COMPENSATION FOR EXPROPRIATION:

An Analysis of the Constitutional Standard and Its Judicial

Interpretation

by

Simone Gregor (GRGSIM004)

Submitted to The University Of Cape Town

in fulfilment of the requirements for the degree LLB

Faculty of Law, University of Cape Town

Date of submission: 17 September 2010

Supervisor: Professor Hanri Mostert

Department of Private Law, University of Cape Town

DECLARATION

1. I know that plagiarism is wrong. Plagiarism is to use another‟s work and pretend that it is one‟s own.

2. I have used the footnoting convention for citation and referencing. Each contribution to, and quotation in,

this opinion from the work(s) of other people has been attributed, and has been cited and referenced.

3. This opinion is my own work.

4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing it off as his or

her own work.

Signature ______________________________

Compensation for Expropriation

An Analysis of the Constitutional Standard and its Judicial

Interpretation

by

Simone Gregor (GRGSIM004)

Word Count: 11 751

This paper was written under the auspices of the LandLawWatch project. The views and opinions expressed here are

the author's own and should not be attributed to the LandLawWatch project or the University of Cape Town.

ABSTRACT

This paper analyses the constitutional standard of just and equitable compensation and looks particularly at how it

has been interpreted by courts. Of key importance to this concept is the role played by market value – and how this is

used within the context of the constitutional standard. The notion of market value is traced through compensation for

expropriation jurisprudence to determine its role and to speculate on how it could be incorporated into a new

expropriation bill. A close analysis of market value and its application is done in the decisions of Du Toit v Minister of

Transport and Khumalo and Others v Potgieter and Others. In conclusion, it is argued that a more nuanced approach

which considers the purpose of the expropriation needs to be adopted in the application of section 25(3) of the

Constitution. Furthermore, attention is also given to the judiciary‟s responsibility to develop land reform jurisprudence

which reflects a balancing of interests informed by section 25(3).

Table of Contents

1. Introduction .............................................................................................................................................................. 1 2. Standards to determine compensation ................................................................................................................. 3

2.1 Market value.................................................................................................................................................... 3 2.2 Just and equitable compensation .................................................................................................................... 6

3. Legislation – overview ............................................................................................................................................ 7 3.1 Expropriation Act of 1975 ................................................................................................................................ 7 3.2 Section 25(3) of the Constitution of the Republic of South Africa, 1996 .......................................................... 8

4. Case law – overview ............................................................................................................................................. 10 4.1 Pre-constitutional case law ........................................................................................................................... 10

4.1.1 Residual value ........................................................................................................................................ 11 4.1.2 Comparative sales method .................................................................................................................... 12 4.1.3 Assessment ........................................................................................................................................... 12

4.2 Constitutional case law ................................................................................................................................. 14 4.2.1 Expropriation (of land/rights) for public purpose ..................................................................................... 15 4.2.2 Compensation for expropriation done for the purpose of restitution ....................................................... 21

5. Conclusion ............................................................................................................................................................. 23 Bibliography .......................................................................................................................................................... 26

Literature ................................................................................................................................................................. 26 Primary sources ...................................................................................................................................................... 26

Cases...................................................................................................................................................................26 Legislation ........................................................................................................................................................... 27

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1. Introduction

Prior to the Constitutional dispensation, the Expropriation Act.1 set out a particular method to be

followed in calculating the amount of compensation to be received after expropriation. With the advent

of the Constitutional dispensation came a property clause2 which affirmed the democratic values of

human dignity, equality and freedom. The method by which remuneration for expropriation was to be

calculated was also subject the provisions of the constitutional property clause. However, the

Expropriation Act was not made obsolete by the Constitutional provisions – rather, the two are read

together and where the Act conflicts with the Constitution, the Constitution prevails. To understand the

interplay between the Expropriation Act and the Constitution, it is necessary to examine the relevant

provisions of each piece of legislation briefly.

Section 12 of the Expropriation Act is the principal statutory provision regulating calculation and

payment for expropriation.3 The section states that the point of departure for the calculation of

compensation is the market value of the property.4 Together with this, courts also considered the actual

losses suffered by the expropriatee and allocated solatium.5 The result of this was that land prices were

often over-inflated resulting in frustration of the restitution process.6 The emphasis of the Act was largely

on the market value approach.

In contrast to this, the Constitutional provisions concerning compensation for expropriation have a

different emphasis informed by the restitution of land rights, the redistribution of land and the promotion

of security of tenure.7 The overriding consideration in determining the compensation amount is that the

interests of the expropriatee and the public must be balanced.8 There are five factors to be borne in

mind when calculating the compensation for expropriation – market value is merely one of these factors

and is given no prominence in the formula. The other factors are: the current use of the property; the

history of the acquisition of the property and use thereof; the extent of direct state investment and

subsidy in the acquisition and beneficial capital improvement of the property; and the purpose of the

expropriation.9 Thus, unlike the pre-Constitutional implementation of section 12 of the Expropriation Act,

1 63 of 1975, hereafter referred to as the “Expropriation Act.” 2 Section 25 of the Constitution of the Republic of South Africa, 1996. 3 Silberberg and Schoeman's The Law of Property 568. 4 Van der Walt Constitutional Property Law 273. 5 Onagoruwa & Straughan LexisNexis Property Law Digest (2008.09) 9. 6 See note 5 above. 7 Carey Miller and Pope Land Title in SA 2000 313-551; see note 4 above 593-651; and in Pienaar G 2009 TSAR 344. 8 See note 3 above. 9 Section 25 of the Constitution of the Republic of South Africa, 1996.

2

the market value of a property is no longer the point of departure in the calculation of the amount of

compensation.

This paper contrasts the character of compensation for expropriation as it was understood prior to the

coming into force of the 1996 Constitution with the interpretation of the notion of “just and equitable

compensation” which was the standard implemented to govern Constitutional-era compensation. The

specific purpose of this paper, accordingly, is to evaluate the standard of market value against the

constitutional provision that compensation should be just and equitable. The aim of this research is to

consider the courts‟ jurisprudence surrounding the notion of just and equitable compensation in the

hope of finding a workable solution for the calculation of compensation in future instances of

expropriation. The focus of this paper is the question how the notion of “just and equitable”

compensation for expropriation, as envisaged by the Constitutional property clause, should be defined;

and how the courts should give effect to this concept.

The premise of this inquiry is to trace the development of the notion of market value through the case

law and to determine in what way it could still be a valuable contribution in the calculation of

compensation for expropriated land or rights. The methodology which will be used to conduct this

survey will be two-fold. Firstly, the statutory provisions concerning calculation of compensation for

expropriation will be analysed. Secondly, the case law surrounding the issue will be considered – and

from this, the judiciary‟s treatment of the subject will be discussed. The analysis will be done in a multi-

dimensional format in that multiple categories of cases will be considered. Broadly, the case analysis

will be categorized into pre-Constitutional and Constitutional-era decisions. Within these respective

categories, a further distinction will be made between expropriations which occurred for the purpose of

land reform versus expropriations which were not conducted with the aim of achieving land reform

policy objectives. Specific attention will be given to the differing ways in which compensation for

expropriation was calculated in each instance. Through this analysis, an attempt is made to contribute

to the inquiry regarding the most appropriate approach to the calculation of just and equitable

compensation for expropriation.

As explained above, the relevant legislation will first be outlined, followed by a consideration of the case

law concerning the aforementioned legislation. The legislation will be analysed in chronological order.

From the case law analysis, the meaning of the concept of “market value” will be traced as it developed.

Specific attention will also be given to how the application of the concept of market value differs

throughout the case law and what motivates the differing application thereof. It is important to look at

the changing role of market value as it will inform the drafting of future legislation governing the

calculation of compensation for expropriation.

