Commercial real estate in South Africa: overview

A Q&A guide to corporate real estate law in South Africa.

The Q&A gives a high level overview of the corporate real estate market; real estate investment structures, including REITs; title; tenure; sale of real estate; liability; due diligence; warranties; real estate tax, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership; real estate finance; commercial leases; and planning law.

To compare answers across jurisdictions, visit the Corporate Real Estate Country Q&A tool.

This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-guide.

Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

Since the national government promulgated the Restitution of Land Rights Amendment Act, which reopened the time period within which to submit land claims until 30 June 2019, an estimated 60,000 land claims have been submitted. This may impact mostly rural and agricultural land, but some land claims have also started affecting urban areas. Under the land claims process, successful claimants can either be compensated for the land or rights in land that were dispossessed, or the land can be returned. It has been stated that where land claims affect urban areas, compensation will be the preferred manner of redress in terms of the legislation. In accordance with the 2014/2015 report, ZAR1 billion has been paid as compensation to claimants and ZAR1 billion has been spent acquiring land from landowners, where restitution of land was ordered consisting of more than 144,000 hectares.

The introduction of draft legislation is still awaited, following the President's State of the Nation speech on 12 February 2015 relating to the possible restriction of foreign ownership in relation to rural and agricultural land, and the mooted limitation of 12,000 hectares in size (or two aggregate farms) in respect of farming land, applicable to both citizens and foreigners. The proposed legislation will have to first pass Constitutional muster, given the strict criteria set out in section 25 of the Constitution (see Question 39 ( www.practicallaw.com/3-633-1568) ).

Renewable energy deals continue to change the landscape. Every solar plant, wind energy facility, and concentrated solar power (CSP) facility requires intense negotiations and input in respect of land tenure and environmental considerations.

There continues to be some foreign direct investment, especially by Chinese investors and foreign pension funds in the South African real estate market. The introduction of REIT legislation in 2013, continues to drive some consolidation among funds previously competing in the same sector, as well as stimulating new entrants to the market.

The commercial property finance sector continues to show steady improvement, driven by retail, industrial and office developments. Plans are still being formulated to facilitate the national government's ZAR827 billion infrastructure development plan, to install new and upgrade existing infrastructure. Infrastructure spending is a key topic on the national agenda given that 2016 is a local government election year.

Transfer duty rates payable on properties valued at more than ZAR2.25 million also increased in the 2016 budget announcement but value added tax (VAT) remained unchanged at 14%.

South Africa is currently in an upward interest rate cycle, with the Reserve Bank raising the REPO rate four times, resulting in the prime rate of interest being increased to 10.5% at present.

 

Real estate investment

2. What structures do investors typically use for real estate investment in your jurisdiction and what are the main advantages and disadvantages of each (for example, flexibility and tax transparency)?

Property owning companies operating as developers in their own right, or as subsidiaries of listed property funds and/or REITs, are by far the most popular vehicle for investment in real estate. These entities have been the major drivers of corporate real estate investment.

Almost all of the former listed property funds have converted to REITs since 2013 legislative changes came into force, to make use of the taxation benefits offered. It also enhances the synergy with international markets as REITs represent a familiar investment vehicle used for over 40 years internationally. The intention was always to make the South African real estate market more understandable for foreign based investors. Already, it has proven to be a popular development in the market, partly because of its less restrictive yet clearly defined rules relating to investments. For further information, see www.reits.co.za.

 
3. What are the main sources of finance and types of investors for real estate investment in your jurisdiction? Does your government encourage overseas investment into real estate in your jurisdiction, for example through real estate investment legislation?

The major financial institutions (including banks, pension funds and insurance companies) remain strong investors in the market, and appear to focus their attention in the mixed use, retail and office developments sector. The Public Investment Corporation (PIC) represents the Government Employees Pension Fund with an amount in excess of ZAR1.8 trillion available for investment, in well considered projects and initiatives.

There are some private investors but most investment by private investors is done through private companies, close corporations and to a lesser degree partnerships and trusts.

Restrictions on foreign ownership or occupation

4. Are there restrictions on foreign ownership or occupation of real estate (including foreign ownership of shares in companies holding real estate)? Are there restrictions on foreign guarantees or security for ownership or occupation and on lending for the purchase of real estate?

