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 Associate Brokers)

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 actual 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 copy of the tax receipt (impuesto territorial) proving that all taxes and registration fees are paid as of the date of purchase (Puleo, 1995)
• A certificate (constancia municipal) issued by the municipal authority of the Municipality where the property is located (Carballo, 1993)
• Sufficient funds to pay all necessary taxes and registration fees, including notary fees. Usually one half is paid by the seller and one half is paid by the purchaser (Carballo, 1993)
• Evidence that all prior mortgages, liens and judgments have been lifted (Puleo, 1995)

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 assigment 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 projecs 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 govemed 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 reforrn. 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 agranian 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 attomey 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 unconunon 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 attomey 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) onlv 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 1949.

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: Squatter Invasion," The Tico Times, 17 March 1995.

Instituto Costarricense de Turismo (ICT), Interview of 7 July 1995.

La Asamblea Legislativa de la Republica de Costa Rica, Decreta: Ley de

Expropriaciones, No. 7595, 8 July 1995.

Lawrence International Publication. Official Guide to Living and Investing in Costa Rica, 1995.

Ley Sobre la zona marítimo terrestre y su reglamento. 1st ed., San Jose, Costa Rica, IJSA, 1991.

McMerty, John. "The Realities of Real Estate Transactions," Costa Rican Business Journal, Issue 1, 1995.

McMerty, John. Interview of 11 July 1995.

McMerty, John. "The Realities of Real Estate Transactions, Part II," Costa Rican Business Journal, Issue 2, 1995.

Phelps, William. "Business Risks, Opportunities in Costa Rica," The Tico Times, 17 March 1995.

Puleo, Christine. "Step by step through the Real Estate Process: What you need to do, Pay," The Tico Times, 17 March 1995.

Quiros, José Maria, Interview of 15 June 1995.

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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