National Assembly Portfolio Committee on Public Works

EXPROPRIATION BILL (B4 - 2015)

PIERRE VENTER28 July

2015

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EXPROPRIATION OF PROPERTY IN CONTEXT

“ The power of compulsory acquisition can be abused. Unfair procedures for the compulsory acquisition of land and inequitable compensation for its loss can reduce land tenure security, increase tensions between government and citizens, and reduce public confidence in the rule of law.

Good governance is necessary to provide a balance between the need of the government to acquire land rapidly, and the need to protect the rights of people whose land is to be acquired.”

Food and Agriculture Organisation (FAO) of the United Nations: Paper on Best Practice for the Compulsory Acquisition of Land

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BASA is the industry representative body for commercial banks which consists of 32 local and international member banks.

It is an organisation that promotes the enablement of a competitive, sustainable and conducive banking environment.

The Banking Association supports Government’s initiative to address the past imbalances through processes such as reform, as envisaged and provided for by the Expropriation Bill.

The banking sector is a critical stakeholder because of the substantial sums of credit extended by banks in respect of “property”

• In respect of immoveable property alone, mortgages total some R2.3 trillion of which R70 Billion represents mortgages to the agricultural sector.

THE BANKING ASSOCIATION SOUTH AFRICA

4THEMES

We suggest four critical themes needs for the Bill:

Alignment to international norms and the Constitution.

Completeness of definitions.

Protection of the rights of owners and holders of registered and unregistered rights( notification, processes etc. to support this.)

“Just and equitable” principle to provide underpinning support for owners and holders of rights.

5DEFINING “PROPERTY”

6DEFINING “PROPERTY” (cont.)

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The Preamble of the Bill as well as s25 (4)(a) of the Constitution should be aligned:

The Bill should therefore be restricted to land reform and equitable access to all South Africa’s natural resources.

This includes land, water and related reform as opposed to other types of property and thus should be restricted accordingly.

The Bill should be aligned to relevant international norms and standards and for this to be restricted to real rights in respect of immoveable property and natural resources as:

The inclusion of intellectual property could have an adverse impact on international trade which rights are governed by international by laws/bi-lateral treaties/ conventions/ agreements.

The inclusion of personal rights could have an adverse impact on international investments into South Africa including trade in the South African stock and bond markets.

DEFINING “PROPERTY” (cont.)

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RECOMMENDATION:

The definition of “property” should be restricted to “real rights” in property only and to equitable access to all South Africa’s natural resources.

DEFINING “PROPERTY” (cont.)

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The Bill defines “public interest” as “includes the nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources “and other related reforms in order to redress the results of pass racial discriminatory laws or practices.”

“Public interest” is defined in the Constitution as “includes the Nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources”

The Bill does not clearly define what is meant by the additional wording (highlighted above). This opens it up to wide interpretation which causes concern for local and international investors.

There is also a need for “public interest” and “public purpose” to align with international norms and standards in order to prevent third party transfers that benefit a private person but not the public.

PUBLIC INTEREST AND PUBLIC PURPOSE

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Internationally – “public purpose” and “public interest” has been strictly defined.

RECOMMENDATIONS:

“Public Interest” within the Bill should be restricted to:

Land reform and to reforms to bring about equitable access to all South Africa’s natural resources- this proposal would be in line with section 25(2) of the Constitution.

It should also be restricted to consumptive and non-profit use purposes.

Adverse impact - remaining portion/adjacent property owners need a process to be able to request expropriation of their property too if an expropriation has an adverse impact on their property.

PUBLIC INTEREST AND PUBLIC PURPOSE (cont.)

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“Public purpose” is defined as “ includes any purpose connected with the administration of the provisions of any law or practice.”

RECOMMENDATION:

“Public purpose” as defined is incomplete- there is a need for clarity to ensure conformity with Section 25(2) of the Constitution (demonstrate public necessity – Constitutional court cases: Fnb v SARS, Bissett v Buffalo City Municipality refer.)