At present there are no restrictions on foreign ownership or occupation. However, at the start of 2015 the government mooted legislation to prevent foreigners owning agricultural and rural land, instead favouring long-term leasehold tenure for foreigners. The proposed legislation will however not apply retrospectively, and no draft legislation has been circulated yet. As part of the same discussion, the government also proposed introducing maximum land areas that can be owned by one individual or entity and this will apply to both citizens and foreigners, but no draft bills have been tabled for comment (see Question 1 ( www.practicallaw.com/3-633-1568) ).

There are formal requirements for a foreign company to register under the Companies Act, if it wishes to acquire South African immovable property in its name. Ownership of shares by a foreign person in a local entity that owns real property is also permitted, subject to certain tax implications relating to withholding tax, capital gains tax and exchange control.

 

Title to real estate

5. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

Based on common law principles, the registered owner of the land is also the owner of the buildings and other fixed improvements situated on the land. However there may be exceptions in terms of certain long term lease structures (whereby certain rights in the dominium are retained by one party and another party still owns the land). The Sectional Titles Act 1986 also finds great application in certain commercial real estate developments. This ownership structure enables multiple owners to own defined sections within a building or on a property, together with an undivided share of the common property and specifically denoted exclusive use areas assigned to that particular section. Ownership, and long term tenure by means of leasehold or notarial long term leases are recorded in the ten deeds registries located throughout South Africa.

 
6. How is title to real estate evidenced? What is the name of the public register of title and the authorities responsible for managing it? Is electronic access and electronic conveyancing available?

There is a very advanced cadastral system intrinsically linked to the deeds registry system. Title is evidenced by a deed of transfer (or title deed), notarial deeds (required for long term leases and other limited real rights such as servitudes) and deeds of grant for leaseholds, and all these deeds are registered in one of the ten deeds registries.

Each deeds registry has a Registrar of Deeds and staff, who in turn report to the Chief Registrar of Deeds based in Pretoria. The deeds registries operate under the auspices of the national government's Department of Rural Development and Land Reform (www.ruraldevelopment.gov.za).

 
7. What are the main information and documents registered in the public register of title? Can confidential information or documents be protected from disclosure in the public register of title?

The public register is electronically updated every time a deed is registered in relation to a person, company or property.

In relation to ownership of land the following information appears:

  • Full names of individual or entity.

  • Identification number and marital status and/or registration number.

  • The property description with reference to the township, farm or agricultural holding register or sectional title scheme.

  • The size of the property or section.

  • Previous holding deeds relating to the land.

  • Each title deed refers to conditions of title applicable, which may contain some information relating to land use rights.

  • Encumbrances such as mortgage bonds and or real rights are endorsed on the title deeds of properties.

Once a person or entity becomes the registered owner in the deeds registry, the information is updated with the owner's details and is accessible to the public. For example, the amounts of mortgages registered over property are clear for all to see and sometimes even the terms of repayment. All deeds registered in the deeds registries are scanned and retained for record purposes.

 

State guarantee of title

8. Is there a state guarantee of title? Is the authority that manages the public register liable to pay compensation for any errors it makes in relation to title registration? Is title insurance available and is it commonly used?

No title insurance is available. There is no formal state guarantee of title. The Constitution enshrines the right to property, and states that no one can be deprived of property except in terms of general law and no law can permit arbitrary deprivation of property (section 25, Constitution 1996). However, property can be expropriated by the state for public purposes or in public interest, subject to compensation being paid.

A new Expropriation Bill has been introduced and if passed into legislation, the office of the Valuer-General will come into force to assist in managing the expropriation process, by providing input in respect of the market value of property.

If a mistake is made in relation to the registration in a deeds registry, the deeds registry and its officials cannot be held liable to pay compensation, based on a specific inclusion in the Deeds Registries Act (section 99) which exempts it from liability for acts or omissions. The court process is however available to parties who wish to rectify serious mistakes and to restore the pre-registration status.

 

Tenure

9. How can real estate be held (that is, what types of tenure and other main ownership rights exist over land)?

The most common type of tenure is freehold in respect of land defined in the township register, the farm register and the agricultural holding register. For higher density developments, sectional title schemes may be opened. Also, registered long term leases are equivalent to land in terms of the Deeds Registries Act and can even be mortgaged. In some instances, tenure can be enjoyed in terms of a share block scheme, where a person holds a share in a share block company that actually owns the land.

