Tuesday, December 14, 2010

Ethiopia: Reflections on the Crusade against Real Estate

Alemayehu Fentaw


What motivated me to write this piece is the recent measures taken by the Addis Ababa City Administration against real estate developers to expropriate their lease holdings. One thing that strikes me as odd is that actions took on the form of a campaign at best and a crusade at worst, pursued with the enthusiasm of a zealot. As a word of caveat, I don't gainsay the government's desire to combat against wasteful rent-seeking and unproductive activities on part of the real estate developers. Again, I don't deny that there remains a class that pillages, seizes and exploits in broad day in Ethiopia today. Nevertheless, in waging the campaign, the role the government played in creating and sustaining this squalid state of affairs has been reckoned without. Undoubtedly, lack of transparency in public affairs encouraged lease-offs of urban land to the well-connected leading to a speculative accumulation of large non-productive land holdings. The recently launched campaign against real estate therefore leaves much to be desired. Above all, the City Administration should remind itself of the fact that this is a country of rule of law and not of rule of zeal.


Constitutional and Statutory Guarantees against Expropriation in Ethiopia

The Constitution of the Federal Democratic Republic of Ethiopia, under its Article 40(6), provides that "… [the] government shall ensure the right of private investors to the use of land on the basis of payment arrangements established by law", subject to the proviso under sub-article (8) of same, which reads: "Without prejudice to the right to private property, the government may expropriate private property for public purposes subject to payment in advance of compensation commensurate to the value of the property." In keeping with the Constitutional rule, Article 21 of Proclamation 280/2002 provides for investment guarantees. Sub-article (1) of same stipulates that: "[n]o investment may be expropriated or nationalized except when required by the public interest and then, only in compliance with the requirements of the law" whilst sub-article (2) provides that: "[a]dequate compensation, corresponding to the Prevailing market value shall be paid in advance in case of expropriation or nationalization of an investment for public interest." Accordingly, the government may expropriate property for public interest, strictly according to the law and only after making advance payment of adequate compensation corresponding to the prevailing market value of the investment.


Article 3(1) of Expropriation of Landholdings for Public Purposes and Payment of Compensation Proclamation 455/2005 provides that "[a] woreda or an urban administration shall, upon payment in advance of compensation in accordance with this Proclamation, have the power to expropriate rural or urban landholdings for public purpose where it believes that it should be used for a better development project to be carried out by public entities, private investors, cooperative societies or other organs, or where' such expropriation has been decided by the appropriate higher regional or federal government organ for the same purpose." Sub-article (2) stipulates that "Notwithstanding the provisions of Sub-Article (I) of this Article, no land lease holding may be expropriated unless the lessee has failed to honor the obligations he assumed under the Lease Proclamation and Regulations or the land is required for development works to be undertaken by government." Pursuant to Article 2(5) of same, 'public purpose' denotes "the use of land defined as such by the decision of the appropriate body in conformity with urban structure plan or development plan in order to ensure the interest of the peoples to acquire direct or indirect benefits from the use of the land and to consolidate sustainable socio-economic development."


In addition, the Re-enactment of Urban Lands Lease Holding Proclamation 272/2002, under its Article 15(1), spells out three distinct grounds for termination of lease-hold. It stipulates that the lease-hold of urban land shall be terminated: (a) where the lease-hold possessor has failed to use the land in accordance with Sub-Article (1) of Article 12; (b) where it is decided to use the land for a public interest; or (c) where the period of lease is not renewed in accordance with Sub-Article (1) of Article 7. Firstly, a lease-hold can be terminated in situations where the holder violates Article 12 (1), which stipulates that "Any person, to whom lease-hold of urban land is permitted, must begin to use the land for the prescribed activity or service within the period of time set by Regulations to be issued by Region or City Government." Thus, a lease-holder cannot put his lease-hold to any use, activity or service other than the authorized. However, if a lease-holder wishes to put his lease-hold to a different use than for which he has had authorization, he must obtain permission for conversion pursuant to Sub-Article (2) of same.


Secondly, a lease-hold can be terminated on account of a decision by the concerned administration to use the land for development works to be undertaken by the government in pursuit of public interest. 'Public interest' is defined, under Article 2(7), in the same manner as in the Expropriation Proclamation, as "that which an appropriate body determines as a public interest in conformity with Master Plan or development plan in order to continuously ensure the direct or indirect usability of land by peoples, and to progressively enhance urban development." It follows that expropriation of urban land is permissible as long as it is for the implementation of the master plan or urban development plan, on condition that the expropriated land turns out to be beneficial, be it directly or indirectly, to the public. Finally, a lease-hold is terminated automatically upon expiry of the lease term unless it is renewed for another term.