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2. Standards of determining compensation To properly understand the context in which the concept of „market value‟ developed in its use by

courts, it is useful to consider other ways in which the court determined compensation. This will show

the relative strengths and weakness of each standard. The purpose of this is to ascertain whether or not

there are any useful contributions made by pre-constitutional case law which can be incorporated into

the new Expropriation Bill.

2.1 Market value

Case law interpreting the Expropriation Act holds that compensation money is substituted for

expropriated property.10 This also includes the probable amount of appreciation in value of the

land.11 To determine the amount of compensation money, courts initially used market value as an aid.12

The concept of market value then evolved to become an independent norm for calculation of

compensation.13 The market value of property has been defined by South African courts as “the best

price which it [the property] would realise if brought to a voluntary sale between a willing seller and a

willing buyer”.14 At common law, before the implementation of the Constitution, market value was seen

as the best measure of compensation due to its uniformity and ease of application.15

Together with the concept of market value, the “willing buyer, willing seller” principle must also be

considered as this informs the determination of market value – working on the assumption that both

parties are truly willing (unlike in the case of expropriation). Plainly speaking, this contemplates what

sum of compensation a person willing to sell his property would be willing to accept from a buyer willing

to buy the said property. It operates on the assumption of the presence of free market principles.

However, as Southern Transvaal Buildings (Pty) Ltd v Johannesburg City Council points out,16 such a

principle depends on the fictitious requirement that an evaluator must simultaneously be the willing

seller and the willing buyer. Furthermore, the evaluator must determine a price which was non-existent

at the time the property was expropriated because the effect of the expropriation on the price is not

accounted for.17 It is stated that such a fictitious/imaginary situation is one where the owner of the

10 Estate Marks v Pretoria City Council [1969] 3 All SA 271 (A) 279. 11 See note 10 above. 12 United States v Miler [1943] 317 US 369 (USA) 375 in Geldenhuys Onteieningsreg 174. 13 O‟Keefe The Legal Concept and Principles of Land Valuation 24–25 in Geldenhuys Onteieningsreg 174. 14 Kim Investments (Pty) Ltd v Durban Valuation Appeal Board and Others 1979 (4) SA 504 at 508G. 15 Pietermaritzburg Corporation v South African Breweries Ltd 1911 AD 501 at 515. 16 1979 (1) SA 949 (W) 955–956. 17 Southern Transvaal Buildings (Pty) Ltd v Johannesburg City Council 1979 (1) SA 949 (W) 955–956.

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property is not compelled to sell the property but rather wants to sell because s/he has been offered a

good price for it.18

In calculating the market value of land, the possible application of the Pointe Gourde19 principle must

also be borne in mind. In such a case, any effects of a scheme enhancing or detrimentally affecting the

underlying value of the land are not to be incorporated in the compensation assessment.20 Rather, the

land must be valued on the premise that such a scheme never existed. This principle is embodied in

section 12(5)(f) of the Expropriation Act. Since its initial application, the Pointe Gourde principle has

been extended to apply to enhancements to property as well as depreciation in value of the property.21

The object of section 12(5)(f) is that “any appreciation or depreciation in the value of the property which,

broadly speaking, is a by-product or spin-off of the expropriation, is to be ignored.”22

This brief consideration of the notion of market value and the concepts incidental thereto confirms the

statutory position that it was the point of departure for calculation of compensation for expropriation

before the Constitutional dispensation came into force. Even thereafter, it could be argued that this

factor played a dominant role in the determination of compensation.23 However, despite the fact that the

Expropriation Act is interpreted according to Constitutional principles, the general consensus is that this

method of interpretation leaves much to be desired. One of the primary motivations for this sentiment is

the prominence it gives market value and the accompanying notion of needing to reach a price

settlement between the expropriator and expropriatee. Arguably, the use of these principles allows for

“inflated” values for land subject to expropriation – which results in a deadlock between land owners

and the Land Claims Commission.24 The act has said to lead to the “frustration of the public interest and

purpose” as it gives landowners more power and enables them to demand “excessive” compensation.25

The Expropriation Bill26 (which has been temporarily shelved since its proposal) aimed to provide a

suitable mechanism to depart from the unhelpful formulation entrenched by the Expropriation Act. The

bill jettisoned the willing buyer, willing seller approach because of its incongruence with the reformative

18 Geldenhuys Markwaarde as Vergoedingsmaatstaf by Onteiening 1977 TSAR 13 in Du Plessis Compensation for Expropriation under the Constitution 274. 19 Pointe Gourde Quarrying and Transport Co. Ltd. v. Sub-Intendent of Crown Lands (Trinidad) [1947] AC 565. 20 See note 19 above. 21 Randburg Town Council v Kerksay Investments (Pty) Ltd 1997 (4) All SA 121 (A) 125. 22 Port Edward Town Board v Kay 1996 (3) SA 664 (A) at 679B–C in Randburg Town Council v Kerksay Investments (Pty) Ltd 1997 (4) All SA 121 (A) 125. 23 See cases such as Khumalo and Others v Potgieter and Others [2000] 2 All SA 456 and also Ex parte Former Highland Residents; In re: Ash and Others v Department of Land Affairs [2000] 2 All SA 26 (LCC). 24 Onagoruwa & Straughan LexisNexis Property Law Digest (2008.09) 9. 25 See note 24 above. 26 The Bill has been temporarily shelved and is said to be reproposed in January 2011.

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norms espoused by the Constitution.27 This move was met with much resistance as it would allow

compensation for expropriation to be calculated in accordance with values lower than the market

value.28 What many critics did not notice/realize is that the concept of compensation below the market

value was already theoretically permissible in the constitutional property clause.29 Furthermore, looking

to foreign law – especially German jurisprudence30 - it is clear that compensation for expropriation

below market value is accepted31 (albeit subject to valid qualifications which conform to the legislation of

the country concerned).32

The reason for the withdrawal of the Expropriation Bill is because some of its provisions – particularly

those allowing state seizure of land where sellers were unwilling to sell – were seen as being

unconstitutional.33 The disputed provision vested too much authority in the hands of state officials in that

it empowered government officials, rather than courts, to decide on the amount of compensation that

owners of expropriated farms should receive.34 The effect of this would be to make the compensation

calculation process very one-sided where an initial agreement on price was not reached. Despite its

unwelcome reception, the Expropriation Bill, albeit in a reworked form, is set to be re-submitted for

cabinet approval in January 2011.35 What has been made clear is that especially among policy makers,

there is a disdain for the willing buyer, willing seller model as its application has frustrated the land

restitution process.36 The government‟s goals of increasing black-held land will not be realized if it waits

for white landowners to be willing to sell their farms at their desired price – the process will simply take

too long. President Jacob Zuma has promised a more “pragmatic formula” to deal with South Africa‟s

land problems which includes cheaper ways of buying land from owners for the purposes of

redistribution.37 The African National Congress Youth League has also called for the abandonment of

the willing buyer, willing seller model and for the government to have a more unilateral say in

determining how much compensation it is willing to give for expropriated land.38

A potential point of confusion must be clarified to avoid making the same mistake political

commentators and the media seem to be making. Section 25(2)(b) of the Constitution states that the

27 See note 24 above. 28 Hofstatter Business Day (2009.10.09). 29 Van der Walt Constitutional Property Law 271. 30 See especially Deichordnung case – BVerfGE 24 367 421 (1968) Hamburgisches Deichordnung gesetz where the court held the value arrived at after consideration of the social objectives of the expropriation was equivalent to the market value. 31 Van der Walt Constitutional Property Law and in Du Plessis Compensation for Expropriation under the Constitution 273. 32 See note 29 above 273. 33 Ensor Business Day (2009.11.03). 34 Pienaar 2009 TSAR 347. 35 SAPA Mail & Guardian (2010.05.06). 36 See note 28 above. 37 Groenewald Mail & Guardian (2010.05.14). 38 Marrian Mail & Guardian (2010.09.09) In this context it is presumed that the journalist is referring to land used for reform/restitutionary purposes.

