor classification, neither may work for
someone else. Individuals of either residency status must first become
permanent residents in order to obtain a work permit.
The investor status is granted to those who invest at least $50,000
in special projects such as reforestation, tourism and exports, or who
invest at least $200,000 in any other business. The investor must also
reside in Costa Rica for at least six months out of the year. If there
are no problems, the investor may become a permanent resident in two
years.
The two other methods of achieving legal residency are atypical,
since both are contingent upon very particular circumstances. The
resident as a first-degree relative status is the easiest method, as one
need only be closely related to a Costa Rican. One with such status has
all of the rights of a Costa Rican save for the right to vote.
Another
method is employment by a foreign government or an international
mission.
Hazards of Property Ownership
There are three major hazards of property ownership in Costa Rica:
the uncertainties of the Zona Marítimo Terrestre, the
unavoidable reality of squatters and the possibility of expropriation.
More space will be dedicated to the Zona Marítimo Terrestre, as
it is by far the most convoluted and misunderstood hazard of property
ownership.
Zona Marítimo Terrestre
Costa Rica is famed throughout the world for its beautiful, untainted
beaches. It is therefore no surprise that beachfront property is
actively sought by American developers, retirees and those looking for
vacation homes. The significant caveat regarding beachfront development
is that it is rarely the bargain it appears.
No private ownership of beachfront
property is allowed. The Costa Rican government owns the first 200
meters of the beach front area, known as the Zona Marítimo Terrestre,
or the Maritime Zone, and it is governed by the Ley sobre la Zona Marítimo
Terrestre (hereafter referred to as 'ZM').
The first 50 meters are
public beaches on which absolutely no construction may take place or any
concession be granted.
The remaining 150 meters may be developed via
special "concessions" that are granted by a governing
Municipality (ZM Art. 35). In order for any construction to take place
on this 150 meters the area must be part of a Plan Regulador, or
a special zoning district created by the Instituto Costarricense de
Turismo (ICT). It shoud be noted that some privately owned
beachfront property does exist, due to the fact it was registered prior
to the 1977 Maritime Zone law, which has a grandfather provision
providing for such ownership (ZM Art. 6).
Before actually attempting to obtain a concession for developing
rights in the Zona Maritimo Terrestre, a foreign investor must
first be in compliance with Article 31 and 47 of the Ley Sobre la
Zona Maritimo Terrestre (Carballo, 28 June 1995 interview). Article
31 specifies that at least fifty percent of the development capital must
be Costa Rican (ZM Art. 31). In addition, foreign investors must have
resided in Costa Rica for at least five years (ZM Art. 47).
Such discrimination concerning foreign ownership could possibly be
questioned on a constitutional basis in the Sala Constituicional,
or the Constitutional Court. Article 19 of the Costa Rican Constitution
(CRC) explicitly states that foreigners have the same individual and
social rights as Costa Ricans (CRC Art. 19). Howeverer, Article 19 does
contain ambiguity with the inclusion of the clause, "with the
exceptions and limitations that the Constitution and its laws
establish," thereby creating the window for Article 31 of the Ley
de Zona Marítimo Terrestre which allows discrimination
against foreign investment (CRC Art. 19 and ZM Art. 31).
Inevitably there are methods employed by those who seek to circumvent
the restrictions of foreign ownership as established by Article 31
(Carballo, 27 June 1995 interview). A common procedure entails
establishing a Costa Rican as the "legal" owner of a parcel of
land by recording his/her name on the necessary documentation.
Frequently the name of the attorney or one of his/her staff is used as
the local owner on the concession. Needless to say such measures have a
certain amount of inherent risk. For example, in July 1995, the
Municipality of Golfito threatened to pull the concession rights of many
foreign investors on the grounds of Article 57, which states that
"no person together with his/her spouse and minor children will be
able to have more than one concession" (ZM Art. 57). The fact that
many foreign owners use the same lawyers, and hence have the same names
as the legal owners of their concessions, is now creating a major
problem in the Golfito region. Such non-compliance with the law may
result in the nullification of concessions without compensation.
The first step for a foreign firm or individual interested in
developing the 150 meters of the Zona Marítimo Terrestre is
to contact the Municipality that has jurisdiction over the desired
coastal areas (ICT, 7 July 1995 interview). It is absolutely imperative
that the area proposed for development be covered by a Plan Regulador
created by the ICT and that its zoning requirements be compatible with
the proposed development project. Beware of so-called "rights of
occupation" granted by Municipalities. Such rights are only
tentative and must ultimately succumb to the zoning requirements of a Plan
Regulador when, or if, it is created by the ICT, making "rights
of occupation" too volatile and susceptible to corruption to be
recommended for development.
If the ICT has already created a Plan Regulador in an
area, the developer must abide by the arrangements of the Plan or
risk losing the concession. If a Plan Regulador does not exist, a
firm wishing to develop the area must write a proposal for the
implementation of such a Plan. The proposal is in essence an
environmental impact statement that must include detailed information
about possible damage to the environment, proposed rights of way and
other necessary infrastructure developments. By law, the Municipalities
are unable to grant concessions in the Zona Marítimo without the
aforementioned development plan (ZM Art. 38) and without the consent of
the ICT (ZM Art. 37).
