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...