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Bulletin

Unpacking some principles of the new compensation dispensation in the 2020 Expropriation Bill

Fasken
Reading Time 11 minute read
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Media platforms have been flooded with articles exhibiting signs of uncertainty and anxiety over the security of ownership of property and fears of being left empty-handed when the State eventually decides to expropriate such property. Compensation is an integral part of expropriation and it is no wonder that this debate has continued and remains active since the publication of the Expropriation Bill, 2020[1] (“the Bill”) on 9 October 2020.

The Constitution of the Republic of South Africa, 1996 ("the Constitution"), recognises expropriation as an essential mechanism for the State to acquire another’s property for a public purpose or in the public interest, subject to just and equitable compensation being paid.

In this bulletin, we aim to unpack certain principles touching on the subject of compensation in the context of expropriation, and more specifically answering the following questions:

  • What will the standard (benchmark) for the determination of compensation be?
  • How will the final amount of compensation be determined?
  • Under what circumstances will ‘nil’ compensation become payable?
  • How will the benchmark of (nil) compensation affect pre-expropriation bonds and deeds of sale?

This bulletin is the second in a series of bulletins where we unpack and discuss some of the material provisions of the Bill. In our first bulletin, we unpacked the who, what and why of the Bill, which bulletin can be accessed here.

What will the standard for the determination of compensation be?

The pre-constitutional enacted Expropriation Act, 1975 (Act No. 63 of 1975) ("the 1975 Act") benchmarked “market value” and the willing buyer, willing sellerprinciple as the foremost determinant of compensation. This gave rise to the legal principle that owners of property[2] expropriated by the State would be entitled to an amount that such property would realize if the property is sold on the date of notice of expropriation in the open market by a willing seller to a willing buyer.[3]

Some twenty years later, with the advent of our constitutional democracy coupled with the supremacy of our Constitution,[4] the standard for the determination of compensation shifted from the notion of “market value” to what would be regarded as “just and equitable” compensation.

What is regarded as “just and equitable” compensation, would depend on the circumstances prevalent in each case and will be guided by a number of factors listed in section 25(3) of the Constitution. These factors include the market value of the property.[5]

In a bid to (i) remedy, the inconsistencies between the 1975 Act and the provisions of the Constitution, and (ii) provide a common framework for expropriation which aligns with the Constitution, clause 12(1) of the Bill has been drafted to substantially mirror the “just and equitable” standard set out in section 25(3) of the Constitution. Clause 12(1) of the Bill states that “[t]he amount of compensation to be paid to an expropriated owner or expropriated holder must be just and equitable reflecting an equitable balance between the public interest and the interests of the expropriated owner or expropriated holder” (own emphasis). The factors listed in section 25(3) of the Constitution have also been “copied and pasted” under clause 12(1) of the Bill.

Accordingly, there is no hard and fast rule of what would be regarded as “just and equitable” compensation, and would extensively rely on the exercise by the State of its discretion when considering the factors listed under section 12(1) of the Bill.

How will the final amount of compensation be determined?

The Bill adopts a fairly transparent and participatory approach in the process of determining the final amount of compensation payable to an owner of property or holder of (unregistered) rights in the property.[6]

What follows below, is a high-level summary of the (i) process involved in the determination of the final amount of compensation, and, where relevant, (ii) participatory rights enjoyed by owners and holders of rights during such process.

Pre-expropriation (investigation and valuation) Phase:

Chapter 3 of the Bill deals with the pre-expropriation phase and detail various procedures to be followed by an expropriating authority prior to expropriation. During this phase, an expropriating authority has the discretion to authorise a valuer to enter the land and conduct a valuation of such land.[7]

Presumably, the valuation will inform the expropriating authority of the feasibility of the indented expropriation, and be taken into consideration when an expropriating authority determines the amount of compensation that is both just and equitable under the circumstances.

Intention Phase:

After having gathered all of the information it requires, the expropriating authority must decide whether it wants to proceed with expropriation. If so, then the expropriating authority must serve a notice of intention to expropriate on the owner and any holder of a right in the property in question.

