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PER: Potchefstroomse Elektroniese Regsblad

On-line version ISSN 1727-3781

PER vol.17 n.2 Potchefstroom Feb. 2014

 

ARTICLES

 

Silence is golden: The lack of direction on compensation for expropriation in the 2011 Green Paper on Land Reform

 

 

E du Plessis

Senior Lecturer, University of Johannesburg, Law Faculty. elmiendp@uj.ac.za

 

 


SUMMARY

The government set the target for redistribution of land to 30% by 2014. They have adopted the "willing-buyer-willing-seller" model that relies on a voluntary transaction between farmers and government to acquire such land. Frustrated at the slow pace of land reform, the ruling party is starting to indicate that the state will in future rely on its expropriation powers to acquire such land.
Section 25 of the Constitution makes it clear that when the state expropriates property, compensation must be paid. The current act, the 1975 Expropriation Act, determines that such compensation must be market value, while the Constitution lists market value as only one of at least five factors that must be taken into account when determining compensation.
There have been various attempts at drafting legislation that will bring compensation practices in line with the Constitution, with the latest Bill published in March 2013. This article focusses on the Green Paper that preceded the Bill, and argues that not much direction is given on how compensation for expropriation should be calculated.

Keywords: Compensation for Expropriation; Land Reform; Willing-buyer-willing-seller; Expropriation; Green Paper on Land Reform.


 

 

1 Introduction

When I started my doctorate in 2005, the then Minister of Land Affairs, Lulu Xingwana, had just caused an uproar by remarking that land reform will be speeded up by shortening the negotiation period for compensation for individual expropriations.1 Farmers, concerned that South Africa would become the next Zimbabwe,2 objected that Xingwana's statements were in conflict with land reform laws setting out the procedures to be followed for expropriation. They insisted on a reasonable commercial price for farming properties. The ministry, on the other hand, was of the opinion that farmers were making expropriation difficult by inflating property prices,3 thereby preventing the government from successfully returning property to people who lost it under "years of racial discrimination and white colonial rule".4 The government therefore proposed to move away from the willing-buyer-willing-seller model5, intimating its intention to move away from buying property from farmers through negotiations, and using expropriation as a legitimate alternative method of land acquisition instead. This resulted in fierce media debates and reports of tension between mostly white farmers and the government.6 The farmers persistently relied on the concept of "compensation" as contained in and historically construed under the Expropriation Act,7 should they be expropriated. For the farmers it is important to receive the full market value of property that has been expropriated. That is how it used to be prior to 1994. A Constitution8 protecting existing property rights, but not guaranteeing full market-value compensation for expropriation, is in their view insufficient and may pose a threat to their vested interests.9 This indicates a perception that when land is bought, prices can be negotiated and the farmer is likely to receive full market value for the property, while when the property is expropriated, the Constitution causes uncertainty and poses the risk of compensation below market value. The farmers' fears stand in tension with the government's land reform aspirations. The government, pressed by the constitutional mandate to transform, seeks to rely to an increasing extent on the new compensation possibilities created by the Constitution and entailing possible departure from strict market value compensation in all instances.10

Seven years down the line the issue is still not settled. The Expropriation Bill11 was shelved in 2009,12 a draft Green Paper leaked in 2010, an official Green Paper published in 201113 and a Land Reform Policy document of the African National Congress (ANC) produced in 2012,14 while a Draft Expropriation Bill made its appearance in March 2013.15 Recently Stone Sizane, as chairperson of Parliament's land reform committee, stated that government is not making sufficient use of its right to expropriate land.16 Despite South Africa having a land market and the necessary infrastructure to facilitate transfer of land, the government has so far been unable to affect land reform through the voluntary acquisition of land.17 In many instances it is bureaucratic obstacles that prevented this, but there are also instances where the land offered for sale was not suitable for the purpose it was acquired for, and in some instances the current owners demanded excessive prices for land.18 With many landowners politically sceptical or opposed to land reform and with some loosing their faith in the process because of bureaucratic delays from the government, land reform has reached a stalemate. A possible solution lies in the state making better use of its expropriation powers by expropriating property for land reform purposes.19 Upon such expropriation, compensation must be paid.

