The Rule of Law

One of the most fundamental requirements of a civil society is the rule of law which means that the people must follow the law of the land irrespective of his or her status or position in the society. In the modern world, the developed countries feel proud that their society is governed by the rule of law while most developing countries like India feel ashamed that their society does not have the rule of law. The developed countries are the role model for the underdeveloped countries, where the rule of law is still a distant dream.

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Societies that follow rule of law are often considered more civilized as there is much more order in the society. Everything in such societies appears to be in order. The roads are clean, lawns and parks are well-maintained, government officials work in the office, trains and public transports run on time. Further, there is virtually no corruption in public offices. People are well paid, deliver better efficiencies and keep everything neat and clean. These societies appear perfect to the people of other parts of the world, who often wonder why they can’t be like them.

All societies need laws for their existence. Even though the laws may be different in each society, yet there are some basic principles that are common to all laws of the world. These fundamental principles are equality, fraternity, justice, and liberty. The Indian constitution, for example, incorporates these goals in the preamble to the constitution which seek to secure for all its citizen’s justice, liberty, equality and to promote among them the spirit of fraternity.

These principles are so universal in nature that they find the place in every civilized society of the world. It is the matter of great surprise that in reality, the outcome of the rule of law is just the opposite. The more civilized a society is, the more is the inequality among its population – more injustice to the have-nots, less liberty due to strict enforcement of law and more hatred among the citizens based on race, caste, and religion. What goes wrong in the implementation in the so-called rule of law?

Law of Nature

Indian thinkers in the Vedic period, i.e. around 3000 years before the birth of Christ, discovered that the universe does not perform its functions at random but follows certain laws. These were called “Rita” or the universal laws or principles that guided the universe. The progress of man can be largely attributed in understanding these basic principles of nature and exploiting them for the benefit of the human race at the cost of the rest of the creations. The laws of man, therefore, run contrary to the laws of nature as they are human-centric and not designed for all the creations of God or Nature.

One of the basic differences between man-made laws and the laws of Nature is that the laws of nature are spontaneous as they require no effort in implementation. For example, in a natural piece of earth like a forest, the earth produces trees, plants, fruits and vegetables spontaneously without any need for watering or breeding. Nature itself provides timely rain and fertilizer to the new plants. The forests and the mountains are covered with greenery and beauty, which is purely natural since it comes without any effort.

On the contrary, the man-made creations like parks, trees, plants are artificially made. They too may look as beautiful as the natural ones, yet they cannot survive without regular effort on the part of man. Imagine a park, which is not maintained for a few months, or a house not cleaned for months. It will lose all its beauty and soon be filled with dust and weeds. No building or modern gadget can survive without external effort from man. However, all natural creations are able to survive on their own and maintain their existence; and enjoy their life without any external support.

The laws of nature are just as they treat every species (and not only man) with equality. In a jungle, every species gets its due share of food, air, and water which enable them to live a dignified life without being dependent on any other creation. Nature makes no distinction between one special and the other as all species are the children of the same God.

However, in the man’s world, every other creature is killed if it is not useful for man. They can survive only if they can be useful for man. Thus man’s world does not treat any other creature of nature with respect and does not provide them any right to equality, liberty, justice or fraternity. He cleverly usurps this universal law and makes it applicable only to human beings. For all other lesser species, he has created a man-made law, calling it ‘the law of jungle’ or ‘the survival of the fittest’ which justifies his domination over the weak creations. The fact, on the contrary, is that the laws of the jungle are far more just and equal for all species than the man-made law.

Most men are not concerned about the way they treat the lesser animals as they feel that ‘the survival of the fittest’ theory is more logical than the laws of nature. However, they forget that every principle created in the universe has to be applied on them also and that they may not always be a beneficiary. Man-made-laws do not stop with animals but they soon spread their wings to encompass human beings, too. This is where conflicts between man and man start that gives rise to hatred and wars. Man feels the pinch when the law of jungle is applied against them and the law of nature is denied to him. He is hurt when he is treated like weeds by the society.

Weeds: The Undesirable Plants of Nature?

One of the most interesting creations of the natural world is the weed. Weeds are undesirable vegetation in the kingdom of plants. Weeds are defined as any plant that is not valued by the human society and usually tends to overgrow or compete with valued flora. Weeds are the plants which are considered by human beings as unattractive, undesirable, or troublesome.

In the natural world, man has to continuously fight against weeds to make their artificial plants survive. Weeds grow automatically and if the artificial gardens do not have the support of the man, it is soon overpowered by weeds and the whole field or garden becomes full of weeds. Weeds are created by Nature (God) as no human effort is required to grow them. They are, however, so powerful that man has to continuously guard his creation against these weeds, lest all creation of the civilized society is destroyed. Weeds are as undesirable to man in the world of plants as criminals in the human society.

Criminals: The Necessary Evil for the Civil Society

Similar to weeds in the natural world, there is a growth of criminals in civilized societies. Who are these criminals? Why do they grow? Whether the criminals are healthy people or are they mentally ill as often thought by the civilized world?

Criminals are defined as the people who commit the crime. Crime is defined as an act that is a violation of the criminal law that is punishable by law. Crime is usually considered an evil act and criminals are often seen as evil created by Devil, out there to destroy the civilized citizens, the children of God.

There are many similarities between criminals and weeds. Criminals grow automatically in every society and the society has to work hard to weed out these criminals. Criminals like weeds are so powerful and competitive that they have the power to defeat the civilized people. They are, therefore, fought jointly by the society. Yet in every society, there is the crime and there are criminals. We are used to looking criminals as the evil that is unnecessary just like weeds. Yet if God (Nature) is the creator of all, then everything in this world must have been created with a purpose. “What could be the purpose of creation of criminals?” We wonder.

Criminals are, as a matter of fact, creation of the civilized world. In an uncivilized world, there would be no law, so there can be no violation of a law and hence, no criminal. If we wish to understand the utility of criminals in the civilized world, we must imagine the world of nature without weeds. In such a world, all plants will have to be grown by the man with artificial watering – canals, tube-wells, and other irrigation systems used for agriculture. In all certainty, man will grow only such crops and plants that are useful to man and the rest of the species would surely not survive in the man’s world. Further, man’s energy is limited and with all his effort, he can hardly take care of a minuscule part of the world by artificial plantation, so the rest of the physical world would be without plants and so without oxygen and other animal life and eco-system. This will soon lead to the end of the world including the human being.

The role of criminals is similar to the role of the weeds. Imagine the world without crime i.e. everyone follows the law of the land without questioning. It will only provide status quo in the world. Kings will always be kings and only their children or loved ones can become kings. Poor will always be poor. Kings will frame more inhuman laws that would give them more powers. The less fortunate people would die out of hunger and poverty as they won’t break the law and the state will have no obligation to feed them. Thus the world without criminals would be a place where people will die due to inaction, boredom, and cruelty. Such an ideal world, indeed, would be the most inhuman and most undesirable to mankind.

Thankfully, people called criminals automatically grow in every civil society as soon as man creates laws to govern it. The laws of man are always challenged by them since they are mostly against the laws of nature i.e. equality, justice, liberty and fraternity. States always have to face opposition from such people who break the law and are known as criminals. They may have an ugly appearance as weeds but they only provide oxygen to the society for its life. Thus in posterity, people recognize them not as criminals but as heroes.

The Path of Heroism

While man hates criminals, he worships the heroes. He can lay his most valuable possession i.e. his life on a single call from his hero. Who are these heroes? Are they law-abiding civilized people or the law-defying criminals? Take the example of Mahatma Gandhi in the modern world. He was perhaps the biggest criminal in the time of the British rule in India and he was jailed many times on charges of being waging war against the state. He spent more than 15 years in jail for his various crimes. Yet the people of India call him ‘Father of the Nation’ and love him more than any civilized person on the earth. Nelson Mandela spent 27 years in jail, yet he is a national hero not only for South Africa but for the entire world.

In history, we can find numerous examples of great people who have broken the law and having been punished for their criminal acts. The list includes people like Christ, Prophet Mohammad, Socrates, and Galileo. Yet it is these people who changed the history of the world and they are rightly worshiped as heroes by the masses even after their death.

How many people have you ever known who have become heroes without breaking the law and committing crimes in their time? Perhaps none. Heroes are created not by following the law but by breaking the law.

