Leasehold could replace ownership

Leasehold agreements regarding property are common in countries where land is limited, such as Europe and Asia, but are becoming more popular in South Africa, particularly where state or city-owned land is concerned. By Glenda Nevill

'I believe that the more demand and less supply of limited land could perhaps push South Africa into the concept of leasehold land,' says Bev I'ons-Raeburn, a director of strb Smith Tabata Buchanan Boyes.

Leasehold title allows a buyer to purchase a property for a fixed period of ownership. In the United Kingdom, where such agreements are more common, this period can range from 50 to 99 to 999 years.

Basically, a leasehold title allows the beneficiary rights over the property, for a certain amount of time, without that person becoming the owner.

I'ons-Raeburn is involved in a mixed use residential and retail development that is regarded by the City of Cape Town as a 'pilot' project in terms of leasehold agreements.

The developers - who wish to remain anonymous - have entered into an agreement whereby the two components of the development were sub-divided but both the residential and retail leasehold will be cancelled in 2009 and will convert to full ownership.

'The advantage of leasehold agreements favour the state or council as they can enter into development lease agreements with the developers, and control the development until completion,' I'ons-Raeburn says.

'The disadvantages, particularly in this case as it is a pilot project, was selling the public and financial institutions into the limited risk factor concept as buyers only know ownership.

'Generally, financial institutions have no problem with commercial leasehold as it affords them "step in rights" which means that in the event of the developer failing to comply with the development lease agreement, the bank concerned, with its development bond over the property, then steps into the shoes of the development and completes the development for its own account, protecting its security,' I'ons-Raeburn explains.

'However, the registered sub-leases which are bonded to various financial institutions cannot practically have step in rights as the development is generally completed by the time that their morgage bond is registered. Financial institutions now understand the concept and are comfortable with their security.'

Standard Bank's Ian Raeburn, who worked on the deal from a financing perspective, says leasehold titles, in certain scenarios, benefit the government as it has the option to have state-owned land developed, while still maintaining ownership.

'The government doesn't want to dispossess the country's assets, yet has surplus land that needs developing. Using leaseholds is a way in which they get the best of both worlds - the land is developed and improved, becomes more valuable but after the lease expires, reverts back to them with all the improvements. And while the land is being developed, they receive ground rent.'

Leasehold titles are also increasingly being mooted as a way in which to control foreign ownership of land.

'Ownership is your ultimate right in property. People like to bequeath property to their children. Whilst leasehold can be passed on to heirs, [obviously depending how the lease is worded], the property will not remain in the family for generations,' says I'ons-Raeburn.

'I believe that there should be a limited number of leaseholds applicable to foreign ownership, especially in regard to prime areas in our country. There should perhaps be a provision that in the event of the leasehold been sold to a South African, such rights should then convert to ownership, with a restriction thereafter that it may not be sold to a foreigner once converted into ownership.

'A restrictive condition can easily be created in the title deed. One must ensure that we do not end up scaring off foreign investment in property. It creates security within our country, but also a problem in that South Africans cannot afford land in their own country. A balance is required.' – Glenda Nevill

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