Foreign investors wishing to develop tourist areas in the Zona Marítimo
may seek tax incentives from the ICT. The granting of such incentives
are governed by law No. 6990 of 30 July 1985 which was amended by law No.
3293 of April 1992. Regulations for tourist areas are governed by Decree
No. 9387 of 8 January 1979 (ICT 7 July, 1995 interview). Keep in mind
that the ICT has the sole faculty to declare tourist zones and such
zones are published in the Diario Oficial (La Gaceta)
(ZM Art. 27).
An understanding of the law and its inherent ambiguities is
absolutely necessary before purchasing concessionaire rights. Obviously,
one should not heed hearsay or follow the advice of friends and
neighbors. Such behavior could result not only in the loss of the
concession but also that of improvements, such as a house, on the
property without compensation from the Municipality. The following are
some principal points of the law that must be adhered to:
Concessions cannot be granted to:
-
Foreigners who have not been residents for five years
-
Companies with bearer shares
-
Foreign companies based abroad
-
A company set up in Costa Rica exclusively for foreigners
-
A company with more than fifty percent foreign capital (ZM Art.
47)
Concessions can be forfeited for the following reasons:
-
Failure to apply for an extension of a concession in a timely
manner
-
The forfeiture of rights by the interested parties
-
The death or legal absence of the concession holder with no heir
-
Not abiding by the established obligations of Article 51
-
Cancellation of the concession (ZM Art. 52)
The ICT can cancel a concession for:
-
Non payment of the yearly canon or royalty
-
Breach of contract (e.g. use of the land for purposes other than
those expressly stated by ICT)
-
Violation of the ordinances of the law that grants the concession
-
Impediment of the use of the public right of way
-
Other causes that this law establishes (ZM Art. 53)
The reality of purchasing a concession in the Zona Marítimo
is that ambiguities exist within the written law, so that as regulations
are created and amended, rights to property may also change. The lesson
garnered from concession holders is that there are no guarantees and
there is no foolproof way around the law. Additionally, even if a
concession is granted, there are no guarantees that the concessions will
be renewed or that the price of the concession or the yearly canon will
be within reason. The fact remains that one is not purchasing property
but is simply "leasing" it with absolutely no title.
Therefore, one must be willing to accept the risk inherent in any such
endeavor. In fact, official correspondence of 10 May 1995, from the
Attomey General's office to the Municipality of Golfito, explicitly
states that these concessions are temporary and precarious (Bulgareilli,
1995).
Squatters
The greatest potential danger for land ownership in absentia and at
times even when the landowner resides on the property is the problem of
squatters. Before investing in large expanses of land or even a cottage,
or a quinta in the countryside, knowledge of the legal procedures
along with due diligence is necessary to maintain one's property rights.
Written into the Civil Code (hereafter referred to as 'CC') are numerous
passages that deal with the rights of possession that are reminiscent of
the earlier days of agricultural reform. Such clauses tend to favor the
small, poor land-holder by upholding de facto "squatters
rights" (CC Titulo II, Capítulo II).
Technically, squatters can only attempt to gain legal rights to a
non-maritime property by peacefully occupying non-cultivated, unimproved
agrarian land over an extended period of time. The difficulty of
maintaining one's rights over those of the squatters is due to the
nebulous nature of the law and what legally passes as
"non-cultivated" or "unimproved" land. It can be
equally difficult to establish the duration of the squatter occupation,
which is a crucial piece of evidence in the eviction process. It is
imperative to understand that, according to the law, in case of doubt,
"good faith" is presumed on the side of the squatters (CC Art.
284).
There are legal steps that can be taken to rid one's land of
squatters. Procedurally, the eviction process is divided into three
phases. The first phase is the eviction of squatters during the first
three months of occupation. Such early discovery is key, as during this
period one need not go to court. Theoretically, one need only alert the
local police, who are then obliged to evict the squatters. The catch is
that it can be extremely difficult to get the police to carry out their
duty, and if one is not in the country, actual eviction is very
difficult to verify. Even though eviction within the first three months
is a rather straightforward procedure, at least in principle, early
recognition can prove to be difficult if one is not residing on the
property.
The second phase is after the initial three months of occupation but
before one year. If squatters are "allowed" to squat on
property for this duration of time, one must go to the courts and start
the process of "administrative eviction" (Harris, 1995). The
third phase is continued occupation for more than one year. According to
the law, squatters have then achieved a "legal assumption,"
and the owners must go through an ordinary lawsuit process. Such a
process has been described by attorney Robert Wells as "kind of like
a root canal" (Harris, 1995). In order for the court to grant the
property rights to squatters, they must prove that they have been on the
land "uninterrupted," "non-challenged" and
"peacefully" for ten years.
