I Introduction to the Legal Framework

i Ownership of real estate

Ownership of immovable property can take on various formats in South Africa. It largely depends on whether the property falls into the Farm Register, Township Register, Agricultural Holding Register or whether it is contained in the Sectional Title Register, as administered by the 11 deeds registries located throughout the country.

To briefly summarise, in the township, farm and agricultural holdings registers, a person or entity can own, or enjoy tenure, on the property either as:

  1. a freehold owner, whereby full ownership of a property denoted on a plan is enjoyed and the owner's rights are recorded in a deed of transfer registered in a deeds registry;
  2. as leasehold owner, whereby the state owns the land but has granted permanent tenure thereof in terms of a deed of grant or deed of transfer recording the leasehold arrangement. Note though that this is not a very common structure anymore as a result of our history and a majority of leasehold properties have been converted into freehold ownership post 1991; or
  3. tenure can be enjoyed by virtue of a 'real right' in terms whereof the real right holder either has rights over another freehold owner's property by virtue of a registered lease, or servitude (i.e., an easement of sorts).

In South Africa we also have many thousands of properties that are categorised as sectional title properties, which is governed in terms of the Sectional Title Schemes Management Act, 2011, which amended and replaced the Sectional Titles Act, 1986. Under this form of ownership, a person or entity has the rights of ownership in relation to a sectional title unit, which is clearly denoted on a sectional title plan, which sets out all of the respective units, the common property and exclusive use areas (such as parking bays, balconies etc.). Depending on the size of the sectional title unit owned, the owner has a proportionate right in relation to the common property.

All of the aforementioned property rights are capable of being used as collateral to raise finance from a bank and the properties and some real rights may be mortgaged to grant security to a bank for repayment of the loan.

There is also further forms of 'ownership' such as fractional ownership, which may take on the form of a person owning shares in a company that in turns own immovable property and the rights of tenure are regulated in terms of a shareholders agreement or use agreement granting a fractional owner rights in relation to the property, usually on the basis of set times during the year. Some other fractional ownership schemes are a form of co-ownership where each co-owner is issued with a deed of transfer in respect of an undivided share of the property, which rights are further regulated by a memorandum of agreement indicating when you are able to use the property. This form of ownership is popular in the leisure market but it is clearly distinguishable from the time share schemes. In fractional ownership you are actually an owner, either of shares or of an undivided share in the property, whereas under time share schemes, you have no title, just a claim for occupation during a pre-determined time in a year in lieu of the annual levies you pay.

Finally, there is also ownership through share block companies that own or lease immovable property, and this is regulated by the Share Blocks Control Act, 1980. In terms thereof, a person or entity (defined as a member) can own shares in a share block company whose articles of incorporation must provide that a member shall be entitled to the use of a specified part of the immovable property in respect of which the company operates the share block scheme, on the terms and conditions contained in a use agreement entered into between the company and such member. Quite often, after many years, members of a share block company may resolve to convert the share block scheme into a sectional title scheme for a variety of reasons such as improving the ability to sell a member's rights. As mentioned earlier, one can mortgage freehold and sectional title property but one cannot mortgage one's rights in a share block company, hence the reason why many share block companies have been dissolved and converted into sectional title schemes where a member's rights to the particular section in the property are then denoted on a sectional title plan and a separate deed of transfer is issued to the member in respect of such sectional title unit.

ii System of registration

The right to property is enshrined under Section 25 of the Constitution of the Republic of South Africa, 1996. The registration of rights to, and over immovable property is regulated by the Deeds Registries Act, 1937. It sets out the registration requirements and processes necessary for the transfer of ownership or creation of real rights in respect of land, including the process whereby security is registered in favour of creditors. All regions' and cities' planning legislation (called provincial ordinances/laws and bylaws) are now subject to framework legislation that was enacted in terms of the Spatial Planning Land Use Management Act, 2013 (SPLUMA). There are many other statutes regulating real estate law but the aforementioned are the main pieces of legislation to consider.

Ownership and real rights are required to be registered, save for short term leases (leases shorter than nine years and 11 months, unless contractually agreed otherwise between lessor and lessee), in the 11 deeds registries according to a procedure detailed in the Deeds Registries Act. Real rights in land (e.g., mortgages, servitudes and restrictive conditions of title) must be registered also and endorsed against the relevant deeds of transfer of properties.

In light of what is stated herein after, there is currently no formal state guarantee of title as ownership rights are registered in the relevant deeds registries as aforementioned.