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Rule of Divine Law

It is not always good to follow the law blindly as it provides order and rule of law in the society but kills the humanity as the implementation of most of the man-made laws are against the natural laws. Man-made laws are often disguised under the cover of natural laws like equality, justice, liberty, and fraternity yet they serve just the opposite purpose. Most people see the letter of the law but fail to grasp its spirit. One must understand that breaking man-made laws is one of the fundamental requirements of all civil societies if it contradicts the natural or divine laws. Thus every person who breaks the law need not be a criminal. One must go deeper into the facts before declaring a law-breaker to be a criminal. The key distinction perhaps would be to see if he is breaking the law for the interest of the humanity or for his own selfish end. Is it need-based or greed-based? There lies the distinction between good and evil, between a true criminal and a hero. One who is breaking a law for others or to fight injustice is a hero and not a criminal. A poet said, “Jo lade die he that, Sura to” (One who fights for the weak is the real hero).

Let’s Say Goodbye To Vanity Laws

Once upon a time, in countries far and wide, rulers such as kings and emperors created laws that all subjects living within their realms were forced to obey. If the king or emperor was a fair and just person, the laws they made served the people they ruled and everyone, for the most part, was happy. But inevitably, there came to the thrones of these lands kings and emperors who were not fair and not just. And the laws that these monarchs made caused suffering to their people.

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And so it came to pass that people arose in defiance of these monarchs and demanded change. Chief among the demands of the people was that the law is placed above all men – including kings and emperors. They also demanded that laws would not arbitrarily change and that new laws would not be enacted without the consent of the people.

In other words, instead of the King being the law, the law would be King. And those governed by the “Rule of Law” would have an equal voice in the creation and administration of such laws.

Revolutions were brought and many people gave their lives to bring about such change.

This is why we in the United States don’t have things like “King James Law” or “Queen Anne’s Law”. We have public laws, enacted by our elected officials through consent of the people. We live under the Rule of Law and not under the rule of someone making up laws by which we must live. At least, that’s the way it’s supposed to work.

Lately, however, we seem to have embraced some sort of macabre fad that ushers in new laws named after people who were victims of one calamity or another. This new law fad has been happening so fast and so frequently that some people have come to call these new laws, “vanity laws”.

You know what I am talking about. I’m talking about Adam’s Law and Mary’s Law and Scott’s Law and God-Only-Knows Law. They are popping up everywhere, in every state, and even on the federal level.

Unfortunately, no one is given a pass in life. Bad things can and do happen to good people. And it is understandable that friends and relatives of people who suffered calamity would want to honor them. When John Lennon was shot out front of the Dakota in New York, people showed up and placed flowers on the ground where he was slain.

Since then, flowers and crosses and pictures and signs and all sorts of memorabilia have shown up on curbsides and fences and everywhere someone perished in an automobile accident or some other tragic event. It has become so prolific that ordinances have been passed to remove these makeshift memorials from the pedestrian way in many cities. While the public seems to have said enough is enough to these roadside shrines, unfortunately, the public hasn’t done enough to say enough is enough with vanity laws.

So, I have decided to start. ENOUGH ALREADY WITH VANITY LAWS!

In a democracy, no law should bear the name of anyone. Remember, we are supposed to live under the rule of law through the consent of the people. We are not supposed to live under Joe’s law at the whim of Joe’s weeping relatives.

I know that sounds harsh. But bear with me for a moment longer and I will explain why I am being harsh.

Let’s start with “Katie’s Law”. If you enter the search term, “Katie’s Law” in Google or some other search engine, you are going to find several different Katie’s Laws. That’s because this craze has gotten so big we are starting to run out of names. But in this case, I am referring to Katie’s Law that originated in New Mexico.

In 2003, a young woman by the name of Katie Sepich was brutally attacked and murdered in New Mexico. Although police had little clues to go on, they did find DNA evidence under the fingernails of the victim. The police entered the DNA into the national DNA database and waited to find a match.

Katie’s parents found out that in most states, a person is only required to register their DNA in the national database if they are convicted of a felony. They reasoned that if the law was changed to require anyone arrested on a felony charge to give their DNA to authorities, then the perpetrator of the crime against their daughter might be more quickly found. And so they started the effort to create “Katie’s Law”, which requires just that. In January 2007, Katie’s Law was enacted in New Mexico. Since then, anyone arrested on a felony charge in that state must register his or her DNA in the national DNA database.

At present, 11 states have laws similar to Katie’s Law and 26 states are considering enacting the law.

Katie’s parents are correct. If people arrested on felony charges are forced to submit to DNA testing, then some cases will be solved that otherwise would not. The actions on the part of Katie’s parents are also understandable. What happened to their daughter was beyond evil and their determination to find the person responsible was and is admirable.

What is not understandable nor admirable, however, is the actions of elected officials who put common sense aside and for political gain, seize upon these passionate issues and usher them into law. When they do this, they do not serve the people. They also do not serve the victim in whose name the law will be enacted.

Katie’s Law is a bad law. And I say that for four reasons. First, there is the presumption of innocence that we subscribe to under the laws of this land. You and everyone else in this country are presumed innocent until proven guilty. This being true, how can we force people who have not been convicted of a crime to give up their DNA? I can see no difference in demanding that an accused register their DNA and demanding that every person in the U.S. register their DNA.

Now mind you, I am not talking about requiring someone who is arrested for a specific crime being required to give DNA to compare to other DNA found at that particular crime scene. What Katie’s Law requires is that anyone – for any reason – who is arrested on a felony charge, must submit his or her DNA to the national DNA registry – where it will forever be kept on file.

Secondly, our laws are supposed to preclude authorities from forcing any person to incriminate himself or herself. Every time a person is arrested, police are required to read them their rights. They are told that they have a right to keep silent. They have a right not to incriminate themselves. But how can we tell someone he has a right to keep his mouth shut but no right to protect himself from genetic testing? What Katie’s Law means is that for any reason what-so-ever, police can submit an arrestee’s DNA into the national database to see if they find a match somewhere for some reason. It’s like trolling for a criminal charge.

Once your DNA is registered in the national database, it will remain there for the rest of your life – regardless if you are innocent. Regardless if the charges are dropped. Regardless if you were falsely accused or falsely arrested. You are in the database – forever.

Thirdly, DNA is shared. Two or more people can have the exact same DNA. Identical twins, for example, will not have the same fingerprints, but they do have the same DNA. So while DNA evidence is useful for excluding someone from having perpetrated a particular crime, it is not conclusive evidence that someone actually committed a crime.

And finally, there is the simple fact that in a democracy, we should respect law enforcement, but we should never unconditionally trust law enforcement. Contrary to what most people think when the police arrive at a crime scene they do not start looking for clues that lead them to a suspect. What police generally do is decide on a suspect and then build a case against him or her. If during the case building phase of the investigation, the police find they cannot obtain sufficient evidence for an arrest, ideally they will look for another suspect and start the whole case building phase again. But in some cases, too often, in fact, some police don’t stop when they hit a wall.

Instead, they coerce confessions and they resort to torture. That is how innocent people go to prison. With Katie’s Law, we have given these police officials another avenue to build cases. And because of this, one day, a police officer will decide that someone is probably guilty of a crime. And the police officer will reason that if he can just get a sample of that person DNA then he can tie them to the crime he is investigating. And so that hapless person may find himself stopped by some cop for a simple traffic violation and during the course of that traffic stop the officer will just happen to find a bag of suspicious white powder in that person’s car. Enough white powder to warrant a felony arrest and the requirement that the person submits to DNA sampling.

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It is unfortunate, but this will happen. Katie’s Law will be abused by law enforcement to obtain DNA results.

It will make the task of law enforcement easier and faster. And if some poor schmuck has to battle a phony felony charge because of a cop’s shortcut, well, to some cops’ thinking, that’s just collateral damage. Take a look at all the people that are presently being freed because DNA evidence has exonerated them. Then ask yourself the big question that no one seems willing to ask. Ask yourself how all these guys wound up in prison in the first place? The sad, sad, truth is that there are bad cops out there. And Katie’s Law hands these bad cops a new tool in which to do bad things.

 

International Law And The Right To A Healthy Environment As A Jus Cogens Human Right

the traditional international law does not consider human environmental rights to a clean and healthy environment to be a jus cogen human right. Jus cogens (“compelling law”) refers to peremptory legal principles and norms that are binding on all international States, regardless of their consent. They are not-derogate in the sense that States cannot make a reservation to a treaty or make domestic or international laws that are in conflict with any international agreement that they have ratified and thus to which they are a party. They “prevail over and invalidate international agreements and other rules of international law in conflict with them… [and are] subject to modification only by a subsequent norm… having the same character.” (1) Thus, they are the axiomatic and universally accepted legal norms that bind all nations under jus gentium (law of nations). For example, some U.N. Charter provisions and conventions against slavery or torture are considered jus cogens rules of international law that are nondelegable by parties to any international convention.

