The Difference between Titled and Rights of Possession Properties
There is a lot of confusion when foreigners look to buy real estate in Panama. That’s because some sellers have actual “title” and others only sell their rights to “possess” a property. Moreover, deeds of title are different in Panama from the United States or Canada.
Let’s clear up this confusion. Panama recognizes three different types of real properties: Titled, Rights of Possession, and Concessions.
1. TITLED PROPERTY
Titled property is similar to “fee-simple” title in the United States and is the most secure form of real property ownership in Panama. The Constitution of the Republic of Panama guarantees the right to own private property. Titled properties measured and properly recorded in Panama’s Public Registry office verify one’s real property “title”. These verifiable, guaranteed rights allow banks to issue mortgage loans for titled properties by registering liens against one’s title as collateral.
Purchasing titled property is simple by following these procedures:
a) Negotiation: If you are dealing through a real estate agent, make sure all of the terms and conditions are clear and in writing. Make sure that the written contract clearly sets forth the payment amounts and dates. If you are dealing directly with the seller, all terms should be clearly understood before hiring an attorney to prepare the written contract.
b) Promise to Purchase Contract: Instead of a Purchase & Sale Agreement (common in the United States), the buyer and seller initially sign a Promise to Purchase (the property) Contract. A small down payment when signing a written Promise to Purchase Contract secures the property while the buyer conducts a title search to verify the seller’s ownership. In the meantime, the purchaser arranges for financing (if not paying fully in cash) and setting up a corporation (if applicable) to hold title. Register this contract at the Public Registry to prevent the seller from selling the property to another party prior to the Closing.
c) Title Search: Once you sign the Promise to Purchase Contract, you should hire a competent attorney to conduct an investigation of the seller’s title at the Public Registry. The lawyer will also verify that the property is free and clear of any encumbrances, liens, and other issues affecting transfer of title. Title Search also includes reviewing the catastral survey map. In many cases, a professional surveyor will verify the map points on the property to avoid future boundary conflicts. Finally, have your lawyer verify the main utility debts (water & sewer) with the government agency providing them (IDAAN).
d) Buy-Sell Contract: Upon conclusion of the Title Search, the parties sign a formal Buy-Sell Contract (also known as Public Deed of Title Transfer). The escrow agent pays the seller’s final balance and transfers title into the buyer’s name. I highly recommend using an established Escrow company to protect both parties.
e) Title Transfer: This process is known as the “Closing” in the United States. Property ownership officially transfers to the buyer when both parties sign the Buy-Sell Contract (Public Deed of Title Transfer) and registers it with the Public Registry. If title is in a corporation’s name and the buyer chooses to, the seller merely transfers the corporation’s sharesto the buyer without transferring title. In order to facilitate the Closing by assuring the seller will be paid and the buyer will receive full Title; the attorney prepares a “Promise To Pay Letter” from a local bank. This letter guarantees full payment to the seller when the Title Transfer registers at the Public Registry.
Problem Solved: The “Promise To Pay Letter” solves a typical Closing problem. Sellers usually require full payment when they sign the Public Deed of Transfer prior to the actual registration of Title Transfer at the Public Registry. There have been instances when the seller received full payment, but the Deed was not registered (or the government rejected the deed). The buyer did not become the new owner because there was no record of the title transfer in the Public Registry. The “Promise To Pay Letter” guarantees payment to the seller by a local bank while assuring the buyer that payment is not made until actual transfer of title.
2. RIGHTS OF POSSESSION
This is similar to “squatter’s rights”. This is where government owned property is “occupied” by a Panamanian (or entity) over time. Possession rights granted to the squatter through a simple certification document issued by either municipal mayors, sheriffs, or other government agencies such as the Agricultural Reform Department (Reforma Agraria). There are no property taxes because the possessor does not own the property. However, any structures built on the property may incur municipal and/or national taxes if they are registered. Possession rights become titled by purchasing the property from the government. However, certain coastal areas, national parks, or islands are “protected properties” where the possessor can apply for an administrative “Concession” over the land guaranteeing use of it.
To acquire possession rights over a property, it is important to follow these steps:
1. Promise to Purchase Contract: Pay a small down payment at the signing of the Promise to Purchase Rights of Possession Contract securing the property and providing enough time for the due diligence. During this time, the buyer coordinates payment arrangements for the closing. Contracts for the purchase of Rights of Possession cannot be registered at the Public Registry; therefore, a public notary should authenticate them.