Although there are no foolproof, preventive measures for eliminating
the problem of squatters on land owned in absentia, there are a few
somewhat helpful steps that can be taken. Firstly, the propety should
not appear abandoned and signs should be posted with the owner's name.
The most important, albeit expensive, precaution is to hire a caretaker
for the property. Great pains should be taken to secure a reliable
caretaker, as well as another individual who can monitor the caretaker;
it is not uncommon for a caretaker to squat on the land that he is paid
to protect. The easiest way to avoid such a problem is to register the
caretaker as an employee, which entails paying minimum wage and social
security. One should also demand signed receipts from the caretaker as
proof of payment.
A word of caution regarding squatters: the notion that squatters are
simple campesinos is unfortunately not always correct. There have
been numerous reports of armed, dangerous and organized squatters --
predominantly in the southern regions of Golfito and Pavones, and one
such group killed an American landowner in 1997. There have been other
reports of a armed squatters using intimidation and violence with
caretakers and landowners in order to gain control of the land.
Obviously, extreme caution should be exercised when purchasing land in
Costa Rica to avoid areas with known organized squatters. The bottom
line with purchasing land for future development or as a summer getaway
is that, while it may be less expensive than other developed resort
areas, it may not be the bargain it appears, as caretaker and attorney
costs may accumulate very quickly.
Expropriation
An unavoidable hazard in the past has been governmental expropriation
of land, predominantly for the purposes of establishing or enlarging
national parks or indigenous reserves. While this is perhaps not the
greatest hazard associated with land ownership in Costa Rica, it has
been a very well-publicized and expensive danger due to the fact that
the government does not have a history of fair and quick reparations for
the expropriated lands.
Prior to 1995, no single law governed expropriation matters in Costa
Rica. The dispersed nature of the law, along with general judicial and
executive branch inefficiency, has contributed to the protracted nature
of many expropriation disputes, some of which have gone on for more than
a decade without resolution.
The prospects for future expropriation cases may be more favorable,
for on 8 June 1995, the Nueva Ley de Expropriation (New
Expropriation Law, hereafter referred to as NLE) No. 7495, was signed
into law. The stated purpose of the legislation is to replace with a
single law the several laws that allow the expropriation of private
property by any state institution. The new law seems aimed primarily at
ensuring that expropriations take place only after full and adequate
payment is made, regardless of the nationality of the holder of such
property. Also, while an earlier bill was aimed at making expropriation
easier, the new law imposes obligations and restraints on the state and
its institutions (Quiros, 1995). A few of the more important provisions
of the new law are: (1) the return of the property within ten years if
it is not used for the purpose for which it was intended (NLE Art. 16);
(2) only one month is granted to the tax office to do an appraisal of
the property to be expropriated (NLE Art. 21); (3) payment in cash is
required unless otherwise agreed upon (NLE Art. 47); (4) only six months
are allowed to fully complete registration of the property (NLE Art.
20); and (5) local and international arbitration are contemplated (NLE
Art. 27). The possibility of international arbitration could permit
cases to be brought before the International Center for the Settlement
of Investment Disputes (ICSID). (Quiros, 1995).
In sum, it appears that if expropriation of land is to occur in the
future, the owner may be in a better position than in the past to
receive a prompt and equitable settlement. It must be stressed, however,
that the new law has yet to be tested and it remains to be seen whether
it will prove to be a dramatic improvement over the prior laws.
Bibliography
Blanco, Arturo. Interview of 6 July 1995.
Brennan, Peter. "What to Expect when Investing in Miniscule
Costa Rica Market," The Tico Times, 17 March 1995.
Bulgarelli, Victor. Letter to Consejo Municipal de Golfito, 10 May
1995.
Carballo, Alvaro. "The Golden Rules of Buying Real Estate,"
The Tico Times, 17 March 1995.
Carballo, Alvaro. Purchasing Real Estate in Costa Rica. Mundo
Gráfico, San José, Costa Rica, 1993.
Carballo, Alvaro. Interview of 28 June 1995.
Constitucion Politica de la Republica de Costa Rica 7 November
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Código Civil de Costa Rica
Fundacion Internacional de Derecho Agrario Comparado, La
Propiedad, San Jose: Editorial Juricentro, 1983).
Harris, Brian. "How to Avoid Landowners' Worst Nightmare:
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McMerty, John. "The Realities of Real Estate Transactions,"
Costa Rican Business Journal, Issue 1, 1995.
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McMerty, John. "The Realities of Real Estate Transactions, Part
II," Costa Rican Business Journal, Issue 2, 1995.
Phelps, William. "Business Risks, Opportunities in Costa
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Ruiz, Miguel, Interview of 14 July 1995.
About the Author
Marie C. Wold worked as an intern at the US Embassy in San Jose,
Costa Rica, during the summer of 1995. This document was produced as a
special research report for the Embassy's economic section. It was
revised January 1998 by Steve Olson and Jose Maria Quiros.
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