Ownership of real property

Buying real property (land, building, house, condominium unit, town houses, warehouse, etc.) is a major financial undertaking and buyers/investors should proceed with extreme caution. As a general rule, foreigners are restricted from ownership of land. However, a corporation, which is 40 percent owned by foreigners and 60 percent by Filipino citizens is considered a Philippine national and is therefore allowed to acquire land.

Foreigners are allowed to acquire condominium units and any improvements constructed on the land. However,one disadvantage of course of this limitation is that without ownership of the land, a businessman can hardly obtain loans or financing from the local banks. Banks, in general, will lend money only with real property as security.

The restriction on land ownership has long been the subject of debate and is the single most important factor that restricts the flow of investment in the country. Liberalization of investments is expected to continue with the Philippines being integrated slowly to the global economy. With this, we expect that land ownership, eventually will be opened to foreigners.

Registered or Titled Land vs. Unregistered Land.

The presumption is all lands belong to the State (under the Regalian legal doctrine). Subsequently, certain parcels of land are declared and classified as alienable and disposable. Then occupants of said land can proceed by applying for titles on the land under various modes (judicial or administrative). A successful applicant is then issued an Original Torrens Title (OCTs) putting said land under the Torrens system. Subsequent buyers of the land are issued Torrens Certificate of Title (TCTs).

The Torrens Certificate of Title is designed to protect buyers of land in good faith against adverse claimants. Once registered, it is notice to the whole world of the person's ownership.

If an alienable or disposable land is not yet registered under the Torrens system, then it is considered as unregistered. Ownership is not yet perfected as the state or other private claimants can still object to the titling of the land. Ownership claims on unregistered lands, oftentimes are evidenced by tax declarations. Certain types of land, such as those forming part of marine waters, forest, military reservations, etc. cannot be alienated, hence, cannot be titled to private persons.

For safety reasons, buyers must deal, as much as possible with lands that are covered by TCTs or those registered. The risk of legal claims and conflicts are greater when acquiring an unregistered land.

BUYING TIPS

1) Assistance of a Real Estate Lawyer:

For peace of mind, hiring an experienced lawyer can take most of the worry out of the proposed transaction. If the proposed deal involves a huge sum of money, then the lawyer's assistance may be a necessity. Not just an ordinary attorney, but a lawyer, who specialized in real estate transaction should be hired right from the start of serious negotiations.

The seller's attorney prepares almost all contracts of sale and their provisions are intended to protect the seller's interest. The buyer's attorney should be able to balance the situation and protect his client's interest in the deal.

Land cases may involve 5 to 20 years or even more, for court to resolve. Legal remedies in court may not provide adequate relief for grievances. The involvement of an experienced lawyer in a land deal will greatly minimize legal conflicts, which are very costly.

2) Investigate the Title and Ownership

Fake titles abound in many parts of the country. Although the Philippines has adopted the Torrens system of title, unscrupulous individuals or criminal syndicates are out to tinker with the system. With a fake title on hand, possessors or even squatters are entitled to be heard in court (which could be protracted). This is principal reason why the title or ownership must be investigated for possible flaw or claims.

There could be liens or charges against the properties, which should be cleared prior to acquisition.

3) Inspect the Land, Building or Site

There could be illegal occupants or squatters possessing the property. Ejecting them is not an easy task, especially so that they can only be ejected after due process of law. There is also the Lina Law, which prohibits ejecting squatters without giving them land in another place for settlement.

A thorough inspection may disclose claims from adjoining owners, boundary disputes, such as if present, buyers can ask the owner or seller to resolve the disputes prior to acquisitions. The area you intend to buy may be landlocked, meaning there is no right of way. A geodetic engineer may be asked to assist if the technical description in the title corresponds to the land or site identified by seller to the buyer.

The use of substandard construction materials is prevalent. Buyers of finished houses and buildings are cheated when developers or contractors used substandard materials like reinforcing steel bars, hollow blocks, untreated lumber, low quality fixtures, and undersized electrical wirings. Finished structures should be inspected carefully.

The Buyer, by visiting the site, can at least determine the quality of neighborhood. Criminality such as petty thefts, robberies, and drug-related crimes abound in places proximate to depressed areas. The availability of utility services such as telephone, water and electricity must also be evaluated.

Environmental problems such as flooding during rainy season (not only on the site but in the road system leading to the site), threat of erosions and mudslides must be approximated. Traffic problems in the vicinity and accessibility to churches, market, malls and other establishment must be considered.

4) Determine Market Value and Taxes

Are you buying the property for your money's worth? Unscrupulous real estate brokers can unnecessarily jack up the price of a property by paying themselves hefty commissions. Be careful in dealing with real estate brokers.

If in doubt, as to the real value of the property, then hiring the services of a reputable and independent appraisal company is advisable. An appraisal company charges fees commencing from USD 100 up depending on several factors surrounding the property.

