Ethiopia: Reflections on the Crusade
against Real Estate
Alemayehu Fentaw
December 11, 2010
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.
Legal
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.”