The 2023 Cayman Islands Real Estate Guide by Appleby Global

The Appleby Global Real Estate 2023 guide to the Cayman Islands provides the latest legal information on the impact of disruptive technologies, proposals for reform, sale and purchase, real estate finance, planning and zoning, investment vehicles, commercial leases, construction and tax.

This exceptional article is written by Norman Klein [Managing Partner] & Adam Johnson [Partner] at Appleby Global, Cayman Islands.

1. GENERAL

1.1 MAIN SOURCES OF LAW

Real estate in the Cayman Islands is primarily governed by legislation and case law, although decisions in commonwealth jurisdictions may be considered in circumstances where there is no relevant local legislation or case law.

1.2 MAIN MARKET TRENDS AND DEALS

The local real estate market has continued to produce strong sales and price results over the last 12 months.

Luxury condos along the famous Seven Mile Beach continue to attract overseas investment, at increasing prices. Several major projects are nearing completion.

The leisure and tourism sector remains active despite the temporary downturn in global travel, with several projects underway. Developments of note include:

- - - the Mandarin Oriental resort and residences at Beach Bay;
    - the Grand Hyatt resort and residences along Seven Mile Beach; and
    - the Kailani Grand Cayman resort and residences along Seven Mile Beach.

In addition, the Cayman Islands’ largest developer, Dart Realty, recently completed the renovation and rebranding of the Hampton by Hilton Grand Cayman hotel, as well as commencing construction of the Hotel Indigo near Seven Mile Beach. Dart Realty has also completed phase one of a new residential complex, and is nearing completion of two new ten-storey buildings (one residential, one commercial), both within in its self-sufficient town known as Camana Bay.

Remediation work on the George Town landfill site continues, with plans for new waste-to-energy and recycling infrastructure that will significantly reduce the amount of new landfill.

Construction has commenced on a new hotel and residences in central George Town, which is set to kick-start revitalisation plans for the capital.

In a landmark case, Dart Realty recently won its case (on appeal) against the proprietors of a neighbouring development who sought to challenge its plans to develop the former Britannia golf course on the basis that they had the benefit of unregistered rights to use said property. The Court of Appeal ruled in favour of Dart, reinforcing the integrity of the Torrens system of registered land interests used in the Cayman Islands.

Rising inflation and associated increase in interest rates have certainly impacted developers, whose construction and carrying costs have increased significantly over the past 12 months. This has led to increased prices for end-buyers, a more innovative approach to value-engineering and a rise in private financing clubs to replace or supplement traditional bank borrowing.

Mandarin Oriental Grand Cayman — Mandarin Oriental Beachfront Corner

1.3 IMPACT OF DISRUPTIVE TECHNOLOGIES

Given the size of the jurisdiction, the use of disruptive technologies is relatively uncommon in real estate transactions. However, many new developments are using cutting-edge technology solutions within designs, as evidenced by a number of development projects winning regional industry awards in recent years.

1.4 PROPOSALS FOR REFORM

At the time of writing, there are proposals to reform the law applicable to mortgage enforcement, which will create a more consumer-friendly environment for those securing financing over Cayman Islands real estate.

There are also longstanding proposals to modernise the Strata Titles Registration Act (2013 Revision) and update the Development Plan 1997.

The Cayman Islands Land Registry continues its work to implement e-conveyancing, and plans to propose a number of legislative initiatives to further streamline the land registration process.

2. SALE AND PURCHASE

2.1 CATEGORIES OF PROPERTY RIGHTS

Real property can be held as freehold (held by the registered proprietor indefinitely) or leasehold (held by the registered proprietor for the term of the lease).

The Strata Titles Registration Act (2013 Revision) allows for the registration of a strata plan against a freehold or leasehold land parcel to create individual strata lots, each of which is registered with its own derivative title and the remainder held as “common property” by a strata corporation. Strata titles are often used as a mechanism to govern multi-unit developments such as office buildings, shopping centres and condominium developments.

The Registered Land Act (2018 Revision) allows for the registration of a volumetric plan against a land parcel, whereby a parcel can be subdivided into several three-dimensional parcels (which can include airspace).

A contractual licence can allow for the occupation or use of real property. However, this is a personal right and does not create a registerable interest.

2.2 LAWS APPLICABLE TO TRANSFER OF TITLE

All transfers of title of real estate are primarily governed by the Registered Land Act (2018 Revision). While not specifically related to the transfer of title, the carrying on of business from real estate within the Cayman Islands requires certain local licences, some of which are specific to property type.

2.3 EFFECTING LAWFUL AND PROPER TRANSFER OF TITLE

Transfers of real estate must be registered at the Cayman Islands Land Registry.

Broadly speaking, the land register is definitive and is supported by a government-backed indemnity (although it can be rectified to deal with matters such as error and fraud). Title insurance is available only on the larger commercial transactions, but it is expensive and rarely used.