There are also still cases of leasehold, but partly based on historical events leasehold has been gradually done away with since about 1991, when the Conversion Act was introduced to convert leasehold into freehold. With the national government's proposals regarding foreign land ownership (see Question 1), leasehold may again become more prevalent.

 

Sale of real estate

Preliminary agreements

10. What types of preliminary agreements are typically used in the sale of real estate? Are they legally binding?

Either the seller or buyer can instruct a broker or estate agent to find an interested counterparty. The agreement of sale is usually negotiated by the parties, sometimes with the assistance of the broker/agent/attorney. In most large transactions, both parties retain independent legal counsel to assist and draft agreements, including finance documents. The lender usually instructs different legal counsel for purposes of loan facility agreements and registration of security documents, such as covering mortgage bonds, special- and general notarial bons (which hypothecate movable assets, especially in project finance deals).

Subject to the requirements of the parties, a formal agreement of sale may be preceded by a binding or non-binding heads of terms which sets out basic commercial terms and the conditions precedent (for example, due diligence investigations).

 

Sale contract

11. Briefly outline the typical main provisions of a corporate real estate sale contract and main real estate provisions of a typical share purchase agreement.

The following applies:

  • In many instances, the contract comes into being when a signed offer to purchase is presented to the seller for consideration. Once the offer and terms are unequivocally accepted by the seller (that is, no counter offer is made), the sale contract comes into being.

  • If the sale contract is preceded by heads of terms, a much more detailed agreement is usually concluded by the parties.

  • Sale contracts must be in writing, signed by both parties who are duly authorised, and there must be clear agreement in respect of the property description, the purchase consideration and terms of payment.

If the sale contract:

  • Contains no suspensive conditions or conditions precedent, the agreement becomes binding on both parties on signing a written agreement.

  • Does not contain suspensive conditions (for example, obtaining requisite financing), the agreement only becomes binding once such conditions are complied with timeously by the respective parties.

 

Due diligence

12. What real estate due diligence is typically carried out before an acquisition and what key areas does it cover? Which documents are typically reviewed? Which specialist advisers are usually involved and which reports do they typically produce?

The buyer will usually, at its own cost instruct:

  • A conveyancer or attorney to verify title, encumbrances (for example, existing mortgage bonds or possible judicial attachment of the property) and restrictive conditions of title that may relate to the property, as well as zoning/land use rights that may affect use, construction or possession of the property.

  • An attorney or property manager, who may also inspect the tenant mix and status of lease agreements.

  • An engineer to verify structural integrity and or soil conditions and or electrical installations and other amenities (for example, plumbing and heating, ventilation and air conditioning (HVAC)).

  • An architect to obtain and verify whether municipal approved plans exist in respect of the buildings on the property.

  • A land surveyor to verify the extent of the property and or buildings situated on it.

Depending on the size and value of the property, the parties agree on a suitable time period for the buyer to undertake and finalise the due diligence report. The right to conduct the inspections and time period allowed is usually a suspensive condition or condition precedent. The buyer must notify the seller of its satisfaction with the due diligence report, or waiver of the condition, before the expiry of the time period agreed by the parties.

Where some transactions are preceded by a request for proposal (RFP) process, a data room containing all the relevant documents is usually set up in advance for interested parties participating in the RFP to view.

 

Sellers' warranties

13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover? What are the main limitations on warranties, for example are they typically qualified by disclosure?

The most common warranties are:

  • Warranty of ownership or right to dispose of the property. A person or entity is entitled to sell something that does not vest in ownership in that person in terms of common law but the requirement for transfer of ownership is delivery, which is evidenced only by registration in the deeds registry. Accordingly, the deeds office procedures conducted by the conveyancer usually ensures compliance with this warranty.

  • That there is no prior agreement, which may be stronger in law, to grant any rights to other persons relating to disposal or hypothecation of the sale property.

  • The buildings on the property are built in accordance with municipal approved plans.

  • Absence of heritage, environmental or legislative (for example, land claims) restrictions that prevent transfer of ownership and use of the property for the purpose intended.