While the international legal system has evolved to embrace and even codify basic, not-derogate human rights (2), the evolution of environmental legal regimes has not advanced as far. While the former have found a place at the highest level of universally recognized legal rights, the latter has only recently and over much opposition reached a modest level of recognition as a legally regulated activity within the economics and politics of sustainable development.

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1. The international legal community recognizes the same sources of international law as does the United States’ legal system. The three sources of international law are stated and defined in the Restatement (Third) of the Foreign Relations Law of the United States (R3dFRLUS), Section 102. The first source is Customary International Law (CIL), defined as the “general and consistent practice of states followed out of a sense of legal obligation” (3) (opinio juris sive necessitatus), rather than out of moral obligation. Furthermore, CIL is violated whenever a State, “as a matter of state policy,… practices, encourages or condones (a) genocide, (b) slavery… (c) the murder or causing the disappearance of individuals, (d) torture or other cruel, inhuman or degrading treatment… or (g) a consistent pattern of gross violations of internationally recognized human rights.” (4) To what extent such human rights need to be “internationally recognized” is not clear, but surely a majority of the world’s nations must recognize such rights before a “consistent pattern of gross violations” results in a violation of CIL. CIL is analogous to “course of dealing” or “usage of trade” in the domestic commercial legal system.

Evidence of CIL includes “constitutional, legislative, and executive promulgations of states, proclamations, judicial decisions, arbitral awards, writings of specialists on international law, international agreements, and resolutions and recommendations of international conferences and organizations.” (5) It follows that such evidence is sufficient to make “internationally recognized human rights” protected under universally recognized international law. Thus, CIL can be created by the general proliferation of the legal acknowledgment (opinio juris) and actions of States of what exactly constitutes “internationally recognized human rights.”

2. The next level of binding international law is that of international agreements (treaties), or Conventional International Law. Just as jus cogens rights and rules of law, as well as CIL, are primary and universally binding legal precepts, so do international treaties form binding international law for the Party Members that have ratified that treaty. The same way that some States’ domestic constitutional law declares the basic human rights of each State’s citizens, so do international treaties create binding law regarding the rights delineated therein, according to the customary international jus gentium principle of pacta sunt servanda (agreements are to be respected). Treaties are in turn internalized by the domestic legal system as a matter of law. Thus, for example, the U.N Charter’s provision against the use of force is binding international law on all States and it, in turn, is binding law in the United States, for example, and on its citizens. (6) Treaties are analogous to “contracts” in the domestic legal system.

Evidence of Conventional International Law includes treaties, of course, as well as related material, interpreted under the usual canons of construction of relying on the text itself and the words’ ordinary meanings. (7) Often, conventional law has to be interpreted within the context of CIL. (8) As a practical matter, treaties are often modified by amendments, protocols and (usually technical) annexes. Mechanisms exist for “circumventing strict application of consent” by the party states. Generally, these mechanisms include “framework or umbrella conventions that merely state general obligations and establish the machinery for further norm-formulating devices… individual protocols establishing particular substantive obligations… [and] technical annexes.” (9) Most of these new instruments “do no require ratification but enter into force in some simplified way.” (10) For example, they may require only signatures, or they enter into force for all original parties when a minimum number of States ratify the modification or unless a minimum number of States object within a certain time frame, or goes into force for all except those that object. (11) Depending on the treaty itself, once basic consensus is reached, it is not necessary for all to consent to certain modifications for them to go into effect. “[I]n a sense these are instances of an IGO [(international governmental organization)] organ ‘legislating’ directly for [S]tates.” (12)

3. Finally, rules of international law are also derived from universal General Principles of Law “common to the major legal systems of the world.” (13) These “general principles of law” are principles of law as such, not of international law per se. While many consider these general principles to be a secondary source of international law that “may be invoked as supplementary rules… where appropriate” (14), some consider them on an “footing of formal equality with the two positivist elements of custom and treaty”. (15) Examples are the principles of res judicata, equity, justice, and estoppel. Frequently, these rules are inferred by “analogy to domestic law concerning rules of procedure, evidence and jurisdiction.” (16) However, “while shared concepts of of internal law can be used as a fall-back, there are sever limits because of the characteristic differences between international law and internal law.” (17) Evidence of General Principles of Law includes “municipal laws, doctrine and judicial decisions.” (18)

Treaty provisions and their inherent obligations can create binding CIL if they are “of a fundamentally norm-creating character such as could be regarded as forming the basis of a general rule of law.” (19) A basic premise of this article is that the “relatively exclusive ways (of lawmaking) of the past are not suitable for contemporary circumstances.” (20) Jonathan Charney maintains that today’s CIL is more and more being created by consensual multilateral forums, as opposed to State practice and opinio juris, and that “[consensus, defined as the lack of expressed objections to the rule by any participant, may often be sufficient… In theory, one clearly phrased and strongly endorsed declaration at a near-universal diplomatic forum could be sufficient to establish new international law.” (21) This process should be distinguished conceptually as “general international law”, rather than CIL, as the International Court of Justice (ICJ) has often done.

In like vein, Professor Gunther Handl argues that all multilateral environmental agreements (MEAs) of “global applicability” create “general international law”:

“A multilateral treaty that addresses fundamental concerns of the international community at large, and that as such is strongly supported by the vast majority of states, by international organizations and other transnational actors,– and this is, of course, precisely the case with the biodiversity, climate, and ozone regimes, among others-may indeed create expectations of general compliance, in short such a treaty may come to be seen as reflecting legal standards of general applicability… and as such must be deemed capable of creating rights and obligations both for third states and third organizations.” (22)

Notwithstanding, Daniel Bodansky argues that CIL is so rarely supported by State action, that it is not customary law at all. “International environmental norms reflect not how states regularly behave, but how states speak to each other.” (23) Calling such law “declarative law” that is part of a “myth system” representing the collective ideals and the “verbal practice” of States, he concludes that “our time and efforts would be better spent attempting to translate the general norms of international environmental relations into concrete treaties and actions.” (24)

However, a review of the current status of international human rights and environmental law may reveal the mechanisms for raising environmental rights to the level of jus cogens rights. For example, the U.N. Convention on the Law of the Seas (UNCLOS), whose negotiation was initiated in 1972 and signed in 1982, was considered by most countries to be CIL by the time it came into force in 1994. (25)

II. CURRENT STATUS OF THE RIGHT TO A HEALTHY ENVIRONMENT No State today will publicly state that it is within its sovereign rights to damage their domestic environment, much less that of the international community, however most States do not guarantee environmental protection as a basic human right. Currently, environmental law is composed of mostly Conventional International Law and some CIL. The former relies on express consent and the latter on implied consent, unless a State avails itself of the Persistent Objector principle, which precludes it from being bound by even most CIL. Unlike for human rights and international crimes, there is no general environmental rights court in existence today. While the Law of the Sea Tribunal and other U.N. forums (e.g., the ICJ) exist for trying cases of treaty violations, non-treaty specific violations have no international venue at present. Italian Supreme Court Justice Amedeo Postiglione states that

“[T]he human right to the environment, must have, at the international level, a specific organ of protection for a fundamental legal and political reason: the environment is not a right of States but of individuals and cannot be effectively protected by the International Court of Justice in the Hague because the predominantly economic interests of the States and existing institutions are often at loggerheads with the human right to the environment.” (26)

Domestic remedies would have to be pursued first, of course, but standing would be granted to NGOs, individuals, and States when such remedies proved futile or “the dispute raises issues of international importance.” (27) For example, although the ICJ has an “environmental chamber” and U.S. courts often appoint “special masters” to handle these types of disputes, it is clear that the recognition of the human right to the environment needs an international court of its own in order to recognize such a right and remedy international violations in an efficient and equitable manner. (28)

III. THE JUS COGENS NATURE OF ENVIRONMENTAL RIGHTS Irrespective of specific treaty obligations and domestic environmental legislation, do States, or the international community as a whole, have a duty to take measures to prevent and safeguard against environmental hazards?

Human rights are “claims of entitlement” that arise “as of right” (31) and are independent of external justification; they are “self evident” and fundamental to any human being living a dignified, healthy and productive and rewarding life. As Louis Henkin points out:

“Human rights are not some abstract, inchoate ‘good’; they are defined, particular claims listed in international instruments such as the [U.N.’s] Universal Declaration of Human Rights and the major covenants and conventions. They are those benefits deemed essential for individual well-being [sic], dignity, and fulfillment, and that reflect a common sense of justice, fairness, and decency. [No longer are human rights regarded as grounded in or justified by utilitarianism,] natural law,… social contract, or any other political theory…[but] are derived from accepted principles, or are required by accepted ends-societal ends such as peace and justice; individual ends such as human dignity, happiness, fulfillment. [Like the fundamental rights guaranteed by the U.S. Constitution, these rights are] inalienable and imprescriptible; they cannot be transferred, forfeited, or waived; they cannot be lost by having been usurped, or by one’s failure to exercise or assert them.” (32)

Henkin distinguishes between “immunity claims” (such as ‘the State cannot do X to me’; the hallmark of the U.S. constitutional jurisprudential system) and “resource claims” (such as ‘I have a right to Y’) such that the individual has the right to, for example, free speech, “food, housing, and other basic human needs.” (33) In today’s “global village”, the Right to a Healthy Environment is clearly a “resource claim” and a basic human need that transcends national boundaries.