Although the Constitution enshrines the right to property, and states that no one can be deprived of property except in terms of general law and no law can permit arbitrary deprivation of property (Section 25, Constitution 1996) recently Parliament adopted a report from its Constitutional Review Committee indicating that the wording of Section 25 should be reviewed to expressly permit expropriation without compensation. The process is, however, currently the topic of legal challenges and is unlikely to result in a change to the current wording of Section 25 in the foreseeable future. That said, on 21 December 2018, the Department of Public Works published for comment the Draft Expropriation Bill, 2019 and it is commonly believed that it is through this legislation, rather than a change to the Constitution, that the state will be permitted to expropriate property, either through payment of compensation, or in selected instances, expropriation without compensation. In terms of this draft legislation, property can be expropriated by the state for 'public purposes', which 'includes any purposes connected with the administration of the provisions of any law by an organ of State', or in the 'public interest', which 'includes the nation's commitment to land reform and to reforms to bring about equitable access to all South Africa's national resources in order to redress the results of past racial discriminatory laws or practices'. Section 12(3) of the proposed bill states that

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:
  1. where land is occupied or used by a labour tenant as defined in the Land Reform (Labour Tenants) Act, 1996;
  2. where the land is held purely for speculative purposes;
  3. where the land is owned by state-owned corporation or other state-owned entity;
  4. where the owner of the land has abandoned the land;
  5. 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.

Proper and meaningful land reform that is done in an orderly and sustainable manner, and which is not a threat to the economy and food security, is a stated objective of the current governing party. In a country where there are massive disparities between rich and poor, access to land is a very emotive and controversial topic. It is, however, absolutely imperative that 25 years after democracy, the topic be addressed in a manner that does not adversely impact the country and that implementation of the prevailing, and new, legislation is implemented correctly without prejudicing the economy and food security. If so, it can only aid in boosting the economy and uplifting the poor, which is in the public interest.

iii Choice of law

In all transactions relating to land, the multitude of legislation governing property rights and processes have to be observed and thus are governed by South African law. There are definitely instances where commercial agreements such as loan agreements denote that foreign law, such as English law, must apply in relation to the transaction, but where ownership of land and real rights such as mortgages are affected, South African law will still govern that element of the transaction.

II Overview of Real Estate Activity

In general, real estate activity levels across the commercial, industrial, residential and agricultural sectors have been quite depressed over the past few years, which is mostly associated with a slow economy and policy uncertainty. However, in the past year, the new leaders of the governing party have introduced notable proposed policy changes and have taken steps to boost the economy and make it more attractive for foreign direct investors. There is a firm acknowledgement that policy certainty, and safety of one's capital investment, especially where investment is done in real estate across the sectors, is a non-negotiable and hence the reason for the proposed legislative changes as more fully described above.

Our banking and financial services sector is very strong, well-regulated and by all accounts ready, willing and able to provide finance for acquisitions and projects, but as mentioned before, until the economy in general improves and presumably until after the general election in April 2019, when everyone will have greater clarity on the future political landscape and policies, the opportunities to lend will be scrutinised carefully. Where a good deal is to be done though, the banks won't hesitate to support.

With a changing economy and the advent of logistical services as a real driver of real estate investment, there has, however, been real growth in the warehousing and logistical centres market over the past few years. The commercial office space sector has been ticking along, but currently it is definitely a tenant's market given the relative over-supply in the major business centres of Johannesburg, Durban and Cape Town of especially higher-end office space. Retirement living is also showing steady growth.

Renewable energy deals have flourished in the last decade and will continue to change the landscape. Every solar plant, wind energy facility, and concentrated solar power facility requires intense negotiations and input in respect of land tenure and environmental considerations.

The introduction of REIT legislation in 2014 continues to drive some consolidation among funds previously competing in the same sector, as well as stimulating new entrants to the market. Several of South Africa's biggest REITs have already expanded into other markets in sub-Saharan Africa, Europe and Australia.

In summary, the major factors that will affect real estate have already been noted as being proposed legislative changes, general economic uncertainty and the national election set for the second quarter of 2019, which will give policy certainty.

III Foreign Investment

At present there are no restrictions on foreign ownership or occupation but as stated previously there is currently a constitutional review process underway, which may result in recommendations as to how tenure may be enjoyed by foreigners and whether different ownership structures (e.g., leasehold as an alternative to freehold) should be introduced. As part of the same discussion, the government also previously mooted introducing maximum land areas that can be owned by one individual or entity, but no draft bills have been tabled for comment.

There are formal requirements for a foreign company to register under the Companies Act, 2008 if it wishes to acquire immovable property in South Africa. Ownership of shares by a foreign person in a local entity that owns real property is also permitted, subject to certain tax implications relating to withholding tax, capital gains tax and exchange control.