With respect to the consequences of termination of lease-hold on the ground that
the lease-holder failed to use the land in accordance with Article 12 (1), Sub-Article (2) of same provides that "The lease payment shall be returned, subject to the reduction of costs incurred and penalty fee, where the lease-hold of urban land is terminated in accordance with Sub-Article (1) (a) of this Article. Penalty may not, however, be due where the land fell short of use because of force majeure set forth under Article 1793 of the Civil Code." Therefore, in cases of termination on account of failure to honor obligations on part of the lease-holder, refund of an amount equal to the lease payment less costs and penalty must be made to the lessee by the concerned administration, provided that the lessee could not make use of the land for any reason short of force majeure.


With regard to the legal effect of termination of lease-hold on the ground that
the lease-hold is needed for development projects in the pursuit of public interest, Sub-Article (3) stipulates that "Where the lease-hold of urban land is terminated in accordance with Sub-Article (1) (b) of this Article the lease-hold possessor shall be paid commensurate compensation in conformity with the pleadings institution procedure set forth in Article 17. With respect to the consequence of termination of lease-hold on account of failure to have it renewed, Sub-article (4) provides: "Where the lease-hold of urban land is terminated in accordance with Sub-Article (1) (c) of this Article, the lease-hold possessor must hand over the land to the body which gave it by removing within one year the property he has on the ground." And Sub-article (5) confers on the body, which handed the urban land over to the lease-hold possessor, the power to take over the land, together with the property thereon without any payment, where the latter has failed to remove the property on the ground within the period of time set forth in Sub-Article (4) of this Article. It can also order the Police where it finds it necessary for the execution thereof.


Before winding up my sketchy elucidation of the law governing urban landholdings in Ethiopia, I should like to draw particular attention to an important right that the law entitles the lease-holder to, despite the gross neglect and disregard it suffered recently. Any lease-holder is entitled to transfer, or charge an encumbrance on, his lease right. Article 13 (1) stipulates: "Without prejudice to Article 6 and Sub-Article(1) of Article 10, any lease-hold possessor may transfer, or undertake a surety on, his right of lease-hold; and he may also use it as a capital contribution to the amount of the lease payment he has made." This right is not limited to the lease-holder, nonetheless. It also extends to the transferee or mortgagee. Sub-Article (3) stipulates that "A person, who has the right of surety, may make use thereof by transferring the right, the building on the land and facilities accessory to it according to law or by using it on his own where the person undertaking the surety has failed to perform his obligation in the contract of suretyship, or where he is declared by court that he has proved to be bankrupt." So much for the law.


The Crusade against Real Estate Developers

Citing a statement from the Addis Ababa City Administration, New Business Ethiopia reported that a total of 923,380 square meters of land in different sub-cities was grabbed unlawfully by about 23 real estate developers. In response, the administration launched an all-out campaign against real estate developers for the reclamation of such unlawfully held land to the hitherto-unheard-of land bank in the first week of November 2010. The real estate developers targeted by the administration include, among others, Sunshine Real Estate (sister company of Sunshine Construction Company), Ayat Real Estate, Gad Real Estate, Michael Real Estate, Satcon Construction Company, Berta Construction, and Gift Real Estate.  

Reportedly, Bole, Yeka, Nefas Silk Lafto, Kolfe Keranyo are among the major sub-cities of Addis Ababa where significant number of illegal land gabbing took place. According to news reports, in Bole Sub-city alone, Sunshine Real Estate has taken 35,000 square meters of land illegally. In the same sub-city, Gad Real Estate has allegedly grabbed 14,000, whilst Michael Real Estate and Satcon Construction have taken 13,000 and 12,000 square meters of land illegally. In Yeka Sub-city, Berta Construction has allegedly grabbed 33,100 square meters of land unlawfully, followed by Sunshine and Gift Real Estate Company, which took 21,000 and 10,048 square meters of land respectively.