According to R.G. Ramcharan, there is “a strict duty… to take effective measures” by States and the international community as a whole to protect the environment from the potential hazards of economic development. (34) His position is that the Human Right to Life is a. jus cogens, non-derogable peremptory norm that by its very nature includes the right to a clean environment. This duty is clearly spelled out in such multilateral treaties as the UN Convention on Desertification, the UN Framework Convention on Climate Change, and the Convention on Biological Diversity. (35) It is expounded in the Stockholm, Rio and Copenhagen Declarations as a core component of the principle of Sustainable Development. It forms the basis of NAFTA’s, the WTO’s and the European Union’s economic development agreements, and the European Convention and the International Covenant on Civil and Political Rights (ICCPR), which has been ratified by most countries in the world, including the United States.

The Human Right to a Healthy Environment is explicitly contained in the Inter-American and African Charters, as well as in the constitution of over 50 countries worldwide. Whether it is based on treaties, CIL, or “basic principles”, the obligation of the international community to the environment is today clearly spelled out and enforceable through international tribunals. For example, the Lhaka Honhat Amid Curiae Brief recognized the rights of the indigenous peoples of Argentina to “an environment that supports physical and spiritual well being and development.” (36) Similarly, in a separate decision, the Inter-American Human Rights Commission upheld the right of the Yanomani in Brazil to a healthy and clean environment. (37) On a global level, the UN Human Rights Committee has indicated that environmental damage is “a violation of the right to life contained in Article 6(1) of the [ICCPR]”. (38)

Thus, today, the erga omnes obligation of States to take effective steps to safeguard the environment is a duty that no State can shirk or ignore. If it does, it runs the risk of prosecution by international courts and having to institute measures commensurate with its responsibility to protect its share of the “global commons”. Interestingly, the concept of jus cogens emerged after World War II as a response to the commonly held view that the sovereignty of States excused them from violating any of the then so-called CILs. According to Black’s Law Dictionary, “there is a close connection between jus cogens and the recognition of a ‘public order of the international community’… Without expressly using the notion of jus cogens, the [ICJ] implied its existence when it referred to obligations erga omnes in its judgment… in the Barcelona Traction Case.” (39)

IV. THIRD GENERATION HUMAN RIGHTS AND THE ENVIRONMENT Is environmental protection is an erga omnes obligation, that is, one owed to the international community as a whole as a jus cogens human right?

In a separate opinion to the Case Concerning the Gebecikovo-Nagymaros Project (Hungary v. Slovakia), Judge Weeramantry, the Vice President of the ICJ, expounded on the legal basis for sustainable development as a general principle of international law. In the process, he concludes that environmental protection is a universal erga omnes legal norm that is both CIL as well as a general principle of law per se. In Gebecikovo, ostensibly to have been decided upon the merits of the treaty governing the building of power plants along the Danube, as well as by international customary law, the ICJ held that the right to development must be balanced with the right to environmental protection by the principle of sustainable development. Even in the absence of a specific treaty provision, the concept of sustainable development has become a legal principle that is “an integral principle of modem international law”. (40)

Sustainable development is also recognized in State practice, such as the Dublin Declaration by the European Council on the Environmental Imperative. (41) As such, sustainable development has in effect been raised to the level of CIL.

For example, the Martens Clause of the 1899 Hague Convention Respecting the Laws and Customs of War on Land has been interpreted in 1996 by Judge Shahabudeen of the ICJ as providing a legal basis for inferring that general principles rise above custom and treaty, having their basis in “principles of humanity and the dictates of public conscience”. (42) According to Weeramantry, “when a duty such as the duty to protect the environment is so well accepted that all citizens act upon it, that duty is part of the legal system in question… as general principles of law recognized by civilized of nations.” (43)

Sustainable development acts as a reconciling principle between economic development and environmental protection. Just as economic development is an inalienable right of States’ self-determination, environmental protection is an erga omnes obligation of all States for the benefit of the global commons that all share. “The principle of sustainable development is thus a part of modern international law by reason not only of its inescapable logical necessity, but also by reason of its wide and general acceptance by the global community”, and not just by developing countries. (44)

Drawing upon the rich history of diverse cultures’ legal systems and what he calls “living law”, Judge Weeramantry points out that traditional respect for nature has been a guiding moral and legal principle for economic development throughout history. The ICJ has also recognized these principles in such previous decisions as Barcelona Traction, Light and Power Company, Ltd. (Belgium v. Spain) in 1972. (45) Judge Weeramantry concludes that the “ingrained values of any civilization are the source from which its legal concepts derive… [and that environmental protection is] among those pristine and universal values which command international recognition.” (46)

The first generation of Human Rights were those declared by the “soft law” of the Universal Declaration of Human Rights: “Everyone has the right to life liberty and security of person.” Art. 3. It was modeled on the U.S. Bill of Rights and the American Declaration of Independence. This was echoed in the binding ICCPR (“Every human being has the inherent right to life.”, ICCPR, Art. 6(1) (1966)), which the U.S. has ratified, and the American Convention on Political and Civil Rights of the Inter-American System (which draws direct connections between human rights and environmental rights).

The second generation of human rights emerged with the Economic, Social and Cultural (ECOSOC) Rights developed in such treaties as the International Covenant on Economic, Social and Cultural Rights (ICESCR; which the U.S. has not ratified), and many foreign State’s Constitutions (e.g., Germany, Mexico, and Costa Rica). These include the right to free choice of work, to (usually free) education, to rest, leisure, etc. Highly complied with in Europe, these rights have additionally been expanded by the EU in their European Social Charter (1961) creating much legislation for the protection of workers, women, and children.

The third and current generation of human rights has emerged from the Eco-Peace-Feminist Movement. These include the Right to Development, the Right to A Safe Environment and the Right to Peace. In essence, this third generation of rights addresses the problem of poverty as a social (and hence legally redressable) ill that lies at the core of environmental problems and violations. The “environmental justice” movement considers cases that demonstrate that environmental pollution is disproportionately prevalent in minority communities, whether at a local or international level. Authors John Cronin & Robert F. Kennedy, Jr., have explicitly entitled their study of environmental pollution along the Hudson River The Riverkeepers: Two Activists Fight to Reclaim Our Environment as a Basic Human Right. (47) This predominantly U.S. movement focuses on “environmental racism” as a means for seeking remedies or the disproportionate pollution of minority communities as violations of current civil rights legislation by “exploring] the use of the nations’ environmental laws to protect the rights of the poor.” (48)

V. RECOGNITION, COMMITMENT AND ENFORCEMENT OF A RIGHT: THE MONTREAL PROTOCOL AS A MODEL FOR CONSENSUS BUILDING The key mechanisms for establishing binding international law are recognition of an obligation or right, commitment to its protection, and effective enforcement methods. The Montreal Protocol on Substances that Deplete the Ozone Layer is the “most important precedent in international law for the management of global environmental harms.” (49) It serves as a model for many other environmental concerns that require decision-making in the face of scientific uncertainty, global non-consensus, and high harm-avoidance costs. It was the first international “precautionary” treaty to address a global environmental concern when not even “measurable evidence of environmental damage existed.” (50) Although ozone depletion by chloro-fluorocarbons (CFCs) and other ozone depleting substances (ODSs), and the attendant harms of overexposure to harmful ultraviolet radiation, had been suspected by scientists in the early 1970s, it was not until 1985 and the Vienna Convention for the Protection of the Ozone Layer that international action was taken to address the problem.

THE VIENNA CONVENTION FOR THE PROTECTION OF THE OZONE LAYER At the time of the Vienna Convention, the U.S. represented over 50% of the global consumption of CFCs in a $3 billion market for aerosol propellants alone. Overall, CFC products represented a $20 billion market and about a quarter of a million jobs in America alone. (51) The Clean Air Amendments of 1977 and the 1978 EPA ban on all “non-essential” uses of CFC in aerosol propellants was quickly followed internationally by similar bans by Sweden, Canada and Norway. (52) These actions were a direct response to consumer pressure and market demands by newly environmentally-conscious consumers.(53) Incentives were also provided to the developing countries so that they could “ramp up” at reasonable levels of reductions. (54)

Creative ratification incentives included requiring only 11 of the top two-thirds of CFC producing countries to ratify and bring the treaty into force. (55) As a result of such flexibility, innovation, consensus and cooperation, the Montreal Protocol has been hailed as a major success in international diplomacy and international environmental law. Today almost every nation in the world is a member (over 175 States).

