March 2021

Issues and Risks Affecting Energy, Forestry and Agro-industrial Projects in Colombia

Project Developers Must Perform Proper Real Estate and Environmental Due Diligence
Holland & Knight's ENR ISG Quarterly Newsletter
Esteban Garcia Jimeno

Colombia is one of the Latin American countries with the greatest growth potential in its agricultural and forestry sector, given its climatic and topographic conditions as well as its land availability for planting of several types of crops (e.g., pineapple, avocado, cacao, African palm, teak, etc.). In recent years, especially since the signing of the peace agreements with illegal armed groups, the government has encouraged investments to develop the country's agricultural and forestry sector, including the regulation of special areas with high agricultural or forestry potential (e.g., Zones of Interest for Rural, Economic and Social Development or Zidres, its acronym in Spanish). In addition, the government has offered tax benefits and exemptions for new projects, among others. However, its development has been affected by social and legal aspects, such as the effects of the post-conflict and the lack of clarity in the allocation of property rights over land.

Something similar happens with respect to energy projects and the exploration and exploitation of natural resources, which have had increased relevance in recent years as a fundamental sector for the economic development of the country. However, such types of projects have also been affected by the lack of clarity on real estate rights as well as the social and political impacts that the activity generates in the configuration of land uses.

Because of the lack of legal certainty in Colombian real estate, especially in rural areas where informality and effects of the armed conflict are more evident, it is of utmost importance for new investors who intend to develop projects in Colombia to perform a comprehensive and strict due diligence procedure regarding real estate matters in order to identify and quantify the potential risks of affectation for a certain project, as well as to establish the necessary measures for their mitigation.

Under such perspective, this article aims to identify in a general way the most relevant risks to bear in mind in the due diligence procedure and how such risks could affect the development of projects, whether energy (conventional or renewable), exploitation of natural resources, forestry or agro-industrial activities.

Environmental and Land Use Restrictions

Colombia is a highly biodiverse country with a large amount of natural resources that results in a protection scheme with different types of legal environmental categories that, in a higher or lesser extent, will affect, restrict or impede the development of certain agro-industrial or forestry projects. Likewise, as anticipated, there is a high level of conflict in political responsibilities for the determination of land use rules that allow the development of energy projects or exploitation of natural resources.

The main regulatory instruments in land use, which seek the protection of natural resources and sustainable development, are developed in 1) the specific environmental regulation for certain areas (environmental categories such as Paramos, Distritos de Manejo Integrado or DMI, forestall reserves, POMCAS, among others) and 2) the territorial regulations of the soil issued by the territorial entities, such as territorial ordering plans (POT).

Before acquiring or developing a specific project, or prior to acquire the land intended for it, the applicable regulations on land use must be reviewed and confirmed in detail according to the territorial and environmental regulations applicable to the area. Thus should be done in order to confirm whether 1) the development of the productive activity is feasible in the relevant properties and 2) if feasible, determine the scope and restrictions that could apply to the land according to the environmental and territorial regulations.

Regarding this last issue, the level of conflict that could be generated in the development of the project vis-à-vis the territorial authorities (e.g., municipalities) and other potentially affected communities (e.g., ethnic communities) must be carefully studied. For such purposes, it is essential to carry out a comprehensive due diligence on the matter.

Land Restitution Processes

Another crucial factor in real estate due diligence, for all kinds of projects, is the potential legal uncertainty derived from the Victims' and Land Restitution Law (Law 1448 of 2011), which establishes a fundamental right to land restitution for victims who have been dispossessed or displaced during the armed conflict.

Such regulation affects legal certainty in property rights all over Colombian lands, mainly reflected in properties located in rural areas. Because of restitution procedures, property rights acquired even by bona fide third parties could be evicted through judicial decision, in the event in which a property has been subject of dispossession from Jan. 1, 1991, until the term of validity of Law 1448 of 2011, which has just been extended until June 10, 2031 (Law 2078 of 2021). In such events of restitution, the owners who have acquired the property in a "non-negligent bona fide" manner are entitled to request only a monetary compensation. Such "non-negligent bona fide" must be proven in the correspondent procedure, which is not usually an easy endeavor.

