Legal Talk – Alternative forms of title to land in the Republic of South Africa

Alternative forms of title to land in the Republic of South Africa

Traditionally the most common form of title to land in the Republic of South Africa has been through full ownership of the land in question.

Fundamentally such ownership is the most comprehensive of all real rights (being rights which are enforceable by the holder against the world at large) and confer upon the holder, inter alia, the right to use the land, the right to income derived from the land and the right to consume, dispose of and even destroy the improvements on the land. Ownership is unlimited in duration and is not subject to time limit. It is an independent right and is not dependant on or derived from any other right.

However it is becoming more and more common for landowners (particularly in the governmental/quasi governmental sectors) to elect to "dispose" of their land in terms of long leases rather than by way of the transfer of full ownership. There are probably any number of reasons for this tendency. Certainly and by no means least is the very real benefit to the landowner that on the termination of the lease period the property will fully revert to it by operation of law. Typically, land, whether vacant or improved, is leased to a tenant for a period of up to 99 years, with or without renewal options. The rental may be paid in a single, upfront, lump sum amount or may be paid in periodical instalments. The lease is usually registered in terms of the Deeds Registries Act. For the sake of convenience I shall refer to the rights of a tenant in terms of such a registered long lease as "leasehold title".

Leasehold title confers upon the holder limited real rights. They are not as comprehensive as those of an owner. A limited real right is a right over the property of another. The rights of the holder of leasehold title are limited to the use and enjoyment of the land which is the subject matter of the lease for a limited period of time and for which the holder of the rights must pay the owner of the land a rental. Upon the termination of the lease period the holder of the leasehold title must return the land to the owner.

Both full ownership and leasehold title confer upon the holder a real right which is enforceable by the holder against the world at large. Being real rights, both ownership and leasehold title confer upon the holder the best security of title available in terms of our law. It must always be borne in mind that no real right is absolute to the extent that it operates in all circumstances and against all entities. By way example an owner of land may (notwithstanding its comprehensive real right which is enforceable against the world at large) be deprived of such ownership through expropriation. Similarly the holder of leasehold title may be deprived of its through expropriation and/or (in certain circumstances) through the insolvency of the landowner.

One may well ask how secure is the title of the holder of leasehold rights and under what circumstances can the holder of such rights be deprived thereof through reasons beyond its control.

If land which is subject to a registered long lease is sold then by operation of our common law the purchaser is automatically bound by the lease. It simply steps into the shoes of the previous owner. The tenant remains entitled to all of the benefits of the lease. Even if the land is sold by the liquidator or trustee of an insolvent landlord, the land must first be offered for sale subject to the lease. It is only if such sale does not realise sufficient proceeds to discharge a pre-existing real right (i.e. a registered mortgage bond) that the land, having been offered for sale subject to the lease, may be offered for sale free of the lease. If no such pre-existing real right exists then the tenancy of the tenant is secure. Accordingly it is important to the tenant that it must ensure that at the time the lease is entered into the land is not encumbered by mortgage bond. If the land is encumbered by mortgage bond the tenant must insist that the bondholder first waives its rights in favour of the tenant. Conversely if the landowner subsequently wishes to encumber the land by mortgage bond, the tenant should not waive its rights as registered lessee in favour of those of the proposed bondholder.

In terms of the Deeds Registries Act "immovable property" includes (by definition) any registered lease of land which, when entered into, was for a period of not less than 10 years or the natural life of the lessee or which is renewable from time to time at the will of the lessee indefinitely or for periods which together with the first period amount in all to not less than 10 years. Accordingly leasehold title constitutes immovable property within the meaning of the Deeds Registries Act and as such is capable of being encumbered by mortgage bond as security for a loan or other debt. Just as land can be encumbered by mortgage bond, so can leasehold title be encumbered by mortgage bond.

Notably however the rights of the holder of a mortgage bond over leasehold title are subject to the continuation of the relevant lease. If the underlying relevant lease is cancelled for whatever reason (whether by agreement between the landowner and the holder of the leasehold title, or by reason of default or insolvency of the holder of the leasehold title, or by operation of law) then the security afforded by the mortgage bond effectively disappears. Similarly the rights of a sub-lessee are subject to the continuation of the head lease. If the head lease terminates for any reason then the sub-lease will automatically and simultaneously also terminate. It is for these reasons that banks and other financial institutions are often reluctant to grant loans against the security of mortgage bonds over leasehold title.

These limitations applying to leasehold title can however be readily overcome by the appropriate use of "step in rights agreements" (being agreements between the landowner and the bondholder or sub-tenant concerned in terms whereof the bondholder/sub-tenant or its nominee is given the right to "step into the shoes of" the lessee if the lease is cancelled or terminated) or "suspended" lease agreements (being leases entered into between the landowner and the bondholder/sub-lessee and which commence only on the termination of the original lease between the landowner and the original holder of the leasehold title). The careful and considered use of these mechanisms can adequately address the risks to which a mortgagee and/or sub-lessee may be exposed if the underlying lease is prematurely cancelled or terminated.

In conclusion full ownership of land is the most commonly used and most comprehensive and best form of title available to a person in terms of our law. However, where full ownership of land cannot be obtained, a registered long lease can provide an acceptable alternative form of title provided salient pitfalls are suitably addressed. Professional advice should be sought in these circumstances.

Courtesy: Frans van Hoogstraten from Bowman Gilfillan

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