THE LONDON ADJUSTMENTS AND AMENDMENTS OF 1990 By 1990 scientific confirmation of global warming and the depletion of the ozone layer led to the London Adjustments and Amendments. Again, U.S. companies such as Dupont, IBM and Motorola reacted to massive negative media attention and promised to halt complete production by 2000.

Non-compliance procedures were made even more user friendly and no sanction for non-compliance was initiated against a country that was failing to reach quotas while acting in good faith. Technology transfer was made in a “fair and favorable way”, with developed countries taking the lead in assisting developing countries reach compliance. (56) The U.S. instituted “ozone depletion taxes” which did much to get more comprehensive compliance, as well as promoting research into CFC alternatives. (57) To emphasize the vast enforcement mechanisms employed, consider that by early 1998 the U.S. Justice Department had prosecuted 62 individuals and 7 corporations for the illegal smuggling into the emergent CFC black markets. Despite an international crackdown by the FBI, EPA, CIA, and Interpol in the global police effort Operation Breeze, 5 to 10 thousand tons are smuggled annually into Miami alone, second only to cocaine smuggling. (58) In 1992 the Copenhagen Amendments required every State party (practically the whole world) to institute “procedures and institutional mechanisms” to determine non-compliance and enforcement. (59)

VI. CONCLUSION: CRITICAL WEAKNESS OF THE CURRENT SYSTEM AND THE LEGAL CONSEQUENCES OF THE RIGHT TO A HEALTHY ENVIRONMENT AS A BASIC HUMAN RIGHT

The critical weaknesses of the existing system include self-serving pronouncements by non-complying States, lack of effective enforcement mechanisms, political limitations such as State sovereignty and the “margin of appreciation”, and the lack of universal consensus on basic human rights terminology and their enforcement. As long as States can ignore commonplace violations of human rights (sporadic instances of torture, occasional “disappearances”) and shun the edicts of human rights judicial decisions, there can be no effective system of international human rights enforcement. Currently, unless a State commits such outrageous acts on a mass scale that affects world peace, such as in Yugoslavia and Rwanda, it can often evade its responsibilities under international human rights treaties.

There are few international agreements that admit of universal jurisdiction for their violation by any State in the world. All CIL, however, is by its very nature prosecutable under universal jurisdiction. “Crimes against humanity” (e.g., War Crimes, Genocide, and State-supported torture) are universally held to be under universal jurisdiction, typically in the International Court of Justice, ad hoc war crime tribunals, and the new International Criminal Court.

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While interpretive gaps exist, it is not inconceivable that the right to a healthy environment can be extrapolated from current international environmental treaties and CIL. At the treaty level, the protection of the environment appears to be of paramount importance to the international community. At the level of CIL, there is much evidence that the right to a healthy environment is already an internationally protected right, at least as far as trans-boundary pollution is concerned. In any case, it seems to be universally held that it should be protected as a right. The impression is that there is an unmistakable consensus in this regard. “Soft law” over time becomes CIL.

The U.N. World Commission on Environment and Development released the Earth Charter in 1987. It has yet to be fully implemented on a global scale. Its broad themes include respect and care for the environment, ecological integrity, social and economic justice and democracy, nonviolence and peace. (60) The argument can be made that by now, protection of the environment has reached the threshold of Customary International Law. Whether the nations of the world choose to thereafter recognize the right to a healthy environment as a jus cogens human right will depend on the near universal consensus and political will of most of the nations of the world. Until then, as long as human life continues to be destroyed by “human rights ratifying” nations, how much enforcement will be employed against violators of environmental laws when the right to a healthy environment is not upheld as a basic human right remains to be seen. It will take the cooperation of all nations to ensure that this becomes a non-derogable, unalienable right and recognizing it as essential to the Right to Life.

1. Restatement (Third) of the Foreign Relations Law of the United States, § 102 cmt. k (1987).
The elements can also be found in the Vienna Convention, Article 53.
2. For example, the Right to Life, to be Free from Torture, Genocide, and Murder.
3. R(3d)FRLUS § 102(l)(a) and cmt. h.
4. Id., § 702 (my emphasis).
5. Mark W. Janis, An Introduction to International Law 6 (3d. ed, Aspen Law & Business 1999).
6. R3dFRLUS § 102(2).
7. Janis, supra.
8. David Hunter, et al., International Environmental Law and Policy, p. 306 (2d. ed., Foundation Press 2002).
9. Paul Szasz, International Norm Making, in Edith Brown Weiss, Ed., ENVIRONMENTAL CHANGE IN INTERNATIONAL LAW (1995), as quoted in Id, p. 307.
10. Id.
11. Id.
12. Id.
13. R3dFRLUS § 102(l)(c), as presented in Donoho, supra.
14. Supra, R3dFRLUS §102(4).
15. Shabtai Rosenne, Practice and Methods of International Law 69 (1984), as quoted in Hunter, Id, p. 317.
16. Hunter, supra, p. 316 (Foundation Press 2002).
17. Id, p. 316.
18. Janis, supra, p. 29.
19. Id, p. 312.
20. Jonathan Charney, Universal International Law, 87 Am.J.Int’l.L. 529, at 543-48 (1993), as quoted in Hunter, supra, p. 322.
21. Id.
22. Gunther Handl, The Legal Mandate of Multilateral Development Banks as Agents for Change Toward Sustainable Development, 92 Am.J.Int’l.L. 642, at 660-62 (1998), as quoted in Hunter, supra, p. 324.
23. Daniel Bodansky, Customary (and Not So Customary) International Environmental Law, 3 Ind. J. Global Legal Stud. 105, 110-119 (1995), as quoted in Hunter, Id.
24. Id.
25. Id, p. 659.
26. Amedeo Postiglione, The Global Environmental Crisis: The Need for and International Court of the Environment, ICEF INTERNATIONAL REPORT at 33-36 (1996), quoted in Hunter, supra, p. 495.
27. Id., p. 496.
28. Id.
29. Id, p. 1298.
30. Id, p. 1299.
31. L. Henkin, “The Human Rights Idea”, The Age of Rights (reprinted in Henkin, et al., Human Rights, 1999), as presented in Donoho, supra, p. 14-16.
32. Id.
33. Id.
34. The Right to Life, p. 310 (The Hague, 1983), quoted in Hunter, supra, p. 1297.
35. Hunter, supra, p. 341.
36. Id, p. 1299.
37. Id, p. 1294.
38. Id, p. 1295.
39. Black’s Law Dictionary, p. 864. (West 1999).
40. Hunter, supra, p. 339-341.
41. Id, footnotes 1 through 6, pp. 341-342.
42. Id, pp. 317-318.
43. Id, p. 345.
44. Id, p. 342.
45. Id, p. 315.
46. Id, p. 344.
47. In particular, see pages 35, 38, 159, 162, 177-199 and 221 (Scribner 1997).
48. New York Law Journal, January 1993, Friday, ENVIRONMENTAL LAW, p. 3. See also, DISCUSSION: REFLECTIONS ON ENVIRONMENTAL JUSTICE, 65 Alb. L. Rev. 357, 2001.
49. Hunter, supra, p. 526.
50. Id, p. 527, quoting Richard Benedick, Ozone Diplomacy 2 (1998)
51. Id, p. 532.
52. Id, p. 535.
53. Id, p. 542.
54. Id, p. 545.
55. Id.
56. Id, p. 550-54.
57. Id, p. 562.
58. Id, p. 559.
59. Id, p. 566-67.
60. Roland Huber, International Environmental Law Seminar: Human Rights and the Environment, p. 24, in Donoho, Douglas L.

Comparison of the Traditional English Laws & European Community (EC) Laws on Jurisdictional Values

Introduction: This paper endeavors to compare the traditional English law and the European Community (EC) law on jurisdictional values, in that, it seeks to understand and elucidate why the former set of jurisdictional rules value flexibility and justice while the latter values certainty and predictability vis-à-vis the other. It shall analyze their historical or political background, their objectives, and basis for assuming jurisdiction. It shall highlight the areas of differences between these jurisdictional regimes with the assistance of authorities like significant Court cases and books that have besides explaining or simplifying the law have also helped its evolution.

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Definition: The word ‘Jurisdiction’ can have several meanings, but if understood in context with the Court of law it generally means the ability or authority of a particular Court to determine the issues before it on which a decision is sought. The rules on Jurisdiction play a pivotal role in determining the Court’s ability to address the issues in a given matter.

