Real Estate Investments In Ghana II

This article provides an overview of the booming real estate market in Ghana. The article looks at some latent problems in the sector and how statutory intervention can be used to accelerate growth in the real estate industry. It is an expansion of an earlier written article.

The positive economic outlook in Ghana has sparked an unprecedented growth in the Real Estate industry. Significant increase in income levels across the economy within the last 10 years together with a staggering housing shortfall in both residential and commercial sectors in urban areas have made real estate investments an instant success. Financial institutions have therefore partnered with Real Estate companies to fund new construction projects whiles a burgeoning housing loan market has also provided mortgage loans to help consumers become house owners.

In spite of the glowing picture within the industry, the underdeveloped land tenure system and property rights regime seem to pose a significant threat to further growth in the industry. In fact in the absence of statutory intervention, growth in the industry as well as other supporting sectors will be stunted. Problems in the land tenure system and the property rights regime present potential latent transactions costs which are likely to cause unnecessary uncertainties in the market.

The 1992 Constitution of Ghana provides that no interest in or any right over stool lands (stool lands make up the bulk of land interest in Ghana) shall be created which vest in any person or body corporate a freehold interest in land. Thus effectively, majority of Real Estate properties are constructed on lands that have been leased. A lease by definition must have a beginning and an end date. In Ghana, the industry practice is to grant a lease for 99 years.

The standard lease agreement in has a sublease or assignment clause that is subject to approval from the head lease or the freehold interest holder. This presents two issues. First, the real estate company (lessor or assignor) must obtain from the head lease or the freehold interest holder the necessary permission before a valid sublease or assignment. Second, the customer (subleasee or assignee) must ensure that the necessary permissions have been obtained. Failure to obtain a properly executed permission from the head lease or freehold interest holder may lead to undue delay in the registration process or possibly a protracted litigation.

Since the lessor can only grant what he has, the highest interest the customer can have will be the remainder of the interest of the lessor or assignor). Thus, if the remainder of the original lease is 40 years, then the highest interest the purchase can obtain is the remaining 40-year interest. After the lease has expired, the land will technically revert back to the freehold interest owner unless the lease is renewed. This is the crux of the pitfall in the real estate industry. In the absence of codified traditional officers with the authority to alienate land, alienation of stool lands can be equated to navigating a sophisticated maze. A valid renewal of lease must be with the consent of the appropriate traditional officers. However at any point in time, there are numerous people within the traditional state who claim to have authority to alienate lands. It is therefore not uncommon to witness cases where a faction will institute an injunctive action against any such alienation until the question of who has authority has been settled.

Where the authority for the renewable of leases has been settled, there is also uncertainty as to terms of the renewal. Here, questions such as the duration of the new lease as well as the fee for the renewal of the lease then becomes very important. Where the occupier of the land has substantial interest in the land, in an open market the owners of the land may be incentivized to ask for an outrageous sum of money as consideration for the renewal of the lease. In such circumstance, although the occupier of the land can apply to the court to vary the terms of the new lease, the court action and its outcome then becomes a transaction cost and an uncertainty, respectively. The freehold interest holder may be tempted to hold out as against the lessee in anticipation of realizing substantial amount of money for the renewal of the lease. This is because under the current system, the freehold interest holder technically owns everything on the land including all structures thereon if the lease is determined. These issues are worrying for industry players such as the mortgage market, bankers, investors and also the individual house owner (sub lessee or assignee).

Where the remaining interest of the lease is equal or less than the duration of a standard mortgage, mortgage companies will certainly not be ready to fund such mortgages. This is because the mortgage company cannot plan with some certainty as to what will ensue when the lease comes up for renewal. In addition, until these issues are resolved, the mortgage companies will be forced to hold onto mortgages until they are redeemed although mortgage companies may be able to securitize mortgages and sell them as financial instruments to investors. The value of such securitized mortgages becomes difficult to determine because one cannot reasonably make assumptions as to the value of leases in the future.

However, statutory intervention in the industry will help tremendously to reduce the uncertainties and risks in the industry. First, a statute that offers guidelines or provides a framework for the calculation of leases where the original interest has been exhausted and the lessee has significant investment on the land will be useful to ensure that industry players can reasonably predict the value of such renewals. The statute must also provide that where the officers responsible for alienation of land is in dispute, the court must appoint a receiver and manager to work with the lessee to determine the terms of the lease and the price thereof based on the existing guidelines or framework. Any money realized will then be put in an escrow until a determination is made as to who should be entitled to the money.

AUTHOR: AB Lexmall & Associates