Does the 2011 Green Paper on Land Reform provide any guidance on the issue of compensation for expropriation? The aim of this paper is to show the potential and the shortcomings of the Green Paper with regard to compensation for expropriation in the land reform context. To do so it will start by clarifying the concept of "willing-buyer-willing-seller". Thereafter, the paper will discuss the Green Paper's stance on the issue. A discussion of compensation for expropriation under the Constitution20 will follow, discussing the constitutional mandate to expropriate for land reform purposes, as well as the way compensation should be calculated under the Constitution. Lastly, it will conclude with an evaluation of the Green Paper on the issue of compensation for expropriation.

 

2 Terminology

The willing-buyer-willing-seller model stands opposed to expropriation as a way of acquiring land for land reform purposes. This is based on the pro-market approach the government adopted in 1994 on advice from the World Bank.21 In terms of this approach, land is transferred by contract. It effectively leaves landowners with the discretion of whether they want to partake in land reform or not.22

The 1997 White Paper on South African Land Policy-23 supported the willing-buyer-willing-seller model. This was despite section 25 of the Constitution that provides for expropriation of land for land reform purposes and for compensation below market prices.24 One can only attribute this to the neoliberal and investor friendly economic strategy adopted by the ANC at the start of the constitutional democracy.25

This approach should be distinguished from the willing-buyer-willing-seller model that is used to calculate market value compensation when expropriating property based on section 1226 of the Expropriation Act27 All this is done to determine what price the property will fetch in the open market on the date of the notice. The value that property will fetch in the open market is commonly referred to as the market value. Market value as compensation norm is based on the assumption that in the property market there will always be a free interchange between supply and demand.28 This is problematic when it comes to the (real) property market that is regulated by its own occurrences and acts.29 The rationale remains that the market price will be determined by the economic principles of supply and demand,30 thereby determining the "equivalent in value ... of the property loss" as the Estate Marks v Pretoria City Council 31 requires. This method of calculation was adopted in South African case law.32

Notwithstanding the problems with this approach,33 the courts have usually found a way to apply the open market test, even where it has been very difficult to do so.34 The market value test plays a central role in South African expropriation law, and in order to determine the market value, one has to hypothesise what the property would have realised if sold on an open market by a willing seller to a willing buyer.

When the government therefore talks about the willing-buyer-willing-seller principle, it refers to open-market transactions based on contract.

When one talks about the willing-buyer-willing-seller approach with regard to compensation for expropriation, it refers to one (of many) methods to determine market value.

2.1 The problem with the market value principle

There seems to be general consensus that the willing-buyer-willing-seller model to acquire land for land reform purposes has failed.35 There are various reasons for this. Most notable is the long time it takes to acquire land (from the negotiation phase to the actual transfer). Firstly, good quality land is sold in the open market -either by public auction or private transaction, with relatively expedient transfer of ownership.36 This makes it almost impossible for land reform beneficiaries who rely on funding to purchase farms, as the funding application takes longer than a normal transfer.37

Secondly, the beneficiaries are not directly involved in this process, and must rely on the Department of Land Reform (as it was) to do the negotiation on their behalf. This means that even if there are small differences in price that a willing buyer might have negotiated around, the deal might fall through because the officials do not negotiate as a willing buyer would.38 From the seller's side there also seems to be delays in payment once the agreement has been reached. This, amongst other things, creates the perception that the Department is an unreliable negotiation partner.39 This bureaucratic obstacle to purchasing land means that the land purchased and transferred to beneficiaries is often of poor quality and very expensive. Without a credible threat of expropriation, the status quo will continue.40

2.2 The problem with market value and the willing-buyer-willing-seller method of determining market value when calculating compensation

