South Africa: The Real Estate Law Review – Introduction To The Legal Framework

Originally published by Law Business Research Ltd.

By Andrew Bembridge¹

I INTRODUCTION TO THE LEGAL FRAMEWORK

South Africa has an efficient system of registration of title to land, based on a land survey system. Each portion of land is determined by a diagram prepared by a surveyor and registered in the Surveyor General's Office. This gives rise to a certain and definite basis of registration of land.

Pursuant to the land survey, property registers have been established in the various Deeds Registries within the different provinces of South Africa. Those registers are properly indexed and are now accessible electronically, the originals of title deeds and other documentation having been digitised. The deeds registries are established under the relevant government department, and all fall under a chief registrar of deeds. Given the definite underlying survey system, the property registers are very accurate and create a definite form of land registration. All ownership of land is recorded in a deeds registry.

Ownership of land is evidenced by a title deed issued by the deeds registry, which will record the owner's details and the conditions under which the land is held. These conditions are normally imposed by local authorities and by private agreement. If ownership is not registered in a deeds registry, then it is most likely that ownership of the property has not passed. Transfer of ownership of property is also evidenced by registration in the deeds registry.

The law applicable to the transfer and registration of land, is, in the first instance, the Deeds Registries Act 47 of 1937, together with its regulations. There are a number of other statutes that govern the ownership and transfer of land, but in essence, there is no restriction on ownership of land in South Africa and any natural person or juristic person may own land.

A statutory legal framework for real estate in South Africa gives rise to a definite and comprehensive legislative framework within which property is owned. Actual ownership vests in the owner and not the state.

It is possible to own units in buildings through the Sectional Titles Act 95 of 1986. These are known as sectional title units, and are registered in a deeds registry, by reference to a sectional title plan, prepared by a surveyor registered with the Surveyor General.

Both the Deeds Registries Act and the Sectional Titles Act create the environment and legislative framework within which properties are transferred from one party to another. Property rights are protected in the Constitution of South Africa 1996. The Bill of Rights in the Constitution restricts the deprivation of property, except in the case of expropriation in terms of a law of general application, and then must be subject to compensation, which must be agreed by the affected persons or approved by a court. That compensation must be just and equitable and generally requires that regard be given to the fair-value principle.

There is a process of restitution of land to persons dispossessed of land through racially discriminatory laws, which is governed by the Restitution of Land Rights Act 22 of 1994.

ii OVERVIEW OF REAL ESTATE ACTIVITY

As in the rest of the world, there has recently been a downturn in the property market that has had an effect on prices and activity in the real estate market. The National Credit Act 34 of 2005 became law on 1 June 2006, and is a comprehensive piece of legislation regulating the granting of credit to consumers. Its purpose is to protect consumers and regulate credit providers. This Act regulates consumer credit, promotes responsible credit granting, and prohibits reckless granting of credit.

The National Credit Act has had a marked effect on the real estate activity in South Africa, as credit is not easily available to consumers.

In addition to the National Credit Act, the Consumer Protection Act 68 of 2008, became into force on 31 March 2011. That Act promotes a fair, accessible and sustainable market place for consumer products and services. It protects consumers against certain suppliers of services (i.e., developers) in the property and other industries. The intention of the Act is also to promote the economic welfare of consumers in South Africa. Agreements between suppliers of property to consumers are regulated, outlawing certain unfair practices and illegal provisions and allowing the reversal of transactions under certain circumstances. The Consumer Protection Act does not apply to transactions between two contracting individuals. It only applies to suppliers whose business is the supply of properties to the public.

The land restitution process continues in South Africa. This process is to provide for restitution of land to persons or communities disposed of such rights after 19 June 1913 by past racially discriminatory laws or practices. The Restitution of Land Rights Act 22 of 1994 regulates the restitution of land. One is able with a fair degree of accuracy to determine whether a piece of land is subject to a claim by a community. This is either through enquiry at the local land claims office or the publication in the Government Gazette. The Constitution requires that fair value be given to any property expropriated for Land Restitution or other purposes. Land claims have been made mostly in respect of rural property and not to urban property, although there are certain tracts of urban property that are subject to outstanding land claims. This has had an effect on investment in properties subject to land claims.

All of these pieces of legislation have affected real estate activity in South Africa to a greater or lesser degree. The National Credit Act, has had a marked effect as credit is not easily obtainable. The Restitution of Land Rights Act has affected the activity in the relevant areas. The Consumer Protection Act requires compliance and as such has had little effect on the real estate activity.