Unless the contrary is expressed in the register, a parcel of registered land is also subject to such of the following overriding interests as may for the time being subsist and affect the same, without their being noted on the register:

- - - rights of way, rights of water and any easement or profit subsisting at the time of first registration;
    - natural rights of light, air, water and support;
    - rights of compulsory acquisition, resumption, entry, search, user or limitation of user conferred by any law;
    - leases or agreements for leases for a term not exceeding two years, and periodic tenancies;
    - any unpaid moneys that are expressly declared by any law to be a charge upon the land;
      rights acquired or in the process of being acquired by virtue of any law (ie, adverse possession and prescriptive rights);
    - the rights of a person in actual occupation of land or in receipt of the rents and profits thereof (save where inquiry is made of such person and the rights are not disclosed); and
    - electric supply lines, telephone and telegraph lines or poles, pipelines, aqueducts, canals, weirs and dams erected, constructed or laid in pursuance or by virtue of any power conferred by any law.

In 2020, temporary measures were introduced in light of reduced in-person availability for document signing and notarisation caused by the COVID-19 pandemic. While those measures have since been rolled back, the Cayman Islands Land Registry has redoubled its efforts to implement a secure e-conveyancing system to reduce the reliance on physical documentation.

Sea views from Villa Aqua Vista in Grand Cayman — Villa Aqua Vista, South Sound

2.4 REAL ESTATE DUE DILIGENCE

As there is no commonly accepted market standard of due diligence when acquiring real estate, the purchaser is responsible for determining the level of investigation that would be appropriate on a case-by-case basis.

The purchaser’s attorney should do the following at the very least:

- - - review the title documents, including a copy of the land register for the subject parcel, a copy of any connected or superior interests (ie, the strata common property or the landlord’s title), a copy of the registry map and a copy of all instruments noted on title;
    - review the lease and any other ancillary documents, if the property is leasehold;
    - review any leases to which the property is subject;
    - raise any relevant enquiries with the seller (about the state and condition of the property, any disputes, compliance with laws, overriding interests, services, etc);
    - consider whether any additional enquiries should be raised with public or other bodies (depending on the nature of the transaction), such as the Lands & Survey Department, the Department of Environment or the Department of Planning; and
    - consider recommending a physical inspection or survey of the property by the purchaser and a professional.

Although uncommon, real property can be sold by way of transfer of the entity or structure through which it is held. In such cases, due diligence is usually the same, with some additional due diligence on the relevant entity or structure.

If the purchase of property is financed by third-party debt, the lender will typically require specific due diligence, often in the form of a report on title and a legal opinion.

2.5 TYPICAL REPRESENTATIONS AND WARRANTIES

Warranties are always subject to negotiation and should be expressly included in the sale and purchase agreement, although extensive warranties are not customary on anything but the largest commercial transactions. There is no customary approach to warranties, so the scope and duration would depend entirely upon the specifics of the transaction and the respective bargaining strengths of the parties.

Common purchaser remedies for misrepresentation or breach of warranty would include an action for damages, misrepresentation and/or rescission of the agreement, and a refund of any deposit paid.

Insurance is very rarely used outside of the largest international transactions.

2.6 IMPORTANT AREAS OF LAW FOR INVESTORS

Any investor should consider the primary sources of law, including the Registered Land Act (2018 Revision), the Development and Planning Act (2021 Revision) and the Stamp Duty Act (2019 Revision). However, there are other laws that may be applicable, depending on the specifics of the transaction (such as the type of purchaser, the type of property and what activities the purchaser intends to carry out from the property).

There are generally no restrictions on foreign ownership of real estate in the Cayman Islands, although certain formalities may apply to different types of purchaser.

The carrying on of business from real estate within the Cayman Islands requires certain local licences, some of which are specific to property type.

It is always advisable to consult with a professional at the outset of a transaction in order to understand any applicable requirements.

2.7 SOIL POLLUTION OR ENVIRONMENTAL CONTAMINATION

Although not common, environmental liabilities can be dealt with contractually between the parties by way of warranty and representation.

The Development and Planning Act (2021 Revision) enables the Central Planning Authority to serve a remediation notice where it considers that the amenity of an area is adversely affected by reason of, inter alia, the ruinous, dilapidated or other condition of any structure, or by the condition of land due to the deposit of any refuse or spoil. The remediation notice can be served on the owner or occupier of the land or building, or on the person responsible for causing the condition of the land or building.

The National Conservation Act, 2013 establishes a council, whose role is to promote the conservation of natural resources, including the preservation of wetlands and wetland resources, habitats and the conservation of wildlife. Pursuant to this law, protected areas can be created on Crown and private land with the agreement of the proprietor of the land. Developers should consider the potential effects of this law on any development plans, and should make the appropriate enquiries when purchasing raw land to ascertain whether any conservation agreements have been entered into with respect to the land.

Polluters, owners and occupiers could also be subjected to civil action for any environmental harm.

2.8 PERMITTED USES OF REAL ESTATE UNDER ZONING OR PLANNING LAW

Any development of land requires a grant of planning permission.