Market value is a problematic concept because in transactions of sale, the market is a relatively unrestrained phenomenon where sellers and buyers bargain until they reach an acceptable price level, and such bargaining is usually done without many artificial constraints. The problem thus lies in the fact that one must imagine compensating a compulsory purchase in terms of exactly the opposite, namely a free market transaction where the price level is determined by the relatively free will of the buyer and the seller. The determination of market value is therefore an informed guess.41 The method is described as illusory, since the bargaining process is constrained by a compulsory sale, and the seller is more often than not unwilling to sell.42

As King J stated in Southern Transvaal Buildings (Pty) Ltd v Johannesburg City Council.43

Notwithstanding, the law enjoins me to transport myself into a world of fiction and to don the mantle of a super valuator, overriding, if necessary, the views expressed by men experienced in the valuation of property and whose views are relied upon almost daily by willing purchasers and sellers. I must at one and the same time be the willing seller and the willing buyer, both well-informed, and I must arrive at a price in a market that did not exist at the time of expropriation. This is so because I must ignore any enhancement or diminution in value flowing from the expropriation or the scheme causing the expropriation. It is an Alice in Wonderland world in which the consideration of principles of valuation and the opinions expressed by experienced property valuators make the task of the super valuator seemingly 'curiouser and curiouser'.

The court in Todd v Administrator, Transvaal44 ruled that despite the fact that there was no open market, it will nonetheless determine what such property would fetch on the open market, since the Expropriation Act requires it.45 It took value to be the value that the arbitrator placed on it. This is a clear indication of how the courts labour the idea that value can only refer to market value.46

It is unclear which persons would qualify as hypothetical buyers, because different buyers will pay different prices for land, based on their needs.47 It is therefore assumed that the hypothetical buyer should at least be someone who would in practice buy or have bought similar properties.48 This must be done without regard to the particular seller, since no method of calculation should include subjective considerations.49

The market-led approach based on the willing-buyer-willing-seller method seems to stand in the way of expedient land transfers of land reform purposes.50 Is expropriation a viable alternative, and if so, how should compensation be calculated for expropriated land? What does the Green Paper have to say about this issue?

 

3 Green Paper on Land Reform and compensation for expropriation

The Green Paper in clause 5 states that one of the challenges and weaknesses (and thus the rationale for change) is inter alia "the land acquisition strategy / willing-buyer willing-seller model". It proposes an improved track for land reform51 that will attempt to "improve on past and current land reform perspectives, without significantly disrupting agricultural production and food security".52 This new track will be supported, amongst other things, by the Land Valuer-General.

The Land Valuer-General (LVG) will be a statutory office that will, inter alia, be responsible for "determining financial compensation in cases of land expropriation, under the Expropriation Act or any other policy and legislation, in compliance with the [C]onstitution". Exactly what the powers of the LVG will be or how compensation will be calculated is not clear from the Green Paper. The ANC Land Reform Policy Discussion Document53 expands a bit more on what is envisioned. According to this policy discussion document, the office of the LVG will report to an inter-ministerial committee of ministers who have land interests vested in their departments.54 The rationale for this "office" is to provide a "hub of property values" that is reliable and comprehensive.55 Importantly, this document raises the concern that there is no legislative framework to determine when "market value" must be one of the variables in calculating compensation, as opposed to it begin the only variable. Therefore, one of the functions of this office will be to determine financial compensation when expropriating in line with the Constitution and other legislation.56 Again, this document does not seem to give clear and specific direction. What follows is an attempt to put a possible direction on the table for discussion.

 

4 Expropriation for land reform purposes

A holistic reading of section 25 makes it clear that expropriation is possible for land reform purposes. Section 25(2) states that "[p]roperty may be expropriated only in terms of law of general application (a) for public purpose or in public interest; and (b) subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court". Section 25(4) qualifies this by stating that "for the purposes of this section (a) the public interest includes the nation's commitment to land reform, and to reforms to bring about equitable access to South Africa's natural resources".57 Section 25(5)-(9) provides for land reform.

As far as the interpretation techniques are concerned, the Constitutional Court tends to follow a purposive interpretation when interpreting the Bill of Rights.58 The tension in section 25 between the protection afforded to existing rights and the reformist imperatives makes it a particularly difficult clause to interpret.