III DEVELOPMENTS IN PRACTICE

i Land Claims Commission

While the South African system of registration of title in land is based on old and well-tried legislation, since free elections in 1994 and the implementation of the new Constitution in the country, a number of laws that directly affect real estate have been passed, many of which are required in terms of the Constitution; many of these protect previously disadvantaged communities. One of the main cornerstones of land reform is the Restitution of Land Rights Act No. 22 of 1994. This provides for the restitution of rights in land to persons or communities dispossessed of such rights after 19 June 1913 as a result of past racially discriminatory laws or practices. The legislation establishes a Commission on Restitution of Land rights and a Land Claims Court. In terms thereof, persons are entitled to lodge a claim for restitution of land with the Land Claims Commission. The Commission is then required to investigate the claim and if the claim has merit, to publish the claim in the Government Gazette. Thereafter, the claim may be resolved in a number of ways. The state must settle the claim and compensate the owners of land should the land be found to have been expropriated by the government, for restitution purposes; fair value is required to be paid by the Government. Where matters cannot be resolved, the Land Claims Court may hear the matter and make rulings. All land claims had to have been filed with the Land Claims Commission by December 1998, and no new claims may be entertained. The Land Claims Commission continues to settle land claims.

ii Fast-track developments

In an endeavour to fast-track housing developments, the Development Facilitation Act No. 67 of 1985 was put in place. This enabled tribunals to make rulings and fast-track land developments and override planning procedures and other laws. However, the Constitutional Court has since found this Act to be unconstitutional and ruled that the government should re-visit the procedure and this particular legislation.

iii Protection of tenants

The Land Reform (Labour Tenants) Act No. 3 of 1996, the Interim Protection of Informal Land Rights Act No. 31 of 1996 and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998, all provide security of tenure to particular classes of tenants. The legislation, while giving protection to tenants, does not restrict land owners from approaching a court of law for the eviction of those tenants. the principles of justice and fairness must, however, be implemented by the court and justice and equity must prevail.

iv Communal property associations

The Communal Property Associations Act No. 28 of 1996 enables communities to form juristic persons known as communal property associations in order to acquire, hold and manage property on a basis agreed to by members of a community in terms of a written constitution. This is in essence to allow restitution of land to communities and to create legal entities to hold land for the benefit of communities. The associations are registered at a central registry and upon registration assume legal identity.

v Sustainable housing

The Housing Act No. 107 of 1997 was promulgated to provide for the facilitation of a sustainable housing development process and in so doing to define the functions of national, provincial and local governments in respect of housing developments. A South African Housing Development Board is established under this legislation, which is to give priority to the needs of the poor in respect of housing development.

vi Water

In keeping with the new legislation relating to water, the Water Services Act No. 108 of 1997 was promulgated to provide for the setting of national standards and of norms and standards for tariffs and to provide for water services development plans and a regulatory frame work for water services institution. This is in keeping with and gives effect to the constitutional right that everyone has a right of access to basic water supply and basic sanitation.

vii Roads

The South African National Roads Agency Limited and National Roads Act No. 7 of 1998 makes provision for a National Roads Agency for the republic, to manage and control the national road systems and to take charge, inter alia, of the development, maintenance and rehabilitation of national roads within the frame work of government policy. A National Roads Agency is established under that legislation, which is a public company wholly owned by the state. That entity is governed and managed by a board of directors and they are required to implement government policy relating to national roads.

viii Rental accommodation

The Rental Housing Act No. 50 of 1999 defines the responsibility of the government in respect of rental housing property and creates mechanism to promote the provision of rental housing.

ix Environmental issues

The National Environmental Management Act No. 107 of 1998 is one of the many pieces of legislation to provide for the constitutional requirement of the state's responsibility to respect, protect, promote and fulfil the social and economic rights and to set out a general frame work within which environmental management and implementation plans must be formulated. In addition, the National Environmental Management: Protected Areas Act No. 57 of 2003 provides for the protection and conservation of ecological viable areas and the natural landscapes and seascapes. In essence, the Act provides for the declaration and management of protected areas such as special nature reserves, national parks, nature reserves and other protected areas. It also protects world heritage sites, marine-protected areas, special forests and forest reserves and mountain catchment areas.

x Local government

A number of legislative frameworks have been established governing local government and municipality. One of these is the Local Government: Municipal Property Rates Act No. 6 of 2004, which regulates the power of a municipality to impose rates on property and makes provision for municipalities to implement a transparent and fair system of rating, exemptions, reductions and rebates through rating policies. The valuation methods of properties must be fair and equitable and permit objections and appeal processes to be implemented. Municipalities must adopt rates policies in terms of this act.

xi Mineral and petroleum resources

The Mineral and Petroleum Resources Development Act No. 28 of 2002 makes provision for equitable access to and sustainable development of the nation's mineral and petroleum resources. In terms of the act, mineral and petroleum resources are the common heritage of all the people of South Africa and the state is the custodian thereof for their benefit. The state in terms thereof grants and administers all prospecting and mining rights in the country. The act sets out the parameters within which the holders of rights may operate and procure and renew those rights. Application for mining rights must be made to the relevant minister in terms of the legislation.

iv FOREIGN INVESTMENT

There is no restriction on foreign investors acquiring property in South Africa. For foreign companies to acquire property in South Africa, they must register as an external company in terms of the Companies Act 2008.

