Real Estate Investment in Nigeria

A story was reported on the NEWS PAGE of Prime Assets Plus issue No. 28 dated  June 8, 2009 on this matter. It was tacked: Lagos Bans Advance Rent Payment. There, the Commissioner for Justice and Attorney General of Lagos State, Mr. Olasupo Shasore was quoted as saying that the criminalisation of multiple, collection of rents in advance is one of the aspects of the Tenancy Law of 2009 proposed by the state government now before the Lagos State House of Assembly adding that the new law is not an invocation of the Brigadier General Mohammed Buba Marwa’s Rent Edict of 1997.

The so-called Tenancy Act proposes to outlaw the unpopular practice, which excludes many people from the rental market due to the difficulty of paying such a large sum of naira in advance. The bill builds on existing tenancy legislation in the state, namely the Rent Control and Recovery of Residential Premises Edict of 1997, which is largely unenforced.

The practice by landlords of charging rent upfront began in major cities such as Lagos and Abuja but is now the norm in many parts of the country. It is also not the prerogative of Nigeria but is a common practice in many cities in Africa

I think the Attorney General of the Federation and Minister of Justice, Chief Michael Aaondaka, S.A.N.,  started it all when he expressed an intention to pursue the enactment of a law that would make it illegal for a landlord to demand, or require a tenant to make, a two-year advance payment of rents before he could be offered an accommodation on the landlord’s premises.

I intend to share an article by Vitus Nnamaka Okpara, a lecturer in the Faculty of Law, Madonna University, Okija, Anambra State  titled “The Economic Reality of Rent Control in Country” in Daily Independence of sometime in February 2009. The article fully represent my thinking on this subject pretty and simple. Read on:

“…….The learned Senior Advocate of Nigeria gave as his reasons for this line of thinking that it was not only inhumane but also bestial for any person to demand such an outrageous sum of money as rent simply because the other party might be in dire need of accommodation. He further posits, that in these hard days and times, tenants who are largely civil servants and low-income earners do not receive their salaries in advance, much less in two-year advance. And so they can hardly afford to fulfil the harsh conditions for securing accommodation. Besides, to him such dastardly practice is never obtained in the civilised world.

Going by the reasons advanced by the Honourable Minister for this proposal (or in a manner of speaking, his “pet project”), one cannot but notice the altruistic if benevolent motive apparent therein, in view of the plight of our people over non-availability of decent accommodation in most of our cities.

However, since the Honourable Minister mooted the idea, it has prompted some informed discussion on the necessity or desirability of rent control in this country. Indeed, this is not the first attempt (by the authorities) at influencing rent charges in some parts of this country, and with the benefit of hindsight, it is less difficult to come to terms with the futility of undue interference by the government in the freedom of the landlord and tenant to contract.

Besides, it must be asserted in limine that public servants and policy makers in this country should be properly advised to desist from introducing ideas that are specious, or policies that merely commend themselves to sentiments, simply to attract the fancy or admiration of the largely uninformed Nigerian populace. They should rather always strive to design and formulate policies and programmes which are devoid of political undertones, and which will in real terms tackle and uproot, or at least minimize the socio-economic problems that confront Nigerians everyday. Government policies and programmes should always be practical and sustainable. They should not be pragmatic, or obviously simple, on-the-spot solutions, lacking in essence. Above all, government policies relating to housing and accommodation should be imbued with some intellectual content in order to meaningfully address the problem of housing in this country. Given the foregoing background, it is intended herein to approach the issues raised by the Honourable Ministers proposal from both the legal and socio-economic perspectives.

Legally speaking, rent is a compensation paid to the landlord by a tenant for the use of his land demised. The obligation on the part of the tenant to pay rent or the corresponding right of the landlord to receive same has been traditionally regarded as an integral part of the tenurial relationship of landlord and tenant, and in fact it has been considered a normal incident annexed to the landlords reversion in the and. (See Kevin Gray & Susan Gray, Elements of Land Law, 4th edn., London, Butterworths. 2005, p. 441).

This “modern” definition of rent was adopted by the Court of Appeal in Olaniyan v. Shokunbi (1997) 6 NWLR (Pt. 509) 447,467 (per Uwaifo, J.C.A), and it is clear from the contractual or commercial attribute of rent, which has been judicially emphasized that it essentially provides the economic attraction or as it were, the commercial incentives for property developers to direct their investment into the provision of housing accommodation in response to demand.

Admittedly, rent is strictly speaking not an essential part of a lease or tenancy and this is indeed ancient law (See Knight’s Case (1588) 5 Co. Rep. 54b at 55a). In other words, a lease or tenancy may be created in the absence of rent. (See A.P. Ltd v. Owodunni (1991) 8 NWLR (Pt. 210) 391. But in the real sense, it is beyond dispute that in modern times leases or tenancies, at least for the landlord’s purpose, are essentially an instrument for the commercial exploitation of land. Most leases or tenancies are granted expressly in consideration of money or money’s worth. Besides, the courts in recent times seem to be more readily disposed to according more relevance to rent payment in leases or tenancies. (See in this regard the opinion delivered by Lord Templeman in Street v. Mountford [1985] 2 All ER 289).

It is correct to say that must people build to earn profits therefrom. And that, apart from charitable organisations, no one sets, out to erect buildings merely to give them out to people to live in free. That being so, investment in the housing sector is profit-oriented and where the marginal cost of developing houses for commercial purpose exceeds the marginal benefit accruable therefrom, then investment in such a venture will hardly make any economic sense.

