New Law Poses Threat to Property Rights

The investment bill purports to protect and promote investments, but in reality it allows the state to deprive owners of their property without paying them compensation. Is this permissible in our law?

Our Constitution draws a distinction between deprivation and expropriation of property rights. Expropriation occurs when the state dramatically interferes with an owner’s property rights. The state may only expropriate property for a public purpose or in the public interest. It is also required to pay the owner compensation that is fair and equitable. For example, if private land stands in the way of building a new road, the state may expropriate this property as long as it compensates the owner. In essence, expropriation is a form of deprivation of property accompanied by compensation.

The investment bill

Any mention of deprivation of property not amounting to expropriation should set off alarm bells, since this means that no compensation is owed by the state. Section 8(2)(d) of the Investment Bill states:

‘(2) The following acts…do not amount to acts of expropriation:

(d) any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that –

(i) there is no permanent destruction of the economic value of the investment; or

(ii) the investor’s ability to manage, use or control his or her investment in a meaningful way is not unduly impeded.’

(our emphasis)

The main clause means that the state does not have to compensate an owner that has been deprived of property if the state does not become the owner of the property. A typical case would be where the state facilitates the stripping of ownership from one person in order to benefit a third party.

The sub clauses create two limitations to the main clause. However, they fail to provide property owners with much protection.

In (i), the phrase ‘no permanent destruction of the economic value of the investment’ is troubling, since it is the economic value to the investor that should concern us, not the value of the object itself.

In (ii), the phrase ‘in a meaningful way’ creates uncertainty. The state could limit an owner’s use of his property and claim that the limitation is justifiable on the grounds that the owner still has meaningful use of the property. Furthermore, the word ‘unduly’ is problematic as it suggests that even if an owner’s ability to exercise his rights over his property is infringed, this may not trigger a need for recompense.

Furthermore, the bill does not require the state to meet both hurdles, since the clause are separated by an ‘or’ not an ‘and’.

What constitutes ‘property’ for the purposes of this Bill?

The act targets all commercial investments, including those made before the act comes into operation. The terms ‘investment’ and ‘property’ appear to be used interchangeably. All kinds of property will be affected, from immovables (flats and houses) and movables (cars and laptops) to intellectual property (authors and artists rights) and shares held on the stock exchange.

The Practical Effects of the Bill

Imagine that you buy a residential house as an investment that produces rental income. If the home is in a neighbourhood where there is no community centre, the state could choose to transfer ownership of your property to the community. The economic value of the property would remain the same, despite you no longer having any right to it. You would no longer be able to use, manage or control the property, but the state could argue that these impediments to your rights are not undue because the community has benefitted from the newly acquired property. Since there is no acquisition of the home by the state, no compensation would be payable and you would have to forfeit your house in return for nothing.

Where to from here?

If the bill is enacted and becomes part of our law our courts may deem it unconstitutional for two reasons.

First, it could be struck down on the basis that it unjustifiably limits an owner’s right to property.

Second, the courts could apply the doctrine of constructive expropriation. The doctrine applies in cases where the state deprives an owner of his property without becoming the owner itself. Much like the doctrine of constructive dismissal in labour law, constructive expropriation favours substance over form. The property owner is either awarded compensation or their property is restored to them.

Conclusion

We have argued that the bill poses a series threat to the rights of property owners. We hope that the bill is withdrawn or amended before it is challenged in the courts. In its current form, it creates legal uncertainty that is sure to discourage both foreign and local investment. If the state cares about economic growth and job creation it should reconsider passing the Investment Bill.

Mark Oppenheimer is a practicing advocate and member of the Johannesburg Bar. He has represented newspapers that are threatened by defamation suits, individuals that were wrongfully arrested by the police and employees that have been unfairly dismissed.

Cecelia Kok obtained a BA LLB (cum laude) from WITS University and now coordinates the Friedrich Naumann Foundation for Freedom’s work with local and international think tanks in South Africa. She has a specific interest in rule of law issues and property rights.

This article was written in the author’s private capacities and originally published in Business Day in August 2014.