A withholding amount is payable to the South African Revenue Services pending determination of the tax liability by the non-resident seller to the South African Revenue Services. The current rates are 5 per cent for individuals, 7.5 per cent for companies and 10 per cent for trusts. Treaty relief may be available to taxpayers in terms of international treaties.

Before the proceeds of the sale of immoveable property in South Africa or shares in a company owning South African immoveable property may be remitted abroad by a non-resident, South African Reserve Bank approval is required, and one of the requirements for approval is that all taxes have been paid. That aside, there is generally no restriction on remitting the proceeds from the sale of a property, provided the purchase price was funded from abroad.

v STRUCTURING THE INVESTMENT

Investors in real estate generally acquire immoveable property in South Africa using a domestic company. The company confers limited liability on the investor. Any rental income, net of expenses, derived by the company is taxed at a rate of 28 per cent. When the company disposes of the immoveable property, capital gains tax ('CGT') is payable at a rate of 14 per cent. Should a non-resident own the shares in the domestic company and later sell the shares in the property rich company, CGT remains payable, in the form of a withholding tax which must be paid by the purchaser to the South African Revenue Service ('SARS') on behalf of the seller. Where the seller is a natural person CGT is payable at the rate of 5 per cent, in the case of a company it is 7.5 per cent and in the case of a trust it is 10 per cent. The withholding tax is an advance payment of the CGT that may finally be payable by the seller. The rate of CGT applicable may be reduced by a tax treaty concluded between South Africa and the shareholder's home country.

Where the company owns commercial property and derives rental therefrom in excess of 1 million rand a year the company must register for value added tax ('VAT') and charge VAT at the rate of 14 per cent on the rentals collected by it. Any VAT paid by the company on expenses incurred by it, is generally recoverable from SARS; however, where the company owns residential property and derives rental from letting such property no VAT is chargeable and the VAT paid on expenses is not recoverable under the VAT system.

Foreign investors investing into a domestic company need to structure the investment into that company correctly so as not to fall foul of the thin capitalisation rules in place. It is important that the company has sufficient equity and is not too highly geared, failing which the interest on the loan payable to the non-resident shareholder will not be fully deductible for tax purposes. Previously, SARS accepted a debt-to-equity ratio of 3:1. The thin capitalisation rules are in a state of flux and it remains to be seen what new guidelines will be published by SARS in this regard.

Once the domestic company has paid tax in South Africa and chooses to distribute dividends to its shareholders a 10 per cent dividends tax will become payable with effect from 1 April 2012. This tax is a tax payable by the shareholder but which is collected by the company and paid over to SARS on behalf of the shareholder. Where the dividend is paid to another South African company the dividends tax is not payable and where the dividends are paid to a non-resident the tax is payable at the rate of 10 per cent, subject to reduction by a tax treaty concluded by South Africa with the shareholder's home country. Currently, South Africa does not impose a withholding tax on interest paid to non-residents, but this is expected to change from 1 January 2013. It has been proposed that a 10 per cent withholding tax on interest payable to non-residents will become payable, subject to a reduction by the provisions of a tax treaty.

Alternatively, non-residents may invest in real estate in South Africa via an external company. An external company pays tax at the rate of 33 per cent but does not suffer the dividends tax and no branch profits tax is payable on after tax profits remitted to the foreign head office. The disadvantage of using an external company is that South African creditors could have recourse to foreign assets to settle claims due in South Africa. This disadvantage does not arise with a domestic company as local creditors only have recourse against assets owned by the domestic company.

Institutions may invest in so-called property unit trusts or variable loan stock companies that are publicly traded and seek investors from the general public. South Africa does not currently have rules in place for real estate investments trusts ('REITs') as is found in other countries. The government was considering the matter but no legislation to create a REIT regime has been forthcoming.

VI REAL ESTATE OWNERSHIP

i Planning

All land in South Africa, falls under either the purview of a local authority or a district authority, by which planning controls are implemented. In the case of urban properties, planning control is extensive through planning ordinances, municipal by-laws and approved development frameworks of the municipalities indicating the extent to which land may be developed with support of the authorities.