Jurisdictional issues become complex on the involvement of more than one Court having jurisdiction. This is certainly an area of concern not only for the international trade or business (who may be put in an invidious position where they are unaware of the extent of their liability) but also the sovereign states that seek to trade with each other without having to spoil their amicable relationship.

The English Law: The English Legal system (having the common law at its core) has had and still continues to have a formidable place in expounding the law on several issues, mostly due to the availability of intellectuals and experts that have helped it in doing so.

Traditional English law (the common law) is basically the case laws that have over the period of time become an authority with regard to the matter determined therein. Prior to entering the European Union (EU) by signing the document of accession in 1978, in the U.K, along with the judge made laws, even legislations played a significant role though it may have been more or less remedial in nature. However, it seems logical to allow the judge made the law to test the legislation whenever it is so required by the change in circumstances which can be given effect to with relative ease as in comparison with the legislation process.

Before the advent of the Brussels/Lugano system and the Modified Regulation, the traditional rules were applied in all cases, and it is their historical roots that make it appropriate to refer to them as the traditional English law/rules.

The jurisdiction of English courts is determined by different regimes:
1. The Brussels I Regulation (hereinafter the ‘Regulation’) (an amended version of the Brussels Convention but notwithstanding the amendments, it applies a similar system of rules on jurisdiction);
2. The Modified Regulation which allocates jurisdiction within U.K under certain circumstances; and
3. The traditional English rules.

There are other sets of rules on jurisdiction like the EC/Denmark Agreement on jurisdiction and the those contained in the Lugano Convention, but their ambit is restricted in application to the cases where the defendant is domiciled in Denmark in a case of the former and in an EFTA member state in case of the latter. There is also the Brussels Convention which applies to Denmark alone.

The EC law: In contrast to the traditional English law, the European Community seems to place more importance on the legislative work than the judge made laws. Apparently, for the EC, it is more important that the basic edifice of their legal system should be based on a codified structure which it defends on the grounds of ease of understanding amongst other reasons. Whereas, English laws seem to put more emphasis on having a common law or judge-made law background. On this anvil, one begins to understand the differences that exist between the respective legal systems and their values, that is, a basic difference in the manner of approaching the issues even in cases where their objectives may be same.

The EC law on jurisdiction is more inclined towards the importance of predictability and certainty in the rules than towards matters like justice and flexibility as can be understood upon reading the 11th recital of the Regulation that states: ‘The rules of jurisdiction must be highly predictable and founded on the principle that jurisdiction must generally be based on defendant’s domicile and jurisdiction must always be available on this ground save in few defined situations…’

Whereas, the only mention of flexibility in the Regulation is contained in the 26th recital wherein it provides that the rules in the regulation may be flexible only to the extent of allowing specific procedural rules of member states.

According to the EC law on jurisdiction, it seems that this particular requirement of predictability is necessary for parties to a dispute to know exactly within which jurisdiction(s) they can sue and be sued. The EC law gives priority to the primary objective of harmonizing the laws of jurisdiction within the territory of its member states and therefore makes it mandatory to uphold the strict accuracy to its principle while giving secondary status to the objective of justice for the parties. The EC law, as well as the traditional English law, may very well have their own justifications and reasons for following a particular system; but it is submitted that this seems to be not only a matter of difference in manner of approach or attitude but also a matter of prioritization of the objectives by both the EC law and traditional English law on jurisdiction. The list of cases mentioned hereinafter for the benefit of elucidating the topic under discussion is, as shall be evident, decided under the Brussels Convention which can be used for interpreting the rules under the Regulation.

Comparison of EC Law v English Law:
1. Bases of Jurisdiction: The most significant difference that exists between the traditional English laws and the EC law on jurisdiction is the element of discretion that the respective body of law gives to the judges in determining the jurisdictional issues. Under the Regulation, the assumption of jurisdiction is largely mandatory with the court not being free to decline jurisdiction; whereas under the English traditional rules the assumption of jurisdiction is discretionary.

The Regulation applies only to matters that are civil and commercial in nature and not to those that have been explicitly excluded from its application (for e.g. Cases pertaining to arbitration, succession, wills, and bankruptcy have been excluded from the application of the Regulation). Whereas, the traditional English rules apply not only to cases that fall outside the scope of Art.1 of the Regulation but also to those that fall within its scope where the defendant is not domiciled in any member state and the jurisdiction is not allocated by any of the rules which apply, regardless of domicile.

A. In the traditional English rules the court has jurisdiction in three situations:
i. If the defendant is present in England (though the court may stay the proceedings on the ground that another court is a more appropriate forum). Jurisdiction under this situation is dependent on the presence of the defendant in the country whereby the claim form may be served to him.
ii. If the defendant submits to the court’s jurisdiction: wherein the defendant submits by not contesting jurisdiction or by arguing the case on its merits.
iii. If the claim falls within Practice Direction: (CPR PD 6B) (which is dependent on the court giving permission to serve process out of its jurisdiction) where the court considering England to be the most appropriate forum (despite absence of reasons under i. or ii. on the basis of some connection between England and the defendant. There seems on a perusal of this provision, a functional similarity with Arts.5 & 6 of the Regulation.

B. Jurisdiction under the EC Law: Except for certain instances where the applicability of the EC law on jurisdiction does not depend on the defendant’s domicile (Art.22 Exclusive Jurisdiction and Art.23 Prorogation of Jurisdiction) the EC law on jurisdiction rests on the domicile of the defendant, and makes it mandatory for the court of a member state to determine the jurisdictional issues and other issues where the defendant is domiciled in its jurisdiction.

The Brussels Regulation does provide for instances where the defendant can be sued in another Member state though he is not domiciled in that particular state, these cases have been very explicitly outlined in the regulation leaving little or no scope for the exercise of discretion by the judge. However, Art.4 of the Regulation provides that a member state can (subject to the provisions of Articles 22 and 23 of the Regulation) exercise its traditional laws of a jurisdiction in cases where the defendant is not domiciled in any of the member states. This provision while giving scope for the applicability of the traditional rules has at the same time also given rise to the idea that there is now only one source of jurisdictional rules, namely the Brussels Regulation.

C. Mandatory rules under EC law v Forum Conveniens:
Forum convenience: upon bringing an action in England, the claimant has to prove that it is the forum convenient, that is, the matter can be tried therein in the interest of justice; and the relevant factors in considering this are the same as under forum non conveniens. Forum conveniens is determined in two stages, namely:
i. Where in the 1st stage the claimant should show that England is an appropriate forum (considering, among other things, the nature of the dispute, issues involved and in cases where relevant, the availability of witnesses.
ii. At the 2nd stage the claimant must establish that even if there is another forum, justice will not be done there, showing thereby that England is the more appropriate forum.

However, England may not be the appropriate forum where the claimant will only be deprived of some legitimate personal or juridical advantage like a higher compensation award.

Mandatory rules under EC law: Unlike the Traditional English rules, under the Regulation, if the court has jurisdiction under any of the provisions thereof (e.g. Arts.2 or 5) it cannot refuse jurisdiction on the grounds that some other court is best suited to determine the matter, showing the mandatory nature of the rules.

In a case of lis pendens (Art.27) or proceedings in 2 or more states (Art.28) the Regulation gives precedence to the court first seized (Art.29 & 30) regardless of the actual jurisdiction being in the court 2nd seized.

These rules are mandatory in so far as they fall within the scope of Art.1 of the Regulation; no deviation thereof is permitted on the grounds of justice or convenience or any like reason. Paraphrasing the reasoning of the ECJ, the reason for such mandatory compliance is the promotion of legal certainty and predictability and the free flow of judgments amongst the member states on the basis of the codified rules in the Regulation which is not dependent on any judge’s discretion.

2. Forum nonconveniens and lis pendens:

A. Forum nonconveniens: Jurisdiction under the traditional rules also depends on whether the court shall decline jurisdiction or stay the proceedings. An English court shall in determining jurisdiction under its traditional rules try to ascertain which is the more appropriate forum and may even stay its proceedings in cases where it thinks that another forum is best suited for the case and in doing so it employs what may be called the basic test i.e. whether it is in the interest of the parties and would meet the interest of justice.

