Fair compensation for a servitude

Recently, there has been an increased need for valuations where servitudes will be taken. The reason for this is that several solar farms are in the planning phase. Solar farms need to link up their power lines with Eskom’s transmission lines. Thus, usually the solar power line must traverse farms or smallholdings to link up with the Eskom transmission lines.

Examples are:

• ESKOM power line servitudes

• Right-of-Way servitudes

• Water pipeline servitudes

A Servitude is defined by the Dictionary of Real Estate Appraisal (6th edition) as “An encumbrance consisting in a right to the limited use of a piece of land without the possession of it”.

 A servitude has the following implications:

• It is where only a portion of the property is used (taken up) by the servitude.

• The servitude holder does not own the portion, but the holder does have the right to use the portion for a very specific use.

• This right that the servitude holder has limits the rights that the owner has.

A servitude does not have a value, because it does not have its own Title Deed. A portion that does not have its own Title Deed cannot be sold.

Therefore, a servitude valuation does not estimate the value of the servitude. It does estimate fair compensation to be paid to the property owner for the taking of the servitude.

Fair compensation consists of two aspects:

• The value of the rights that the owner loses in the servitude area.

• The decrease in value of the remainder portion, which is caused by the servitude.

Therefore, to value fair compensation, a specialised type of valuation approach is used.

The Approach (method) that is used is called the Before-and-After approach.

It consists of three steps.

• Step 1 → Value the whole property (as if there is no servitude).

• Step 2 → Value the remainder of the property, as if the servitude was already taken. (This is also a complete valuation)

• Step 3 → Deduct the value in step 2 from the value in step 1 - This answer is the value of the servitude.

It is essential to understand that the process consists of two complete valuations.

Examples of aspects that may influence the value of the remainder:

• Location of the servitude on the property (is it on the boundary or right in the middle of the property?)

• The extent of the servitude in relation to the total property.

• Potential disruption of current farming operations

• Loss of privacy (Eskom employees can at any time enter the property to inspect the transmission line)

• Potential fire hazard (birds fly into the transmission line, catch fire because of the electrical shortage and fall to the ground, causing a veld fire)

• Potential security risk (unannounced visits from Eskom employees – the owner does not know whether they’re legitimate Eskom employees or criminal elements)

• Negative visual effect of the powerlines and pylons (especially in game and eco-tourism farms).

  • It happens that Eskom employees leave farm gates open.

  • Potential theft of livestock (especially sheep)

  • Damage to investment desirability.

  • Buyers’ resistance due to the above.

In the USA, numerous studies have been conducted to quantify the potential decrease in the value of the remainder of the farm.

I name a few:

• In Canada, Woods Gordon (1981) found the average negative effect is 16.9%

• In Southwest Indiana (2010), a study on 32 large farms found a negative effect of 5% - 36%.

• American Transmission Company (on 682 farms), an average of 12%

• A study done by Furby et.al found (on > 1,000 farms), the negative effect is 16% - 29%.

• Kurt C. Kielisch (2010) found a negative effect of 10% - 30%

The most common mistake when doing a valuation to estimate fair compensation:

• Only one valuation is done of the whole property, and the value/ha is calculated.

• Then the extent of the servitude is multiplied by the value/ha, as calculated above, to get a value of the servitude “corridor” (the strip on the property where the servitude is located).

• This method is, in most cases, COMPLETELY WRONG!