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Full ownership v leasehold

20 July 2006

Frans van Hoogstraten considers the legal implications of full ownership as opposed to leasehold title to immovable property. In order to understand the distinction between full ownership of land and leasehold title the author considers their legal nature. The most important distinction being that ownership is the most comprehensive of all real rights giving the owner the right to use the property, the right to income derived from the property, and the right to consume, dispose of and even destroy the property. It is unlimited in duration and is not subject to time limit. It is an independent right and is not dependant on or derived from any other right.

Leasehold title gives its holder a real right, generally limited to the use and enjoyment of the property leased for a limited period. If a lease fulfils the requirements of the Deeds Registries Act definition of "immovable property" and it is registered, the holder of the leasehold title is vested with the real right. Despite being registered, leaseholders can still be deprived of their rights. An example would be where notwithstanding the "huur gaat voor koop" rule (purchaser of land which has a leaseholder is automatically and by operation of law bound by the lease), land sold subject to a lease may have to be offered free of it in order to discharge a registered mortgage bond.

The writer then analyses the pitfalls of registered leases with regard to mortgages being registered over them. The most compelling pitfall is that, since the underlying security afforded by the mortgage bond is only as good as the underlying leasehold title, cancellation thereof effectively removes that security. For this reason, banks are often reluctant to grant loans against the security of a mortgage bond over leasehold title. The author then introduces "step in rights agreements" and "suspended" lease agreements as appropriate remedies to the lack of security.

Full article on werksmans.co.za

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