Tuesday, January 20, 2004

OPTION TO PURCHASE AND EARNEST MONEY DEPOSIT
Having been active in the real estate market in the Dominican Republic for many years, particularly in the tourist sector, we have at times noted a great confusion between the legal notion of the option to purchase and its effects when accompanied by a sum, which in our legislation is typified as earnest money.
First, we should point out that, although in practice an earnest money deposit usually consist of an amount of money, it does not neccesarily or indispensably have to be so. A financial instrument or any chattel that the parties deem of adequate value for entering into a contract may be considered as earnest money for the purpose of a real estate-operation.
This leads to the conclusion that earnest money consitutes essentially a typical security for the fulfillment of such obligations as are normally established in an agreement of option to purchase, and it is therefore also known as handsel; and at the same time such term implies the granting of money or chattel as security or guarantee in a typical real-estate buying/selling deal.
The core of such constant confusion is the implementation of earnest money deposit in options to purchase. The option to purchase, also known as promise of sale, implies the unequivocal manifestation of one (or sometimes both) of the parties to sell a property to another in a given time. Therefore, in principle, an option to purchase should include a rescission period in order for the agreeement to be perfected and for the two wills to meet.
What happens then, when a promise of sale has been made with earnest money or handsel? Such promise of sale implies the ability to retract because it gives both parties the right to withdraw from their commitment and to terminate their covenant sustaining a double penalty as established in article 1590 of our Civil Code, which reads as follows: "If a promise of sale has been made with an earnest money deposit or handsel, each of the contracting parties is entitled to rescind the contract, and the party who made such deposit shall forfeit it, and the party who received it should return such amount twofold"
Many lawyers are wrong in understanding that a promise of sale always has the same force as a sale pursuant to article 1589. In this case, the legislator has in fact introduced an extenuation to one of the effects of a consensual sale, i.e. the transmission of the premises and its risks. In other words, such effects are retarded pendente conditione until the parties waive their right to withdraw by executing a final contract. Thus, there is no actual sale until such time, the contents of article 1589 notwithstanding, since there con be no final agreement while a rescission is possible.
Such misunderstanding is apparent when attempting to combine both articles. For many, a promise of sale has the same effect as a sale until it is rescinded. This would imply that all risk of the chose would be born by th buyer. This notion is erroneous, according to our position regarding this matter. These two provisions may not be combined because they are antagonistic. The legislator´s intent was to sever one from the other. A promise of sale pure an simple, i.e. without earnest money deposit, has the same effect as a sale. A promise of sale with earnest money deposit involves the possibility to rescind such promise, to revoke it, to change one´s mind; it does not have the same effect as a sale until the parties involved give their final consent.
Freddy Miranda, Esq.
Former Professor
Pontifical Catholic University PUCAMAIMA
Attorney at Law
Figueroa Guilamo & Associates
www.fgasoc.com.do
fmiranda@fgasoc.com.do

Monday, January 12, 2004

DO IT YOURSELF IN REAL ESTATE IN THE DOMINICAN REPUBLIC


During our more than nine years of experience in the real estate and tourist markets, we have been greatly surprised to learn that many buyers do not consider their acquisitions to be a true investment. As soon as the purchase of a house, an apartment or a villa is considered an investment, the legal treatment varies substantially.

The first difference is the manner of acquisition. A real investment involves planning. The second factor is the preparation of the mechanism of acquisition—in most cases we recommend forming a company.

What type of company is recommended for purchasing real estate in the Dominican Republic, particularly in the tourist market? Can a foreigner buy shares or invest in real-estate through a company in the Dominican Republic? What is the best option to organize an investment—a Dominican company or a foreign company?

The last question is the most important. It all depends on your priorities, and above all on your interest in the investment. If it is a totally passive or enjoyment investment, the best option would be an off-shore company. Such company would become a simple shareholder. On the other hand, for an active investment, it is best to form a Dominican company, since such investment would yield rentals from a domestic source, and filing an income tax form would be mandatory.

