The Draft Expropriation Bill, 2019 some random personal thoughts, observations, and questions.

[Please note this is a personal opinion by an estate agent – not an attorney and it is of interest value only and cannot in any way be used or relied upon in any way. If you need advice on the Bill, go and consult your legal advisor]

The Draft Expropriation Bill (see the link to the Bill) was published for comment on the 21st December. This is a highly significant piece of legislation because it deals expropriation of property (see definition in the Bill).

There are legitimate instances where expropriation is required for example when a road needs to cross a piece of land and the owner refuses.

Although I have never professed to be an expert on legislation, I would go so far as to say that there was no real reason for this bill. The constitution allows sufficient clarity on the process and what was required for expropriation and after all the existing expropriation legislation has not been a problem, until a year back, when certain parties made ‘expropriation without compensation’ part of their political narrative, in the run-up to the election.

It is said that the State has a large number of properties that it has gained ownership of, which have not been allocated to anyone or where the projects failed. This begs the question: is there any real urgency or is this just a natural and predictable consequence of a deeply flawed, inefficient system?

It, therefore, appears more likely that the lack of progress of land ownership may be a product of the government’s level of efficiency over almost a 1/4 of a century, rather than the existing legislation being the problem.

The other interesting point is that the king of the Zulu’s owns substantial amounts of land through the Ingonyama Trust, which is said to control of an incredible 2.8 million hectares of land. He has demanded that the government exclude his property from the law. It has also been stated that many traditional leaders feel the same.

This poses a considerable conundrum for the government, apart from the threat of conflict, traditional leaders have considerable sway with their people and this translates into a large chunk of votes. The people living on these traditional leaders’ land are farmers, would conceivably directly benefit by the security of tenure, and would benefit personally from mining concessions etc, which are presently being paid to the traditional leaders in addition to their State allowances, as traditional leaders.

Then there is a matter of the constitution which states:

25. (1) No one may be deprived of property except in terms of law of general application

 Section 25 states the law needs to be of ‘general application’, in other words, that all owners of land need to be subject to the law. In terms of the constitution of our country, every person is equal, which includes traditional leaders.

If it appears that one (extremely small) portion of the population is being excluded (despite disproportionally high ownership of property), while another portion of the population is being targeted, this will not amount to a law of general application.

Now the bill proposes compensation but how much land can the state buy given its present financial position?

So when can land be expropriated?

It must be for ‘public purpose’ or in the ‘public interest’. Public purpose is defined in the bill as:

including any purposes connected with the administration of the provisions of any law by an organ of state;

This is a very wide term, as is ‘public interest’.

It would therefore not take a top lawyer to justify why it would be in ‘public purpose’ or ‘public interest’ to expropriate any property. So given the amount of unutilised land owned by the State alone, you would assume that it would be fair game? Think again.

… an expropriating authority may not expropriate the property of a state-owned corporation or a stateowned entity without the concurrence of the executive authority responsible for that corporation or entity.

So despite compelling ‘public purpose’ or ‘public interest’, if the executive authority says no to the expropriation authority, the expropriation is blocked. But was expropriating unused state and SOE properties not a reason given for needing the new act?

Now what will trigger an expropriation, let’s look at section 3(2):

If an organ of state, other than an expropriating authority, satisfies the Minister that it requires particular property for a public purpose or in the public interest, then the Minister must expropriate that property on behalf of that organ of state upon its written request, subject to and in accordance with the provisions of this Act.

Now given the sheer number of State organs and the plethora of connected civil servants would it not be conceivable that such an official could for personal gain or in exchange for an inducement start the process? Given the recent developments which came to light with the Guptas being able to acquire a mine, while a SOE basically helped pay for it while they colluded to collapse another supplier, does not make abuse of this process inconceivable. If one looks at similar expropriation exercises in countries like Zimbabwe and Venezuela, what started as a being billed as a well-intentioned way to empower those without land soon went another direction.

