Land expropriation issues in SA

10 May 2012

There has been a lot of debate in the press recently about land reform and the use of expropriation to bring about such reform in rural areas.

South African cities are currently sprawling, inequitable and economically uncompetitive places that are becoming vulnerable to the impacts of climate change and where poor people are trapped in marginal areas that by their nature discourage investment.

While this is an important debate, it should not be forgotten that the development agenda will be increasingly played out in South Africa’s cities and towns.

South African cities are currently sprawling, inequitable and economically uncompetitive places that are becoming vulnerable to the impacts of climate change and where poor people are trapped in marginal areas that by their nature discourage investment.

While there has been increased investment in township areas and greater sub-division and densification of suburban areas over the last 15 years, the structure of our cities remain largely unchanged, with investment – understandably – continuing to target well-located urban spaces.

Market forces alone are unlikely to change this structure, as few of the costs caused by the negative externalities of a city’s structure are borne by developers and investors.

As a result, the necessary price signals are not sent out and the inefficient structure repeats itself.

So if market forces cannot change the current inefficient and inequitable urban form on their own, what is the role of the state and expropriation in effecting positive change?

At a recent Urban LandMark Conference, prominent property valuers, legal practitioners, NGO representatives and government officials debated the use of expropriation as one such mechanism and highlighted some of the following important points that need to be considered.

Expropriation has been used extensively world-wide for ‘public purposes’, usually in the provision of infrastructure.

It would be virtually impossible for public services such as the Gautrain to be provided without expropriation and most people accept the trade-off of individual rights for a greater public purpose.

South Africa’s Constitution states that expropriation may be used for public purposes and in the public interest.

This inclusion of ‘public interest’ broadens the scope for expropriation and muddies the waters, as it is not as easily defined as ‘public purpose’.

For example, it could be argued that rural land reform is in the public interest and therefore the use of expropriation to achieve this is justified.

However, if such action leads to reduced agricultural output, food insecurity and higher food prices, it could equally be argued that it is not in the public interest, especially if the primary beneficiaries are individuals whose private interests have been served.

Notwithstanding this, it is widely accepted that poverty reduction and urban restructuring are in the public interest and that the use of expropriation to address these issues is justifiable and should be used more often.

There is an argument, however, that the state already owns large tracts of land, and that they should identify and use this before undertaking an expensive expropriation exercise.

There is an argument, however, that the state already owns large tracts of land, and that they should identify and use this before undertaking an expensive expropriation exercise.

The counter to this is that firstly, if the state has not used this apparently easy-to-obtain land in 15 years, there must be real constraints preventing it from doing so.

Secondly, a lot of this land is held by parastatals whose founding statutes either prevent them from selling off their assets if it jeopardises the interests of their shareholders, or require the parastatals to maximise their income when they do so.

The fact that the shareholder is often the state raises interesting questions.

Clearly there is a need for these policies to be reviewed.

One cannot expect a CEO of a parastatal, mandated to maximise profits, to sell off assets at prices significantly below market levels.

Finally, while it is true that the state holds vast tracts of land, much of this is not suitable for development.

Another issue to consider is the fact that many state departments and some of the key professions do not have the requisite expertise, experience and capacity to embark on a wide-spread land acquisition and disposal programme.

For instance, valuers with the necessary experience and expertise to deal with the complexities usually associated with expropriation cases are in short supply and many experienced valuers are approaching retirement age.

The greater use of expropriation is likely to lead to numerous objections and the state and the professions will have to gear up in terms of the use of state land and their capacity to expropriate.

We are in a fortunate position in South Africa though when it comes to expropriation.

We have had clear legislation in place for many years and have built up experience in the courts, with a large body of precedent to guide future legal processes.

In fact, individuals are often better off if their properties are expropriated rather than being acquired on the open market.

However, there is a lot of confusion around the issue of compensation, especially with respect to the application of open market value and the defining concept of ‘willing buyer/willing seller’, which emphasises that no party should be under any obligation to buy or sell a property.

