It has in recent years become more and more commonplace for landowners, and more particularly parastatals and governmental bodies, to be unwilling to sell their land, they preferring to "dispose" of land by way of long term leases.

Fundamental to a proper grasp of the issues concerned is a understanding of both the concept of "real rights" and the maxim or rule "huur gaat voor koop".

In essence a "real right" is a right which is enforceable by the holder against the world at large. Ownership is the most comprehensive and probably the most common of all real rights. Upon a lessee of land taking possession of the land in question that lessee acquires a "real right" in the land concerned and is then protected by the maxim "huur gaat voor koop". In terms of this rule every successor of the owner/lessor is bound by the lease as soon as the land is transferred to him, whether or not he knew of the lease. The lessee can enforce his real right as lessee against the successor or successors in title of the owner.

"Huur gaat voor koop"

However the scope of the "huur gaat voor koop" rule is somewhat curtailed by the provisions of the Formalities in Respect of Leases of Land Act 1969. In terms of this Act leases which endure (or which together with option periods endure) for 10 years or longer are enforceable against a creditor or "successor under onerous title" (i.e. purchaser) of the lessor only for 10 years (notwithstanding the contracted period of the lease) unless (a) the lease has been registered against the title deed of the leased land or (b) the creditor or successor in title concerned had knowledge of the lease.

Registration of a lease is readily effected in terms of the Deeds Registries Act 1937. However if the subject matter of the lease is a portion of land only, then a lease diagram describing the relevant portion is required. Such diagrams must be prepared by land surveyor and be approved by the Surveyor General having jurisdiction over the land concerned.

We see therefore that in the case of both short term leases (i.e. leases of less than 10 years) and long term leases (i.e. leases of 10 years or longer) a real right is acquired and the "huur gaat voor koop" rule applies as soon as the lessee takes possession of the land. However in the case of a long term lease it must be registered for the lessee to be afforded security of tenure for 10 years or longer. Interposing and "option to purchase" takes the matter no further. Not only is a purchase normally not possible under such circumstances but also an option to purchase is an "executory contract" which is not binding on a liquidator or trustee on the insolvency of the lessor.

The duty of the trustee or liquidator

The security of tenure of the lessee can be further threatened upon the insolvency of the lessor. The insolvency of a lessor does not terminate the lease. It is the duty of the trustee or liquidator of the insolvent estate to sell the property concerned for which purpose it must first be offered for sale subject to the lease, the "huur gaat voor koop" principle prevailing. If the highest offer is not sufficient to discharge any prior ranking real right (typically a mortgage bond registered before the conclusion of the lease) then the property must be offered for sale free of the lease.

Both the Formalities in Respect of Leases of Land Act and the laws relating to insolvency are of particular impact on a developer where security of tenure for the agreed term is paramount in order to enable the developer to amortise his investment.

Significant for the developer also the contractual terms of the lease. Typically leases contain relatively standard "breach" or "default" clauses in terms of which the lessor is entitled, inter alia, to cancel the lease in the event of the breach or default by the lessee. This also happens to be common law. Upon such cancellation the land (including improvements) reverts to the lessor, the lessee losing all rights of occupation in terms of the lease. Effectively the lessee loses his capital investment incurred in developing the land! It is of little comfort to the lessee that he may, depending on the terms of the lease, be able to recoup part of that investment by way of an enrichment claim against the lessor and in terms of which the lessee can claim an amount equal to the amount by which the development has enhanced the value of the land.

No prior ranking real rights

These difficulties can, to a large extent, be mitigated against by abiding by three basic principles ?

Insist that the lease is registered in accordance with the formalities in respect of Leases of Land Act and do not commence development and/or incur significant development expenditure before such registration. If registration is not possible (whether within the required time frame or at all) then, as a very distant "second best" ensure that the fact that the land is leased from the owner is prominently displayed thereon. This is not always possible or practical.

Ensure that there are no prior ranking real rights (i.e. mortgages). If there are prior ranking real rights/mortgages the holder must waive such rights in favour of the lessee. Again this is not always possible.

Check the lease terms carefully. Particularly the lessor must have no right of cancellation or, at the very least, such rights must be severely curtailed. In addition there must be no waiver of the lessee?s common law right to claim compensation for improvements in the event of the cancellation of the lease.

Failure to abide by these principles will subject a developer to risk.

Financier has a vested interest

The rights of a lessee in terms of a lease, constituting a real right, are capable of being encumbered by mortgage bond as security for debt. In reality the security value of such encumbrance is largely conditional on the lessee's continued security of tenure. If the lease is cancelled or terminated for any reason the financier's security afforded by the mortgage bond is automatically lost. The financier has a vested interest, corresponding with that of the lessee, in ensuring the continued operation of the lease. Frequently also financiers will, in addition, insist on a "step in rights agreement" with the landowner in terms whereof the owner undertakes, if the lease is cancelled, to lease the land to the financier or its nominee for the unexpired duration thereof against payment of a nominal rental.

The above comprises a brief outline of the issues facing a developer in relation to the development of leased land. It is by no means a comprehensive opinion regarding the issues involved and is intended merely to alert developers to such issues and pitfalls. Developers are urged to seek expert professional advice before embarking on the development of leased land.