6

amount of compensation and the time and manner of payment thereof should be agreed to by the

affected parties and approved by a court. Where parties fail to reach an agreement, the amount of

compensation should be decided by a court.39 The implication of this provision is that the fictional notion

of willing buyer, willing seller still crops up in these guidelines for determining compensation for

expropriation. It is deemed fictional as there is no willingness on the part of the seller to sell where the

state forces an expropriation. There is a danger that the willing buyer, willing seller principle gets

conflated with the notion of expropriation at market value. These two concepts are not interchangeable

nor are they identical. As previously mentioned in defining these two principles, market value is, inter

alia, taken to be the value of a transaction between a willing seller and a willing buyer.40 There is thus

an urgent need to ascertain a legally sound standard for calculating “just and equitable” compensation –

one which includes market value as an equally-weighted factor under section 25(3) of the Constitution.

2.2 Just and equitable compensation

In considering the “just and equitable” compensation as defined in section 25(3) of the Constitution‟s

property clause, it is apparent that there are differing interpretations of how the listed factors influencing

the calculation formula should be applied. Although the factors listed in section 25(3)41 were intended to

be given equal weight in their application when applying the compensation formula, practice has

resulted in a different approach. This raises the question of how “just and equitable” a compensation

formula is which still places precedence on market value as a point of departure.42 Does it give the other

factors taken into account adequate prominence?

A more detailed assessment of the application of section 25(3) will be done at a later stage in this

paper. For now, what is important is to see why the two main approaches to the application of section

25(3) differ. The two-step method, as used by Geldenhuys J and subsequently also Mokgoro J, gives

prominence to the market value factor. The justification for this is that it is the most easily quantifiable

factor. Although the alternative offered to this has not yet been practically applied by the courts, it has

been mentioned by Langa ACJ43 in a minority judgment and also touched on by Zimmerman and

acknowledged Van der Walt.44

In ensuring a fair and equal process in the aforementioned determination of compensation by the

courts, a clear set of guidelines for this purpose would be useful. However, one cannot go so far as to

39 Section 25(2)(b) of the Constitution of the Republic of South Africa, 1996. 40 Section 12(1)(a)(i) of Expropriation Act. 41 Section 12(1)(a) – (e) of Expropriation Act. 42 This approach has in mind the two-step approach first applied by Geldenhuys J. 43 In the minority judgment of Du Toit v Minister of Transport (CCT22/04) [2005] para 84. 44 Zimmerman 2005 (122) SALJ unlike Langa ACJ she does not criticize the two-step method but rather advocates an even-weighted approach to all the factors in section 25(3). Van der Walt 2006 (123) SALJ 29 agrees with Zimmerman that this more practical way which gives market value prominence could breed resistance to reform.

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insist on a set of rules for uniform application in all compensation cases.45 Due to the purposive method

of interpretation espoused by the Constitution46 and also the differing subject matter and nature of each

expropriation case, the uniform application of a set of rigid rules would possibly result in an injustice.

There is thus a need for the recognition of nuances in case law and how the law has been applied to the

differing situations courts have faced when called on to calculate just and equitable compensation for

expropriation.

3. Legislation – overview By juxtaposing the old and new legislation concerning compensation for expropriation, the differences in

approach are highlighted. Considering the legislative framework also gives an idea of how the formula

for compensation should theoretically work. However, as will be seen in the case law analyses, the

theoretical position does not always align with how the courts apply the legislation.

3.1 Expropriation Act of 1975

The purpose of considering the Expropriation Act of 1975, which is pre-Constitutional legislation, is that

it is still applicable and relevant – albeit under regulation of constitutional standards.47 Although the

formulation of this Act has been criticised as not conforming to constitutional norms (and thus the need

for redrafting), it can in some ways be used to inform the redrafting of a new Expropriation Act. Under

the Expropriation Act of 1975, the point of departure is the market value of the property.48 The market

value is calculated using traditional methods of valuation.49 This means that the ordinary meaning of the

concept applies and is held as “the best price which can reasonably be obtained on the open market”.50

According to section 12(1)(a)(i) of the Act,51 the compensation for the expropriated property may not

exceed the market value thereof. Market value is taken on the date of notice, determined by a price

fetched on an open market and taken to be the value of a transaction between a willing seller and a

willing buyer.52

Furthermore, the act53 lays out a number of rules to be used by the court in determining the amount of

compensation to be paid out. The first set of rules list conditions which will not be considered with

45 Geldenhuys Onteieningsreg 167. 46 Constitutional jurisprudence in cases such as S v Makwanyane and Another 1995 (3) SA 391 (CC) 403 and S v Zuma and Others 1995 (2) 642 (CC) advocates a “generous and purposive interpretation [that] gives expression to the underlying values of the Constitution”. 47 Silberberg & Schoeman The Law of Property 559. 48 Geldenhuys Onteieningsreg 174–176. 49 See note 48 above. 50 May, Thomas, Cairns & Frogmore v Reserve Bank of Zimbabwe 1986 (3) SA 107 (ZS) at 120I in Geldenhuys Onteieningsreg 174. 51 63 of 1975. 52 Section 12(1)(a)(i) of Expropriation Act 63 of 1975. 53 Section 12(5).

8

regard to calculation of remuneration for the expropriated land.54 Firstly, the fact that the property has

been taken “without the consent of the owner in question” will not be taken into account.55 Secondly, the

usefulness of the property in issue will not be considered if the property would not have been bought on

the open market for purpose for which the State requires it.56 Thirdly, should the value of the property

have been increased by unlawful means, this enhancement will not affect the price thereof.57 Fourthly,

any improvements to the property made after or on the date of notice (excluding for maintenance

purposes or due to obligations undertaken before the date of notice) will not be considered when

remuneration is calculated.58 Fifthly, depreciation occurring after the date of notice will also not affect

the amount of remuneration adversely.59

The second set of rules states factors which will be considered during the calculation for

remuneration.60 Financial loss caused by the expropriation is taken into consideration.61 This financial

loss could be caused by the loss of a benefit which has been lost due to the expropriation of the land.62

It is clear that these detailed provisions amount to a formulaic approach to the calculation of

compensation for expropriated property. The majority of the listed factors to be taken into consideration

in determining the amount are quantifiable in monetary terms. In section 12(2), the act also provides for

solatium (solace money), calculated at a prescribed rate which forms a percentage of the total

remuneration amount in subsection one.

Although the Constitution63 sets out its own considerations to be borne in mind when calculating

compensation, the Expropriation Act is still operational and is said to “maintain a profound influence” on

the regulation of expropriation.64 Section 25(3) of the Constitution informs the interpretation of the

Expropriation Act and where there are inconsistencies between the two, the Constitution will override

the Act.65

3.2 Section 25(3) of the Constitution

Section 25(3) of the Constitution deals with how compensation for expropriation is to be calculated. The

standard set is one which must be “just and equitable” which reflects an “equitable balance between the

54 Section 12(5)(a)–(f). 55 Section 12(5)(a). 56 Section 12(5)(b). 57 Section 12(5)(c). 58 Section 12(5)(d). 59 Section 12(5)(f). 60 Section 12(5)(h). 61 Section 12(5)(h)(i). 62 Section 5(h)(ii). 63 1996 of the Republic of South Africa. 64 Silberberg and Schoeman's The Law of Property 559. 65 See note 64 above.