Not only is market-related compensation paid, the state is also obliged to pay the ‘actual financial costs’ (such as relocating) resulting from the expropriation and a nominal fee or solatium (often called ‘trane geld’) for the inconvenience of the expropriation.

However, there is a lot of confusion around the issue of compensation, especially with respect to the application of open market value and the defining concept of ‘willing buyer/willing seller’, which emphasises that no party should be under any obligation to buy or sell a property.

Compensation in terms of the current Expropriation Act is made up of market value, actual financial loss incurred and solatium.

However, since the introduction of Section 25 of the Constitution, more factors have to be taken in account in the determination of compensation, including:

“The amount of the compensation and the time and manner of payment must be just and equitable, reflecting an equitable balance between the public interest and the interests of those affected, having regard to all relevant circumstances, including:

1. The current use of the property

2. The history of the acquisition and use of the property

3. The market value of the property

4. The extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property

5. The purpose of the expropriation

For instance, if the property had been acquired by the current owner with the benefit of cheap (subsidised) state loans, this must be taken into account and the compensation reduced, the argument being that the state should not pay ‘twice’ for the property.

Compensation made in terms of the Expropriation Act is seen to be constitutionally valid if it is shown to be just and equitable and reflects a fair balance between public and private interests.

The Constitutional Court has applied this in a practical manner by stating that the market value of the expropriated property should be the starting point in determining compensation, and then adjusted according to the other provisions of Section 25.

There are mixed views about this application. Some Constitutional Court judges argue that starting with market value in the determination of compensation is useful because it is one of the few factors in Section 25 that is readily quantifiable.

Since a value has to be arrived at, it is not clear how else one would begin to determine an amount from which additions or deductions can be made.

Other Constitutional Court judges argue that the just and equitable factor is not a ‘review’ test but the test for the calculation of compensation.

The confusion surrounding the ‘willing buyer/willing seller’ concept arises because the state, through its land reform programme, has attempted to purchase (as opposed to expropriate) land directly from land owners on what it calls a ‘willing buyer/willing seller’ basis.

 In many cases the land owners were not planning to sell their properties and had to be induced to do so, usually through generous offers that were often above market value.

The Constitutional Court has applied this in a practical manner by stating that the market value of the expropriated property should be the starting point in determining compensation, and then adjusted according to the other provisions of Section 25.

Consequently the state has frequently ‘over-paid’ for properties, raising doubt about its financial ability to roll out its land reform programme at scale.

This has rightly aggrieved many who have called into question the appropriateness of applying this ‘willing buyer/willing seller’ concept to the land reform programme.

The way that the ‘willing buyer/willing seller’ concept is used in the land reform programme is therefore very different to how it is used to define open market value.

Its use in the land reform programme to acquire property on the open market by inducing people to sell through higher prices is problematic and unsustainable.

Expropriation should rather be used to ‘trigger’ the property sale, and due to its quantifiable nature – open market value – based on the ‘willing buyer/willing seller’ concept as per the definition should be used as the starting point to calculate compensation from which adjustments can be made.

This would result in the state paying lower prices in general, and concerns around ‘Mugabe-style’ land-grabs would be reduced.

The state should use expropriation to a greater extent to attain strategic land for developmental objectives provided it is undertaken within a clear policy and legal framework where the principle of equivalence prevails, just and equitable remuneration is made and legal recourse is available for parties to seek fairness.

Discussions around expropriation and the need to amend the legislation to speed up land reform are usually fairly emotive and present extreme opposing positions.

It is important that we reach a more sophisticated position on how and when expropriation should be used.

If the redrafting of the Expropriation Act goes ahead without addressing this complexity, there will simply be a stand-off between the opposing positions and a fair, workable system which favours urban efficiency and the interests of poor people, is unlikely to be achieved. – Rob McGaffin

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