IV Structuring the Investment

Financing of, and the acquisition of large real estate portfolios or companies holding real estate, varies depending on the value of the transaction and the parties involved. Most acquisition financed and re-financing is done with institutional banks. REITS and other institutional investors such as listed property funds, banks, pension funds and insurance companies mostly fund their own acquisitions.

Recently, based on long-term strategy, many large corporations have decided to focus on their core business rather than manage a large property portfolio in addition thereto. This gave rise to a number of joint venture structures whereby the corporations dispose of their property portfolios to special purpose vehicle (SPV) companies, or to listed property funds, and then enter into lease arrangements in respect of such properties, thereby generating an immediate cash injection, while at the same time not affecting operations. In many instances, the corporations decide to retain a stake in the SPV company so as to not miss out totally on the upside if the property portfolio is disposed of in future.

It must be said though, that deciding on the structure is heavily dependent on tax structuring and a 'one size fits all' approach must be avoided.

Non-residents may only borrow up to the value of the equity they inject into the property (i.e., half of the value can be financed, and half must be equity). The National Credit Act protects primarily individual persons who are borrowers against unscrupulous lending practices.

Lenders providing finance usually require security packages consisting of one or more of the following forms of security:

  1. mortgage bonds over the immovable property;
  2. suretyship or guarantee by parent company or directors, or even shareholders;
  3. notarial bonds (both general and special in nature over movable property such as plant and equipment);
  4. cession of rental income and any other proceeds derived from the property; or
  5. pledge of shares in the property owning entity.

In addition to security packages, lenders usually require a portion of the acquisition to be equity funded, the percentage varying depending of the nature of the property or the project.

V Real Estate Ownership

i Planning

Planning in each jurisdiction is governed by the local authorities in terms of the local government planning ordinances. In 2013, the SPLUMA was promulgated and this national legislation came into force during 2015. It is framework legislation that provides for the enactment and, where necessary, amendment of provincial and local planning legislation to ensure uniformity.

In almost all instances of commercial development, rezoning applications will have to be made to ensure that the desired density and bulk is allocated to the property from a services and infrastructure perspective.

Accordingly, rezoning approvals will require amongst others:

  1. traffic impact assessments;
  2. environmental impact review;
  3. consent from adjacent property owners;
  4. review of title conditions and other conditions of establishment relating to the broader township;
  5. consideration of what servitudes (or example, access and egress) may be required over adjacent properties; and
  6. filing of a proposed site development plan.

Once the authorities have reviewed all documentation, rezoning of the land parcel may be granted or refused. If it is refused, an appeal process can be followed.

ii Environment

The National Environmental Management: Waste Act, 59 of 2008 (NEMWA) came into operation in July 2009. NEMWA (Section 40(1)) provides that no person may transfer contaminated land without informing the person to whom that land is to be transferred that the land is contaminated and, in the case of a remediation site, without notifying the Minister or the MEC and complying with any conditions that are specified by them. These provisions have direct consequences for alienation of land that may be contaminated, including potentially impacting on the right of freedom to contract for the purchase and sale of the land. In the event of non-compliance with the obligation to provide information on contaminated land in the event of transfer of such land, the same penalty provisions as are applicable to non-compliance with Section 36(5), will apply.

Owners of potentially contaminated land or persons undertaking activities that have the potential to contaminate land are advised to take note of the operation of the Contaminated Land Provisions, particularly the issues discussed above.

iii Tax

If a seller is not registered for value added tax (VAT) purposes, the buyer will have to pay transfer duty in addition to the purchase price. The rates for individuals, corporations and trusts are the same, and, with effect from 1 March 2017, changed to apply as follows for the following property values:

0–900,000 rand 0%
900,001–1.25 million rand 3% of the value above 900,000 rand
1,250,001–1.75 million rand 10,500 rand + 6% of the value above 1.25 million rand
1,750,001–2.25 million rand 40,500 rand + 8% of the value above 1.75 million rand
2,250,001–10 million rand 80,500 rand +11% of the value above 2.25 million rand
10,000,001 rand and above 933,000 rand + 13% of the value above 10 million rand

VAT is payable either at the rate of 15 per cent (as of 1 April 2018 the VAT rate increased from 14 to 15 per cent), or in some instances 0 per cent (e.g., property is sold as a going concern) or in some instances exemptions may apply, for example to charitable institutions.

Transfer duty is payable within six months from the date of acquisition (i.e., the signing of the sale agreement). If the transfer duty is not paid within this period, transfer duty penalties will be levied.