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public interest and the interests of those affected…”66 Furthermore, section 25(3) states that “all

relevant circumstances” must be borne in mind when calculating the payment. Included in these

circumstances are the following equally-weighted factors listed in no significant order. These factors

are: the current use of the property,67 how the property was acquired and its history68 and the market

value of the property.69 Further factors include how much the state has invested in the property and how

much it has subsidized the purchase and improvements to the property70 and the purpose of the

expropriation.71 Furthermore, in calculating an amount of compensation, the public interest and the

interests of those affected must be balanced to achieve a result in line with the aims of restoration of

land rights, redistribution of land and the advancement of land-user certainty.72

Unlike the 1975 Expropriation Act where market value is the point of departure for the determination of

the amount of compensation due, the Constitution advocates balancing the interests listed in section

25(3)(a) – (e) as a method of determining what compensation amount is to be received.73 These

interests can be seen as part of the broader concept of “relevant circumstances” and must all be given

equal weight as factors which make the amount of compensation increase or decrease.

Despite a notional move towards more equally-weighted factors of which market value forms but one

factor, it seems as though the Constitutional method of applying the compensation does not differ much

from the approach followed by the Expropriation Act. An examination of Constitutional-era case law

reveals a reluctance to depart from the formula which gives market value precedence. Scholars and

judges admit that the prominence of market value in the calculation is not ideal but concede this position

to it because it is easily quantifiable.74 By considering the case law dealing with the application of the

compensation calculation, insight can be gained regarding emerging methodology. Moreover, a further

aim of case analyses is to establish whether the courts have in any way advocated an alternative

approach which considers all factors equally and disposes of the traditional tendency to give market

value prominence.

66 Section 25(3) of the Constitution of the Republic of South Africa, 1996. 67 Section 25(3)(a). 68 Section 25(3)(b). 69 Section 25(3)(c). 70 Section 25(3)(d). 71 Section 25(3)(e). 72 Carey Miller and Pope in Pienaar 2009 TSAR 344. 73 Mostert and Badenhorst Bill of Rights Compendium 3FB7. 74 Cheadle, Davis & Haysom “Property” in South African Constitutional Law: The Bill of Rights 20.5.

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4. Case law – overview

The case law analysis can be divided into two broad categories, namely pre-constitutional case law and

constitutional case law. This distinction is made to assess the impact of the provisions in the

constitutional property clause on the provisions of the Expropriation Act. The value of the pre-

constitutional case law analysis is that it highlights the market-value centred approach favoured by the

courts. From these cases, the shortcomings of market value as a prominent standard will hopefully

emerge, illustrating why lawmakers have been so eager to depart from it.

As stated, the consideration of Constitutional-era case law is intended to inform future approaches of

the courts in the application of the formula for calculation of compensation. Where constitutional-era

cases still adhere to the traditional formulation, the courts‟ reason for refusing to abandon this will be

considered in an effort to gain perspective on the role market value serves. Possible alternatives to the

traditional formulation and application will also be investigated.

4.1 Pre-constitutional case law

Although there is a tendency to move away from market value, this standard must be defined within its

context. To understand the concept of market value more clearly, how it is determined and the way in

which it should be applied, a string of cases concerning expropriation and decided before the

implementation of the constitutional dispensation will be considered.

In determining the market value in partial takings (where the piece of land expropriation does not

constitute the whole registered unit belonging to the owner), both Expropriation Acts75 state that

compensation should be paid for the market value of the property as well as for the “actual financial loss

caused by the expropriation”.76 Where the claimant has suffered losses exceeding the market value of

the portion of land, the question arises as to how the claimant should be compensated for this.

The comparable sales method and the residual land value method are the main methods of determining

compensation for expropriation of property done according to section 12(1)(a)(i) of the Expropriation Act

63 of 1975.77 The comparable sales method is defined as “the assessment of the value of the

expropriated property by reference to actual prices obtained in sales of comparable prices”.78 This

75 Act 55 of 1965 and Act 63 of 1975. 76 Administrator, Transvaal v Kildrummy Holdings (Pty) Ltd and Another 1983 (3) All SA 1 (T) 9. 77 Opera House (Grand Parade) Restaurant (Pty) Ltd v Cape Town Municipality 1989 (2) SA 670 (C). 78 See note 77 above.

11

method has been endorsed by South African courts in a number of decisions and is seen as the most

accepted method of valuation to cater for partial expropriation.79

The residual land value method is calculated by determining the development potential of the property,

then the profit potential, then its capitalisation and thereafter deduction of the total cost of the project.80

This method has received much criticism and has never been used to calculate compensation in an

expropriation matter.81 The reason for the reluctance to use this method is that the validity of this

approach depends on three key factors – and if any one of these factors cannot be exactly determined,

it will drastically affect the end result.82 The primary shortcoming is therefore that the residual land value

method of valuation is “fraught with uncertainties”.83

4.1.1 Residual value

Where there is a concentration of value on the property, a “before and after” valuation is important

because, for example, the street front a business‟ premises could be much more valuable than a

section further away from the street.84 The “before and after” method of valuation assists in determining

the objective market value and involves the assumption of a hypothetical buyer and seller.85 This allows

for the integration potential of the property to be calculated in a reliable way.86

The “before and after” method works in the following way (if one were to take the expropriation of land

for purposes of building a public road as an example): firstly, the value of a sale occurring before the

expropriation declaration announcing the intention to expropriate for the road is calculated.87 Secondly,

the sale of the remnant of property (after the declaration of the road) in the open market is posited.88

Together with these calculations comes the consideration of township development potential –

something which could potentially decrease after expropriation occurs.89 This causes the price payable

per hectare to decrease significantly. The compensation paid for the expropriated property is the

difference between the price for the first sale (pre-expropriation of land for the road) and the price

79 Pietermaritzberg Corporation v SA Breweries Ltd 1911 AD 501 at 506; Minister of Water Affairs v Mostert and Others 1966 (4) SA 690 (A) at 723F; Estate Marks v Pretoria City Council 1969 (3) SA 227 (A) 253H – 254B; Hargovan and Others v Minister of Agriculture 1971 (4) SA 257 (D) 259. 80 See note 77 above. 81 See note 77 above. 82 See note 77 above. 83 Estate Marks v Pretoria City Council 1969 (3) SA 227 (A) 253H–254B. 84 Ingersoll-Rand Co (SA) Ltd v Administrateur, Transvaal [1991] 3 All SA 564 (T) 568. 85 Ingersoll-Rand Co (SA) Ltd v Administrateur, Transvaal [1991] 3 All SA 564 (T) 568. 86 See note 85 above. 87 See note 85 above. 88 See note 85 above. 89 See note 85 above.

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determined after the declaration of the road.90 This “before and after” calculation of compensation

method includes the integration potential of expropriated property.91 The integration potential of property

does not always have to be borne in mind when calculating the market value of property as it is not

always applicable.92 Where there is an increase or decrease in the price of land as a result of the

purpose for which it is expropriated, this fluctuation of price should not be taken into consideration.93

This also applies in the case of partial expropriation of property.94

4.1.2 Comparative sales method

To ensure that compensation for expropriation is not calculated in unrealistic vacuum, the Courts

suggest looking to “contemporaneous expropriation prices for property in the vicinity”.95 However,

caution must also be given to not over-emphasise those prices as being a complete test.96 Comparable

transactions are used in cases where there are land transactions in a similar geographical area and

time-frame forming the subject of expropriation.97 Geldenhuys‟ approach qualifies this method in that

the party selling the land must present the facts of the case in such a way as to show that it is

essentially comparable and not too remote from the expropriation transaction at hand in space and

time.98

The following approach is prescribed in the context of sales of comparable property: where there is no

evidence suggesting otherwise, the Court should assume it was a bona fide transaction which was

made between “reasonably intelligent and well informed people who were not acting under any

abnormal pressure, or subject to any delusions or misapprehensions about the property which was

being bought and sold. If there were any abnormal features of the transaction, it is for the party who

wishes the Court to disregard the price reflected therein to prove those features”.99

4.1.3 Assessment

It is clear that in pre-constitutional cases concerning the calculation of compensation for expropriation,

the notion of market value was of utmost importance. The trend underlying the jurisprudence

concerning compensation during this time is well summed-up by the following dictum:

90 See note 85 above. 91 See note 85 above. 92 See note 85 above. 93 Section 12(5)(f) read together with section 26(2) and (4) of Act 63 of 1975. 94 See note 85 above 569. 95 Van Zyl v Stadsraad van Ermelo [1979] 1 All SA 428 (A) 444. 96 See note 95 above. 97 See note 95 above. 98 Geldenhuys at 277 in Van Zyl see note 95 above 445. 99 Jacobs v Minister of Agriculture 1972 (4) SA 608 (W).

