Commentary On Leasehold Land

Posted on: September 12th, 2014 by STBBSiteOwner

Leasehold land generally relates to land, which is owned by the State, local authority and/or a parelegal state, i.e. Intersite which controls most of South African Railway land.

The controlling body often has land which to too costly for them to maintain and serves little purpose to them in its present condition. The controlling body can develop the land by entering into a long-term lease agreement in 2 separate ways.

1. The lease is given the right to develop the property in terms of a registered long-term lease, viz, 40 years or longer, and will only pay an annual market rental for the use of the land. Sometimes a once-off upfront rental is paid an a nominal rental is paid thereafter. At the completion of the rental period, the lease will be cancelled and the improvements will become the property of the controlling authority, without any right of compensation by the Lessee.

2. In the second case the Lessee is given an option to purchase the property and the end of the lease period. During the lease period, rental is paid on the land in terms of the specific rental arrangement. The amount can vary depending on the lease arrangement and the specific amount payable is often determined as at the commencement of the date of the lease and included or specified in the lease agreement.

When one is dealing with only commercial or retail uses on the property, it is easy to identify the property. But what about a situation where one intends to have a mixed use component with different tenants and alternative uses? The solution is the establishment of a sectional title scheme on the property, but is it possible to establish a sectional title scheme on the leasehold land?

On perusal of the Sectional Titles Act and the Land Surveyors Act, it appears that there is nothing in these Acts which prohibits a Sectional Title Scheme being established on leasehold land. This said, neither of the aforementioned Acts provides any methodology for such an establishment.

On perusal of the definitions of Sectional Title Act, one needs to ascertain how Developer is defined, as the Developer applies for the opening of the Sectional title register.

“Developer” – means a person who is the register owner of land situated within the area of jurisdiction of a local authority, on which is situated or to be erected a building or buildings which the Developer has divided or proposes to divide into two or more sections in terms of a scheme, or the holder of the holding of the right referred to in section 25 to extend a scheme. We shall not deal with Section 25 herein, to avoid confusion and detraction from the aspect of leasehold land.

The definition “Owner” means in relation to immovable property, the person registered as owner or holder thereof and includes the trustee of an insolvent estate, a liquidator of a legal entity or an executor of a deceased estate, or any such trustee, acting within the scope of his or her appointment.

The best manner how one deals with leasehold land within a sectional title scheme is to use an example.

The cleaning and dumping site in Cape Town was located on prime land. The local authority entered into a development lease agreement with the Developer, whereby the Developer would be obliged to pay for the relocation of the site and was obliged to build a mixed use development. The majority of the development was to be residential wherein the Developer would need its money on completion and the end-user purchasers wanting to take occupation. The problem was that the land was leasehold and the one needed to create real rights for the both the Developer and such purchasers. As the Developer could not apply for the opening of the sectional title register, local authority was approached to consent to opening of he register in its capacity as registered owner, together with the consent to subdivide the leasehold land into 2 components, being for the retail and the residential component. Thereafter the long-term lease is registered over the 2 portions and each residential purchaser thus receives an assignment of a sub-lease pertaining to their specific unit and the financial institutions may simultaneously register mortgage bonds over leases, thus allowing the Developer to be paid upfront. Ownership of the land is only transferred to the Developer and its purchasers, some 5 years from date of the long-term lease having been registered.

Often the local authority will be give Developer an option during the lease agreement period, to purchase the property from the local authority. Generally the purchase is price is a formula driven based on the current value of the land prior to the commencement of the lease agreement.

One of the formulas is: P = V – E

P = The purchase price

V = The unimproved market value of the land immediately prior to the re-zoning thereof for the purposes of development by the Developer, which will be an X sum, being the pro rata market value as determined by auctioneers in terms of a valuation.

E = All expenditure actually incurred by the Developer, supported by invoices and excluding VAT thereon for all the following:

  • The pro rata purchase price
  • The cost of the adequate treatment in the opinion of the local authority for the infestation of the property.
  • The cost of town-planners employed by the Developer for the re-zoning of the property.
  • All the legal expenses of the Developer incurred in the respect of the development.

Whereas a dispute arises between the local authority and the Developer regarding any item of cost as referred above, such dispute is generally referred to arbitration for final determination.

We are of the opinion that the development of leasehold land shall become more prominent and become a household name in future not unlike the United Kingdom.