Impact of“ public interest” on just and equitable compensation
The reasons for the anxiety is two-fold. Firstly, within s12( 1) of Chapter 5 lurks an ominous qualification: the amount of compensation payable for expropriated land must strike an equitable balance between the public interest on the one hand, and the interests of the expropriated owner / holder of the other.
That said, the Bill, in its current form, does not define“ compensation” or“ just and equitable”. Second, the Bill is conspicuously silent on the crucial issue of the value of the property to be expropriated. Experts are fearful the amount of compensation will be arbitrarily determined without compensating the landowner for the value of the property.
The concerns are well-founded. The drafters of the Bill appear to have promoted“ public interest” as the overarching factor underpinning an amount of“ just and equitable compensation”. The obvious question is this: is“ public interest” a basis or method of valuation, and if so, how do you value“ public interest” in a commercial world?
The impact is obvious: how do entities affected by the Bill, such as pension funds, property funds, listed and non-listed entities, or even a farmer, account for the value of property in their balance sheets if the Bill can ignore the market value or replacement costs of properties targeted for expropriation? The ramifications also affect those industries that
Secondly, the Bill provides that the amount of compensation must be determined by considering the following five“ relevant circumstances”:
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; and
5 The purpose of the expropriation.
rely on the strength( and certainty) of the values placed on their balance sheets especially when relying on loan finance. The Bill threatens the values placed on these properties that can become worthless because of“ public interest” considerations.
The proposed formula for determining compensation for expropriated property is set out in s12 of Chapter 5 of the Bill. Firstly, the amount of compensation for expropriated property must be just and equitable. The writer does not view this as contentious as it mirrors the requirements found in s25 of the Constitution.
The peril of ignoring the recognised principles of valuation
In short, the uncertainty lies not with what the Bill says but rather what is does not say. The Bill is silent on the method and basis of valuation and does not borrow any of the key concepts found in other similar South African legislation that deals with the valuation of property. In this regard s12( 1)( a) of the Expropriation Act( 63 of 1975) expressly provides for compensation to the owner of the expropriate property in the amount which the property would have realised if it was sold in the open market by a willing seller to a willing buyer.
The Expropriation Act even provides for circumstances where there may not be an open market for the property in question, in which case, and only then, the amount of compensation will be that amount it would cost to replace the improvement on the property expropriated, having regard to the depreciation thereof.
Section 46 of the Local Government: Municipal Property Rates Act,( 6 of 2004)( the MPRA) prescribes the general basis of the valuation of property as market value which is defined as“… the amount the property would have realised if sold on the date of valuation in the open market by a willing buyer to a willing seller”.
Significantly, both the MPRA and the Expropriation Act recognise and prescribe recognised and accepted principles fundamental to the determination of a property’ s value. In this regard, second 46 of the MPRA prescribes market value as the basis of valuation. This is unlike the Expropriation Act( and the now repealed Property Valuation Ordinance( Cape)), which provides for an alternative basis of valuation. If regard is had to International Value Standards( the IVS), it is clear there are three main methods for determining market value:
1 Comparable sales, where comparative transactions are used to determine market value( also known as the sales approach);
2 Capitalisation of net income, where actual or assumed rent is determined and the income stream is then used to indicate the value by a process of capitalisation or discounting( also known as the income approach); and
3 Depreciated replacement cost plus land value, where there is no identifiable, actual or notional income stream that would accrue to the owner of the property( also known as the cost approach).
Typically, the market value is the preferred basis of valuation of property funds and auditors of balance
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