“Development” encompasses the carrying out of building, engineering or other operations in, on, over or under any land, the making of any material change in the use of any building or other land, or the subdivision of land. However, it is subject to a number of exclusions, including any works for the maintenance, improvement or other alteration that only affect the interior of a building or do not materially affect the external appearance of the building.

Planning permission may be refused or granted unconditionally, or can be subject to such conditions as the relevant authority deems fit.

A record of all grants of planning permission, modifications, revocations and conditions attached to planning permission relating to Grand Cayman is maintained by the Central Planning Authority, and a record of grants relating to the sister islands, Cayman Brac and Little Cayman, is kept by the Development Control Board.

2.9 CONDEMNATION, EXPROPRIATION OR COMPULSORY PURCHASE

The Cayman Islands government can compulsorily acquire any land. This is usually done for the purposes of establishing new public roads but can also be done in other circumstances.

Compensation is payable, typically at the property’s market value.

2.10 TAXES APPLICABLE TO A TRANSACTION

Ad valorem stamp duty is payable on the following (subject to certain exceptions that are at the discretion of the Minister of Finance).

- - A conveyance or transfer of any immovable property (freehold or leasehold):

1. 1. 1. typically at a rate of 7.5% of the purchase price or of the market value, whichever is higher, although concessions or reduced rates may be available in specific circumstances (such as first-time Caymanian purchasers and purchasers of units in lower value newbuild homes); and
    2. usually paid by the purchaser.

- - A grant of a lease of any immovable property:

1. 1. 1. if the term exceeds 30 years, 7.5% of the full market value of the leasehold interest in the real property; or
    2. if the term is 30 years or less:
      - where any premium or other valuable consideration other than or in addition to rent is provided, 7.5% of the amount of the premium; and
        
        where the consideration or any part of the consideration is rent: (1) 5% of the aggregate rent if the term is less than one year; (2) 5% of the average annual rent or of market rent, whichever is higher, if the term is one year or more but does not exceed five years; (3) 10% of the average annual rent or of market rent, whichever is higher, if the term exceeds five years but does not exceed ten years; or (4) 20% of the average annual rent or of market rent, whichever is higher, if the term exceeds ten years; and
    3. usually paid by the tenant.

- - Debentures and legal or equitable mortgages, or charges of immovable or movable property within the Cayman Islands:

- - 1. in the case of a debenture or a legal or equitable mortgage, or a charge of immovable property within the Cayman Islands:
      - 1% of the sum secured where the sum secured does not exceed KYD300,000; or
      - 5% of the sum secured where the sum secured is more than KYD300,000 (whether initially or after a further advance);
    2. in the case of a legal or equitable mortgage, or a charge of movable property within the Cayman Islands, 1.5% of the sum secured (subject to a maximum charge of KYD500 where the security instrument is granted by a Cayman Islands exempted company, a Cayman Islands ordinary non-resident company, a Cayman Islands exempted trust or a body corporate incorporated outside of the Cayman Islands, or where the security is over shares in a Cayman Islands exempted company or a Cayman Islands ordinary non-resident company); and
    3. usually paid by the borrower.

- - Policies of insurance for property within the Cayman Islands:

1. 1. 1. 2% of the cost of the new or renewed property insurance premiums; and
    2. usually added to insurance premiums.

Subject to limited exceptions, ad valorem share transfer tax is payable on the transfer or issue of equity capital in a land-holding corporation, at the rate of 7.5% of the proportionate value of the entire land holding. A land-holding corporation includes a partnership, foreign corporation, chartered corporation, mutual fund or incorporated company (but not a corporation sole or charitable corporation) that holds any legal or beneficial interest (excluding interests created pursuant to bona fide security instruments) in landed property in the Cayman Islands (or interest in another land-holding corporation). Landed property includes freehold interests in Cayman Islands real property and any leasehold interest where the original term exceeded 30 years.

Most other instruments and documents are subject to a fixed rate of stamp duty in comparatively nominal amounts. Registrable instruments are also subject to relatively immaterial registration fees.

Subject to limited exceptions, real estate used for paid tourist accommodation attracts tax at 13% of the amount charged to each tourist.

No other domestic taxes or municipal rates are currently payable on the occupation, acquisition, ownership or disposal of Cayman Islands real property or income deriving therefrom.

2.11 LEGAL RESTRICTIONS ON FOREIGN INVESTORS

There are generally no restrictions on foreign ownership of real estate in the Cayman Islands, although certain formalities may apply to different types of purchaser.

The carrying on of business from real estate within the Cayman Islands requires certain local licences, some of which are specific to property type.

3. REAL ESTATE FINANCE

3.1 FINANCING ACQUISITIONS OF COMMERCIAL REAL ESTATE

The most typical forms of security for the financing of real estate are:

- - - legal charge;
    - debenture (corporates only);
    - legal or equitable mortgage/charge over shares in the company that holds the real property;
    - assignment of any rental income;
    - assignment of any sale contracts and/or any development contracts (usually for developments);
    - assignment of insurance proceeds; and
    - guarantees from directors, shareholders, related companies or individuals.