There are no restrictions for foreigners wishing to purchase shares in the Dominican Republic, and, as regards the first question, in the case of a Dominican company, the best option is a stock company. If the formation of a foreign company is preferred, in our opinion it is imperative to form an IBC. These companies may be formed through our office. To obtain information about fees, please contact Freddy Miranda at fmiranda@fgasoc.com.do.

Let's take for example the case of an operation in the tourist market, focusing specially on the market of Casa de Campo, La Romana, on the eastern part of the Dominican Republic. In this market, the first element to consider is the construction time for the improvement and its boundaries. Then, it is advisable to verify the payment of common services, the absence of which could jeopardize the improvement, and finally the payment of property taxes which could cause a tax lien to be levied if the property purchased has an outstanding balance to the credit of the Internal Revenue Service.

Then, it is essential to make a formal examination of the title deed, particularly in the case of title deeds issued more than five years before. The ideal is to obtain a certification of liens and encumbrances from the Recorder of Deeds. In many cases, greater assurance may be obtained by means of a collateral on the property, to cover the risks.

If there is no title deed for the property, usually this type of resort has entered into a sales agreement with the buyer, which may be dissolved in order to make a direct sale to the new investor. In this case, it should be noted that in order to make the transfer, the buyer has to pay all appropriate taxes. Many unscrupulous lawyers misadvise their clients, saying that with this method there is no need to pay transfer tax, which is inexact. What is usual is for the seller to have his/her title deed so that the property may be purchased and transferred with no problems or difficulties. In practice, since the buyer has to pay transfer tax, the seller does not bear such taxes. For more information about the amount to be paid, please contact Freddy Miranda, at fmiranda@fgasoc.com.do.

Next, the sales agreement must be drafted. The final sales contract may be preceded by a free-look or due-diligence period, in order to allow the buyer to obtain a certification of liens and encumbrances, to inspect the improvement, to allow for the preparation and investigation by the insurance carrier, if the purchase was agreed upon condition that the property be insured.

Assurance that both parties (or the buyer) will honor their sale/purchase agreement may be obtained by executing a promise of sale. This promise of sale may be agreed to with or without a deposit. In our legislation, such deposit is called earnest money, and it may be considered as payment of part of the purchase price, or it may be kept as security for such sale. It is important to have sound legal assistance for executing a promise of sale with earnest money deposit, since various financial penalties apply in case of default. (Cf. Fgasoc.com.do, article "Promise of Sale with Earnest Money Deposit").

As mentioned above, a sale/purchase agreement is the classic contract for transferring a title deed and obtaining the warranty granted by it. The Internal Revenue Service established that the amount to be paid for transfer tax may never be based on the minimal credible value, or value assessed for property tax or luxury tax. Investors are advised to retain a good real-estate lawyer to avoid problems with the fiscal authorities.

Can transfer tax be avoided without incurring evasion? The classic ways of amortizing the weight of transfer tax are: buying shares of stock from the owning company if that were the case, and, if the property being transferred is the sole asset of such company, obtaining a loan through a savings and loans institution, and incorporating the property into the capital stock by making a contribution in kind.

Taxes are withheld on shares purchases. In the case of a savings and loans bank, the institution will charge a sum in addition to the closing value of the loan for the duration thereof. Finally, a contribution in kind is the most complex way of reducing transfer costs in a real-estate transaction. In most cases, any such contribution is subject to significant expenditures by the investor.

Upon receipt by the appropriate Recorder of Deeds, the sales contract will be duly registered and an entry to that effect will be made in the books kept for real estate transfers. The recorder of deeds or his/her deputy will formally audit the documentation to verify that it meets the requirements prescribed by law in order for a new title deed or an attesting letter to be issued guaranteeing the property. Such documentation should include, depending on the manner of transfer:

A) CONTRIBUTION IN KIND

1. A copy of the notarized declaration (attested copy).
2. A copy of the Company's Bylaws.
3. List of payments made by subscribers.
4. Minutes of the first Shareholders' Meeting, where the Contributions Officer was appointed.
5. Report of the Co��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������