I INTRODUCTION TO THE LEGAL FRAMEWORK
i Ownership of real estate
Under Dominican law, there are several types of ownership of real estate. The most common is absolute property, similar to the common law concept of freehold, which grants the titleholders, according to Article 51 of the Constitution, the right to enjoy, make use of and dispose of their properties.
Other types of ownership of real estate recognised under Dominican law are (1) co-ownership under Condominium Law 5038 of 1958, by which two or more co-owners share the ownership of a residential or commercial property or both, each enjoying full rights over their own units and shared rights over common areas; and (2) indivision, whereby several co-owners jointly exercise the same right of full ownership over the same property considered as a whole.
Dominican law recognises other types of rights over real estate, such as usufruct, which grants the holder the legal right to use and benefit from property owned by a third party; 'use' or 'habitation', which grants the holder the right to use or live in a property owned by a third party; servitude, by which a property is subject to a specified use or enjoyment by another; right of passage, which grants the owner of an enclosed property without access to a public road the right to transit through an adjoining property; and administrative concessions granted by the government over public land that cannot be privately owned, such as the subsoil, coastline and riverside areas.
ii System of registration
Since 1920, the Dominican Republic has employed the Torrens system for real estate registration purposes. This system was developed in Australia in the 19th century and is now widely used in many countries. In the Torrens title system, a register of land holdings is maintained by the government, which guarantees an indefeasible title to the properties included in the register. Land ownership is transferred through registration of title instead of using deeds. The registrar has a duty to ensure that only legally valid changes are made to the register. Any interest affecting or limiting the ownership rights of the registered owner, such as mortgages, easements, liens, etc., must also be registered. Interest in real estate (property, mortgages, privileges, etc.) is only valid and enforceable against third parties upon registration at the office where the register is located (called 'Registry of Titles' in the Dominican Republic). Once registered, the system guarantees title and priority on a first come, first served basis.
In the Torrens system a third party, acting in good faith, can rely on the information in the land register as to the ownership of a property and the other rights and interests that may affect it. In a property purchase, the buyer is not required to look beyond the record in the register. In contrast, in the common law system a vendor cannot transfer to a purchaser a greater interest than he or she owns, and the seller's title is as good or as defective as the weakest link in the chain of title, which necessitates a chain-of-title investigation at the record office.
As in most jurisdictions under the Torrens system, there are still some parcels of land in the Dominican Republic that are unregistered. However, most properties in the country, and 100 per cent of commercial properties, fall under the registered category. Unregistered property is governed by the French 'ministerial' system, whereby deeds affecting real estate are filed at a specific register that only serves as a recorder of documents, without any type of guarantee.
iii Choice of law
The Dominican Civil Code mandates that all matters concerning real estate in the Dominican Republic are subject only to local law, no matter who owns the property (a Dominican or a foreign individual or entity) or the place where the contract was signed. This is a rule of public policy that cannot be amended or waived by the contracting parties. If a transaction involves properties from another jurisdiction as well, then the part of the transaction that refers to the Dominican real estate must be governed by Dominican law; hence, all closing documentation must be drafted, executed and enforced according to Dominican laws. Nevertheless, for estate purposes, a conflict of laws statute, enacted in December 2014, allows foreigners to have their national law determine the rules of inheritance in connection with real estate located in the Dominican Republic; previously, Dominican inheritance rules applied in all cases.
II OVERVIEW OF REAL ESTATE ACTIVITY
During the present decade, the Dominican real estate market has been booming, along with the Dominican economy, which has grown at close to a 6 per cent clip, the highest in the Americas. In the first semester of 2019, the market has experienced, however, a slight slowdown given the world's current geopolitical climate, while still leading growth in the region: the economy grew 4.7 per cent, with a yearly expected regional-leading growth of 5.3 per cent, while construction grew 7.6 per cent. All real estate sectors are growing apace: tourism, commercial and residential. Many international investors are very active in hotel development, especially in the Punta Cana area of the Dominican Republic, the number one resort destination in the Caribbean islands. Commercial real estate in the capital city of Santo Domingo is flourishing partly because of the influx of foreign capital, especially from the Venezuelan diaspora, as well as new investments being made in both commercial and tourism projects by closed-end Dominican publicly traded real estate investment funds. Finally, residential real estate is having significant growth since the enactment of Law 189-11, which facilitated the construction of low-cost housing through the incentives created for developers.