All legal charges over real property must be registered at the Cayman Islands Land Registry, and debentures creating fixed and floating charges are noted on the title for the real property if they are related to a registrable legal charge. Charges over shares in a Cayman Islands company will typically be noted on its register of members, and all security interests granted by a Cayman Islands company should be recorded in its register of mortgages and charges.

Assignments by way of security are usually created by deed, and notice must be given to the counterparty in order to perfect the security.

Due to the size of the Cayman Islands real estate market and the stamp duty payable on direct and indirect ownership interests in Cayman Islands real estate and the granting of security, it is generally not common to see large portfolios of real estate held by funds or investment trusts.

3.2 TYPICAL SECURITY CREATED BY COMMERCIAL INVESTORS

See 3.1 Financing Acquisitions of Commercial Real Estate.

3.3 RESTRICTIONS ON GRANTING SECURITY OVER REAL ESTATE TO FOREIGN LENDERS

There are no restrictions on granting security over real estate to foreign lenders, although a foreign company holding the benefit of a legal charge over Cayman Islands real estate must register as a foreign company in the Cayman Islands.

3.4 TAXES OR FEES RELATING TO THE GRANTING AND ENFORCEMENT OF SECURITY

Ad valorem stamp duty is payable on debentures and legal or equitable mortgages, or on charges of immovable or movable property within the Cayman Islands (subject to certain exceptions that are at the discretion of the Minister of Finance).

In the case of a debenture or a legal or equitable mortgage, or a charge of immovable property within the Cayman Islands, where the sum secured does not exceed KYD300,000, duty is 1% of the sum secured; where the sum secured is more than KYD300,000 (whether initially or after a further advance), duty is 1.5% of the sum secured.

In the case of a legal or equitable mortgage, or a charge of movable property within the Cayman Islands, duty is 1.5% of the sum secured (subject to a maximum charge of KYD500 where the security instrument is granted by a Cayman Islands exempted company, a Cayman Islands ordinary non-resident company, a Cayman Islands exempted trust or a body corporate incorporated outside of the Cayman Islands, or where the security is over shares in a Cayman Islands exempted company or a Cayman Islands ordinary non-resident company).

Where the amount of money to be advanced on the security of any property by way of mortgage is unlimited, the security is to be available for such an amount as the ad valorem duty paid thereon extends to cover. If any advance is made in excess of the amount covered by that duty, the original instrument may be stamped-up with the additional ad valorem duty required to cover the total amount then to be secured.

A mechanism exists through which “double duty” on separate security instruments that secure the same debt can be avoided. In such cases, the ad valorem duty may be paid on the primary security instrument, and the other security instruments can be expressed to be “collateral”, “auxiliary”, “additional” or “substituted”, and attract a fixed rate of duty at KYD50.

Most other instruments and documents are subject to a fixed rate of stamp duty in comparatively nominal amounts. Registrable instruments (such as legal charges over real estate) are also subject to relatively immaterial registration fees.

A release of mortgage over immovable property attracts a fixed rate of duty at KYD50.

It is customary for stamp duty and registration fees to be paid by the borrower.

3.5 LEGAL REQUIREMENTS BEFORE AN ENTITY CAN GIVE VALID SECURITY

There are no legal rules or requirements that must be complied with before an entity can give valid security. Such entities must, however, be empowered to do so/not restricted from doing so by their constitutional documents. Often only board approval is necessary, although the entity’s constitutional documents should be checked for any further requirements or approvals. It would be prudent to obtain shareholder approval in any case where an entity is guaranteeing or pledging assets as security for another party’s liabilities.

3.6 FORMALITIES WHEN A BORROWER IS IN DEFAULT

The priority of enforcement options applicable to security interests, and the typical range of time needed to successfully enforce a security interest, would depend upon the type of security interest in question.

In terms of legal charges registered against Cayman Islands real estate, the security is enforceable pursuant to its terms in conjunction with the provisions of the Registered Land Act (2018 Revision).

The Registered Land Act (2018 Revision) provides a statutory power of sale by public auction, power to lease and power to appoint receivers. Commonly, a legal charge will vary and extend the statutory provisions to give the lender wider powers. To the extent the powers contained in the legal charge vary or are in addition to those created by the Registered Land Act (2018 Revision), they may not be acted on without an order of the court.

Proposals to reform mortgage enforcement have been published, but have not yet been finalised or implemented.

The priority of legal charges is determined by registration at the Cayman Islands Land Registry.

3.7 SUBORDINATING EXISTING DEBT TO NEWLY CREATED DEBT

Generally, the debt secured by a legal charge properly stamped and registered at the Cayman Islands Land Registry will rank in priority to any subsequently registered legal charge, any floating charge or any unsecured debt, in respect of the proceeds of realising such asset. It is possible for lenders to subordinate debt contractually, although this is not common.

3.8 LENDERS’ LIABILITY UNDER ENVIRONMENTAL LAWS

There is currently no statute that has the effect of shifting any environmental liability on to a lender, although a lender can be exposed to potential liability once it takes possession of the premises after a default by the borrower.