It thus goes without saying that in a profit-driven, pseudo-capitalist economy such as Nigeria, there are certainly several competing investment opportunities available to any willing and able investor to choose from. Obviously, the investment choice of every businessman usually gravitates towards the sector or business with a very high potential to deliver a quick return on investment. And so, where, owing to some over-bearing restrictions or excessive governmental control, a particular sector of the economy or a given business becomes economically unviable or unattractive, investment in such sector or business will usually be low if not minimal.

This is particularly true of the housing/property sector of our economy, especially the residential accommodation aspect thereof, where so much unpredictability in the availability and cost of building materials, low return on investment, coupled with undue if unnecessary governmental control constitute a remarkable disincentive for investors. For instance, where one is considering the possibility of ploughing funds into a venture that will be substantially profitable in Nigeria today, he would rather opt for the oil and gas sector, the banking/insurance sector, or even the transportation sector of the economy, rather than hazard the risk of plunging his hard-earned money into the housing accommodation sector, which is more or less prone to harsh realities and debilitating vicissitudes.

And what does this translate to? Certainly, the result is shortages in and scarcity of housing accommodation currently faced by Nigerians, especially those leaving or working in the cities. Indeed, excessive control or restriction in a sector that is naturally under the influence of the market forces constitutes a major draw back on the development of that sector. In this regards, Furmston, writing in respect of a similar situation in England notes: “It is apparent . . . that restrictions on freedom of contract in regard to residential tenancies have led to a dramatic reduction in the amount of residential accommodation available for rent in the private sector and in many ways have exacerbated the problems.” (See M.P. Furmston, Cheshire, Fifoot & Furmston’s Law of Contract, 14th edn. (2001) p. 20).

This is practically the problem being faced in the housing sector in this country today. And government intervention in resolving this problem cannot come by way of further control or restriction on the freedom of contract between the landlord and the tenant. It cannot also come by the imposition of rents and related charges by fiat. Any meaningful intervention by government must be by way of a target-oriented and achievable policy of providing decent accommodation in abundance. The government should either directly or indirectly literally “flood” the whole place with rentable accommodation. Responsible and responsive governments the world over usually design policies whereby the construction and distribution of a given number of houses to the citizens each year is almost a rule without an exception. In Libya with a population of less than ten millions, the yearly minimum is ten thousand houses.

In essence, therefore, rent is a profit earned by a landlord which must be certain, or capable of being reduced to a certainty by either party, and must issue out of the property granted. In the case of C. H. Bailey Ltd. v. Memorial Enterprises Ltd. [1974] 1 WLR 728,732, Lord Denning, M.R. citied with approval a passage in Holdsworth, A History of English Law, Vol. VII (1900) p. 262, which was referred to by Evershed, L.J. in Property Holding Co. Ltd. v. Clark [1948] 1 KB 630, 648, to the effect that “. . . in modern law, rent is not to be conceived as a thing, but rather as a payment which a tenant is bound by his contract to make to his landlord for the use of his land.” (See also United Scientific Holdings Ltd. v. Burnley B.C. [1978] AC 904, 935).

In our own context, it is now more or less clear that government is not a good manager of business in this country; so rather than involves itself directly in the provision of houses, government should simply create the enabling economic/business environment for the private sector operators to drive the engine of development in this sector. This it could do by providing financial assistance in the form of venture capital or soft loans directed solely to property development, which would enable developers to embark on extensive and expansive provisions of accommodation in this country.

One cannot claim to be solving housing problems by simply making the provision of houses unattractive to those with the wherewithal to do so. The smart thing to do in this context is simply to allow the forces of demand and supply to play themselves out until the desired equilibrium is achieved.

It may nevertheless be admitted that the free operation of the forces of demand and supply in the housing sector will be to a great disadvantage of the consumer (tenants in this context), as the demand for houses or accommodation in this country far exceeds supply; and that being the case, an untrammelled freedom of the providers of houses to charge as much as they could extract from hapless tenants will indeed result in grievous social disequilibrium. (Cf. Furmston, op. cit, at p.20, note 18)

But truly, this is not the problem which could be solved simply by fiat or by the imposition of undue restriction on rent charges. As has been noted, any meaningful solution to the problem can only come by undertaking positive measures that would practically push up the supply of this highly essential commodity – housing accommodation – in Nigeria.

Once supply gives demand a real fight, high rent charges will definitely drop, and the housing sector will certainly cease to be a suppliers (or landlord’s) market as it is presently in Nigeria. Government should therefore build houses and sell or rent to Nigerians at affordable prices, or in the alternative, provide adequate incentives to developers to build affordable houses for the people. The housing policy of Libya is highly recommended for adoption and application in this country. And rather than spend over N600m or N700m to build a house for the Senate President or for the Speaker of the House of Representatives (each being for only one family), such sums could deliver decent accommodation for between 500 and 1000 households.

Indeed, our governments, their policy markers and managers of the affairs of this country should do well and stop all their pretences. They should wake up, before it is too late, to the stark reality that most of their policies and programmes are anti-people. Rather than solve problems they end up creating more problems. And this is particularly true of the proposal by the Honourable Attorney General of the Federation to place restriction on rent charges or the mode of rent payment in this country.”

This attempt by the Federal and State government is not the first at controlling rent in this way but all past efforts have always been met with failures. From General Mobolaji Johnson’s era, I think it is only Alhaji Lateef Jakande that did not attempt to do this.

Anyway, for tenants, the lasting way out of this mess is to build your own house. Using our words – Sack Your Landlord ™ !