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“...an owner manifestly ought not to receive more than his total loss, and that the value of

his land may be assessed on such a basis and at such a figure as to negative all possibility

of his having suffered any loss over and above that sum.”100

Most scholars have accepted that market value forms the basis of equitable compensation.101 In pre-

constitutional cases, it could therefore be argued that it was very rare for owners of expropriated

property to receive less than the market value for their properties. The comparative sales method of

determining compensation was envisioned for use where an accurate market value could not be

determined due to expropriation. However, because this method of determining compensation relies on

the existence of other similarly priced properties in a comparable vicinity, its application is limited.

Despite market value being the favoured approach in pre-constitutional formula for calculation of

compensation, case law reveals that this is nevertheless a less-than-perfect method of determining

compensation. In Estate Marks v Pretoria City Council102 Ogilvie-Thompson J‟s dictum underlines one

of the essential problems with the willing seller-willing buyer principle: “ordinarily speaking, an

expropriation price hardly fits the concept prescribed by the Act, of a sale „in the open market by a

willing seller to a willing buyer‟...” Ogilvie-Thompson J goes on to quote Cripps, who states the

necessity of the sales being on a free market, and that a sale necessitated by an authority with

compulsory powers is not “reliable evidence of value in the open market” as they “would not satisfy the

assumption of a willing seller derived from the statutory requirement of market value”.103

The primary concern with market value as used in this context is thus that in a case of expropriation, the

idea of a price truly reflective of a value on the open market is illusory. This is so because there is in

actual fact no willing seller. Where the government implemented an expropriation, the seller would not

have the option to decline the sale if s/he felt dissatisfied with the price being offered. In cases of

dissatisfaction with the proposed price, a more accurate description would be a sale under compulsion.

Furthermore, determining the market value of a property puts the expectation on the Judge to be a

“super valuator” who must simultaneously stand in the shoes of a willing buyer and a willing seller.104

100 Illovo Sugar Estates Limited v South African Railways and Harbours 1947 (1) SA 52 (D) 64. 101 Geldenhuys Onteieningsreg 167. 102 1969 (3) SA 227 (A) 254. 103 Estate Marks v Pretoria City Council 1969 (3) SA 227 (A) 254. 104 King J in Southern Transvaal Buildings (Pty) Ltd v Johannesburg City Council 1979 (1) SA 949 (W) cited in Du Plessis Compensation for Expropriation under the Constitution 54.

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The fictional element of the price determination is added to by the preclusion of considering the fact that

the land price has been influenced by the expropriation.105 King J sums up the confusion by stating that

“it is an Alice in Wonderland world in which the consideration of principles of valuation

and the opinions expressed by experienced property valuators make the task of the

super valuator seem „curiouser and curiouser‟.”106

4.2 Constitutional case law

There are several categories of expropriation. For the purposes of this analysis, rough categories will be

used. A distinction will be made between partial and complete expropriation and also between

expropriation for a public purpose (public works) and expropriation for the purpose of restitution.

One of the most prominent differences (apart from the implementation of the Constitutional property

clause) between pre-constitutional case law and constitutional case law is that pre-constitutional case

law did not have expropriation for the purpose of land reform – only for the purpose of public works. The

constitutional property clause brought with it an emphasis on restitution and redistribution which has led

to assertions that compensation calculations should reflect this “special purpose”.107 A consideration of

constitutional case law according to these categories may inform the way in which the courts should

approach future cases and whether or not they should see the nature of the purpose of the

expropriation as instructive in determining the amount of compensation.

Zimmerman argues that according to Constitutional text and Constitutional Court jurisprudence,

expropriations for the purpose of land reform are a constitutional priority.108 It is asserted that there is

merit in her argument that land reform is constitutionally special and therefore deserves to be treated

differently with regard to applying the compensation formula.109 Van der Walt adds substance to this

with a more concrete assertion that although South African authors have accepted that in the context of

land reform expropriations, compensation could be less than market value, the practical application of

section 25(3) in this context has not been considered.110 This is especially so regarding a “radical”

reform-centred interpretation of this section.111

105 See note 104 above. 106 See note 104 above 55. 107 Zimmerman 2005 (122) SALJ 407. 108 Zimmerman 2005 (122) SALJ 383. 109 See note 108 above 407. 110 Van der Walt 2006 (123) SALJ 29. 111 See note 110 above.

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4.2.1 Expropriation for public purpose

Due to South Africa‟s history of unequal and unjust distribution of property, the equitable redistribution

of land is a priority. It is for this reason that the state‟s ability to expropriate property is seen as a “crucial

constitutional power”.112 With the advent of the Constitution came the need for all legislation to be

applied in conformity with the fundamental values thereof.113 The Constitution (as opposed to the

Expropriation Act which was exclusively used in the past) now provides the principles and values which

must be adhered to when calculating compensation for expropriation of property.114 The standards of

justice and equity, informing the calculation of compensation for expropriation, “are peremptory and

every amount of compensation agreed to or decided on by a court of law must comply with them”.115

In contrast to the open-ended list of factors to take into account in s 25(3); the Expropriation Act does

not necessitate that compensation should meet the peremptory standards mentioned in the

Constitution.116 Instead, section 12(1) of the Expropriation Act lists two possible kinds of compensation.

In the case of an expropriated right, the compensation amount is limited to actual financial loss.117 In the

case of the expropriation of corporeal property, compensation is limited to the aggregate of market

value and financial loss.118 The distinction between the calculation of the compensation value

concerning the expropriation of corporeal property as opposed to the expropriation of a right is not

made in section 25 of the Constitution.119 Mokgoro J points out that differences such as these (between

the Act and the Constitution) have the potential to affect the “fairness of the amount of

compensation”.120

In Du Toit v Minister of Transport,121 the court considered whether section 12(1) was compatible with

section 25 of the Constitution in that it could facilitate the awarding of a “just and equitable” amount of

compensation. The subject of expropriation for which the compensation was calculated was for the right

to remove gravel from private property for the purpose of building a public road (the compensation

which not for the value of the gravel itself). Section 12(1) of the Expropriation Act (which pre-dates the

Constitution) is described as a “mechanism” which can be employed to calculate compensation.122 In

contrast to this, section 25(3) of the Constitution is described as a “broad standard against which the

112 Du Toit v Minister of Transport (CCT22/04) [2005] para 25. 113 See note 112 above para 26. 114 See note 112 above para 25. 115 See note 112 above para 28. 116 See note 112 above para 28. 117 See note 112 above para 28. 118 Du Toit v Minister of Transport (CCT22/04) [2005] para 28. 119 See note 118 above. 120 See note 118 above. 121 See note 118 above para 29. 122 See note 118 above para 29.