3.9 EFFECTS OF A BORROWER BECOMING INSOLVENT

Security interests created by a borrower in favour of the lender will not be rendered void if the borrower becomes insolvent. However, security may be set aside – for example, where it constitutes a preference or a transaction at an undervalue.

Notwithstanding that a winding-up order has been made, a creditor who has security over the whole or part of the assets of a company may enforce their security without the leave of the court and without reference to the liquidator. With respect to security over real estate, the Registered Land Act (2018 Revision) provides a statutory power of sale by public auction, power to lease and power to appoint receivers. Commonly, a legal charge will vary and extend the statutory provisions to give the lender wider powers. To the extent the powers contained in the legal charge vary or are in addition to those created by the Registered Land Act (2018 Revision), they may not be acted on without an order of the court.

3.10 CONSEQUENCES OF LIBOR INDEX EXPIRY

Interest rates on most domestic lending transactions are calculated by reference to a domestic bank’s prime lending rate. To the extent that facilities reference the London Interbank Offered Rate (LIBOR), lenders and borrowers would be advised to review their terms to ensure that an alternative method for calculating interest has been included (eg, SOFR).

Castillo Caribe Estate, Grand Cayman — Castillo Caribe, Grand Cayman

4. PLANNING AND ZONING

4.1 LEGISLATIVE AND GOVERNMENT CONTROLS APPLICABLE TO STRATEGIC PLANNING AND ZONING

The following legislation regulates planning and zoning in real estate:

- - - the Development and Planning Act (2021 Revision);
    - the Development and Planning Regulations (as revised);
    - the Development Plan 1997 (currently under review); and
    - the Building Code Regulations (as revised).

Any development of land requires a grant of planning permission. “Development” encompasses the carrying out of building, engineering or other operations in, on, over or under any land, the making of any material change in the use of any building or other land, or the subdivision of land. However, it is subject to a number of exclusions, including any works for the maintenance, improvement or other alteration that only affect the interior of a building or do not materially affect the external appearance of the building.

Planning permission may be refused or granted unconditionally, or it can be subject to such conditions as the relevant authority deems fit.

The Central Planning Authority for Grand Cayman and the Development Control Board for the sister islands are responsible for reviewing and considering applications to obtain planning permission. The Director of Planning is empowered to take enforcement action where necessary.

A record of all grants of planning permission, modifications, revocations and conditions attached to planning permission relating to Grand Cayman is maintained by the Central Planning Authority, and a record of those relating to the sister islands, Cayman Brac and Little Cayman, is kept by the Development Control Board.

4.2 LEGISLATIVE AND GOVERNMENT CONTROLS APPLICABLE TO DESIGN, APPEARANCE AND METHOD OF CONSTRUCTION

Planning permission is required for any proposed development or a material change in use of any building or land. However, planning permission will not be necessary if certain exclusions apply – for example, if the works are carried out for maintenance, improvement or other alteration and affect only the interior of the building or do not materially affect the external appearance of the building.

A permit is also required under the Building Code Regulations before construction or a change to a building or structure is carried out, or before any work that requires planning permission takes place. All such works must be carried out in the manner authorised by the permit.

4.3 REGULATORY AUTHORITIES

Responsibility for the regulation of development and the designated use of individual parcels lays with the Central Planning Authority for Grand Cayman and with the Development Control Board for the sister islands.

4.4 OBTAINING ENTITLEMENTS TO DEVELOP A NEW PROJECT

Third parties that own land within a radius of 1,000 feet will receive notice of applications for the approval of larger developments (including places of public assembly, gas stations, clubs, restaurants, bars, cinemas and other similar establishments), and may lodge their objections with the Central Planning Authority (or the Development Control Board for the sister islands).

For all other applications for planning permission, only adjacent owners will receive notice of an application, and are able to make objections to it.

Those property owners who are entitled to receive notice and who have objected may appeal to a tribunal against a decision on the grounds that it is erroneous in law, unreasonable, contrary to the principles of natural justice, or not in accordance with the Development Plan.

4.5 RIGHT OF APPEAL AGAINST AN AUTHORITY’S DECISION

Any person who has applied for planning permission (or who has objected to an application for planning permission) may appeal against that decision to a tribunal, within 14 days of notification of the decision. Any person aggrieved by the decision of the tribunal may appeal to the Grand Court. If aggrieved by the decision of the Grand Court, an appeal may be made to the Court of Appeal, whose decision will be final and binding upon the affected parties.

4.6 AGREEMENTS WITH LOCAL OR GOVERNMENT AUTHORITIES

Planning permission may be granted subject to such conditions as the relevant authority sees fit. A prudent developer would engage with utility suppliers at the outset of a project to incorporate their input into their plans. Planning permission runs with the land, although any agreements will be personal to the parties.

4.7 ENFORCEMENT OF RESTRICTIONS ON DEVELOPMENT AND DESIGNATED USE

Where any development of land (including material changes in use) has been carried out without the applicable planning permission or not in compliance with any conditions attached to a grant of planning permission, the Director of Planning may serve the owner or occupier of the land an enforcement notice within five years of the alleged breach.

