The new laws
An important deadline has just passed by which dual national Egyptians and foreign owned businesses must have disposed of their investments in the Sinai Peninsula, or face compulsory acquisition by the state.
Media reports have recently highlighted a crisis gripping the hotel and property businesses in Sharm El Sheikh1 in light of legislation that seeks to compel Egyptians with dual nationality, or who are not descended from two Egyptian parents, to sell land or face compulsory purchase by the state. The deadline for compliance was 13 March 2013.
Sharm El Sheikh has more than 100 hotels and can accommodate more than 200,000 visitors a week. Many international hotel operators have a presence there. The precise extent to which land is owned by dual nationals is not known, however a significant proportion of land is thought to be owned by wealthy resident and émigré Egyptians with dual nationality.
The legislation is not well drafted, and government spokesmen have given conflicting accounts of its significance, but it remains in force nevertheless. The key provisions follow.
Law 14 of 2012 ("Law 14"), signed by the Chairman of the Supreme Council of the Armed Forces, concerns Sinai and states that: "The ownership of lands and built realities ... shall be restricted to natural persons who hold no other nationalities than Egyptian Nationality only and who descend from Egyptian parents and the Egyptian legal persons whose capital is wholly owned by Egyptians. Any ownership contract to be concluded in contravention ... shall be null and void."
Law 14 also aims to capture those that have inherited land: "In case any properties ... have devolved to Non- Egyptians by way of legitimate inheritance or will, the heirs ... shall dispose of such properties to [Egyptian nationals descended from Egyptians] within six months of the date of decease, otherwise the ownership of such properties shall devolve to the State based on the price charged against like properties...."
Not content with restricting land ownership, Law 14 goes on to state that: "investment of development projects owned by non-Egyptians in the region shall take the form of an Egyptian Joint Stock Company to which the percentage of contribution by Egyptians shall be not less than 55%."
Law 14 was expanded upon by Prime Ministerial Decree No 959 of 2012 ("Decree 959"), dated 13 September 2012. Article 8 contains the core provision2:
"Any Egyptian who has acquired another nationality while keeping the Egyptian nationality shall dispose of his acquisition ... to Egyptians holding only Egyptian nationality and born to Egyptian parents by [13 March 2013]. In case of the lapse of six months [to 13 March 2013] without disposal ... the ownership of the same shall be transferred to the State against an amount equal to its equivalent price to be paid by the owner..."
The legislation also restricts property ownership in strategic areas, for example near Gaza.
The legislation provides for a "committee of experts" to determine the price to be paid by the state. Establishing the market value is likely to be a highly controversial exercise. The committee of experts will be appointed by the state, which might be thought unlikely to take a generous approach.
Seemingly by way of afterthought, the final article of Decree 959 allows non-Egyptians or dual nationals to retain land owned before the passing of the decree, if they have "built on or reclaimed or planted such land" but such acquisitions will only be effective "after obtaining written approval of the Ministries of Defence and Interior and the Egyptian General Intelligence ..." The criteria against which these three ministries will give such consent is not stated.
Political risks insurance
Depending on the wordings, covers in respect of expropriation and nationalisation, forced divestiture, selective discrimination and contract frustration could be impacted. If required to pay, the political risks market is likely to seek recompense by way of subrogation, pursuant to bilateral investment treaties.
Bilateral investment treaties
Egypt has bilateral investment treaties ("BIT") with 79 countries, including the United States and United Kingdom. If they do not receive adequate compensation, Egyptians with dual nationality, overseas investors, and their political risk insurers may wish to scrutinise the BITs carefully.
For example, the Egypt-US BIT obligates Egypt to permit "investments" to be afforded treatment no less favourable than the treatment it accords to investments of its own nationals or countries. "Investments" is defined very widely as "every kind of asset" including tangible and intangible property and any right conferred by law or contract. Article III of the Annexe provides that:
"No investment, or any party of an investment ... shall be expropriated or nationalised by the other Party ...or subjected to any other measure, direct or indirect (including the compulsory sale3of all or part of an investment ...) ... if the effect of such measure[s] ... would be tantamount to expropriation or nationalisation ... unless the expropriation (a) is done for a public purpose (b) is accomplished under due process of law (c) is not discriminatory; (d) is accomplished by prompt and adequate compensation ..."
There are thought to be substantial British related interests in the Sinai Peninsula. The Egypt-UK BIT also defines "investment" very widely. It provides that: "Investments of nationals or companies of either state shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Each Contracting Party shall ensure that the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party is not in any way impaired by unreasonable or discriminatory measures...".
Where property is expropriated by a state, the party expropriated shall be afforded "prompt and adequate compensation" which shall "amount to the market value of the investment expropriated immediately before the expropriation itself or before there was an official government announcement that expropriation would be effected in the future, whichever is the earlier."
There is a precedent of a hotel management group claiming successfully under the UK-Egypt BIT4. The claimant managed hotels on behalf of the Egyptian Hotels Company, a state entity. Following certain disputes, EHC decided to evict the Claimant. Police force was used, and significant damage to the properties was caused. Egypt conceded that the eviction was not lawful, but countered that the claimant had been involved in corruption. The claimant successfully argued that Egypt had unlawfully expropriated its property and had failed to ensure fair and equitable treatment in breach of the BIT. The claimant was awarded USD20M plus costs and compound interest. The utility of the UK-Egypt BIT has been demonstrated.
Parties adversely affected by the new laws in Egypt will no doubt be considering all of their options under these and other BITs.
Conclusion
The new laws have reportedly already had a dramatic impact upon inwards investment into Egypt, which is precisely what Egypt does not need at present. The extent of the interference with property and other rights of international hoteliers and investors will become clearer over coming months.
In addition to seeking compensation directly from the Egyptian authorities, affected parties should also consider any force majeure provisions in their contracts, relevant political risk insurances, and their rights under bilateral investment treaties.
Footnotes
2 Further provisions also prohibit land ownership in designated strategically important zones.
3 Emphasis added.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