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amount of compensation arrived at under section 12(1) of the Act must be measured to ensure that it

accords with the Constitution”.123

The effect of section 25(3) is that it vests a duty in the executive, the legislature and the judiciary to

ensure the payment of compensation that is “just and equitable” – despite the possible presence of

contrary provisions in legislation concerning the matter.124 The court acknowledges that when an

amount seen as “just and equitable” is higher than the perceived market value of the property,

interpretation might pose a problem.125 To combat this problem in future drafting, it is suggested that the

jurisprudence developed around the interpretation of section 12(1)(a)(i) of the Expropriation Act be used

to curb inflated compensation amounts. In the application of the factors listed in section 25(3), not all of

the factors listed have to be applied – the list is open-ended (which means that factors additional to

those listed may be considered) and only relevant factors need to be considered.126 However, despite

the flexibility of application of the factors, the final outcome must always be just and equitable and must

“reflect an equitable balance between the interests of the public and those affected by expropriation”.127

In this way too, the outcome of compensation calculated in terms of section 12(1)(a) or 12(1)(b) of the

Expropriation Act must adhere to this “just and equitable” standard and necessitates a consideration of

the relevant factors listed in section 25(3).128

Whereas the Expropriation Act129 uses aggregate market value and actual financial loss as means of

calculating compensation for expropriation, section 25(3) of the Constitution provides for a range of

circumstances which are to be considered in arriving at an amount of compensation seen as “just and

equitable”.130 In contrast to section 12(1) of the Act, none of the factors listed in section 25(3), inter alia

market value and possibly also actual financial loss, are given precedence – they are to be seen as

having equal weight.131 The Constitution does not prescribe how the factors in section 25(3) are to be

applied. Rather, the emphasis is on achieving a final award that is just and equitable and reflective of

“an equitable balance between public and private interests.132 As long as this is achieved, there is

adherence to the constitutional standards in section 25(3).133 Because there is no set formula specified

in section 25(3), the court recommended an approach which considers what compensation is payable

123 See note 118 above para 29. 124 See note 118 above para 30. 125 See note 118 above para 30. 126 See note 118 above para 31. 127 See note 118 above para 31. 128 Du Toit v Minister of Transport (CCT22/04) [2005] para 32. 129 section 12(1)(a) and 12(1)(b). 130 See note 128 above para 33. 131 See note 128 above. 132 See note 128 above. 133 See note 128 above.

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under the Act – and then consider whether the amount arrived at is “just and equitable” in terms of

section 25(3) of the Constitution.134 This is more commonly known as the two-stage approach.

It is acknowledged by the courts135 and scholars136 alike that this approach is not ideal. There is more

than one reason for this. In the majority judgment of the Du Toit case, Mokgoro J‟s mixed sentiments

about this method stem from the fact that it is not the most expedient way to calculate compensation for

expropriation.137 The learned judge stated that “it would have been more expedient if the legislature had

made provision in the Act itself for complying with the constitutional standards of just and equitable

compensation and ensuring that an equitable balance between the interests of the state and those of

the individual is reflected”.138 The need for the reconciliation of the Act and the Constitution was also

mentioned – but in the absence of an alternative, the two-step method, as adopted by Geldenhuys J in

Ex Parte Former Highlands Residents; In Re: Ash and others v Department of Land Affairs,139 was

applied.

As mentioned, section 25(3) does not give precedence to market value as the determining factor in the

compensation calculation.140 The rationale for this is that expropriation and compensation are “matters

of acute socio-economic concern” which should not be left to the mercy of market forces.141 It is

therefore seen as necessary that the market forces be tempered by other factors informed by

constitutional values (such as the factors listed in section 25(3) and any other factors the court should

feel to be relevant to the situation).

In the minority judgment of the Du Toit case, Langa ACJ disagrees with Mokgoro J‟s application of the

two-step method and the way that she has reconciled section 12 of the Expropriation Act with section

25(3) of the Constitution.142 His main point of contention is that the Constitution “expressly” did not

follow the method of calculation set out in the Expropriation Act – and therefore insists on a different

approach which puts precedence on considerations of justice and equity.143 Langa ACJ argues that by

using these considerations as a second-level criteria in the two-stage test, market value continues to

trump the other considerations relevant to justice and equity which are “expressly advocated by the

134 See note 128 above. 135 See note 128 above para 35 and especially the minority judgment para 56. 136 Modipane A critical exposition on the determination of a “just an equitable” compensation for expropriation in South African law” 42 – 44. 137 See note 128 above para 35 – 36. 138 See note 128 above para 35. 139 Du Toit v Minister of Transport (CCT22/04) para 36 and Ex Parte Former Highlands Residents; In Re: Ash and others v Department of Land Affairs [2000] 2 All SA 26 (LCC). 140 Du Toit v Minister of Transport (CCT22/04) [2005] para 35. 141 See note 140 above. 142 See note 140 above para 56. 143 See note 140 above para 84.

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Constitution”.144 In addition to this, Langa ACJ criticizes the two-step method for its “unwieldiness”.145

Cheadle et al, while acknowledging the reliability and soundness of this method, find that the inherent

nature of the property clause makes the factors (all but market value and the extent of direct state

investment) difficult to quantify.146 The effect of this is that “the court is left in the position of making

notional upward or downward adjustments before arriving at an amount of compensation that is really

based on a broad sense of the equities of the particular case”.147 Mostert and Badenhorst also

appreciate the shortcomings of the two-stage method and state that although the market value of the

property is a relevant factor, it should not be the primary factor in determining what “just and equitable

compensation” is.148 The authors go on to submit that market value will in all likelihood still be taken as

the starting point in compensation calculations.149

Mokgoro J‟s decision to use the two-step method in calculating the amount of compensation for

expropriation is motivated by the fact that as in the case at hand, it is practicable where there is no

challenge to the constitutionality of the Act.150 Although Ex Parte Former Highlands Residents dealt with

section 2 of the Restitution of Land Rights Act (as opposed to section 12(1) of the Expropriation Act)

and addressed the calculation of compensation for dispossession of land, the principles applied were

still similar enough to be of use in the majority decision of Du Toit.151 The rationale for the use of market

value as a starting point in the two-step method of calculation applied with regard to section 25(3) of the

Constitution is due to it being one of the only factors in the list which is readily quantifiable.152 The court

mentions that this method will thus not be applicable in all cases.153

It was stressed in the majority decision that referring to the market value of property is a legitimate way

of determining the actual financial loss.154 Furthermore, the court pointed out that the market value of

the property subject to expropriation could also constitute the actual amount of loss sustained by the

expropriatee.155 In the court a quo (SCA), Heher JA held that while Kangra Holdings (Pty) Ltd v Minister

of Water Affairs156 was correct in stating that the measure of loss includes the equivalent of market

value of what is taken by the expropriator, this does not imply that the market value can always be used

144 See note 140 above. 145 See note 140 above para 84. 146 Cheadle, Davis & Haysom “Property” in South African Constitutional Law: The Bill of Rights 20.5. 147 See note 146 above. 148 Mostert and Badenhorst Bill of Rights Compendium 3FB7. 149 See note 148 above. 150 Du Toit v Minister of Transport (CCT22/04) [2005] para 37. 151 See note 150 above para 35. 152 See note 150 above para 37. 153 See note 150 above para 37. 154 See note 150 above para 40. 155 See note 150 above para 40. 156 Kangra Holdings (Pty) Ltd v Minister of Water Affairs 1998 (4) SA 330 (SCA).