Non-compliance with an enforcement notice is an offence and attracts a fine.

If the steps required to be taken by the enforcement notice are not carried out within the allotted period, the Director of Planning may enter on the land and take those steps, and may recover their costs as a debt from the owner of the land.

The Director of Planning may also apply to the Grand Court for an injunction.

5. INVESTMENT VEHICLES

5.1 TYPES OF ENTITIES AVAILABLE TO INVESTORS TO HOLD REAL ESTATE ASSETS

The structures most commonly used to acquire real estate are corporate structures, including Cayman Islands companies and foreign companies.

Because the Cayman Islands is a non-direct taxation jurisdiction and real estate activities can be achieved through different structures, foreign investors are able to select their investment model based on factors not driven by Cayman regulation (eg, taxation and investment regulation), except where participation may be marketed in the Cayman Islands.

The choice of investment vehicle will also often be influenced by whether the investor also intends to carry on business within the Cayman Islands, as there is a local business licensing regime in the jurisdiction.

REITs and real estate derivatives from Cayman Islands real estate are quite uncommon due to the relatively small size of the jurisdiction and the taxable event that arises when an interest in land (including the equity capital of a land holding corporation) is transferred (see 2.10 Taxes Applicable to a Transaction), although there have been a few occurrences of foreign REITs acquiring Cayman Islands commercial property and at least one occurrence of a domestic REIT that is in the process of being formed.

Institutional investment in the Cayman Islands is increasing as the sizes of projects require large amounts of capital. However, the majority of commercial real estate is held privately.

There are beautiful beaches all over the Cayman Islands

5.2 MAIN FEATURES OF THE CONSTITUTION OF EACH TYPE OF ENTITY

A Cayman Islands company’s constitutional documents will set out its governance framework, including the powers of its board of directors, who ordinarily manage the day-to-day operation of the business. In relation to a company incorporated as a company limited by shares, the liability of its shareholders is limited to the amount (if any) unpaid on their shares.

5.3 MINIMUM CAPITAL REQUIREMENT

There are no minimum capital requirements for a Cayman Islands company.

5.4 APPLICABLE GOVERNANCE REQUIREMENTS

The subscribers of the memorandum of association of a Cayman Islands company are deemed to have agreed to become shareholders of the company, and every other person who has agreed to become a member of a company and whose name is entered on the register of members will be deemed to be shareholders of the company. The company will typically have one or more directors who manage the day-to-day business of the company. The constitutional documents set out the governance framework, along with the Companies Act (as revised).

5.5 ANNUAL ENTITY MAINTENANCE AND ACCOUNTING COMPLIANCE

Cayman Islands companies are obliged to pay annual fees in January to the Cayman Islands General Registry.

A schedule of incorporation and annual fees levied by the Cayman Islands Government for different types of company can be found at the Cayman Islands General Registry webpage.

Exempted companies and foreign companies are required to engage a registered office provider in the Cayman Islands, for which additional annual fees will apply.

6. COMMERCIAL LEASES

6.1 TYPES OF ARRANGEMENTS ALLOWING THE USE OF REAL ESTATE FOR A LIMITED PERIOD OF TIME

There are two types of arrangements that allow a person, company or other organisation to occupy and use real estate for a limited period without buying it outright:

- - - a lease grants a tenant the right of exclusive possession of a property for a specified period of time. A lease gives a tenant contractual and proprietary rights in the property, which can typically be transferred to a third party, subject to any restrictions in the lease; and
    - a licence allows a landowner to grant permission for the use and occupation of a property. The occupier of a property does not have exclusive possession, however, and their rights under the licence cannot be transferred. A licence is merely a personal right and does not create a registrable interest.

6.2 TYPES OF COMMERCIAL LEASES

There are no specified types of commercial leases. Given the relatively small size of the jurisdiction, there are relatively few sophisticated landlords of large-scale developments and so landlords use their own form of lease.

Most commonly, leases of part will be for a net rent, with a separate common area maintenance charge levied for landlord insurance, maintenance of common parts, etc.

Leases of whole are less common but would often impose full repair and insurance obligations on the tenant.

Freehold title to a portion of the valuable Seven Mile Beach corridor is owned by the Crown. Originally this was the subject of a long ground lease to facilitate development, but has over time been subdivided into several smaller leases that have been varied to extend their term on payment of large premiums to the Cayman Islands government.

6.3 REGULATION OF RENTS OR LEASE TERMS

All terms of leases are freely negotiable, although certain covenants by the landlord and by the tenant are implied by the Registered Land Act (2018 Revision) unless modified by the lease.