PUBLIC INTEREST AND PUBLIC PURPOSE (cont.)

12PUBLIC INTEREST AND PUBLIC PURPOSE (cont.)

13THE DETERMINATION OF COMPENSATION

Clause 12(1) of the Bill aims to align the compensation paid by the Expropriating Authority to the owner to the Constitution (s25(3)).

  Financial institutions offer credit based on market value as the Banks

Act and Regulations related to this Act (Regulations 23 & 24 of 2012) compel financial institutions to do so.

In turn, South Africa’s Banks Act and its Regulations are aligned to global international regulatory frameworks and prudential frameworks.

Should the compensation paid by the Expropriating Authority be less then market value, in some cases loans would exceed the compensation amount paid and financial institutions and owners would suffer a loss.  

Inadequate management of credit risk can lead to systemic consequences for the economy and financial system as evidenced by the global financial crisis.

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A critical consequence of the Bill would be a negative impact on the stability of or losses suffered by commercial banks.

 o This would in turn result :

  Private sector lenders withdrawing from providing

loans where property is being offered for security, thus sterilizing the market.

Banks adopting a more conservative approach to the extent of loans they would be prepared to provide as compared to property values.

Banks increasing borrowing interest rates to compensate for the additional risk in the event of expropriation

This would promote food instability, job losses and financial exclusion

THE DETERMINATION OF COMPENSATION (cont.)

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In stakeholder engagements with the DRDLR (Department of Rural Development and Land Reform) – the Department recognised the need for the State to avoid such situations.

Cabinet approved the policy framework document styled: “ A policy framework

for land acquisition and land valuation in a land reform context and for the establishment of the of the Office of the Valuer General dated 18 October 2012.”

Extracts from this paper are the following:“ The market value of property be aligned with the international definition and be interpreted to exclude prices paid by Government as evidence for market value. This will have the immediate effect of aligning prices paid by Government with private lenders.

The change to “just and equitable” which was provided for in the document would have negative implications on the collateral value of the existing debt. This has a domino effect as the capital adequacy of these intuitions and their ability to provide loans to the agricultural sector is negatively affected, thus having serious implications on food, security and employment.

THE DETERMINATION OF COMPENSATION (cont.)

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In order to mitigate these negative implications, Government should automatically guarantee the difference between “just and equitable” compensation as contemplated in s25(3) of the Constitution and “market value.”

RECOMMENDATION:The Bill should provide for the Cabinet approved policy framework

THE DETERMINATION OF COMPENSATION (cont.)

17THE DETERMINATION OF COMPENSATION (cont.) More clarification is needed in respect of clause 12(2)(c) where no

compensation is to be provided for in respect of unlawful property enhancements. This could unfairly prejudice owners as most agricultural properties have been enhanced without the approval of building plans as previously they were not subjected to it.

Section 17(2) provides for only 80% of the compensation to be paid on the date of expropriation or a date agreed to by the parties.

There is no mention in the Bill as to when the balance would be paid - this does not reflect a “just and equitable” position to expropriated owners or holders of registered or unregistered rights, as it is unfair for individuals to be deprived of property and further be deprived of payment by the State.

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RECOMMENDATIONS:

The full amount should be paid as at the date of expropriation - where all parties agree to 80% only being paid at date of expropriation, the balance should be paid within 12 months. ( A period in excess of 12 months creates a contingent liability on the State’s balance sheet, which could adversely impact on its sovereign rating)

This should be cross- referenced to Clause 13(1) of the Bill - should the expropriated owner be required to pay a higher interest rate to a financial institution as compared to that stipulated within the PFMA (9%) – the owner should be compensated for the net difference in interest that has been paid.

THE DETERMINATION OF COMPENSATION (cont.)

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RECOMMENDATIONS:

The Bill does not provide for penalties in respect of late payment by the Expropriating Authority. Outside of payment of the principle debt and interest thereon, we recommend that additional compensation based on the average income foregone should be paid pro-rata for the period of late payment.

