25 May 2011 by

Securing land for the development of renewable energy projects

Once an abundant source of renewable energy such as sunlight or wind has been identified in a particular region, developers need to secure access to the land in such region for the duration of the envisaged renewable energy project. Generally this can be done by acquiring or leasing the land.

The land in question is usually agricultural land and because farmers, who typically bequeath their farms to the next generation, may be reluctant to sell their farms, leasing the land is a more typical solution.

Leases of 10 years or longer (Long Term Leases) are specifically regulated in South Africa. Section 1 of the Formalities in respect of Leases of Land Act provides that a Long Term Lease of land, will be only be enforceable against third parties if the lease has been registered against the title deed of property. A Long Term Lease, once registered, is deemed to be immovable property, and a mortgage bond can be registered over it.

Often only a part of the land is identified as being suitable or necessary for carrying out the renewable energy project, but leasing only a part of the land raises additional complexities.

The Subdivision of Agricultural Land Act 70 of 1970 (Act 70 of 70) prohibits the subdivision of agricultural land or the leasing of a portion of agricultural land for a period of 10 years or longer, without the Minister of Agriculture's prior consent. The Surveyor General will not approve a diagram for a portion nor does the Deeds Registries Act allow for the registration of the lease without the Minister's consent prior to the lease agreement being entered into over a portion. Our courts have recently determined that a contract in respect of a portion agricultural land, that was entered into prior to obtaining the Ministers prior consent, was void from the outset.

The current practice is to deal with Act 70 of 70 in one or two ways.

Firstly the developer can lease the whole property in terms of which the developer has the right to construct and operate the project on the land, but the farmer/owner retains the right to use the whole property for farming purposes of any other purposes agreed with the developer. Because the farm will be used for the project as well as for farming purposes, it will be necessary to apply for the whole property to be rezoned for special or mixed use purposes.

Although this model appears to be the most popular, it has the disadvantage that the landowner and the mortgage bond holder have to agree to the lease being registered over the entire property for a long period of time.

The alternative envisages entering into a lease over the entire property for a period of less than 10 years, which gives the developer access to the entire property in order to conduct the necessary viability tests to establish exactly where the project will be constructed, with the right to enter into a long term lease over the property or a portion of the land, pending the necessary ministerial approval. Once ministerial approval is obtained in respect of a portion of the land, a long term lease will be registered over that portion. One of the difficulties with this model is that applying for ministerial consent will be a long and uncertain process.

As yet, the courts have not tested the validity of either of these alternatives in terms of Act 70 of 70. Developers will have to carefully consider all the factors relevant to each particular piece of land when deciding which alternative to follow.

Daniël Fÿfer, Director, Real Estate
Tessa Brewis, Senior Associate, Corporate & Commercial

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