The real estate finance market has improved considerably in the last year, with many banking institutions competing to offer lower pricing and longer-term loans to local and international investors and home owners. The Santo Domingo and the Punta Cana areas are the main focus of real estate and financing activities. The Puerto Plata area, formerly the main tourist region in the country, has not recovered yet from the recession that started in 2008.
III FOREIGN INVESTMENT
The Constitution of the Dominican Republic lays out the fundamental framework for the organisation and the operation of the Dominican government and its institutions, and recognises an impressive list of civil rights for all individuals, Dominicans and non-Dominicans, including an equal protection clause for non-Dominican citizens and investors. Article 25 of the Constitution expressly states that foreign nationals are entitled to the same rights and duties in the Dominican Republic as Dominican nationals, except for the right to take part in political activities. Article 221 of the Constitution sets forth that the government will ensure equal treatment under the law for local and foreign investments.
Hence, there are no restrictions on foreign individuals or entities owning or leasing real estate in the Dominican Republic. The process for purchasing or leasing real estate for foreigners is exactly the same as for Dominicans. Foreign individuals and entities, and Dominicans, must register locally with the tax authorities before registering purchases of real estate. Individuals must submit their application directly at the Internal Revenue office, while entities must first register at the Chamber of Commerce and obtain a mercantile registry certificate, before applying for their tax number. These are mere formal requirements that can be easily fulfilled.
Furthermore, there are no exchange controls issues in investing in real estate in the Dominican Republic. Under current foreign investment laws, foreigners can freely repatriate capital and profits from their investment in the Dominican Republic.
Finally, several statutory incentive laws make it attractive for the foreign investor to purchase property in the Dominican Republic. For example, Law 158-01 on Tourism Incentives, as amended by Law 195-13, and its regulations, grants wide-ranging tax exemptions, for 15 years, to qualifying new tourist projects by local or international investors. The projects and businesses that qualify for these incentives are:
- hotels and resorts;
- facilities for conventions, fairs, festivals, shows and concerts;
- amusement parks, ecological parks and theme parks;
- aquariums, restaurants, golf courses and sports facilities;
- port infrastructure for tourism, such as recreational ports and seaports;
- utility infrastructure for the tourist industry such as aqueducts, treatment plants, environmental cleaning, and garbage and solid waste removal;
- businesses engaged in the promotion of cruises with local ports of call; and
- small and medium-sized tourism-related businesses such as shops or facilities for handicrafts, ornamental plants, tropical fish and endemic reptiles.
IV STRUCTURING THE INVESTMENT
The most common entity used by foreign real estate investors in the Dominican Republic is a local individually owned enterprise, or LLC (sociedad de responsabilidad limitada or SRL). Some, preoccupied by the complexities of reporting a foreign entity to the tax authorities in their home jurisdiction, prefer to register their domestic entity in the Dominican Republic.
There are no restrictions regarding the structure or legal form of foreign investment in real estate. If it is duly incorporated and recognised in the jurisdiction where it was formed, entities can do business in the Dominican Republic upon registration at the Chamber of Commerce and Internal Revenue.
As for Dominican entities, Dominican company law allows different types of commercial companies (LLCs) and corporations (regular or simplified stock corporations), all of which provide limited liability for its owners or shareholders. There are other investment entities recognised under the law, such as business partnerships, limited partnerships and per share limited partnerships, but they are seldom used because they do not offer full liability shields to their members, and are subject to the same tax treatment as the other entities. In 2011, Law 189-11 introduced local fiduciary vehicles as a holding option.