As can be seen, a restitution would definitively affect the development of any productive project that depends on the land. This leads to the need to carry out a detailed study of the antecedents of the relevant properties, in order to reveal potential situations that could arise on land restitution procedures. Likewise, the competent authorities (Land Restitution Unit or URT) must be consulted in order to confirm the potential affectation of the properties in a potential land restitution procedure.

In any case, it should be noted that the risk of restitution is latent and cannot be fully mitigated, but it is controllable and can be adequately dimensioned through a careful study within the due diligence processes.

Demining Processes

Another important aspect to take into account and that derives directly from the post-conflict effects, refers to the lands that could be affected by presence of antipersonnel mines and subsequent demining processes carried out by the national government in collaboration with the international organizations.

In due diligence processes, it is extremely important to confirm with the competent authorities (Descontamina Colombia) in regard to the potential presence in the project area of antipersonnel mines and/or potential demining processes underway.

The verification of this issue is essential to avoid risks because of the impossibility of carrying out the activity due to demining processes or to avoid potential damages to the integrity of the people and/or assets portion of the project.

Lack of Clarity in the Property

As is anticipated, in Colombia there is a high grade of informality in land ownership. Much of the rural lands in Colombia do not have a proper allocation of property rights and the people who exercise their tenure have mere de facto relationships such as possessions or occupations.

Due diligence in this matter must clearly identify if a specific property has dully allocated its property rights and if the holder is actually the owner. Otherwise, the causes of the divergence and the potential to clean up the allocation of property rights should be identified and evaluated according to the project's own requirements. This due diligence review determines the most appropriate structure for the acquisition of rights (whether they should be ownership rights or easements for hydrocarbons, mining energy projects) and how to proceed with implementation of potential remedies.

Vacant Lands

Finally, it is essential to take into account in the due diligence processes the regulation and restrictions that derive from a category of real estate called vacant lands (bienes baldíos), which are those lands owned by the state because the property right has never been allocated to an individual or because it was acquired for the purpose of implementing an agrarian reform (land redistribution). These lands can only be acquired by award of the government through its competent authority (National Land Agency or ANT) or be destined for productive projects in contractual schemes that do not imply the transfer of property rights (e.g., lease agreements), under special and restrictive conditions. This category mainly affects projects for forestry or agro-industrial production. For energy projects and the exploitation of natural resources (e.g., hydrocarbons and mining) the risks derived from this legal category are lower as such activities are classified by law as of public utility and social interest, which implies a clearer legal framework for the imposition of legal easements over any type of land.

Two main risks can be identified in relation to vacant lands:

  1. To be in presence of an occupied vacant land, because the allocation of property rights was never credited. In such case, notwithstanding that the holder who considers itself the owner intends to transfer it to the project, it is not feasible to acquire ownership of the property by purchase agreements or other contractual structures.
  2. To be in presence of an awarded vacant land. In this case, there are burdensome restrictions that would potentially prevent its allocation to a productive agro-industrial or forestry project, as limitations apply, among others, in terms of its destination, disposition and the possibility of accumulation above an specific amount of areas indicated in the law (known as Family Agricultural Units or UAF, which extensions depend on the location, topographic and soil characteristics).

In summary, regarding these types of projects in energy, exploitation of natural resources, agriculture or forestry, the incidences of real estate risks have high impact that potentially determine the success or failure of the business. Therefore, each of the above risks, with its own effects and legal implications, must be duly identified, studied and measured during the real estate due diligence process. Only with such endeavors is it possible to ensure the efficient development of the productive project in Colombia.

Learn more about our Energy and Natural Resources Industry Sector Group.

Information contained in this newsletter is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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