  • On registration of transfer of the property in the deeds registry, that vacant and undisturbed occupation and possession, free from encumbrances, will be granted and given to the buyer (subject to the terms in the sale contract regarding the agreed date of occupation not coinciding with the date of transfer).

 

Liability

14. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

The seller's liability in commercial property transactions is usually contractually agreed in the form of some warranties and declarations (for example, a warranty that it is entitled to transfer ownership as owner).

The warranties and declarations are also coupled with a voetstoots clause, whereby the buyer acknowledges that the property has been inspected and that he is prepared to buy the property "as is". This means that the seller cannot be held liable for defects it did not known about at the time of conclusion of the sale. However, the voetstoots clause will not protect and indemnify a seller who has willingly/fraudulently failed to point out known defects.

Some statutory liability in relation to providing compliance certificates relating to electrical, gas, security fence and plumbing installations also exist, but are almost always incorporated as a contractual term.

 
15. Briefly outline the environmental legislation and potential liability for a buyer in a purchase of real estate. Is it common to carry out environmental surveys and searches and to obtain environmental insurance? How is environmental liability typically dealt with in the sale contract?
 
16. Can an owner or occupier inherit liability for other matters relating to the real estate even if they occurred before it bought or occupied it? Can a seller or occupier retain any other liability relating to the real estate after it has disposed of it?

An owner or occupier can inherit liability for matters relating to the real estate in some cases, for example:

  • Environment liability usually rests with the owner of the property. Therefore, it is necessary to obtain indemnities from the seller in case a claim arises after registration of the transfer of ownership.

  • In limited cases, a buyer cannot demolish or alter buildings on a property based on heritage considerations. Accordingly, a full due diligence of old properties is advisable.

  • A recent Supreme Court of Appeal decision has allowed a local municipal authority with jurisdiction over a property to hold the current owner liable for arrears of assessment rates and taxes due on the property. Conveyancers must file a rates clearance certificate issued by a local authority with every registration of transfer of ownership in the deeds registry. However sometimes the local authority only issues the certificate after payment of the two years' prior amounts. Accordingly, it is now necessary to include indemnities in this respect in the sale contract.

  • Given the requirement that existing mortgage bonds registered in favour of the seller's financier need to be cancelled prior to, or simultaneously with the registration of transfer in the deeds registry, the buyer will not incur liability in that regard unless it has consented to being substituted as a debtor under the mortgage bond, in terms of section 57 of the Deeds Registries Act.

  • In extremely rare cases, a new owner of a property may be faced with a claim from a builder or contractor in relation to improvements erected on the property in terms of a lien. This will constitute a defect that should have been disclosed by the seller and a voetstoots provision will not aid the seller in its defence.

To the extent contractually agreed with the buyer, the seller can be held liable after registration of the transfer of ownership, but not in all cases. To transfer title, the seller must comply with certain formal requirements, settle any existing mortgage and pay relevant assessment rates clearances requested by the local authority. However, retention of liabilities in relation to environmental matters or material defects is normally contractually regulated.

Failure to properly disclose a material defect in the property sold can also lead to the seller being liable.

 

Completion arrangements

17. What are the typical arrangements and main documents required for completion of the sale? When does title transfer and what are the formal legal requirements to execute the sale documents, transfer the real estate and register the change of title? Is notarisation required?

The formal requirements for registration of transfer of ownership, or registration of a notarial deed of lease, are set out in the Deeds Registries Act and Regulations.

The process is performed by a specially qualified attorney known as a conveyancer. The seller has to sign a power of attorney, authorising the conveyancer to attend to registration and submit documents for transfer duty/VAT purposes to the South African Revenue Services (SARS). When the Registrar of Deeds appends his signature and seal and date on the deed of transfer, registration becomes valid and binding.

In some instances, notarial execution and subsequent registration can be linked to a sale transaction (for example, transfer of ownership in an exclusive use area in a sectional title scheme is evidenced by a notarial deed of cession of exclusive use) and the deed is prepared and registered by a notary public.

Title transfers on registration of the deed of transfer in the deeds registry. Registration of transfer of ownership in the relevant deeds registry with jurisdiction constitutes delivery of the sale property. Delivery is required to transfer ownership.