Dominican law does not recognise the concept of pass-through entities. Any entity, local or foreign, is subject to the same tax (27 per cent), regardless of its legal structure. There are two exceptions: (1) entities that have obtained exemptions under Tourism Incentive Law 158-01 and (2) closed-end real estate investment funds approved by the Dominican Republic Security and Exchange Superintendence.
V REAL ESTATE OWNERSHIP
All planning, land use and change of use matters are handled by the municipalities where the real estate is located, the Ministry of Tourism (in tourist areas) and the Ministry of Environment. The municipalities and the Ministry of Tourism establish the general rules regarding use (e.g., residential, commercial, industrial, mixed, density, maximum height, etc.). Any construction or development that may affect the environment must also be approved by the Ministry of Environment.
The Maritime Zone, a strip of land along all the Dominican coastline measuring 60 metres from the high tide mark, is public property (Law 305 of 23 May 1968), and, as such, cannot be sold or purchased. However, it is possible for owners of the adjoining property to build on the Maritime Zone with a special permit granted by Executive Order Decree by the President.
Any real estate project, subdivision or infrastructure must apply for and obtain environmental approval from the Ministry of the Environment and Natural Resources, pursuant to General Law on the Environment and Natural Resources 64-00, which regulates environmental pollution, the generation and control of toxic and hazardous substances, and the treatment of domestic and municipal waste, among other matters. Environmental due diligence is highly advisable for purchases of undeveloped land, as well as off-plan property purchases.
Environmental Law 64-00 requires mandatory insurance for projects needing a permit from the Ministry of Environment.
Issues of environmental clean-ups in real estate transactions are still very rare in the Dominican Republic. So far, this has been a problem only in the mining sector. Therefore, there are no general covenants in use. Of course, the parties to a contract are free to insert mutually agreed terms regarding long-term environmental liability and indemnity issues.
A conveyance tax must be paid before registering the purchase of real estate. The conveyance tax amounts to 3 per cent of the price of sale or the market value of the property as determined by the tax authorities, whichever is higher.
Also, a 1 per cent annual tax is assessed on real estate properties owned by individuals, based on the cumulative value of all the properties owned by each individual as appraised by government authorities. Properties are valued without taking into consideration any furniture or equipment to be found in them. For built lots, the 1 per cent is calculated only for values exceeding 7,138,384.80 Dominican pesos. The amount of the exemption is adjusted annually for inflation. For unbuilt lots, the 1 per cent tax is calculated on the actual appraised value without the exemption. The real estate tax is payable every year on or before 11 March, or in two equal instalments: 50 per cent on or before 11 March, and the remaining 50 per cent on or before 11 September.
The following properties are exempt from paying real estate tax: (1) farm properties; (2) homes whose owner is 65 years old or older, and has no other property in his or her name; and (3) properties owned by companies, which pay a separate 1 per cent tax on company assets.
iv Finance and security
Mortgages (financing from third parties) and privileges (seller's financing) are the customary security interests. Both grant the lender a registered right on the property (collateral) that can be enforced in case of default through a foreclosure process. Holders of mortgages and privileges must go through a court-supervised foreclosure procedure to execute the mortgage; automatic defeasible conveyances in the event of default are illegal.
VI LEASES OF BUSINESS PREMISES
Dominican law is very protective of tenants' rights and there is no fast and efficient eviction procedure in place. Key provisions in a Dominican lease include:
- the lease's term;
- tacit renewal clauses;
- ownership of betterments made by the tenant during the lease;
- default clauses and waiver of certain tenant-friendly statutory provisions;
- clear distinction between minor and major repairs and who will be the responsible party to cover these; and
- specific use of the property during lease term (e.g., the type of business and activities allowed).