VI Leases of Business Premises

There are various laws that govern the way one does business, particularly when it comes to renting out premises. With the promulgation of the Consumer Protection Act (CPA) there are various rules and requirements that apply to leasing of which landlords need to be aware. In a lease agreement, the parties are bound by obligations that include invariable obligations, provisions that the parties have contracted into and residual obligations. The CPA does not necessarily apply to all business premises leases though as there are thresholds based on the tenant's annual turnover or asset value (currently 2 million rand).

Contractual lease provisions are freely negotiable. Leases for a term shorter than nine years and 11 months are usually referred to as short-term leases and do not even have to be in writing. However, most commercial leases have renewal options included that may take the lease period to longer than 10 years. Long-term leases that are to be endorsed against the title deeds must be in writing and need to be executed in front of a notary public so that they can be registered in the deeds registry, and these registered long-term leases are deemed immovable property and may thus be used as collateral to obtain financing from a bank.

Each lease differs and should be contractually negotiated in relation to the prevailing commercial conditions and in line with the parties' own internal compliance structures. Once the parties agree a fixed term, the tenant is expected to honour the lease term for the full period, unless there is agreement in relation to break options that will give a tenant a contractually agreed exit from the lease. In general terms though, the common law is clear that failure on the part of a tenant to honour a fixed-term lease agreement, may lead to penalties and sanctions from the landlord.

In turn, if a tenant agrees a fixed term, regardless of whether it is a two-year or 20-year lease, the landlord will be required to honour the common law principles applicable to leases by giving undisturbed use, occupation and possession of the leased premises for the duration of the period, provided the other terms of the lease are honoured by the tenant.

In almost all instances, tenants have to contractually negotiate the right to assign the lease or even sublet the leased premises. Usual provisions state that the tenant can only assign or sublet with the landlord's prior written consent. Tenants can usually share their business premises with companies in the same corporate group, but landlords will require a principal tenant to honour the lease terms.

Most corporate leases of single tenanted buildings are triple net leases. This means that the tenant is required to perform all obligations in relation to maintenance, payment of assessment rates, utility charges and insurance. In multi-tenanted corporate buildings, the tenant is responsible for all maintenance (not of a structural nature) of its area of the total rentable area. The landlord will invoice the tenant on a proportionate basis for its share of the total insurance premium and general maintenance charges as part of the operating costs.

In terms of legislation, every five years local municipal authorities are required to update their general valuation rolls in respect of each property located within their jurisdictions. This have in the past, and will no doubt in the future, impact on the marketability of leased premises and in general landlords will try and ensure that the property has a correct market valuation, but tenants in return should insist that landlords should take all necessary steps to object and appeal against unreasonable increases in the valuations, as this has a direct impact on the assessment rates payable.

The owner of the property is usually responsible for insuring the leased premises. In triple net leases, the landlord shifts the responsibility to the tenant and in multi-tenanted buildings, each tenant is invoiced on a pro rata basis as part of the operating costs for the insurance premium. This is not always the case though, and can be negotiated by the parties.

VII Development in practice

The notion of flexible workspaces is relatively new in South Africa but has gained popularity. There has been an increase in the development of shared or flexible working spaces within central business districts and along nodes between the central business districts. This trend has been on the rise with an increasingly difficult economic climate and the increase in small businesses that require professional workspaces and facilities. Specialist developers in the flexible workspace field have reported rapid growth in relatively short periods of time.

In respect of residential developments, the general trend has been for high rise and high density, mixed-use developments as a measure to alleviate the pressure of urban sprawl. Local municipalities have increasingly been in favour of developments that are of a high density and mixed-use design that is in line with urban development and spatial development frameworks published from time to time in terms of SPLUMA.

VIII Outlook and conclusions

A formal Property Charter was introduced in 2013 and is being applied. Land reform and redress is a major component of advancing our democracy and if it is done in the manner stated by the governing party, it can only be to the benefit of our economy and country.

The warehousing, distribution centre, logistical and educational facilities sectors seem to be the most buoyant of all property sectors at the moment.

The recent pro-active steps being taken to address economic challenges and creating policy certainty coupled with relatively low and stable interest rates (compared to the 25 per cent interest rate applicable at the end of the 1990s) make investment in real estate in South Africa, for local and foreign investors, still quite attractive.

Our property registration system is very organised and finance is readily available, which differentiates South Africa from other countries in Africa.


Footnotes

1 Pieter Hugo Niehaus is director, head of real estate at Norton Rose Fulbright South Africa Inc.