 

Real estate tax

18. Is stamp duty/transfer tax (or equivalent) payable on the purchase of real estate? Who pays, what are the rates and are there any exemptions? Does it apply to the transfer of shares in a company holding real estate and at what rate?

Stamp duty no longer applies in South Africa. If the seller is not registered for VAT purposes the buyer will have to pay transfer duty in addition to the purchase price. The rates for individuals, corporates and trusts are the same, and with effect from 1 March 2016 changed to apply as follows for the following property values:

  • ZAR0 to ZAR750,000: exempt;

  • ZAR750,001 to ZAR1,250,000: 3% (ZAR,15,000) plus;

  • ZAR1,250,001 to ZAR1,750,000: 6% (ZAR30,000) plus;

  • ZAR1,750,001 to ZAR2,250,000: 8% (ZAR40,000) plus;

  • ZAR2,250,001 to ZAR10 million: 11% (ZAR852,000) plus;

  • ZAR10 million and above: 13% on the amount above this threshold.

VAT is payable either at the rate of 14% or in some instances 0% (for example, property is sold as a going concern) or in some instances exemptions may apply, for example for charitable institutions.

If the buyer is registered as a VAT vendor, it may (subject to conditions) be able to claim the transfer duty or VAT paid as part of the acquisition process, back as an input tax.

The South African Revenue Services (SARS) (www.sars.gov.za/Pages/default.aspx) is the government entity in charge of collecting all taxes and duties.

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios? What is the general approach of the tax authorities in your jurisdiction to such schemes?

In some cases, offshore entities are used to acquire either a property portfolio or an interest in a limited partnership entity that owns a property portfolio.

Mergers, amalgamations and acquisitions of businesses (which includes the properties) may also yield the desired mitigation effect.

The choice of investment vehicle/purchasing entity may also yield tax benefits.

 
20. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate? Who pays? What are the rates? Are there any exemptions?

The sale of property attracts either VAT or transfer duty, depending on the VAT status of the seller.

If the seller is a registered VAT vendor and the sale of the property is a supply subject to VAT, the buyer must pay VAT on the purchase price, provided the buyer's consideration is stated as "R X plus VAT" or "excluding VAT". If not, VAT is deemed to be included in the purchase consideration set out in the sale contract. The applicable rate of VAT is 14%. The following exceptions may apply, provided the buyer is also registered for VAT:

  • The sale of the property may be part of the sale of a business being sold as a going concern, which may lead to VAT being levied on the transaction at a zero rate. The test is whether the sale of the property is part of the sale of an income earning enterprise.

  • Certain statutory exemptions apply in relation to intra-group transfers between companies/entities, or if the buyer has the requisite public benefit organisation/institution of learning/charity/religious status.

 
21. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

Assessment rates are levied in respect of business, commercial and industrial premises. Each year, local authorities issue the applicable rates policy and tariffs that apply to all classes of property. 

 

Climate change issues

22. Are there targets or incentives to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there legislation requiring buildings to meet certain minimum energy efficiency criteria?

There are no formal targets yet to reduce greenhouse gas emissions from buildings in South Africa, other than those contemplated in COP21 and committed to by the government. The Green Building Council of South Africa is a full member of the World Green Building Council and issues GreenStar ratings in respect of building projects. There are limited legislative requirements at this stage contained in local authorities' bye-laws.

 
23. Are provisions relating to the energy efficiency of buildings commonly included in contracts for the sale of real estate or in leases (for example, green leases)?

Increasing awareness is prevalent in the development of commercial office space. Tenants, especially global entities, seek to commit developers to more environmentally sustainable building practices, and in some instances even insist on including penalty clauses in development lease agreements if the developer does not meet a required standard.

 

Real estate finance

Secured lending involving real estate

24. Briefly outline the typical security package required by lenders in relation to real estate lending. How are the most common forms of security interest relating to real estate created and perfected (that is, made valid and enforceable)?

Financing of the acquisitions of large real estate portfolios or companies holding real estate varies, depending on the value of the transaction and the parties involved. Most acquisition finance and re-financing is done with institutional banks. REITs and other institutional investors such as listed property funds, banks, pension funds and insurance companies fund their own acquisitions.

To raise finance, the property/registered long term lease is commonly provided as security, in the form of registration of a mortgage bond over the property.