However, it was the Spiliada Case which promulgated another test i.e. ‘the two stage test’ for deciding the more appropriate forum for determining the case before the court. Where the court considers, in the 1st stage which is prima facie the most appropriate forum (burden being on the defendant) on the basis of connecting factors like (territorial connection) place where the parties reside, the law applicable, the availability of witnesses (if any), balance of convenience (applied in Spiliada itself) and where proceedings between the same parties arising out of the same dispute are pending before a foreign court, show how long the trial has been in existence which would be a strong argument in favour of forum non conveniens where such case is on the verge of resolution one (unlike Art. 27 of the Brussels Regulation, the traditional rules do not endorse a simple ‘first come, first serve’ approach) and whereas in the 2nd stage (burden shifting on the claimant) upon considering the relevant connecting factors it thinks that the dispute is more closely connected with a foreign court.

B. Lis alibi pendens: The doctrine of Lis Pendens under Art.27 of the Brussels Regulation makes it mandatory for the court which is second seized (in proceedings having same cause of action and same parties and the dispute is before the courts of two or more member states) to stay its proceedings in favour of the court first seized until such time till the latter has not established its jurisdiction notwithstanding that the court second seized may actually have prima facie grounds for the exercise of its jurisdiction (For example Arts. 22 and 23).

In contrast to the traditional English law, the Brussels Regulation gives absolutely no discretion to the judge to stay its own proceedings and grant jurisdiction in favour of another court on grounds of availability of a more appropriate forum. For instance, in the Owusu case wherein the European Court of Justice held that Brussels Convention precludes a Court of a contracting state from declining jurisdiction conferred on it by Art.2 on the ground that a court of a non-contracting state would be more appropriate forum for the trial of the action even if the jurisdiction of no other state is in issue or the proceedings have no connecting factors to any other contracting state. This regardless of the fact that the person putting up a plea of forum nonconveniens is able to prove that he may not be able to secure justice in a foreign court or that he is, in fact, devoid of any access to effective justice.

The doctrine of Lis Pendens may seem like a simplified manner of approaching simultaneous proceedings in different courts vis-à-vis the doctrine of forum nonconveniens which is dependent on the judge’s discretion; and also seems logical in cases where there could be a possibility of having two conflicting decisions as may happen under the traditional rules. At the same time, it also seems arbitrary in that it makes mandatory for the court first seized to decide upon its jurisdiction before the court second seized, regardless of any pressing evidence adduced that places jurisdiction elsewhere.

The doctrine of lis pendens seeks to support the object of the drafters of the Brussels Regulation which is to promote confidence in the internal market, to reduce disparities between national laws on the jurisdictional front; and to strengthen the belief of persons domiciled in the member states under the present jurisdictional set-up, so as to safeguard their legal and large monetary interests and this in turn leads to the creation of legal certainty which view or observation is supported by several bearers of intellect in the concerned field of study.

Art. 27 of the Regulation requires the court second seized to stay its proceedings until the court first seized has established its jurisdiction. This provision seems to give ample room for parties to commercial matters, in particular, to take advantage of the loopholes available in the legal framework established under the Brussels Regulation which is best explained by the explanation of the term ‘Italian Torpedo’.

Art. 27 while intending certainly has ended up providing an avenue for a rat race of sorts to the courthouse for the parties having a dispute in civil and commercial matters as well as those that wish to obstruct the course of justice. A party seeking to prolong the outcome of the dispute can approach the court of a member state which otherwise on the merits of the case may not have the requisite jurisdiction to hear it (e.g. Italy); and where the hearing and official determination of only the jurisdictional issues may possibly take long enough to frustrate the objectives of the party seeking an early resolution or remedy for the mischief of the other party.

In the Transport Castelletti case where a Danish shipping company had to contest a jurisdictional issue before the Italian court for eight years when the receiver of the cargo under its Bill of Lading brought proceedings in Italy this notwithstanding the fact that the Bill of Lading which it delivered to an Argentinean shipper for voyage from Argentina to Italy had explicitly mentioned a ‘choice of court clause’ favouring England. This outcome does beg the question if there are any provisions that guarantee a fair and speedy delivery of justice. This requirement seems to have been overlooked even by the European Court of Justice, specially, with regard to the lack of efficiency which the Italian courts have shown in dispensing speedy remedies.

This issue was once again put to test in the Erich Gasser GmbH v MIST Srl which was pertaining to patent rights and also involved a ‘choice of court agreement’ (Art.17 of the Brussels Convention) whereby the parties are free to choose which court shall have exclusive jurisdiction or if the parties require they may even make it a non-exclusive jurisdiction clause by stating the courts that shall have jurisdiction.

Gasser, an Austrian firm and MISRAT an Italian Company had submitted to the exclusive jurisdiction of an Austrian court by virtue of statement granting jurisdiction to the Austrian court contained in all invoices transacted under by the parties. But knowing that there was a possibility that Gasser may file a suit under the choice of court agreement, Mist with the intent to prolong the proceedings and the outcome of the case sought to invoke the jurisdiction of the Italian court and filed a suit there thereby making it the court first seized of the matter.

The case was pending before the Italian court for a period of eight years simply to have its jurisdiction established though it could be seen from the invoices transacted between the parties to the dispute that there was an explicit clause which was as per the provisions of Art.23 namely, i. the agreement was in writing; ii. in form with accords with practices which the parties have established between themselves; or iii. in international trade or commerce in a form which accords with a usage of which the parties are ought to have been aware and which is in widely known in such trade or commerce or regularly observed by the parties to the contract of the type involved in the particular trade or commerce.

3. Preclusion of jurisdiction under the English Law and EC law: Under the traditional English law, when the court finds itself to be the more appropriate forum it may grant an anti-suit injunction i.e. an injunction restraining a party from instituting or pursuing proceedings in another court, which is generally sought by defendants in foreign proceedings praying that the matter be decided in England where the grounds for injunction can include: unconscionable behavior, ends of justice and contractual reasons i.e. arbitration agreement.

In contrast to the English law under the Brussels Regulation the court 1st seized will determine its jurisdiction first and the courts 2nd seized shall (despite having jurisdiction over the matter on all relevant grounds) stay its own proceedings and not be permitted to issue any anti-suit injunction and will have to await the determination of jurisdiction by the court first seized. This despite the fact that the proceedings in the court first seized might be brought in bad fait and to frustrate the proceedings of the court second seized. (Based on the view of the ECJ that the states must trust each other, which seems like allowing the interest of justice in favor of an individual, as in Turner v Grovit to be overlain by the interest of the state)

The scope of jurisdiction in recognition and enforcement of judgments: A court cannot recognize or enforce a judgment without the requisite jurisdiction. The set of rules applicable would depend primarily on the country where the judgment was given. Recognition of the traditional law operates without impediments as regards judgments from many countries including many of the Middle Eastern countries, the non-common wealth countries including therein the US, Asia, and Africa. Enforcement of the common law is dependent on bringing ordinary proceedings, whereas, the statutory regimes require specific procedures i.e. Registration.

In contrast to the English law, under the EC law on recognition and enforcement contained in Chapter III of the Regulation, jurisdiction is available only in civil and commercial matters; where the judgment is given by the court of a member state, the EC law will only give recognition and enforce those judgments that are given under the Regulation. Where unlike the common law there is no special procedure for recognition and enforcement; yet the number of defenses, are limited.

Critical Analysis: One critical aspect in favour of forum nonconveniens is the noble and paramount objective namely, the interest of justice, which would have rightly served the need of cases like Gasser and Turner v Grovit had the objective of the EC law been so. In that, the requirement of maintaining comity amongst nations is given preference over doing justice to the parties, a codified structure and interpretation thereof seem to overrule the requirement of practicality and logic.

Due to cases like Gasser, there is a possibility that the reasoning of the European Court of Justice may be able to change the meaning behind the maxim pacta sent servants giving rise to instances where the terms contained in the express contracts like, jurisdiction agreement may be ignored or subverted in pursuance of sinister objectives like causing delays; frustration of commercial enterprise and cause heavy losses.

There are certain provisions in the Regulation (for instance Art.22 (4)) that run contrary to the objective of the EC law as stated hereinbefore while leaving many questions unanswered. It may also be argued that the definition of lis pendens in Art.27 is quite technical and mechanical, being hinged on the 1st seized rule implying a first come first serve basis of justice, whereas in the traditional English laws there is no requirement of a definition; can deal with most problems with the help of discretionary rules. But matters like anti-suit injunctions under the traditional rules run contrary to modern objectives like comity of nations

The Regulation excoriates the application of the domestic laws of the jurisdiction by member states under circumstances where the Regulation is applicable. Though the intention is to help parties to civil and commercial matters discern their rights and liabilities lie; but in doing so the EC law has in fact taken away much of the English Court’s discretionary power, as is evident from the outcome of the Owusu case.

Conclusion: It is submitted that it is not only the difference of attitudes or manner of approach that differentiates the traditional English law and the EC law on jurisdiction; but also the nature of these rules which as regards the EC law on jurisdiction is mandatory unlike- the traditional English law which is discretionary.

