Ownership: the 99-year lease agreement
Long term property lease agreements are rare in South Africa, but not unheard of. One of the major developments in recent time, Waterfall in Midrand implemented an interesting, innovative 99-year lease agreement where you sort of have ownership, but don’t.
Notwithstanding, we find that in our culture, we have the need for property ownership. We want to know that we own the land and the property on it – that it is ours. Many countries, including the United Kingdom and Lesotho, has a system of leasing land for a period of time, rather than owning the property.
Freehold, leasehold and renting
Land tenure in South Africa tends to be limited to full- and sectional title. In both cases, the person (or group of people) owns the property (land, building and sometimes garden).
In other cases, people don’t own the land. They merely rent the property for a time – either for a short time or long term.
In both cases, the owner/tenant has the right to exclusive use of some or all of the property.
How does a 99-year lease agreement work?
A long term lease is not quite like renting a property. Rather than paying the monthly rental, you would pay a once-off fee in the same way you would buy the property but are able to use the property as if it was your own for the term.
Though not a requirement, it is often stipulated that the lease period is 99 years, as this was historically seen as one lifetime. A 99-year lease agreement normally has the following clauses:
- You would get exclusive use of the property for the lease period.
- After 99 years, the original owner has the right to take back the land or renew the lease.
- If the property is sold, the new tenant will only have rights to the property for the remaining years.
- The land must be used for something ‘productive’ – commercial, industrial, residential or farming. There might be clauses that you need to build a property on vacant land or better the existing property.
- A long lease is generally registered in terms of the Deeds Registries Act against the title deed of a property and is fully legal.
- Rent may be paid in a lump sum (once-off) or over the tenure (monthly).
An example of a long term leasehold includes:
- British Hong Kong was handed over back to China in 1998
- The Panama Canal was returned to Panama in 1999 under the 1977 Torrijos-Carter treaties.
What makes Waterfall different?
The land Waterfall is built on, is owned by the Waterfall Islamic Institute (WIC), founded by the Mia family. For religious reasons, the land can not be sold. As this piece of land is prime property, negotiations took place between Balwin, Attacq and WIC, facilitated by Cliffe Dekker Hofmeyr Attorneys.
As is generally accepted with leasehold properties, the lease will be for 99 years. The following innovations have made Waterfall different:
- If sold, the new tenant will have a 99-year lease again.
- When sold, or if the lease expires, a fee of 3.5% of the market value will be payable to WIC to renew the lease for another 99 years. The money will be used for charity work.
Tenants will be able to ‘sell’ the rights to usage of the property in year 80 of the lease – and the new tenant will get a 99-year lease again. This innovative approach gives the tenants security to extend the lease an infinite number of times.
How safe is the 99 year lease?
Though strange, the 99-year lease is not so much different from freehold and sectional title property. Though the renewal after 99 years might mean that it is handed over to the government or to the relevant trust, no investment is completely safe.
The current landscape of property ownership has the following uncertainties and proposals:
- A proposed amendment to Section 25 of the Constitution to allow for expropriation without compensation
- A recommendation of changing the Upgrading of Land Tenure Rights Act of 1991 to make all land fall under the 99-year lease agreement
With this in mind, we need to be level headed about real estate and how the government works. We know that land grabs and unethical/illegal repossession do not go unpunished. See details on Zimbabwe’s land grab legal woes here and here.
One might say that stocks are a better option, but we know that even this has its risks – for example, huge market crashes and buyouts below market-related value.
Conclusion
The 99-year lease is a vehicle to keep ownership of a property in the long run but also gives the tenant enough security to make it profitable.
Waterfall really did a great job to make to profitable and secure for their tenants, but also still get 3.5% of the market value back for charity when the property is sold.
Happy investing!
Sources consulted
- SA Property Insider – The 99-year lease is a viable tenure model that could be used to effectively help address land reform
- Snymans Inc – The long lease
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Portfolio Property Investments – LEGAL TALK – ALTERNATIVE FORMS OF TITLE TO LAND IN THE REPUBLIC OF SOUTH AFRICA