In this notice, the owner or holder of a right will be called to deliver within 30 days of such notice, a statement of the amount claimed by such owner or holder of a right that he/she/it regards as “just and equitable”, supported by particulars of how the amount is made up.[8]

Within 20 days thereafter, the expropriating authority must either (i) indicate in writing that such amount of compensation is accepted;[9] or (ii) if not accepted, submit an offer with full particulars of how the amount offered is made up[10] and proceed with negotiations.

Negotiations may proceed up to 40 days after the expropriating authority has received the owner’s or rights holder’s claim statement. Failure by the parties to reach an agreement on the amount of compensation claimed or offered, as the case may be, the expropriating authority must decide whether or not it will proceed with expropriation, and if so, must continue the negotiation process in accordance with clause 16 of the Bill.[11]

Clause 16 of the Bill provides for certain particulars the expropriating authority or claimant may request regarding the particulars of claims and offers. It is important to understand that any claim by a claimant or by an expropriating authority remains in force until (i) the claim or the offer, as the case may be, has been revised by either the claimant or offeror, as the case may be;[12] (ii) the amount of compensation has been approved by agreement between the parties;[13] or (iii) the compensation has been approved by a court.[14]

The participation of owners and rights holders in a process that affects their interests to a great extent is welcomed, as this creates credibility and certainty in the expropriation process. However, the provisions of clause 7 discussed above raise two particular questions, namely (i) how would an owner or rights holder in South Africa be able to determine what is considered to be “just and equitable” compensation, particularly in the more vulnerable groups of this country, where resources and capacity are scarce? and (ii) how does an owner or rights holder’s entitlement to determine and claim compensation, instead of merely being offered compensation, move away from the current “willing buyer, willing seller” principle entrenched in the 1975 Act?

If an owner or rights holder is vested with the power to negotiate his/her/its bargain, then it could possibly be argued that the standard of justice and equity, to some extent, will continue to surrender to the “willing buyer, willing seller” principle in the future.

Expropriation Phase

This earmarks the final phase in the expropriation process where the expropriating authority has elected to proceed with expropriation and serves onto the owner or holder of a right an expropriation notice (notwithstanding any dispute on the amount of compensation pending).[15]

Ordinarily, subject to certain exceptions, expropriation (the right to possession of the expropriated property) takes effect on the date of expropriation reflected in the expropriation notice.[16] On this date, the owner or the holder of a right becomes entitled to the amount of compensation.[17]

If at this stage of the process, the amount of compensation remains in dispute, then the owner or holder of a right may either (i) institute proceedings in a court; or (ii) request the expropriating authority to institute such court proceedings, within 180 days of the date of expropriation.[18] This implies that the payment of the compensation amount may extend well beyond the date of expropriation unless a court orders otherwise.[19]

This may lead to a situation where an owner or holder of a right is left ill-equipped to pursue such dispute in court, due to him/her being stripped of his/her property and having received no money for it. It will be interesting to see how this plays out in practice.

Under what circumstances will ‘nil’ compensation become payable?

Clause 12(3) of the Bill introduces the notion of the payment by the State of ‘nil’ compensation where land is expropriated, provided that it is determined by the State to be just and equitable. Instances, where it may be just and equitable for the State to pay ‘nil’ compensation, are listed under clause 12(3) of the Bill, and notably, excludes primary residential homes and productive farm land.

The instances listed under clause 12(3) have been quite controversial, especially clause 12(3)(a) which refers to “where the land is not being used and the owner’s main purpose is not to develop the land or use it to generate income, but to benefit from appreciation of its market value” (in other words for speculative purposes).  Several concerns immediately arise, for example who will determine this and what will happen to land that is used for example for conservation purposes and cannot be developed for a valid reason? Hopefully, these type of issues will be clarified in regulations.

It is important to note that the ‘nil’ compensation clause only applies to property which is land and does not apply to any other form of property, for example, any movable or intellectual property.[20] More importantly (which appears to be widely misunderstood), the Bill does not provide a blanket provision for the expropriation of land at ‘nil’ compensation.