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to prove the fact that such a loss was suffered.157 The essence of the SCA‟s finding is that in cases

where the market value of the property attaches thereto, this market value will have to be considered to

determine the measure of financial loss.158 Cases dealing with the expropriation of a right which has a

market value will result in the blurring of the distinction between section 12(1)(a) and 12(1)(b).159

The Constitutional Court concluded that the right to use land temporarily had been expropriated so that

a quarry pit for the extraction of gravel for construction purposes could occur.160 In the court‟s

consideration of the factors listed in section 25(3), much importance was attributed to the purpose of the

expropriation in terms of it being beneficial for economy and “general wellbeing of the populace”.161

Furthermore, the road system was described as a “national asset and a matter of public interest”.162

Due to the fact that the court determined the compensation to be for the right to use land temporarily –

and not for the actual value of the gravel expropriated, the expropriatee received less compensation

than he had initially claimed.

In cases where the comparable sales method cannot be used because the nature of the expropriated

property is such that there is no open market for it, the standard of market value must be abandoned in

exchange for the saving clause (voorbehoudsbepaling).163 This is especially valid in cases where the

shape or size of the property or the nature of the buildings on the property make it unmarketable.164 In

such cases, a court is entitled to deviate from the provisions of s 12(1)(a)(i) of the Expropriation Act.165

Despite this, it is recommended that the Act should be followed as closely as possible without keeping

too much of a rigid distinction between the value of the expropriated property and the severance loss

caused to the remaining portion by the expropriation.166 In calculating the compensation for expropriated

property as prescribed by section 12(1) of the Expropriation Act, the aggregate of the market value and

the financial loss caused by the expropriation must first be determined individually.167

It must be noted that market value of the expropriated property excludes some forms of loss – such as

reduced potential of the remainder of the expropriated property.168 In the Mooikloof Estates (Edms) Bpk

v Premier, Gauteng, the court endorsed determining loss of this nature by using the “before and after”

157 See note 150 above para 42. 158 See note 150 above para 42. 159 See note 150 above para 43. 160 See note 150 above para 54. 161 Du Toit v Minister of Transport (CCT22/04) [2005] para 51. 162 See note 161 above. 163 Mooikloof Estates (Edms) Bpk v Premier, Gauteng 2000 (3) SA 463 (T). 164 See note 163 above. 165 See note 163 above. 166 See note 163 above 473J–474C. 167 See note 163 above. 168 See note 163 above.

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method as employed in pre-constitutional jurisprudence concerning calculation of compensation for

expropriation of land for public works purposes.169 In determining the value of expropriated property –

by way of its market value in an open market – the valuation must take value-added tax into

consideration.170

The Constitutional Court‟s decision in the Du Toit case has also been faulted for its failure to distinguish

between the determination of compensation for expropriation done for the sake of restitution and the

determination of compensation done in the public interest. It is taken that public interest is here defined

in the context of public works purposes (although the Constitution defines it in section 25(4)(a) to

include the nation‟s commitment to land reform). Van der Walt is the main proponent of this argument

and states that “the public interest justifies expropriation in the first place, but should not also justify a

reduction of the compensation amount unless there is a special reason such as land reform involved.”171

He argues that this particular decision did attempt to weigh up considerations of public fairness against

the interests of the expropriatee (as instructed by section 25(3)) but that too much weight was attributed

to the public interest. In cases where the public interest trumps the interests of the expropriatee, Van

der Walt calls for the courts to give special justification for this.172 While not denying that the

considerations in section 25(3) could in some cases justify and necessitate a “significant reduction” of

market value to attain the correct balance between the factors, Van der Walt opines that more than just

public interest is required as motivation for this.173 This would most likely be related to the other

considerations mentioned in section 25(3) and also to “the unfair balance that characterised land rights

and land holdings in the apartheid system”.174

The question has to be asked whether expropriation in this case accorded with the idea of equitable

redistribution of land. In a technical sense, the question can be answered in the negative as the case

concerns the expropriation of a right to temporarily use privately owned land to extract gravel from it.

However, when the purpose of the expropriation is not to further government policy attempting to

correct the skewed land ownership trend entrenched during the apartheid era, should the public interest

criteria in section 25(3) be so persuasive in causing a downward adjustment to the value of the

expropriated right or property?

169 See note 163 above 475E–G. 170 See note 163 above 476A-B. 171 Van der Walt Constitutional Property Law 277. 172 See note 171 above. 173 See note 171 above. 174 See note 171 above.

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Cheadle et al remark that the Du Toit case does not give much guidance in determining when

expropriation justifies the award of compensation below market value.175 Furthermore, the case also

fails to instruct how courts are to balance expropriation serving the public interest against the contrary

interests of the property owner.176 What can be taken from the Court‟s approach in this case is the way

in which the analysis of the factors to be taken into account when calculating compensation is to be

conducted. Cheadle et al also venture as far as saying that this analysis may also show that the Court

will not treat payment below the market value of the land as the norm in calculating compensation for

expropriation cases.177

4.2.2 Expropriation done for restitution

To investigate whether or not the courts have given attention to expropriation for land reform being

“special” because it has restitutionary purposes, constitutional-era case law dealing with land reform will

be considered.

One of the purposes of the Land Reform (Labour Tenants) Act178 is to “provide for the acquisition of

land by labour tenants”.179 In Khumalo and others v Potgieter and others,180 the court was required to

decide whether the compensation paid to the first respondent for the transferral of land in terms of the

Land Reform Act was “just and equitable”.181 As in the majority decision of the Du Toit case, the court

based the determination of compensation on a calculation using the two-step method. Meer J described

the method as first assessing the market value and then moving on to the second stage in which the

compensation was to be considered in view of the factors listed in section 25(3) of the Constitution.182

Once a result had been reached using the two-step method, the Point Gourde principle could be

applied.183 In applying this principle to assess the value, “…it is important to consider what would have

happened had there been no scheme… The valuer must cast aside his knowledge of what has

happened due to that scheme”.184 Bearing this in mind, the court considered the market value of the

affected properties by using comparable sales transactions.185 This was done according to the principle

of valuation which states that because there is a chance of expropriation if an agreement is not

175 Cheadle, Davis & Haysom “Property” in South African Constitutional Law: The Bill of Rights 20.5. 176 See note 175 above. 177 See note 175 above. 178 Act 3 of 1996. 179 Khumalo and Others v Potgieter and Others 1999 [ZALCC] 68. 180 See note 179 above. 181 See note 179 above para 2. 182 See note 179 above para 29. 183 See note 179 above para 29. 184 Lord Denning cited in note 179 above para 29. 185 See note 179 above para 30.

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reached, sales to an expropriator should be treated cautiously.186 Because the seller may not be willing,

the comparable sales method is considered as a way of determining value for the subject property

which was not seen as an open market transaction.187 The court stressed that “a sale by an owner to an

authority having expropriating powers is usually not a reliable indication of market value…”188 If an

agreement is not reached between the parties involved, an expropriation could follow – and as a

consequence, the price of the property might drop as the expropriator has increased bargaining

power.189 Once again, the problem forming the crux of the willing buyer, willing seller concept emerges.

In assessing the potential for a different assessment to be applied to expropriations for the purpose of

public works as opposed to those for the purpose of restitution, it is useful to look at the court‟s

consideration of the factors listed in section 25(3) in the Khumalo case. The second leg of the two-stage

method involves consideration of factors (a), (b), (d) and (e) of section 25(3) to consider how market

value should be adjusted.190 Factor (a), the current use of the property by the labour tenants warrants

an upward adjustment.191 This is because that by virtue of the Land Reform Act, the labour tenants are

“almost completely protected” against eviction which means that their security of tenure is not

dependant on them providing their labour.192 Due to this, a limited upward adjustment of the market

value is warranted.193

In considering factor (b), the history of the acquisition and use of the properties, it is noted by the court

that the market value of the property was adversely affected by the rights vested in the labour tenants

when the Act came about in 1996.194 However, because the first respondent was not directly affected by

the devaluation of the property due to the Act in that the predecessor in title was affected, the loss of

value was already accounted for in the purchase price.195 The court thus saw the need to substantially

adjust the price downward.196 It is common cause that the first respondent bought the properties for an

amount significantly lower than market value.197 Awarding the respondent compensation at market

value would result in over-compensation which would be detrimental to the state budget and would not

be in keeping with the equitable balance between the public interest and the affected parties‟

186 See note 179 above para 30. 187 See note 179 above para 30. 188 See note 179 above para 85. 189 See note 179 above para 85. 190 Khumalo and Others v Potgieter and Others 1999 [ZALCC] 68 para 85. 191 See note 190 above para 85. 192 See note 190 above. 193 See note 190 above. 194 See note 190 above. 195 See note 190 above para 95. 196 See note 190 above para 95. 197 See note 190 above para 96.

