Because of the shortage of suitable zoned land for development and other business purposes in SA, some developers and users of space are being forced to enter into long leaseholds, which generally vary from 30 years to 99 years.

Although a long leasehold title is second best to actually having full title over a land or property, Frans van Hoogstraten, a director at Bowman Gilfillan Attorneys, says it is a valid form of title. But he warns that prospective lessees should be aware of the pitfalls of such an agreement.  For instance, if the lessee breaches the lease agreement on a land leasehold, the land and any improvements made by the lessee are returned to the landlord with no compensation.

Van Hoogstraten says the most common form of title to land in SA has been through full ownership. Such ownership is the most comprehensive of all real rights and confers upon the holder the right to the use the land, the right to income derived from the land, the right to consume, dispose of and destroy the improvements on the land. Ownership is unlimited in duration and is not subject to a time limit.

However, he says it is becoming more common for landowners such as government and government agencies to elect to dispose of their land in terms of long leases.

“There are probably any number of reasons for this tendency. Certainly and by no means least is the very real benefit to the landowner 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 sum or may be paid in periodic instalments.

Van Hoogstraten says at the termination of the lease period, any improvements on the land in the way of new developments also revert to the landlord. The tenant gets the use and occupation of property for a fixed period.

For a commercial or residential property, the decision to lease is based on whether the lessee can get the required return on the investment. “It becomes a financial calculation as to whether you can get a return over that period.”  Van Hoogstraten says because of the shortage of suitable zoned land in SA, developers are increasingly willing to enter into long-term leases.

“There are residential and commercial developments that operate on this basis,” he says. For example, there is an equestrian residential estate that operates on a long lease on Johannesburg’s Waterfall Farm, which is controlled by the Mia family. The Cape Town International Convention Centre was developed on leasehold land. The centre, as well as the Arabella Sheraton Hotel and an adjoining office block, are all used on a leasehold basis. “Similarly, there are a lot of similar arrangements on Airports Company SA land.”

It is becoming a more commonly used form of title provided that certain pitfalls are addressed, he says. “I think it is an acceptable form of title, especially when there is a shortage of zoned land.”

One example of a pitfall is when a lessee leases a piece of land and pays periodic instalments. The tenant then elects to build a valuable building on the land, but somewhere down the line he commits a breach of the contract entitling the landlord to cancel the agreement.

“Unless there are severe restrictions against the landlord’s right of cancellation, the lessee will find himself in a position where the lease is cancelled and the land including the valuable building reverts to the landowner.”  Van Hoogstraten says this can create difficulties for financing of any improvements on the land.

“If the bank takes a bond over the lease, which it can do, and the lease is cancelled, the bank loses its security.” But there are also some benefits to be had from entering a long lease. If a tenant can lease a property for 20 years at a nominal rental, it may well be worth it to put a building on the land because he can “amortise his costs and get his return over the 20-year period”.   “The longer the period, the more valuable it is.”

David Alcock, a director of property services group Broll, says he has not yet detected a trend of landowners “disposing” of properties through long leaseholds. Alcock says it is “quite an alien concept” for most of SA’s developers.

He says long ground leases came about in the UK and have been in existence there for a long time. For example, in London, the Duke of Westminster estate owns most of the ground in upmarket Belgravia and Mayfair. The estate granted long-term ground leases to developers instead of selling the land as freehold. This enabled the estate to control the type of development in the areas.