The payment of ‘nil’ compensation must be just and equitable under the circumstances, and when it is determined by the State to be just and equitable, then the State must provide particulars of how such amount was determined. Although not expressly stated, given that ‘nil’ compensation albeit at ‘nil’ rand is still regarded as “compensation”, the Bill can be interpreted to imply that the process of determining compensation discussed above also applies to ‘nil’ compensation, which means that it can be challenged.

The use of the word “may” further implies that clause 12(3) is a discretionary provision. It would be interesting to see if regulations will be published on how such discretion must be exercised.

How will the benchmark of (nil) compensation affect pre-expropriation bonds and deeds of sale?

Understandably so, the advent of the Bill has caused havoc in the financial services industry, and particularly so in as far as the mortgage bond market is concerned.

The Bill provides that where property is encumbered by a mortgage bond or subject to a deed of sale, immediately prior to the date of expropriation, then the compensation amount determined to be just and equitable will be paid to the mortgagee or purchaser, as the case may be, on such terms as may have been agreed between the owner or rights holder and the mortgagee or purchaser.[21]

Two main concerns arising from this provision are that (i) if the amount of compensation payable to the owner or the rights holder is ‘nil’ compensation, then the owner or rights holder will be left to settle the mortgage bond without having the benefit of the asset to secure the debt; and (ii) clause 18 only refers to mortgage bonds, which in our law, is distinguished from notarial bonds. In terms of section 102 of the Deeds Registries Act, 1937 (Act 47 of 1937), a mortgage bond is defined as “a bond attested by the registrar specially hypothecating immovable property”; and a notarial bond as “a bond attested by a notary public hypothecating movable property generally or specially.”

This means that the Bill limits the payment of compensation to any person or entity holding a mortgage bond registered over immovable property, and excludes notarial bonds registered over moveable property.

Arguably, the rights enjoyed by a holder of a notarial bond registered over such property may be protected under the auspices of clause 9(1)(d) of the Bill, which means that the expropriated property will remain subject to the notarial bond. The position, however, remains unclear.

Conclusion

As seen above, compensation in the context of expropriation plays a vital role in the expropriation process. The transparent and participatory approach adopted by the Bill in the negotiation and determination of the amount of compensation payable must be welcomed, however, as can be seen from this bulletin, there remains many uncertainty and grey areas, which we could only hope would be ironed out in regulations to be published by the Minister.

The time to submit comments on the Bill expired on 28 February 2021 and the Portfolio Committee is still to schedule further meetings and public hearings on this Bill.

If more information or any assistance is required, please feel free to contact our property team.



[2] The term "property" is defined in section 1 of the 1975 Act to mean both movable and immovable property.

[3] Section 12(1)(a) of the 1975 Act.

[4] Section 2 of the Constitution states that the Constitution is the supreme law of the Republic and law or conduct inconsistent with it is invalid, and the obligations imposed by it must be fulfilled.

[5] See section 25(3)(c) of the Constitution.

[6] Any reference to a "holder of rights" in this bulletin and the Bill, refers to a holder of "unregistered rights" in property (see clause 1 of the Bill).

[7] Clauses 5(2)(b) of the Bill.

[8] Clauses 7(2)(h)(ii) and 7(4)(a) of the Bill.

[9] Clause 7(6)(a) of the Bill.

[10] Clause 7(6)(b) of the Bill.

[11] Clause 7(7) of the Bill.

[12] Clause 16(3)(a) of the Bill.

[13] Clause 16(3)(b) of the Bill.

[14] Clause 16(3)(c) of the Bill.

[15] Clause 8 of the Bill.

[16] Clause 8(3)(f), 9(2)(a) - (b) and 9(4) of the Bill.

[17] Clause 17(1) of the Bill.

[18] Clause 8(3)(h) of the Bill.

[19] See Clause 17(3) of the Bill.

[20] Clause 12(3) of the Bill - "It may be just and equitable for nil compensation to be paid where land is expropriated..."

[21] Clause 18(1) of the Bill.

 

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