Expropriation

What is Expropriation?

Expropriation refers to a government taking over any property that is privately owned, with or without the permission of the owners, for the benefit of the general public. Properties can be expropriated for the construction of roadways, airports, and other infrastructure projects. The government can also expropriate property in a heavily polluted locality to move the residents to a place with a cleaner environment.

Since the government seizes property for public benefit, owners’ consent is not required. However, they must be given “just compensation” for their property. Generally, just compensation should be equivalent to the market value of the property, but the amount might not be considered fair by the owners.

For example, when the government seizes the property of a landlord, the latter will seek compensation not only for the property but also for the rent that is lost. However, the market value might not be enough to cover the forgone rental income.

The Process of Expropriation

Expropriation consists of the following steps:

1. Condemnation

When a government seizes private property for public use, it is known as condemnation. The constitutions of most countries allow their governments to do so. For example, the U.S. Constitution gives the right of eminent domain to government bodies at the federal, state, and municipal levels. It allows them to acquire the title of ownership of any property for public use after paying adequate compensation to the previous owners.

2. Appraisal

Appraisal requires the government to evaluate the market value of the property seized in order to estimate the amount of compensation. The appraisal should be conducted by a neutral third party.

3. Offer

Once the current market value of the acquired property is appraised, the government offers the previous owners what it considers an adequate amount of compensation.

4. Negotiation

In case the property owners are dissatisfied with the amount of compensation or the cause of expropriation, they can challenge the government in both cases in a court of law.

Expropriation of Foreign Property

International law allows governments to expropriate properties owned by foreign entities within its domestic territory as long as the following conditions are satisfied:

• The property must be seized for public benefit.
• The seizure must be non-discriminatory.
• The actions of the State must be in keeping with international norms for dealing with foreign individuals and properties.
• The State must offer fair compensation.

Also referred to as nationalization, expropriation of foreign property is of two types:

1. Direct Expropriation

Direct expropriation occurs when there is a legal transfer of title of the property. Along with the property, the foreign owners also give up any returns that might’ve been expected from their investment in the property.

The domestic government assumes both ownership of the property, as well as the right to employ it commercially. The foreign investor must be paid a compensation equivalent to the true market value of the investment.

2. Indirect Expropriation

Under indirect expropriation, the foreign investor retains the title to the property but forgoes the right to earn any returns from the investment. The domestic government does not seize the property absolutely but acquires the right to keep any earnings arising out of commercialization of the property.

Unlike its direct counterpart, indirect expropriation is not considered unlawful if the State does not offer any compensation to the foreign investor. It is because sometimes indirect expropriation is not even considered as expropriation. Since there is no legal transfer of title, the State can refuse to acknowledge such restrictions on the foreign investor as expropriatory in nature.

The investor can file a lawsuit for the same in a court of law, which will need to identify the situation as an expropriation. Even if the investor wins the case, the amount of compensation is not defined by the market value of the property.

Practical Example

To understand the difference between the two kinds of expropriation better, consider the following example. Investor A is a national of Country X and owns a plot of land in Country Y.

Situation 1 (Direct expropriation): The government of Country Y seizes the land, and constructs a highway and a toll booth on it.

Situation 2 (Indirect expropriation): The government of Country Y issues a regulation to construct a highway and a toll booth on the land, and deprives A of keeping the earnings from the toll booth. The ownership of the land, however, remains with A.

Situation 3 (No expropriation): Investor A constructs a highway and a toll booth on the plot of land.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Government Spending
• Negative Externalities
• ESG (Environmental, Social, and Governance)
• Indemnification
• See all commercial lending resources