Can 99-year leases work?
The 99-year lease is a viable tenure model that could be used to effectively help address land reform — and it need not be confined to state-owned or communal land
Last week’s announcement by President Cyril Ramaphosa that the ANC will initiate an amendment to section 25 of the constitution to allow for expropriation without compensation raises renewed questions about SA’s land tenure models.
One view is that government should reintroduce the leasehold structure, albeit in a different format than the old model that was effectively repealed under the Upgrading of Land Tenure Rights Act of 1991.
Currently, the most widely used form of tenure in SA is full-or sectional-title property ownership, which allows buyers the right to own — as opposed to a right to use and occupy — a property. While acquiring a property via a lease structure is not common in SA, the practice is widely used in neighbouring countries such as Mozambique, Zambia and Botswana, where large parts of the country comprise state-owned or communal land.
When someone buys a leasehold title they pay a lump sum upfront for the right to use and/or occupy the property for a specified time. The most widely adopted lease period is 99 years, though a leaseholding may be granted for any period. The leaseholder is entitled — and often obliged — to erect buildings on the land or improve the existing property. When the lease period expires, the leaseholder typically has the right to renew the lease period, or the property can revert to the landowner. The leaseholder also has the right to sell the lease at any time. If a leaseholder dies before the lease expires, the leasehold title is usually transferred to their estate or heirs, similar to any other asset owned by the deceased.
The leasehold issue has been raised by, among others, the EFF. It wants all land to be expropriated and placed under state custodianship. The state should lease the land to the private sector and individuals for residential and productive use. The EFF believes a leasehold period of 25 years will provide adequate security of tenure, specifically on agricultural land, which should be provided at a low cost to farmers and food producers.
The EFF’s policy document refers to the fact that the lease of state-owned land already takes place without fanfare, where the department of agriculture, forestry & fisheries indirectly manages large tracts of state plantations through lease agreements with private forestry companies, as well as in special economic zones such as Coega near Port Elizabeth.
The lease model need not be confined to state-owned or communal land. The Waterfall development near Midrand, which is one of the largest mixed-use projects in SA, anchored by the Mall of Africa, is one of the first privately owned land parcels where long-term leases have successfully been introduced.
The land is owned by the Waterfall Islamic Institute, founded by the Mia family. Under the institute’s religious code, the land cannot be sold. But to generate income for charity, the Mias made portions of the farm available to private developers, such as JSE-listed Attacq and Balwin, which are extending end-user lease agreements for all commercial and residential properties in the precinct.
John Webber, head of Cliffe Dekker Hofmeyr’s real estate practice, was involved in drafting the innovative 99-year lease for Waterfall. He says the key to its success is that in the event of a resale of the lease, the new lessee acquires the rights for 99 years — a crucial change. Previous standard practice was that a new lessee acquired the rights only for the remaining years of the original lease period. When lessees at Waterfall wish to renew the lease, a fee of 3.5% of the market value is payable.
"The fact that this long-term lease can be extended an infinite number of times, each extension restoring the lease period back to 99 years, provides security of tenure and effectively means the rights of a lessee are similar to the rights of a full-or sectional-title property owner," says Webber.
"Banks are happy to provide funding for this form of tenure."
He concedes that the long-term lease model poses some administrative challenges — notably over the way lease rights are recorded at the deeds office. However, he believes the structure should be adopted more widely in SA as it is a viable and globally recognised form of residential and commercial property tenure.
Webber says the long-term lease structure could also be a model to speed up land restitution in rural communities or to provide affordable housing to low-income families on state-owned land.
Cliffe Dekker Hofmeyr is creating a long-term lease model to help secure land-tenure rights for a number of communal property associations in the North West whose members are living on old government trust-owned land.