According to Gubae Gundarta, Haile and Alem Real Estate Company, owned by the world-renowned athlete Haile Gebreselassie and his wife, has also been a subject of the expropriation measure taken by the city administration recently. Haile and Alem Real Estate Company acquired 40,000 square meters of land from the city administration on a basis of lease agreement on the 7th day of October 2005. The blue-print of 38 villas and 224 condos to be constructed on the property located in Bole Sub-city's Kebele 18, has already been taken care of by Gerrita Consultancy. It was when Haile and Alem Real Estate Company was gearing up for construction that a dispute arose between the former and Addis Real Estate over boundaries between their respective adjacent landholdings. Gundarta quoted Haile: "We got the plots of land demarcated only this week, October 26, 2010. It means four years after the land was actually leased out to us. And then, they confiscated the land and all documentation pertaining thereto saying we haven't undertaken the business soon enough. This is not legal."


Groum Abate, a staff writer at Capital,
in his piece entitled 'Real estates swindle banks hundreds of millions', contends that banks will not be able to recover loans they disbursed to real estate developers as a result of the city administration's reclamation of the over 200,000 square meters of land holdings, which had served as collaterals. At the minimum, several private banks will lose more than four hundred million birr in loans to only four real estate developers after the Addis Ababa City Administration reclaimed their holdings. The real estate developers allegedly used their holdings illegally as collateral to secure bank loans, albeit there is nothing in the law that prohibits lease-holders from furnishing their right of lease as collateral to financiers.

According to the City Administration, only 18 percent of a total of 5.9 million square meter of land distributed to 125 real estate developers since 1997 is used properly, whilst the rest of the plots are transferred to third parties without any construction being built or used as collateral for loans in contravention of the land law.
Over two million square meters of plot from different real estate developers has already been taken back. This accounts for over 33 percent of the total amount of land given for real estate development. The administration claims to have expropriated over 1.5 million square meters from real estate developers that allegedly failed or refused to start construction within eighteen months. Besides, the city reclaimed more than 500,000 square meters of plot that has allegedly been held illegally by real estate developers. In the administration's estimation, the city would have raised over 6 billion birr had it leased the 2 million square meters at an average rate of 3,000 ETB per square meter.

Concluding Remarks

In the course of the crusade, due care has to be taken to respect the principle of fairness. First and foremost, the city administration has to see to it that the measure is taken in accordance with the law. Second, the accused real estate developers must be given fair hearings, prior to the city administration taking the measure of expropriating their landholdings and demolishing constructions, where the alleged unlawful urban land lease-holders show to its satisfaction that they possess duly signed and sealed lease-hold title-deeds thereof and have not yet failed to honor the obligations they assumed under the lease proclamations and regulations. Nevertheless, a blanket measure to expropriate lease holdings without a showing that such holdings are unlawful amounts to not only a violation of the relevant statutes but also of the Constitution of the Federal Democratic Republic of Ethiopia.


To that end, the city administration has to make decisions on a case-by-case basis. Hence, it has to distinguish between the two category of cases of termination of lease-hold that are likely to arise, namely: cases of termination on account of failure to honor obligations on part of the lease-holder, on the one hand, and cases of termination on account of a decision to use the land for development works in the interest of the public, on the other hand, on the bases of the abovementioned three legal grounds, excluding the third ground which is unlikely to give rise to a dispute in the short- and medium-term. Besides, the administration should be able to distinguish between compensable and non-compensable termination.


Moreover, judicious and level-headed decisions have to be reached lest it should create a sense of insecurity of investment in the minds of our investors, whether actual and potential, already engaged or wishing to engage in real estate development in the country. Furthermore, the administration should not lose sight of the interests of third parties, including banks and buyers that will be adversely affected as a result of such measures and the grave implication they will have on the financial sector. For instance, one can reasonably expect the expropriation measures to result in a proliferation of lawsuits, adding an extra burden to courts that are already congested with backlogs, not to mention the ensuing immense litigation costs, as long as aggrieved parties, whether developers or their clients, are likely to file suits any time soon. It is also not clear enough if our private commercial banks can survive the huge financial losses they sustained as a result of the expropriation measures taken against the real estate developers who borrowed funds by undertaking surety on their rights of lease-hold and consequent civil suits and if their probable failure might not affect the growth rate, if not the macroeconomic stability, of our economy. After all, as Access Capital Research 2010 Sector Report on Real Estate put it, "had it not been for the expansion of this sector and the closely affiliated construction sector, Ethiopia would not have registered double-digit economic growth in the past five years."

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