If the property is let to tenants, the rental stream is usually ceded in favour of the financier as additional security.

Strict liquidity and solvency requirements must be complied with by borrowers who wish to raise finance against real estate.

The most common forms of security granted over real estate to raise finance are mortgage bonds. They are registered over the property and endorsed in the deeds registry against the deed of transfer of the property, or against the notarial deed of long term lease.

 
25. What other real estate related measures do lenders typically take to protect themselves against default by the borrower?

Lenders providing finance usually require security packages consisting of one or more of the following forms of security:

  • Mortgage bonds over immovable property.

  • Suretyship and/or guarantee by parent company or directors, or even shareholders.

  • Notarial bonds (both general and special) of movable property such as plant and equipment.

  • Cession of rental income and any other proceeds derived from the property.

  • Pledge of shares in the property owning entity.

In addition to security packages, lenders currently also seek equity funding from the borrower, the percentage varying depending on the nature of the property or the project.

 
26. Can lenders incur environmental liability? What measures do lenders typically take to manage potential environmental liability?

No. The registered owner is the responsible entity in respect of environmental liability and South African legislation follows a principle of polluter pays. Lenders have recently started to insist on separate undertakings and indemnities from borrowers to comply with the relevant environmental management plan (EMP) approved in respect of a development, failing which certain sanctions will follow.

 
27. Briefly outline the main remedies for lenders in relation to the secured real estate if the borrower defaults on the loan. What is the effect of the borrower's insolvency on the lender's remedies?

A lender cannot enforce a system of parate execute or summary execution in respect of the repossession of immovable property over which it holds a registered mortgage. The lender will have to obtain a court judgment against the borrower to proceed to a sale in execution of the immovable property. As a result of a mortgage bond in its favour, the lender will however not have to first execute against the movables of the borrower, but can apply for an order of special executability against the property and proceed with a sale in execution.

In cases of insolvency, a registered mortgage holder:

  • Ranks very high in preference, third only to SARS, local authorities and property owners associations (who impose assessment rates and levies and have to issue rates clearance certificates and levy clearance certificates before ownership in the property can be transferred).

  • Is entitled to claim from the insolvent estate on a secured basis, without having to pay contributions if there is a shortfall in the insolvent estate.

 
28. Briefly outline key additional issues for lenders in relation to construction and development projects.

Key additional issues for lenders in relation to construction and development projects include that:

  • Lenders require to be kept up to date with progress and, if it is an owner-build, require periodical valuations before progress payments are made to contractors from the loan proceeds.

  • Lenders require assurances from the borrower relating to compliance with land use regulations, planning procedures, approved contractors and project budget as standard requirements.

  • Extensive vetting of the principal building contract together with assurances about security of tenure are required as part of the due diligence process.

  • Depending on the nature of the project, lenders may insist on step-in rights to be included in the loan agreements in case of delays, default or breach.

 

Other real estate financing techniques

29. Are other real estate finance techniques commonly used in your jurisdiction? For example, real estate securitisation and sale and leasebacks.

Real estate securitisation is not common in South Africa.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable? Which legislation applies?

Contractual lease provisions are freely negotiable.

 
31. What are the formal legal requirements to execute a lease? Does the lease have to be executed by certain parties or as a deed? How do the formalities differ for a company, partnership and for individuals?

Leases for a term shorter than nine years and 11 months are usually referred to as short term leases and do not even have to be in writing. However, most commercial leases have renewal options included which may take the lease period to longer than ten years. Long term leases that are to be endorsed against the title deeds must be in writing and need to be executed in front of a notary public so that they can be registered in the deeds registry.

 

Rent payments

32. How are rent levels usually reviewed and are there restrictions on this? Is stamp duty and VAT (or equivalent) payable on rent? Is a rent security deposit required and does it have to be managed in a certain way?

Rent payment escalation and reviews are contractually agreed and in most instances the parties agree on a fixed annual escalation. Rent reviews, if contractually agreed, are usually done on renewal of a lease for a further period.

VAT is payable in almost all instances in respect of commercial leases, provided the landlord is registered for VAT.

 

Length of term and security of occupation

33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

Each lease differs and should be contractually negotiated in relation to the commercial conditions, including lease term. Once the parties agree a fixed term, the tenant is expected to honour the lease term for the full period. Failure to do so may lead to penalties and sanctions from the landlord.