2. Due Diligence: Unlike titled property that is easily verifiable through the Public Registry, the due diligence procedures on Possession Rights property is more complex. Panama has no central database of Possession Rights properties. Therefore, buyers of Possession Rights should take extra precaution during the due diligence process. Generally, the extent of the due diligence investigation that one can realize on Possession Rights property is the following:
a. Verification of Certification of Rights of Possession: The Certification of Possession Rights validly issued from a competent government authority containing the possessors’ name and correct description of the property in terms of location, size (area), limits, boundaries, and neighbors on all sides.
b. Verification of Survey: A survey stamped and signed by a professional, licensed, surveyor engineer. This identifies the possessors’ name, location and reflects the same information in accordance with the Certification of Possession Rights.
c. Inspection: The main elements to verify are: physical occupation, no opposition by third persons, and good faith. Your surveyor identifies and marks the points of the property confirming these points with the neighbors to ensure that there are no future
boundary conflicts. This requires a physical inspection. In addition, the property should be marked and fenced, delineating
the boundaries.
d. Permit Verification: In some cases, if the buyers’ intentions are to build a certain type of structure or project on the Possession Rights property (for example, a marina, port, hotel, airstrip, etc.), it is necessary to verify if there are any national or municipal regulations prohibiting those activities in the area.
3. Buy-Sell Contract: After verification, the seller expects the final balance at the signing of the Buy-Sell Contract. If you use an escrow agent, payment of the final balance is made once the Possession Rights Certification transfers to the buyers’ name. Contracts for the purchase of Rights of Possession cannot be registered at the Public Registry; therefore, a public notary should authenticate them.
4. Possession Rights Certification Transfer: The possession rights over the property officially transfers to the buyer in the Possession Rights Certification. This occurs immediately after each party signs the Buy-Sell Contract. If the possession rights are in a corporations’ name, the buyer agrees to purchase the corporations’ shares. Then there is no transfer of Possession Rights Certification, only a transfer of the corporation shares to the buyer.
3. CONCESSION PROPERTY
Concession property is similar to a land lease arrangement, common in Mexico or Hawaii. This is where the government grants a Concession to an individual or an entity for a specific purpose, such as a real estate development, hotel, or marina. Most Concessions in Panama are granted for a maximum of 20-year (renewable) periods. However, some Concessions are granted for up to 40 years (renewable) in specially designated areas such as the Amador Causeway where there are commercial and condominium developments currently being sold. Concession Property exists in special coastal or other governmentally protected areas where actual title is prohibited by law. In many cases, real estate developments on Concession properties offer investors time-share or fractional ownership arrangements, which are very common in Mexico and other resort-type coastal areas around the world. Unlike Possession Rights property, the government through a specific contractual agreement guarantees Concession property. Therefore, there is very little risk to the investor. Title insurance companies generally offer title policies for Concession properties.
ACQUIRING TITLE OVER POSSESSION PROPERTIES
“Titling Process” is the official administrative procedure to purchase Rights of Possession property from the Panamanian government. You are buying the property from the government and registering the Buy-Sell Contract with the Public Registry. Island properties cannot become “Titled” according to the Constitution of the Republic of Panama (only mainland can become titled). However, there are some titled Island properties registered before the Constitutional restrictions existed which can be sold. All beachfront titled properties require a 22 meter set back due to high tide.
TITLE INSURANCE
Even though Panamanian laws are setup to protect foreign investors, you should always take precautionary measures to insure your investment. I recommend Title Insurance for every property transaction. This is readily available in Panama through major international title insurers, such as LandAmerica Lawyers Title and Stewart Title. Title policy costs are minimal and the peace of mind is definitely worth the cost.
In Conclusion: Now that you have learned the different types of real property rights in Panama, you can take steps to protect your investments. Look for “titled” properties first. Make sure that you use a competent real estate lawyer to prepare your Promise to Purchase Contract, to conduct a thorough Title Search, and to prepare your Buy-Sell Contract. Hire a good Escrow company to ensure that all documents registered with the Public Registry before making final payment.
If you purchase Rights of Possession, hire a competent real estate lawyer to prepare your Promise to Purchase Rights of Possession Contract, conduct Due Diligence, and to prepare your Buy-Sell Contract. Hire a professional surveyor to verify all-important facts. Protect your original documents from loss because they will not be registered.
Obtain Concession rights for using government property whenever you can. Again, hire a knowledgeable real estate lawyer to prepare your contracts.
Finally, purchase Title Insurance to protect your investments.
With these precautions, you should be able to enjoy full rights of ownership or possession of your new real property purchases.
Steven Rich, MBA is the Marketing Manager for Panama Offshore Legal Services whose website is at:
http://www.panama-offshore-services.com
By: Steven Rich
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