As Africa increasingly becomes a retirement destination and a place for investment, land ownership is often through leasehold for foreigners. Investors needs to understand how to navigate leasehold terms to ensure profitability because many African countries do not allow foreigners to own land outright. This make African leasehold contract terms very important when making investments in Africa.
Throughout history, real estate has been a wise investment and this sentiment remains true for the African real estate market. With a fast growing tourist industry on the continent, opportunity abounds for developing the beaches and building world class resorts. Economists have routinely stated Africa can become the future bread basket of the world. In addition, retirees are increasingly focusing on Africa as a retirement destination. Before a person invests into African real estate, it is important to understand that long-term leasehold ownership is the norm in many African countries and investors may never own the property outright. In this paper, we explain leasehold property ownership and the legal strategies investors can use to properly protect themselves.
How Freehold vs Leasehold Land greatly impact African Land Ownership
It is vital to understand the difference between Freehold vs Leasehold land ownership. Freehold allows a person to completely own a piece of property 100% outright; leasehold ownership only allows possession of the property for a certain amount of time. This distinction is important because in many African countries leasehold ownership in Africa is generally either approximately 50 years or 99 years. Thus once that time period ends, the land reverts back to the original owner of the land.
This can create devastating effects as the land may have been developed into profitable structures such as resorts, farms, and even vacation/retirement residences. However, there are legal strategies that individuals should be aware of to minimize the risk of such catastrophic loss.
Three Legal Strategies to Minimize Risk with African Leasehold Property
I. Automatic Renewal
One of the first legal strategies to understand when negotiating a leasehold property purchase is to ensure that the buyer has the right to automatically renew the contract for another term length.
If a person purchases 30 acres of land on a 50 year leasehold period, it is important that when the 50 years are over the buyer has the right to automatically extend the contract for an additional 50 years. Therefore, the buyer can have the property for a total of 100 years.
It is vital to understand that only buyer should have the right to renew the lease, not the original owner. If the original owner has the right to renew, the original owner of the land may choose to not renew. This is to be avoided.
II. Renewal of Multiple Period Clause
Leasehold property can be used to create profitable farms.
The second option to minimize risk is to have a contractual clause that allows you to renew the lease for multiple periods.
When the leasehold contract is coming to an end, the buyer has the option to renew for three consecutive periods of 50 years. Therefore, the buyer has the opportunity to control the land for 200 years total.
The reason the contract renews for multiple 50 year terms is because in some jurisdictions, these respective African laws allow foreigners are only allowed to own property for 50 years. Therefore, if the parties agreed for 200 years outright in the contract it would not be a valid contract in that country. Three consecutive periods of 50 years allows the maximum period of 50 years to remain, and gives the buyer the opportunity to own the land for 200 years.
It is important to ensure that the African country legally allows multiple consecutive periods of land ownership.
The third way to minimize the risk of loss while occupying leasehold land is have insurance. There are many types of insurance related to land ownership including:
- title insurance,
- crop insurance,
- property insurance,
- liability insurance, and
- many others.
When it comes to leasehold property, the buyer of the leasehold interest can purchase insurance that covers the right to renew the lease. If the landowner refuses to allow a renewal of the lease, the insurance will reimburse the buyer for all losses including homes and structures the buyer has on the leasehold property.
The opportunity to invest in Africa can lead to tremendous returns. It is important to understand the legal strategies to maximize this opportunity and minimize risk.
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