In turn, if a tenant agrees a fixed term, regardless of whether it is a two or 20 year lease, the landlord will be required to honour the common law principles applicable to leases by giving undisturbed use, occupation and possession of the leased premises for the duration of the period, provided the other terms of the lease are honoured by the tenant.

 

Disposal

34. What restrictions typically apply to the disposal of the lease by the tenant? Can the tenant assign or sublet the lease with the landlord's consent? Can tenants share their premises with companies in the same group? What is the effect of a legal reorganisation or transfer/sale of the tenant on the lease and on a guarantee of the lease?

Tenants have to contractually negotiate the right to assign the lease or even sub-let the leased premises. Usual provisions state that the tenant can only assign or sub-let with the landlord's prior written consent.

Tenants can usually share their business premises with companies in the same corporate group, but landlords will require a principal tenant to honour the lease terms.

 
35. Does a landlord or tenant retain any liability under the lease after the lease is assigned?

Assignment places the assignee in the same position from a rights and obligations point of view as the assignor. So a tenant who assigns a lease (with permission from the landlord) will, in certain instances and if the assignee does not perform in accordance with the lease, still be liable to the landlord, but this will depend on the contractual arrangements made at the time of the assignment agreement.

Landlords who pass transfer of ownership usually do not retain any liability but the new owner will be bound by the terms of the lease, even if the lease does not expressly provide for it, under the common law doctrine of huur gaat voor koopt (the lease follows transfer of ownership).

 

Repair and insurance

36. Who is usually responsible for keeping the leased premises in good repair and for insuring the leased premises? Are there provisions for the ownership of lease improvements?

Most corporate leases of single tenanted buildings are triple net leases. This means that the tenant is required to perform all obligations in relation to maintenance, payment of assessment rates, utility charges and insurance. In multi-tenanted corporate buildings, the tenant is responsible for all maintenance (not of a structural nature) of its area of the total rentable area. The landlord will invoice the tenant on a proportionate basis for its share of the total insurance premium and general maintenance charges as part of the operating costs.

The owner of the property is usually responsible for insuring the leased premises. In triple net leases, the landlord shifts the responsibility to the tenant and in multi-tenanted buildings, each tenant is invoiced on a pro rata basis as part of the operating costs for the insurance premium. This is not always the case though and can be negotiated by the parties.

 

Landlord's remedies and termination

37. What remedies are available to a landlord for a breach of the lease by the tenant? On what grounds can the landlord usually terminate the lease and what restrictions and procedures apply? What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

The landlord can usually terminate the lease on the following grounds:

  • Failure by the tenant to pay monthly rental in full and on time.

  • Failure by the tenant to use the leased premises for the defined purpose, and generally not complying with the rules of the centre or building in relation to use.

  • Failure by the tenant to pay utility and other charges if required.

  • In retail leases, if the tenant fails to operate during the agreed business hours.

  • Failure to supplement the lease deposit/guarantee, if the landlord has to claim against the deposit.

The tenant's insolvency is usually listed as an event of default in the lease, which gives the landlord the right to exercise the contractual remedies available to it, including termination of the lease.

If the landlord has perfected its lien/statutory hypothec pursuant to a tenant's unremedied default by issuing a summons and attaching the tenant's movables before insolvency, the landlord can be regarded as a secured creditor in the winding up of the tenant's insolvency estate.

 
38. Can the tenant withhold rent payments in certain circumstances, for example for serious damage to the leased premises? Can the tenant terminate the lease in certain circumstances?

The tenant can usually terminate the lease on the following grounds:

  • If landlord has responsibility to provide certain services and the services are not provided (for example, security and cleaning).

  • A common law remedy if the landlord constantly interferes and disrupts the tenant's undisturbed use, enjoyment and occupation of the leased premises.

 

Planning and development controls

39. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

Property can only be expropriated in terms of law of general application for a public purpose or in the public interest, subject to compensation being paid on a basis agreed by those affected, or decided or approved by a court (section 25, Constitution 1996).

The amount of compensation payable must be just and equitable, by reflecting an equitable balance between the public interest and those affected by the expropriation. The following factors must be taken into consideration:

  • Market value.