Covenants implied on behalf of the landlord include the following:

- - - that a tenant shall and may peaceably and quietly possess and enjoy the leased premises during the period of the lease without any lawful interruption from or by the landlord, or any person rightfully claiming through the landlord, so long as said tenant pays the rent and observes and performs the agreements and conditions contained or implied in the lease and to be observed and performed on their part;
    - not to use or permit to be used any adjoining or neighbouring land of which they are the proprietor or lessee in any way that would render the leased premises unfit or materially less fit for the purpose for which they were leased;
    - where only part of a building is leased, to keep the roof, main walls, main drains, common passages and common installations in repair;
      where any dwelling house, flat or room is leased furnished, that such house, flat or room is fit for habitation at the commencement of the tenancy; and
    - that if, at any time, the leased premises or any part thereof are destroyed or damaged by fire, earthquake, hurricane, flood, civil commotion or accident not attributable to the negligence of the tenant, their servants or their licensees, so as to render the leased premises or any part thereof wholly or partially unfit for occupation or use, the rent or a just proportion thereof according to the nature and extent of the damage sustained shall be suspended and cease to be payable until the leased premises have again been rendered fit for occupation and use; if the leased premises have not been so rendered fit for occupation and use within six months of their destruction or damage as aforesaid, the tenant may terminate the lease, at their option and upon giving one month’s written notice of their intention so to do.

Covenants implied on behalf of the tenant include:

- - - to pay the rent reserved by the lease at the times and in the manner specified therein;
    - to pay all rates, taxes and other outgoings that are at any time payable in respect of the leased premises during the continuance of the lease, unless they are payable exclusively by the landlord by virtue of any written law;
    - in the case of agricultural land, to farm said land in accordance with the rules of good husbandry and to yield up the land at the end of the term in good heart;
    - to keep all buildings comprised in the lease and all boundary marks in repair, except where only part of a building is leased, or where a dwelling house is leased furnished;
    - to keep the leased premises, except the roof, main walls, main drains, common passages and common installations, in repair where only part of a building is leased, or where a dwelling house is leased furnished;
    - where the lease is of furnished premises, to keep the furniture in as good a condition as it was at the commencement of the period, fair wear and tear only excepted, and to replace such articles as are lost, destroyed or so damaged as to be beyond repair with articles of equal value to those so lost, destroyed or damaged;
    - to permit the landlord or their agent, with or without workers or others, at all convenient times and after reasonable notice, to enter the leased premises and examine their condition;
    - to repair or otherwise make good any defect or breach of agreement for which the tenant is responsible and of which notice has been given by the landlord to the tenant, within such reasonable period as may be specified in the notice; and
    - not to transfer, charge, sublease or otherwise part with the possession of the leased premises or any part thereof without the previous written consent of the landlord (such consent shall not be unreasonably withheld).

With the exception of a temporary domestic lockdown period, the Cayman Islands government did not take any action to enact legislation to specifically regulate lease terms as a result of the COVID-19 pandemic.

6.4 TYPICAL TERMS OF A LEASE

Because of the stamp duty treatment on the grant of longer leases (see 6.7 Payment of VAT), a lease term of five years (or less) is relatively common, and may include an option for the parties to renew for one or two further terms.

Responsibility for repairing the demised premises is typically assigned to the tenant. The landlord is usually under an obligation to insure and maintain the building and the common parts, and will usually recoup these costs from the tenant through rental payments or common area maintenance charges.

Although always subject to agreement between the parties, rent is commonly paid monthly or quarterly in advance or arrears.

Following the outbreak of the COVID-19 pandemic, parties are advised to pay close attention to force majeure and rent abatement provisions.

6.5 RENT VARIATION

It is typical for commercial leases to make provision for rent to be reviewed.

6.6 DETERMINATION OF NEW RENT

Typically, rent is reviewed in line with the consumer price index (CPI), by a fixed percentage or by market review.

6.7 PAYMENT OF VAT

No VAT is payable on rent, although stamp duty is payable on the lease.

Stamp duty is usually paid for by the tenant and is calculated at the following ad valorem rates:

- - - if the term exceeds 30 years, 7.5% of the full market value of the leasehold interest in the real property; or
    - if the term is 30 years or less:
      - where any premium or other valuable consideration other than or in addition to rent is provided, 7.5% of the amount of the premium; and
        
        where the consideration or any part of the consideration is rent:if the term is less than one year, 5% of the aggregate rent;
        
        if the term is between one and five years, 5% of the average annual rent or of market rent, whichever is higher;
        
        if the term is between five and ten years, 10% of the average annual rent or of market rent, whichever is higher; or
        
        if the term exceeds ten years, 20% of the average annual rent or of market rent, whichever is higher.

6.8 COSTS PAYABLE BY TENANT AT START OF LEASE

Stamp duty (see 6.7 Payment of VAT), any registration fees (nominal) and a security deposit are typically paid by the tenant at the start of the lease.

6.9 PAYMENT OF MAINTENANCE AND REPAIR OF COMMUNAL AREAS

It is common for the lease to assign responsibility to the landlord for the maintenance and insurance of the common areas and the landlord typically recovers their costs from the tenant through rent or common area maintenance charges.

6.10 PAYMENT OF UTILITIES AND TELECOMMUNICATIONS

Where tenants have not purchased their electricity, water, gas and telecommunications services directly from suppliers, tenants will typically pay a share of these services provided by the landlord by reference to the size of their demised premises, or the landlord will separately meter each premises.