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interests.198 On the other hand, the extent of downward adjustment is to be limited by the fact that the

first respondent should not be punished for buying the properties at a low price.199

Referring to the section 25(3) assessment, Meer J addressed the notion of equity and what its

implications were in the case at hand. Equity is served to all when a respondent who willingly engages

with the Chapter III procedure accepts its consequences.200 Equity does not factor the expectations of

the respondent into the calculation of compensation - nor does it take into account the respondents

motives for engaging with the Chapter III procedure or that s/he was not satisfied with its

consequences.201 The purpose of Chapter III of the Land Reform Act202 is to enable labour tenants to

apply for an award of the land they are entitled to occupy.203 The final amount of compensation awarded

to the first respondent was below the calculated market value of the property but exceeded the amount

that he had bought it for.204

Du Plessis205 criticizes the court in Khumalo for a seemingly unbalanced analysis between the interests

of the private individual (the landowner) and the public interest. In the case at hand, the land reform

scheme was used to justify an upward adjustment of the compensation as it impacted negatively on the

owner.206 This seems to be contrary to the purpose of the constitutional power to enforce expropriation

for the purpose of equitable redistribution of land. Furthermore, Du Plessis asserts that the court‟s

failure to calculate compensation using the Expropriation Act shows that the court has not properly

grasped the role of this Act under the Constitution.207 In its judgment, the court did not apply the act in a

way which conforms to the Constitution in order to calculate the compensation. In failing to do this, “it

missed an excellent opportunity to start building a new body of post-apartheid constitutional case

law”.208 The court‟s approach in Khumalo also does not suggest an approach indicative of expropriation

for land reform being “special” in the way described by Zimmerman.

5. Conclusion

In this section, I make suggestions as to how the findings made in this discussion could be reflected in

the redrafted Expropriation Bill.

198 See note 190 above para 96. 199 See note 190 above para 96. 200 See note 190 above para 98. 201 Khumalo and Others v Potgieter and Others 1999 [ZALCC] 68 para 98. 202 Act 3 of 1996. 203 See note 201 above para 1. 204 See note 201 above para 99. 205 Du Plessis Compensation for Expropriation under the Constitution 124. 206 See note 205 above 125. 207 See note 205 above 125. 208 See note 205 above 125.

24

In an evaluation of the previously proposed Expropriation Bill,209 it is pointed out that critics of the bill

cannot possibly argue for market value being used as the sole determinant of calculation for

compensation.210 This is because section 25(3) of the Constitution, on which the former Expropriation

Bill heavily relies and draws its authority from, sees market value as one of several equally weighted

factors which should be taken into consideration when determining compensation for expropriation. On

the other hand, market value – as one of the factors to be taken into consideration in the evaluation

process – cannot and may not be scrapped (as some political arguments have been advanced) due to

its presence in section 25(3) of the Constitution.

This begs the question: how should market value then be represented in the new Expropriation Bill?

The answer to this is difficult to find when there is not a huge body of case law dealing with the subject.

As seen from the existing case law, the merit of market value is that it is easily quantifiable and gives

courts a basis from which to start the section 25(3) calculation. However, the notion of market value in

itself is not completely unassailable. Pre-constitutional case law acknowledges this problem and defines

market value as being illusory in some ways. This is so as it requires the court to work on assumptions

which are not necessarily true – in expropriation cases, there is no willing seller – merely a willing buyer.

Apart from the methodological concerns surrounding the Constitutional-era application of market value,

there is thus the concern that it may not be an accurate starting to point to compensation calculations

(as it has been used in the past).

It is by no means suggested that there is an easily-found practical solution to the problem posed by

allegedly archaic application of market value in the section 25(3) calculation. However, in considering

redrafting the Expropriation Bill, it is worth noting the observation from the Du Toit case, made by

Mokgoro J, who admits that the two-step method is perhaps not the best way to calculate compensation

but practicalities demand its use. Langa ACJ felt strongly about the issue and shunned the market

value-centred approach for an approach centred on justice and equity. Unfortunately he did not give

content to this statement or supply any practical guidelines as to how courts should endeavour to

accomplish this.

In the context of drafting future legislation, it would perhaps be a step in the right direction to be more

specific about defining the purpose of the expropriation and how this affects the way in which

compensation is to be calculated. In keeping with the arguments put forward by Zimmerman and Van

der Walt, expropriation for land reform purposes should be seen by the courts as deserving special

consideration. This can be accomplished by putting more emphasis on principles of justice and equity

209 Since shelved for various reasons. 210 Pienaar 2009 TSAR 350.

25

as advocated by Langa ACJ. The practical implication of this is for market value to be seen as

occupying a much less significant role in the calculation. Thus far however, courts have been very

weary to depart from the relative safety provided by market value factor. In part is also this reluctance

that has added fuel to the argument that land reform is not being implemented effectively – and has led

to the assertion of inflammatory political statements expressing the need for land grabs.

It is suggested that practical effect could be given to the principles of justice and equity by developing

the content of section 25(3)(e) which lists the purpose of expropriation as a factor to consider in the

calculation of compensation. A specific distinction could be made between expropriation for land reform

(restitutionary) purposes and expropriation for public works purposes. Although Zimmerman does not

advocate that this provision be developed in exactly the same way, she recognizes the potential it has

to factor in socio-economic constitutional goals into the compensation calculation.211

Despite the usefulness of this distinction in ensuring a more “just and equitable” method of calculating

compensation, courts have not developed the idea. Van der Walt criticizes the Constitutional Court‟s

failure in the Du Toit case to recognize the significance in the distinction between compensation for

restitution as opposed to restitution for public interest (construed as public works). This oversight by the

court could suggest a failure to appreciate the changes brought by the Constitution as pre-constitutional

case law was confined to expropriation for public works purposes. In determining compensation for

various categories of expropriation, the court thus has a responsibility to give effect to the constitutional

values of justice and equity. This includes the duty to ensure that a balance is achieved between the

state and the individual.

Another point regarding judicial responsibility arises from the Khumalo case. The Land Claims Court‟s

application of the combined mechanism of the Expropriation Act and Constitution was questionable in

this case as the outcome seemed to give preference to the expropriatee. The expropriation was for land

reform purposes and yet the court did not seem to put enough emphasis on this. From this, the

assertion can be made that courts must take their constitutional mandate seriously in the determination

of „just and equitable‟ compensation. Without a judiciary committed to achieving land reform in a

constitutionally sensitive manner, the process holds little merit and is in danger of lacking credibility.

211 Zimmerman 2005 (122) SALJ 410.

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27

Illovo Sugar Estates Limited v South African Railways and Harbours 1947 (1) SA 52 (D).

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Khumalo and Others v Potgieter and Others 1999 [ZALCC].

Kim Investments (Pty) Ltd v Durban Valuation Appeal Board and Others 1979 (4) SA 504.

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Constitution of Republic of South Africa, 1996.

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