  • Current use.

  • History of acquisition and use.

  • Extent of direct state investment and subsidy in the acquisition and capital expenditure undertaken at the property.

  • The purpose of expropriation.

  • The public interest includes the nation's commitment to land reform.

  • Property as mentioned in the Constitution is not limited to land.

 
40. What authorities regulate planning control and which legislation applies? Is there specific protection for special categories of buildings such as historic buildings?

Planning in each jurisdiction is governed by the local authorities in terms of the local government planning ordinances. In 2013, the Spatial Planning and Land Use Management Act (SPLUMA) was promulgated and this national legislation came into force. It is framework legislation that provides for the enactment and, where necessary, amendment of provincial and local planning legislation to ensure uniformity. 

 
41. What planning consents are required for building works and the use of a building?

In almost all instances of commercial development, rezoning applications will have to be made to ensure that the desired density and bulk is allocated to the property from a services and infrastructure perspective.

Accordingly, rezoning approvals will require:

  • Traffic impact assessments.

  • Environmental impact review.

  • Consent from adjacent property owners.

  • Review of title conditions and other conditions of establishment relating to the broader township.

  • Consideration of what servitudes (or example, access and egress) may be required over adjacent properties.

  • Filing of a proposed site development plan.

Once the authorities have reviewed all documentation, rezoning of the land parcel may be granted or refused. If it is refused, an appeal process can be followed.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

Initial consents

At present, the land use planning departments of each municipality consider the applications for rezoning, taking into consideration multiple factors. If a rezoning is refused, an appeal process as set out in the applicable ordinance and more recently the Spatial Planning and Land Use Management Act (see Question 40) must be followed.

The time taken for an initial decision varies greatly, depending on the local authority. In some of the big metropolis areas it usually takes more than six to eight months.

Third party rights and appeals

Third parties can object, if their proprietary rights are affected (for example, encroachment, loss of view, and loss of amenities due to increased traffic). Almost all big municipal authorities publish an integrated development plan every ten years, setting out what the vision is for development in a specific area from an infrastructure and buildings point of view.

When objections from adjacent property owners cannot be settled with the developer, a public inquiry may be called.

The appeals process is detailed in each of the planning ordinances for the relevant jurisdiction. It usually involves a process whereby submissions, both in writing and orally, can be made to a panel of duly appointed property experts (sometimes referred to as the townships board). They take into consideration all aspects and issue a finding. In some instances, the planning officials' and appeal board's processes may even be reviewed by a court.

 
43. Are there proposals to reform real estate law and are they likely to come into force and, if so, when?

A formal Property Charter was introduced in 2013 and is being applied. Land reform and redress is a major component of advancing our democracy. The national government has promulgated the Restitution of Land Rights Amendment Act (see Question 1).

 

Online resources

South African government website

W www.gov.za

Description. All information about national government and departments and other structures, including links to legislation

South African Legal Information Institute (SAFLII)

W www.saflii.org/content/south-africa-index

Description. This website offers access to South African national legislation. It is continuously updated to offer public access to current and historical versions of statutes and regulations.



Contributor profile

Pieter Niehaus, Director: Real Estate

Norton Rose Fulbright South Africa

T +27 11 685 8619
F +27 11 301 3323
E pieter.niehaus@nortonrosefulbright.com
W nortonrosefulbright.com

Professional qualifications.

  • B Comm (Law) LLB (University of Pretoria).
  • Admitted Attorney, Conveyancer and Notary Public of the High Court of South Africa.
  • Member of the Law Society of the Northern Provinces, South Africa.

Areas of practice. Real estate; commercial restructuring of property owning companies and property portfolios; commercial property finance; renewable energy; mining; notarial work associated with these disciplines

Languages. English, Afrikaans

Professional associations/memberships. Member of the Law Society of the Northern Provinces, South Africa

Publications. Financial Mail Property Handbook 2010; Property Law Digest; Practical Law Corporate Real Estate Global Guide 2014, 2015; The International Comparative Legal Guide to Real Estate 2016.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248000677950", "objName" : "Commercial real estate in South Africa_overview", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/6-570-3426?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "22e97be00:15b1badfc49:590", "analyticsSessionCookie" : "22e97be00:15b1badfc49:591", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }