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20 Aug 2019
BY Rachel Musoke AND Sheila Pacuto
ENSight

 


Uganda: Restriction on mortgage of land leased to investors by government

According to recent media reports, a Presidential Policy Directive has been approved by Cabinet, prohibiting the mortgaging of government land leased to investors. The Uganda Investment Authority, the Uganda Land Commission and the Uganda Free Zones which individually hold land on behalf of government and have powers to grant leases thereon for various purposes, have been notified of the Directive.

The Directive essentially restricts investors from mortgaging land granted to them by a government agency to any bank or financial institution and requires that all affected investors be notified of the Directive and an amendment to their leases be effected.

The rationale for this Directive appears to be that leases are given to investors as an incentive for doing business in Uganda. However, there is talk of investors who obtain free land and then mortgage the land without executing the promised projects. The government land is then at risk of being sold by the lender should the investor default on the loan repayment.

The Directive raises a number of issues:

Can the government unilaterally amend the lease agreements already issued?

The simple answer to this must be no. The lease already issued and registered can only be amended by mutual agreement. Such unilateral amendment by the lessor will undermine the traditional lessor’s covenant/undertaking to allow the lessee quiet enjoyment of the land upon the latter’s fulfilment of all the lease obligations.

What happens if the land has already been fully developed by the investor, why should there be a restriction on such an investor seeking to leverage his investment?

The leases issued by the above government agencies usually contain a development covenant requiring the lessee to develop the land within a specified time, say five years, in order for the lease to be extended to a full term lease, usually ninety-nine years. Complying with the development covenant also removes certain restrictions imposed on the undeveloped leases, such as restriction on sale, mortgage or subletting.

An investor who has complied with all the development covenants in the lease and has obtained a full term lease should be at liberty to deal with the land at leisure, whether to mortgage or even sell. In any case, a person buying the land from a mortgagee, would still remain subject to the same lease terms.

It is in this concept of a development covenant that the government can find a solution to its concerns. Leases to investors on an initial term should require the investor to develop the land. It is only upon compliance with the development covenant that the investor should get a full term.

What if the land is already mortgaged when the Presidential Directive was issued?

For already mortgaged land, the Directive will cause shivers for the lenders as their security will now be cast in doubt. Will a bank holding such a title deed be forced to yield it to the government for amendment? Would a lender not simply then recall its loan and move to sell the land?

What is the best way to address the concerns of government?

We could start with enhanced due diligence on prospective investors. A minimum requirement to present some form of track record from their home jurisdictions and proof of capacity to execute the project for which the land is proposed to be leased.

More importantly, the Government should ensure that all such leases by Uganda Land Commission, Uganda Investment Authority, the Free Zones Authority and District Land Boards, are for an initial development term of, say, five years, with a specified development covenant. Sale or mortgage of such land would only be permitted upon satisfactory compliance with the development covenant.

Uganda currently ranks fairly as an investment destination and is crawling up the ladder of the Ease of Doing Business assessments. More needs to be done to promote Uganda as an attractive destination for investment capital. Respect for property rights and security of tenure is among the foremost of these measures.

Rachel Musoke

executive | Uganda

rmusoke@ENSafrica.com

+256 772 778 882

and

Sheila Pacuto

senior associate | Uganda

spacuto@ENSafrica.com

+256 784 116 125