Change of use of land requires planning approval and such approval is subject to public participation and may incur objection from persons opposing such change. Opposition to proposed changes is heard by tribunals established by the local authorities. In certain circumstances there may be appeals from those tribunals to an independent appeal body. Professional town planners practise in South Africa and are useful in assisting in proposed change of use applications.

ii Environment

South Africa has a wide range of acts, laws and regulations legislating for the legal provisions relating to the environment. These arise from Section 29 of the Constitution, which accords a fundamental right to an environment that is not detrimental to health or well-being. One of the principal acts is the National Environment Management Act 107 of 1998 (referred to in Section III.ix, supra), which creates a framework for integrated good environmental management for development activities.

Certain prescribed changes of use of property and activities require environmental authorisation from the relevant authority. The National Environment Management Act establishes a public participation process for the change of use of land and the environmental impact on the change of use. Where approvals are granted, they are often subject to rigorous conditions and may require the implementation of environmental management plans and rehabilitation.

iii Tax

All acquisition of property in South Africa is subject to the Transfer Duty Act 40 of 1949. As a general rule transfer duty is payable; the current rate of transfer duty is 8 per cent for acquisition by a juristic person with a sliding scale for acquisition by a natural person where no transfer duty is payable for the first 600,000 rand of the purchase price (this is to assist in the purchase of lower-value properties). If the seller of the property is a registered vendor for value added tax ('VAT') purposes, then VAT at 14 per cent is payable and not transfer duty.

Under certain circumstances the acquisition of a business premises may be subject to zero-rated VAT.

Properties that are held as private residences, are subject to a primary residence rebate on capital gains tax of 1.5 million rand.

Capital gains tax rates are currently approximately 15 per cent in the case of companies and approximately 20 per cent in the case of trusts.

There is currently a tax amnesty until December 2012, allowing individuals to acquire or controlling individuals to acquire properties from trusts, close corporations or companies controlled by them into their name, free of taxes.

iv Finance and security

Given the accurate registration system within the various deeds registries, mortgage bonds are registered as security for land owners obligations against the title of the property. This is the most common source of security for lenders in the property industry.

Mortgage bonds are ranked in order of preference and a bond holder holds first preference from the proceeds of the sale of the property in the event of insolvency of the property owner. Properties may not be transferred unless the mortgage bond is cancelled. Accordingly the consent of the bond holder is required to the transfer of a property.

VII Leases of business premises

Leases of property in South Africa are respected and given the sanctity of contracts according to South African law. Unless such a contract is against public morals or legislative restrictions such as the Consumer Protection Act, the sanctity of those contracts will be enforced by South African courts of law.

A typical lease will include provisions relating to the contracting parties, the rental payable and the period of the lease.

Leases may be registered against the title deed of a property, and in such event offer security of tenure to a tenant under a lease, should the property be sold to a purchaser unaware of the lease. Generally, leases in excess of 10 years are registered against the title of property as leases in excess of 10 years, will only be binding for a 10-year period on successors in title who were unaware of the lease.

Leases also generally include provisions relating to rent calculations in the event of turnover rental, and the payment of rates and taxes and other outgoings related to the properties by the tenant. A common occurrence is a fully maintaining lease in terms of which the tenant assumes liability for all costs arising from the property including rates, taxes, consumables and insurance. There is no legislation protecting tenants of business premises in South Africa.

Rental increases are often linked to the published consumer price index, which is published by the government. Arbitration clauses are common in extensive leases. Leases of business premises still to be constructed often include the construction obligations relating thereto insofar as they are relevant to the tenant.

Generally, the landlord will insure the premises, as it has an insurable interest in the building. Clauses relating to damage and destruction of the premises often require considerable negotiation as the needs of the tenant may differ from the needs of the landlord, particularly if the lease is security for the financing of the building.

VIII OUTLOOK AND CONCLUSIONS

The land reform programme continues in South Africa, but this relates to rural and agricultural properties. This has had an effect on investment of properties subject to land claim, even though it is an expropriation land value that should be paid.

Recently a green paper on land was published by the government for comment. The purpose of the green paper was to facilitate debate around the land and tenure system in South Africa, and it sets out a number of ideological statements and indicates that the debate about land reform and rural development should continue. The green paper also provides for the establishment of a Land Management Commission, which will be an entity established by government to control and regulate the land issues in South Africa.

The green paper clearly recognises that land reform should continue and that the current land reform and restitution programme, has not succeeded; however, it does recognise the concept of privately owned freehold land as well as communal land. There is an indication that land owned by foreigners should be restricted and in certain cases subject to conditions that have to be complied with. The government published the green paper for debate and addressing the land issues of the country, and it should be seen in that light.

The economic downturn has had its effect on the real estate market as has the restrictions on lending through the National Credit Act. That said, South Africa has a firstclass definite registration system and property rights are protected by the constitution.

Footnotes

1 Andrew Bembridge is a director at Edward Nathan Sonnenbergs Inc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.