Clause 22(4) makes provision for “just and equitable” compensation to the land owner for temporary use of property. No guidance is provided where the compensation amount is disputed in relation to clause 22(4) - our prior recommendation in respect of clause 8(1) is suggested.

THE DETERMINATION OF COMPENSATION (cont.)

20MORTGAGE BONDS

Clause 18 provides for property subject to a mortgage bond or deed of sale.

Clause 8 of the Bill makes it clear that if land in which unregistered rights exist is expropriated, the expropriating authority must offer compensation for both the land and the unregistered right.

The clause is less clear in the context of mortgage bonds specifically in relation to clause 8(3)g as this clause does not compel the expropriating authority to offer compensation to the holder of a mortgage bond over the property in respect of the termination of his rights under the bond.

By way of example, a mortgage bond on a property is worth R4 million. The owner and the expropriating authority agree compensation in an amount of R3 million without informing the mortgage bond holder, thus resulting in no compensation being offered to the mortgage bond holder which effectively is a deprivation of property.

21 MORTGAGE BONDS (CONT.)

The Insolvency Act no. 24 of 1936 protects the holder of a mortgage bond by making such a holder a secured creditor. The Bill should not disregard the other entrenched laws and follows that the proceeds must be paid directly to the mortgagee and not the claimant.

No compensation being offered to a mortgagee would result in the applicable provision being unconstitutional as it would contravene s25 of the Constitution which provides:

“no one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.” (s25(1) of Constitution)

22MORTGAGE BONDS (CONT.)

Clause 9 provides that expropriating property will vest in the expropriating authority “released from mortgage bonds.” It, however, makes no reference to the need for the expropriating authority to demonstrate that this is not of an arbitrary nature, hence our previous comments on the need for “public interest” and “public purpose” to be defined.

The mortgagee would be deprived of “property” since “property” in the Constitution is defined as “not limited to land.”

RECOMMENDATION: If the intention of s18(1) is that compensation must first be offered to

the mortgagee - appropriate amendments would need to be made in the Bill in order to reflect that in any instance where property is subject to a mortgage bond - the Expropriating Authority must offer compensation not just for the property but for the mortgage bond as well.

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The total amount offered should be divided between the property owner and the mortgagee. This should be done in accordance to

factors listed in clause 12 the amount owing under the mortgage bond should

be paid first (as dictated by the Insolvency Act) if there is a dispute concerning compensation, this

should be settled by way of the courts.

ADDITIONAL RECOMMENDATION:

The Bill should allow the same status to be given to special notarial bonds (Bokomo v Standard Bank of SA) and real liens as these forms create the same rights as that of a mortgage bond.

MORTGAGE BONDS (cont.)

24RECOMMENDATIONS - OTHER MATTERS

Clause 21- the Bill should provide a swift alternate dispute resolution mechanism option that parties may voluntarily agree to, as dispute resolution through the courts is both costly and protracted.

Clause 26 (1) and clause 9 - the Bill needs to provide that the Deeds Office should receive Notice of Expropriation as contemplated in the Deeds Registries Act 47 of 1937. Furthermore, this should be captured and maintained in a publically accessible register, otherwise credit providers are adversely affected (between date of intent to expropriate and expropriation)

Clauses (7), (8) and (9) should include the need to advise “registered rights” holders of the intention, notification & amount of compensation to be paid.

Clause 23 needs to define who pays for the costs relating to cancellation of an expropriation and how one reinstates a mortgage bond.

25CONCLUSION

We are concerned that the Bill could have both economic ramifications for South Africa and systemic implications for financial institutions, as we are compelled in terms of local and international regulatory frameworks to use market value as the basis of determining security held in support of loans, mortgages and other forms of acceptable security.

We are concerned that the Bill will result in the further dilution of property rights.

The Bill should not result in discouraging local and international investment.

26THE BANKING ASSOCIATION SOUTH AFRICA

QUESTIONS ?

Thank You