Full ownership of as opposed to leasehold title to immovable property

THE ISSUES

It is becoming more and more common for land owners (both in the governmental/quasi?governmental and in the private sectors) to elect to "dispose" of their land in terms of long leases rather than by way of the transfer of full ownership. There are probably any number of reasons for this tendency. Certainly and by no means least is the very real benefit to the land owner that on the termination of the lease period the property will fully revert to it by operation of law.

Typically, land, whether vacant or improved, is leased to a tenant for a period of up to 99 years, with or without renewal options. The rental may be paid in a single, upfront, lump sum amount or may be paid in periodical instalments. The lease is usually registered in terms of the Deeds Registries Act. For the sake of convenience I shall refer the rights of a tenant in terms of such a registered long lease as "leasehold title".

In order to understand the distinction between full ownership of land and leasehold title to the land it is necessary to briefly consider some basic legal concepts. Fundamentally a "real right" is a right which is enforceable by the holder of the right against the world at large. On the other hand, a "personal right" is a right which is enforceable by the holder only against a specific person or other legal entity.

Ownership is the most comprehensive of all real rights and confers upon the holder, inter alia, the right to use the property, the right to income derived from the property, and the right to consume, dispose of and even destroy the property. Ownership is unlimited in duration and is not subject to time limit. It is an independent right and is not dependant on or derived from any other right.

Leasehold title, on the other hand, confers upon the holder a limited real right. It is a right over the property of another. The rights of the holder of the leasehold title are limited to the use and enjoyment of the property leased for a limited period of time for which the holder of the rights must pay the owner of the land certain rent. Upon the termination of the lease period the holder of the leasehold title must return the property to the owner. Upon registration of the relevant lease the holder of the leasehold title is vested with a real right.

We see therefore that both full ownership and leasehold title confer upon the holder a real right which is enforceable by the holder against the world at large. The rights of an owner are more comprehensive whilst the rights of the holder of leasehold title are limited. Both, being real rights, confer upon the holder the best security of title available in terms of our law. It must always be borne in mind that no real right is absolute to the extent that it operates in all circumstances and against all entities. By way of example an owner of land may be deprived of such ownership through expropriation. Similarly the holder of leasehold title may be deprived of its rights through expropriation and/or (in certain circumstances) through the insolvency of the owner of the land.

One may well ask how secure is the title of the holder of leasehold rights and under what circumstances can the holder of such rights be deprived thereof through reasons beyond its control.

If land which is subject to a registered long lease is sold, then and by reason of the principle of "huur gaat voor koop" the purchaser is automatically and by operation of law bound by the lease. He simply steps into the shoes of the previous owner. The tenant remains entitled to all of the benefits of the lease. Even if the land is sold by the liquidator or trustee of an insolvent landlord, the land must first be offered for sale subject to the lease. It is only if such sale does not realise sufficient proceeds to discharge a pre-existing real right (ie a registered mortgage bond) that the land, having been offered for sale subject to the lease, may be offered for sale free of the lease. If no such pre?existing real right exists then the tenancy of the tenant is secure. Accordingly it is important to the tenant that it must ensure that at the time the lease is entered into the land is not encumbered by mortgage bond. If the land is encumbered by mortgage bond the tenant must insist that the bondholder first waives its rights in favour of the tenant. Conversely if the land owner subsequently wishes to encumber the land by mortgage bond the tenant should not waive its rights as registered lessee in favour of those of the proposed bondholder.

In terms of the Deeds Registries Act "immovable property" includes (by definition) any registered lease of land which, when entered into, was for a period of not less than 10 years or the natural life of the lessee or which is renewable from time to time at the will of the lessee indefinitely or for periods which together with the first period amount in all to not less than 10 years. Accordingly leasehold title constitutes immovable property and as such is capable of being encumbered by mortgage bond as security for a loan. Just as land can be mortgaged by mortgage bond so can leasehold title be mortgaged by mortgage bond. The position of the holder of the mortgage bond (being a limited real right) is less secure than those of the holder of the leasehold title. The security afforded by the mortgage bond is only as good as the underlying leasehold title. If the underlying leasehold title is cancelled for whatever reason (whether by agreement between the land owner and the holder of the leasehold title, or by reason of default or insolvency of the holder of the leasehold title or by operation of any law) then the security afforded by the mortgage bond effectively disappears. It is for that reason that banks and other financial institutions are often reluctant to grant loans against the security of a mortgage bond over leasehold title. These legal difficulties can readily be overcome by the appropriate use of "step in rights agreements" (being agreements between the land owner and the bondholder in terms whereof the bondholder or its nominee is given the right to "step into the shoes of" the lessee if the lease is cancelled or terminated) or "suspended" lease agreements (being leases entered into between the land owner and the bondholder and which are registered but which commence only on the termination of the original lease between the land owner and the original holder of the leasehold title). The careful and considered use of these mechanisms can adequately address the risks to which a mortgagee (and even a sub?lessee) may be exposed to if the underlying lease is prematurely cancelled or otherwise terminated. I will in a future article consider "step in rights agreements" and "suspended leases" in greater detail.

In conclusion, full ownership of land is the most comprehensive and best form of title available to a person in terms of our law. However, where full ownership of land cannot be obtained, a registered long lease can provide an acceptable alternative form of title provided salient pitfalls are suitably addressed.