Now this bill would in effect make the Minister responsible for Public Works incredibly powerful position given his ability to expropriate other’s property, using the powerful machinery of the State.

Morgage Bonds

Now, for most property owners the mortgage bond is a major part of how they legally purchased their property and represent a major debt for many buyers. It must be remembered that a mortgage bond is merely security for the main agreement which is the loan agreement between the purchaser and the bank. The fact that the property has been expropriated, removes the bank’s security but does not cancel the purchaser’s liability to the bank.

Section 9(1) d states:

“…the property remains subject to all registered rights in favour of third parties, with the exception of a mortgage, with which the property was burdened prior to expropriation, unless or until such registered rights are expropriated from the holder thereof in terms of this Act.”

It is highly unlikely that the State will elect to expropriate the mortgage as part of the property expropriation, which means that the owner will still be liable to the financial institution. It may very well be that the financial institution, stripped of its security will foreclose on the loan.

The owner will need to hope that the compensation agreed is sufficient to cover the indebtedness to the bank. the problem could theoretically happen that in the first few years that the costs of acquisition and the interest exceed the value of the property, in which case a possible loss may very well be on the cards.

Section 12 determines how the compensation for the property is to be arrived at. What is going to be a point of contention is the possibility of NIL COMPENSATION, where s12 (3) which states:

(3) It may be just and equitable for nil compensation to be paid where land is expropriated in the public interest, having regard to all relevant circumstances, including but not limited to:
(a) Where the land is occupied or used by a labour tenant, as defined in the Land
Reform (Labour Tenants) Act, 1996 (Act No. 3 of 1996);
(b) where the land is held for purely speculative purposes;
(c) where the land is owned by a state-owned corporation or other state-owned
entity;
(d) where the owner of the land has abandoned the land;
(e) where the market value of the land is equivalent to, or less than, the present
value of direct state investment or subsidy in the acquisition and beneficial capital
improvement of the land.

Farmers may find that a raft of expropriations begin to occur around labour tenants where this act is used to in effect give them ownership of part of the farm where they work. The long-term effect on farms especially after a few decades could be substantial.

It must be noted that 12(3)b states that land bought for speculative purposes could potentially affect many long-term investors, who possibly anticipate to later develop land when the market is optimal. This clause may also impact business people who maybe see an opportunity to buy a low-value property and sell it again shortly thereafter to a developer. In both these cases, the land could be expropriated in terms of the bill, making greatly increasing the risk profile of development land.

This clause may also mean that if the State purchased a farm for an emerging farmer, that farm may very well be subject to expropriation with nil compensation.

What if the parties cannot agree on the compensation (if applicable)?

The parties can agree to mediation or if that fails a competent court will make a finding.

NOTES:

  • SA is a big country with no real shortage of land.
  • Given the professed desperate need for land, it is possibly concerning that the government did not first address the surprisingly large portion of the unutilised land being owned by the State, already expropriated land which has not been transferred to new owners, and of course the properties owned by the raft of failed projects, where government investment far exceeds the property, as it stands presently.
  • Only time will tell if this Bill is applied to all South African and not just used to target a few based on arbitrary criteria like race, economic status, or arbitrary exemptions based on their status as traditional leaders.
  • The bill does not provide nearly enough detail in many instances e.g. such as when a property is deemed to be used for ‘speculative purposes’?
  • It very may be that the Bill (especially in the present political climate in SA) will negatively impact on the property as an asset class, specifically investors who buy for speculation.
  • If land owned by labour tenants is expropriated, what will the long-term effect be on farms where there are a number of labour tenants who become owners of parts of the farm, in addition to their extensive protections under the Land Reform (Labour Tenants) Act, 1996 (Act No. 3 of 1996)?
  • If section 25 of the Constitution were ever to be amended AFTER this Bill becomes law that could have massive implications for the economy in South Africa.

[Please note this is a personal opinion by an estate agent – not an attorney and it is of interest value only and cannot in any way be used or relied upon in any way. If you need advice on the Bill, go and consult your legal advisor]

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