Unpaid real property taxes, capital gains tax, documentary stamp tax, registration fees, transfer taxes must be paid before ownership or title can be transferred. You can have preliminary calculations of these amounts (depending on the sales value, market value or zonal value of the property) and consider the same in negotiating for the final consideration or selling price.

5) Be careful of investing in Undeveloped

Properties

In pre-selling scams, developers entice investors with discounted prices and promises of huge profits through the purchase and sale of real estate properties. Developers or real estate dealers use prominent politicians and personalities, deceiving advertisements as tools to attract buyers. The developer goes bankrupt (as the land was foreclosed by a creditor bank) and abandons the project, leaving the purchaser to lose his entire investment.

In pre-selling or subdivision projects, the precise title number or technical description is unknown to the buyer, allowing opportunities for real estate fraud. In the multiple sales scheme, one lot is sold to several buyers and hope that they may not be able to keep up with the installment and developer rescinds the contract and forfeits the payments already made. An installment buyer, who has fully paid his property would find later that another person has the registered title over it.

The Housing and Land Use Regulatory Board (HLURB) has exclusive jurisdiction over real estate developers. However, even if a project has a Permit to Develop or Permit to Sell issued by government, the same does not guarantee that the developer can finish the project or keep up to his promises. One must select a reputable, honest and legitimate developer or builder.

6) Beware of the fine prints in real estate contracts

The buyer can disagree with escalation clauses, which allows the seller to increase prices in case of extraordinary inflation, peso devaluation, etc. There are grossly disadvantageous provisions such as forfeiture of installment payments, exorbitant interest and penalties. The buyer must not be fooled in accepting these conditions.

REAL PROPERTY MORTGAGE

A Buyer or real property may need financing to acquire the same. He may therefore enter into a loan agreement with a bank or lender constituting a mortgage over the property to secure the payment of the principal obligation.

If the loan is not paid in accordance with the agreement, the lender may foreclose the property by selling it in a public auction in various modes provided by law (judicial or extra-judicial). The proceeds of sale is applied to the loan and the excess if any is returned to the property owner.

Funds from 50 percent to 80 percent of the real property values may be loaned. Type of properties, usage and location are some of the factors that determine its loan value. Bargain for the interest rates and period to fit the buyer's paying capacity.

Documents needed when borrowing from financial institutions include: Torrens Certificate of Title or Condominium Certificate of Title, Tax Declaration, Location and Vicinity Map, Real Property Tax Clearances and others.

LEASING PROPERTIES

Lease of land is a contract by which a person (owner) temporarily grants the use or enjoyment of certain property to another who undertakes to pay rent or price therefore.

Again, if the proposed deal involves a huge sum of money, then the lawyer's assistance may be a necessity. This is so especially if the lessor intends to introduce substantial improvements or building in the leased land. The investor does not want to be kicked out of the property prior to the termination of the lease without justifiable grounds. A long-term lease contract must be subject to review by a competent lawyer.

As a general rule, if the lessor is a Filipino corporation or citizen, the maximum period of lease allowed is 99 years (Art. 1643, Civil Code of the Philippines ).

Long-term leases of properties (more than one year) must be annotated as a lien or encumbrance in the Torrens Certificate of Title of the owner to be valid against third parties. In case ownership of land is transferred to another person during the lifetime of the lease, the new owner has to respect the lease terms and conditions.

Long-Term Lease for Specific Approved Investment or Business by Foreigners

Republic Act No. 7652 (Investors' Lease Act) allows foreign investors to lease private lands in the Philippines for a maximum of 75 years. Under this law, any foreign investor infusing capital into the country can lease private lands, in observance of the Philippine laws and the following:

1) Lease contract shall be for 50 years renewable only once for another 25 years;

2) Leased area will be used solely for investment upon mutual agreement of parties; and

3) The leased premises shall comprise such area as may reasonably be required for the purpose of the investment subject to compliance with the Comprehensive Agrarian Reform Law and the Local Government Code.

Foreign investors are granted long-term lease on private lands to encourage establishment of industrial estates, factories, assembly or processing plants, agro-industrial enterprises, land development for industrial, or commercial use, tourism, and other similar priority productive endeavors.

The long-term lease may be terminated if the leased area is used for purposes other than that authorized. The Secretary of Trade and Industry is likewise authorized to terminate the lease if the investment project is not initiated within three (3) years from signing of the lease contract.

In case of a tourism-related project, the investment must not be less than USD 5,000,000, 70% of which amount shall be infused in the said project within three years from signing of the lease contract.

Long-Term Lease for no specific purpose by Foreigners

In general, if the purpose of the lease of private land is not for business or investment, then the maximum period is established under Presidential Decree No. 471. Under the said law, the maximum period allowable for the duration of leases of private lands to aliens shall be for twenty-five (25) years, renewable for another twenty-five years upon mutual agreement of both lessor and lessee. This law does not require the foreigner to devote the use of the land for investment or business purposes.