The Government of Tanzania has recently passed the Written Laws (Miscellaneous Amendments) No. 1 of 2018, an Act that amends certain written laws. The Act amends sections 45 and 120 of the Land Act, 1999 (Land Act) and introduces new sections 120A, 120B, 120C, 120D and 120E.
The amendments introduce new restrictions on borrowing by landowners from financial institutions, both locally and internationally. The introduced restrictions cover the use of funds borrowed by landowners. Prior to these amendments, landowners were allowed to use the proceeds of the loan obtained from financial institutions by mortgaging their land – these amendments introduce some restrictions in that respect.
First, they provide rights for landowners to mortgage their land for the purposes of obtaining loans from banks or financial institutions, both locally and internationally. Secondly, there are restrictions on the use of the obtained loans – the amendments provide that landowners can only use their loans via mortgaged land (i) where the land is already developed, for further developments or any other investment purposes, (ii) where the land is underdeveloped or undeveloped, for the development of part or whole of such mortgaged land. Undeveloped, as defined in the law, means "in respect of land, land which is not developed in accordance with the conditions of relevant rights of occupancy" and underdeveloped is defined as "land without improvements in, on, under or over such land or without any change of substantial nature in the use of such land". This provision means that borrowing, by using land as a security, should be for the purposes of developing the mortgaged land only. One might say that this restriction is another way of protecting banks and financial institutions and ensuring that the borrowed money is not invested in other businesses, which might make recoveries difficult for banks that subsequently find themselves with securities which are not liquid enough to absorb the liabilities of the mortgagors.
On the other hand, the provisions might be the government's move to ensure that people are not using their properties solely as a means of getting quick money, without developing the mortgaged property. In addition, these provisions intend to give mortgagees the chance to increase the value of their mortgaged property with the requirement that, after having obtained the money from the issuing bank, the mortgagor is required by law to inform the Commissioner for Lands on how the money has been invested to develop the mortgaged land.
The law under the new section 120B restricts the geographical location of where the money obtained from a mortgage can be utilised, by stating that it should only be invested in Tanzania and requiring mortgagees to submit to the Commissioner for Lands a declaration that the money obtained has, in fact, been invested there. All these restrictions can be interpreted as one of Tanzania's fifth government's initiatives to build a strong national economy by requiring that the investment of funds obtained from mortgaging land within Tanzanian territory be used only in developing Tanzania's economy.
The rationale behind the application of sections 120A (2), (3) and 120B (1) is first to ensure that the money borrowed is, if not in its entirety, then partly used to develop the mortgaged land, but secondly to give local Tanzanians (the majority of which already possess land) some leeway to utilise the loaned money for other economic undertakings. The right of occupancy holders and the investors must adhere to the amendment, as failure to comply will amount to a breach of the conditions of the right of occupancy, which ultimately can lead to its revocation. The amendments further provide that the whole procedure and applicability of the conditions in relation to the mortgage of land under sections 120A and 120B will be the subject of Regulations to be issued later.
The amendments introduced aim to reduce the financial risk for banks on defaulted loans by ensuring that loans taken are actually injected into the projects for which they are intended. Although the law has good intentions for the banks, it still does not help to tackle the issues relating to defaulted loans because these are affected by various factors including, but not limited to, economic, market and proper implementation strategies.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.
Dentons takes this opportunity to thank Josephine Mbuya, Senior Associate at Abenry & Company for her contribution to this month's newsletter.
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