6.11 INSURING THE REAL ESTATE THAT IS SUBJECT TO THE LEASE

Typically, the landlord will be responsible for insuring the building and common parts (passing costs on to tenants through rent or common area charges), while the tenant insures the demised premises. Typical insured risks would include fire, earthquake, hurricane, flood and civil commotion.

6.12 RESTRICTIONS ON USE OF REAL ESTATE

It is usual for a landlord to restrict the use of the demised premises and common areas. Planning permissions and zoning constraints would also apply.

6.13 TENANT’S ABILITY TO ALTER AND IMPROVE REAL ESTATE

A lease will ordinarily prohibit the tenant from making alterations or improvements to the real estate without the prior consent of the landlord.

6.14 SPECIFIC REGULATIONS

There are no specific regulations and/or laws that apply to leases of particular categories of real estate. All leases are primarily governed by the Registered Land Act (2018 Revision) and the Registered Land Rules (2018 Revision). Parties generally have the freedom to contract as they wish, although the Registered Land Act does imply certain covenants on the landlord and tenant, unless modified in the lease (see 6.3 Regulation of Rents or Lease Terms).

6.15 EFFECT OF TENANT’S INSOLVENCY

The terms of the lease usually allow a landlord to terminate the lease if the tenant becomes insolvent. Subject to any provisions to the contrary in the lease, the Registered Land Act (2018 Revision) also provides landlords with the right to forfeit the lease if a tenant is adjudicated bankrupt (if an individual) or goes into liquidation (if a company).

6.16 FORMS OF SECURITY TO PROTECT AGAINST FAILURE OF TENANT TO MEET OBLIGATIONS

It is common for a landlord to take a security deposit at the outset of a lease, and they may require guarantees from directors, shareholders or related companies.

Security deposits are freely negotiable but would likely include at least one rental payment. Security deposits are not regulated and so the terms of the lease would govern.

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6.17 RIGHT TO OCCUPY AFTER TERMINATION OR EXPIRY OF A LEASE

Unless expressly provided for in the lease, tenants do not have security of occupation or a right to renew at the end of the term. However, where a tenant continues to occupy the premises with the consent of the landlord after the termination of the lease, the tenant will be deemed to be a tenant holding the premises on a periodic tenancy on the same conditions as those of the expired lease, so far as those conditions are appropriate to a periodic tenancy.

6.18 RIGHT TO ASSIGN LEASEHOLD INTEREST

The Registered Land Act (2018 Revision) implies a covenant on the tenant preventing alienation without the landlord’s consent (which is not to be unreasonably withheld). A landlord would typically impose a more stringent covenant in a well-drafted lease (for example, setting out specific circumstances in which it is prepared to permit assignment, subletting or sharing, and reserving to itself absolute discretion to refuse outside of those circumstances) and a tenant would typically look for more flexibility.

It is therefore a point that is often the subject of some negotiation, but a well-advised landlord would look for at least some assurances on the financial standing and commercial reputation of the incoming tenant’s financial standing in order to protect its interest in the remainder of the estate.

6.19 RIGHT TO TERMINATE LEASE

Typically, a lease would provide for the landlord to terminate in the event of a material breach by the tenant (subject to any negotiated cure periods) or an insolvency event of the tenant. Either the landlord or the tenant would ordinarily be given the right to terminate the lease if the leased premises are substantially destroyed or damaged and not repaired within a specified period. Tenant break options are generally uncommon, but could be negotiated.

6.20 REGISTRATION REQUIREMENTS

All leases attract stamp duty (see 6.7 Payment of VAT) but only leases exceeding a term of two years (whether as an initial term, through extension or renewal options or where expressed to be for the life of one of the parties) require registration (shorter leases are overriding interests).

Registerable leases require a front sheet in prescribed form but otherwise the parties are free to negotiate the form and content of the bulk of the terms. Leases of part of a registered freehold must be accompanied by a plan.

Registration expenses are minimal.

6.21 FORCED EVICTION

It is common for a lease to contain forfeiture clauses that allow the landlord to evict the tenant. However, the tenant has a statutory right to apply to the court for relief against forfeiture and so the timeframe for the forfeiture process can vary.

6.22 TERMINATION BY THIRD PARTY

The Cayman Islands government can compulsorily acquire any land. This is usually done for the purposes of establishing new public roads but can also be done in other circumstances.

Compensation is payable, typically at the market value of the interest acquired.

7. CONSTRUCTION

7.1 COMMON STRUCTURES USED TO PRICE CONSTRUCTION PROJECTS

Due to the relatively small size of the jurisdiction, significant construction projects are few in number at any one time. There is no commonly accepted market standard of contract, so parties are free to agree terms as they see fit, with the format and complexity of the contract often being driven by the sophistication of the parties and the type of project.

However, most larger construction contracts will typically follow a US style (such as the American Institute of Architects), a UK style (such as the joint contracts tribunal), a combination of the two, or even the contractor’s (or developer’s) own standard terms.