Very often, the tenant has to find a guarantor to co-sign the lease. Dominican law requires landlords to deposit mandatory security deposits (in an amount equivalent to one, two or three months of rent, depending on the term of the lease) at the government-controlled Agricultural Bank. Any legal procedures against the tenant cannot be initiated unless these deposits have been made.
In the event of breach of lease terms, tenants can sue landlords for the specific performance of any obligation assumed by the landlord in the lease, as well as claim damages. The landlord, likewise, can sue for specific performance and damages, as well as for eviction.
The customary procedure to evict a defaulting tenant is to sue in court. The process is very time-consuming for two reasons: (1) before suing, the landlord is required in many cases to go through an administrative procedure that usually grants the tenant grace periods of six months or more; and (2) eviction orders by lower courts are subject to appeals to two higher courts, which lengthens the process to three or more years if the tenant retains the services of a savvy lawyer.
General contract law applies to the lease, but is limited by various statutes that protect the tenants. For example, if there is no escalating clause for rent in a lease, the landlord cannot raise it unilaterally without undertaking a lengthy administrative procedure.
Owners and tenants face a standard strict tort liability (custody-based liability) for real estate they own or lease for damage suffered by third parties on their property, if the property has played an active role in causing the damage, or for environmental damages.
There are different tax treatments with regard to leasing to individuals or to corporate entities: leases to entities are subject to value-added tax and leases by individual landlords are subject to a 10 per cent withholding tax that is credited toward the landlord's annual income tax.
VII DEVELOPMENTS IN PRACTICE
2019 saw the materialisation of the development of the new tourist area of Miches, in the eastern Dominican Republic, with the bidding and construction in Miches of the Playa Esmeralda Road, which now connects the Coral Highway with all major future tourism and real estate developments in planning for years, including the Club Med Miches, the first top-of-the-line 5-Trident resort in the Americas, which had its soft opening in November 2019, joining Club Med's Exclusive Collection, a selection of the brand's most exclusive properties around the world. Of particular interest in this new development was the financing of the project by Pioneer Sociedad Administradora de Fondos, the first investment fund to invest in the Dominican tourism sector, the largest in the Caribbean; also, for the first time, Dominican Pension Funds, the biggest institutional investor in the Dominican Republic, invested in the Dominican tourism industry, through Pioneer, to support the project.
Another landmark development in the real estate sector was the construction of Ciudad Juan Bosch (Juan Bosch City) a megaproject of low-cost housing near Santo Domingo being built under the incentives and regulations established under Law 189-11 on Trusts, the first real evidence of the benefits of the statute for lower-income Dominicans, the model of which has now been replicated in all major cities around the country.
Also of interest has been the introduction of the concept of WeWork to the city of Santo Domingo, in the project called Thrive Dominican Republic, which opened during the first half of 2019. WeWork provides shared workspaces that are subleased to entrepreneurs, freelancers, startups, small businesses, etc. WeWork confirms the trend toward an increase in the development of commercial property in the Dominican Republic.
On the legislative front, the only new development has been the enactment of a new statute on Real Estate Evictions: Law 396-2019, dated 1 October 2019, which will now regulates the granting of public force for real estate eviction purposes.
VIII OUTLOOK AND CONCLUSIONS
Despite worldwide fears of a major economic slowdown, the continuing growth of the Dominican economy bodes well for the local real estate market in 2019 and 2020. During 2019, projects submitted and approved for tax exemptions under Tourism Incentive Law 158-01 (CONFOTUR) have seen a 65 per cent growth year on year. Dominican real estate in all sectors is seen as a very attractive investment in the Caribbean when compared to other destinations in the region. The recent diversification of the market into new areas such as tourism project financing through investment funds, low-cost housing, and housing for the elderly, coupled with increased long-term financing by local banks, is a good indication that the boom will continue.
1 Alfredo Guzmán Saladín is a partner and Fabio J Guzmán Ariza is a managing partner at Guzmán Ariza.