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There have been instances wherein, on the basis of the traditional rules on jurisdiction, the English Courts have assumed jurisdiction in cases where it was clearly not the most appropriate court as per its two-stage test promulgated in the Spiliada case; yet for the purpose of doing justice to the parties therein it has even given legal aid to the South African citizens on the English tax payers account, which in itself goes to show the extent to which the English court can be flexible.

The objective of the traditional rules is clear i.e. achieving justice for the parties to a dispute regardless of any set parameters; but this very factor makes a party to a commercial dispute uncertain of the jurisdictions it may or may not get sued in, which contingency the Regulation endeavours to clarify for the purpose of achieving its objective of building confidence in the European commercial market.

Decalogue & Covenant – Does God Want People Today to Obey the Law of Moses?

The short answer is no: God intends for everyone in the world to submit to Christ under the New Covenant, which does not include the Law of Moses, though it shares with Moses fundamental moral values because both are based on the unchanging character of God Himself (compare Leviticus 19:1-2 with Matthew 5:48 and Luke 6:36). To go deeper than the surface, we have to look at what Jeremiah, Jesus, Paul, and the author of Hebrews say about the old and new covenants.

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Prophecy of the New Covenant

About 600 years before Christ, the prophet Jeremiah predicted the new covenant (Jeremiah 31:31-34). He said the new covenant would be different than the old (specified as the one God made with the houses of Israel and Judah when he brought them out of Egypt–definitely referring to the Mosaic Covenant). This time, the laws would be written on the people’s hearts, all of them will know the LORD, and He will completely forgive them. The New Testament book of Hebrews says this is the covenant Christ introduced (Hebrews 8:7-13 and 10:15-18, of which more is said below).

Original subjects of the Law of Moses

According to the Hebrew Scriptures (what Christians call the Old Testament), the Law of Moses constituted the covenant God made with the Israelites. Its moral code, priesthood, festivals and other special days, and sacrificial system were all designed for the Hebrew nation. Essential to the covenant the Israelites made with God was their agreement to obey the stipulations of the Law of Moses and to become the objects of its blessings if they obeyed and its curses if they disobeyed. As originally delivered, no other nation was called upon or expected to keep the Law of Moses. According to Jewish tradition, the rest of the nations of the world were still under the covenant God made with Noah.

What changes, if any, took place when the New Covenant came along? How did it affect the application of the Old? Did it take what makes universal what once applied only to the Israelites? Or did it nullify the Old Covenant so that it no longer applied even for the nation of Israel?

Jesus’ teaching about the Law of Moses

According to Galatians 4:4, Jesus was “born under the Law,” which apparently means that He was bound to obey the Law’s commandments and ordinances. As an Israelite, He was just as obligated to keep the Law as every other Israelite. In the Sermon on the Mount (Matthew 5:17-18), He denies that His purpose is to “abolish” the Law and the Prophets. The Greek word translated “abolish” (Kat also) is “destroy” with an intensifying prepositional prefix, meaning “utterly destroy.” Rather, He says, His purpose is to fulfill the Law, and He says heaven and earth would sooner disappear than the Law until everything is fulfilled. He says that the person breaking or teaching others to break the least of the commandments will be called least in the kingdom of heaven, while those who practice and teach its commandments will be called great in the kingdom of heaven (Matthew 5:19).

His mission in fulfilling the Law seems to have three parts. First, He calls on His disciples to keep the Law even more strictly than the Pharisees and teachers of the law, the most scrupulous religious observers of His time (Matt. 5:20). In the verses that follow (the rest of the Sermon on the Mount — Matthew 5:21-7:27), Jesus reveals what He means: giving to God the obedience of one’s heart, not just one’s actions. Fulfilling the Law then, in this first sense, means explaining it in its fullest meaning. Jesus taught the Law of Moses, but He also kept it perfectly. He fulfilled it, not only by giving its full meaning but by obeying it fully Himself. In this way qualifying to become our perfect sin offering (see John 8:29, 46; Acts 10:38; Hebrews 3:2,6; 4:15; 1 Peter 1:19; 2:22; 1 John 2:2).

This leads us to the third part: when God accepts Christ as our substitute, His righteousness becomes ours (1 Corinthians 1:30; 2 Corinthians 5:21), which includes His perfect obedience of the Law. Because He stands in our place before the throne of God, we who have fully committed ourselves to Him–heart, mind, soul, and strength–are regarded as fully obedient under the Law (Romans 8:3-4; 13:10).

Yet even while upholding the Law, Jesus claims to have an authority above the Law, as when He proclaimed that the Son of Man (an indirect reference to Himself) is Lord of the Sabbath (see Mark 2:23-28; parallels in Matthews 12:1-8; Luke 6:1-5). The examples He gives confirm that He sees His mission to seek and save the lost as claiming a higher priority than the keeping of the Sabbath. He points out the irony of those who used the Sabbath to plot His murder while accusing Him of breaking the Sabbath to heal a man (Mark 3:1-6; parallels in Matthew 12:9-14; Luke 6:6-11). On another occasion (Mark 7:1-23; parallel in Matthew 15:1-20), He notes that concern for inner purity should claim a higher priority than concern for ritual cleanness, and the gospel writer observes, “In saying this, he proclaimed all foods clean” (Mark 7:19).

At the Last Supper, Jesus tells his apostles that wine represents the blood He is about to shed. In Mark 14:24, He calls it “the blood of the covenant, which is poured out for many.” (Matthew 26:28 adds “for the forgiveness of sins,” and Luke’s wording is “the new covenant in my blood, which is poured out for you” (Luke 22:20; compare 1 Corinthians 11:25). This statement of Jesus is an obvious reference back to the moment when Moses said, “This is the blood of the covenant” (Exod. 24:8) during a ceremony confirming the Mosaic Covenant. Jesus says His own blood is what institutes and confirms the New Covenant.

Jesus also demonstrates an openness to Gentiles virtually unique among the Jews of His time. He praises the faith of a Gentile as being greater than any in all of Israel (Matthew 8:10; parallel in Luke 7:9). He likewise praises the strong faith of a Gentile woman (Mark 7:24-30; parallel in Matt. 15:21-28). He predicts the acceptance of Gentiles into God’s kingdom, even at the expense of the Jews (Matthew 8:11-12 and in parabolic form, Luke 14:23-24; 20:16; John 10:16). Although He previously limited His disciples’ proclamation to “the lost sheep of the house of Israel” (Matthew 10:6), after His resurrection, He commands them to preach to all nations and to all creation (Matthew 28:19-20; Mark 16:15-16; Luke 24:46-47; Acts 1:8). Jesus tells His apostles to require of their converts faith, repentance, baptism, and continuing obedience but makes no mention of circumcision as a condition of discipleship or salvation.

God led the apostles to a new understanding

In fulfilling Christ’s commission, the apostles first proclaim the gospel only to Jews and Gentile converts to Judaism (called “proselytes”). Only by a series of miracles does God convince Peter to share the Good News with a Roman centurion named Cornelius (read Acts 10:1-48). When Peter defends his actions to the other believers back in Jerusalem, they are convinced that “God has granted even the Gentiles repentance unto life” (Acts 11:18).

After this, Christians start evangelizing the Gentiles (Acts 11:19-21), especially Saul of Tarsus (later called Paul) and his coworker Barnabas (Acts 13 – 14) on what is known as the First Missionary Journey. Their success among the pagans causes some Jewish Christians to demand that all of the Gentile converts be circumcised and required to keep the Law of Moses. Paul and Barnabas deny that this is required, and the debate becomes so heated that a conference is called of the apostles and Jerusalem elders (Acts 15:1-18). The conference confirms the teaching of Paul and Barnabas, requiring only that Gentile converts observe a few rules that will make their fellowship with Jewish believers less contentious (Acts 15:19-31).

Though many Jewish Christians continued to observe the Law even after this (see Acts 21:20), the Gentiles were not required to be circumcised (see Galatians 2:3-5), since Gentiles, as well as Jews, find acceptance before God by grace through faith, not by works of the Law (Acts 15:9, 11; Galatians 2:16). In other words, they could come to Christ directly, without first becoming converts to Judaism. The apostles recognized that both those whose flesh is circumcised and those whose flesh is not can have a circumcision of the heart (Romans 2:25-29; 4:9-17; Colossians 2:11-13). This is what counts to God (Galatians 6:12-16); even the Law and Prophets recognized heart circumcision as more important (see Deuteronomy 10:16; 30:6; Jeremiah 4:4; 9:25).

Accepting uncircumcised Gentiles into the fellowship of the redeemed, however, was a fundamental departure from the Mosaic Covenant, which required circumcision on pain of excommunication (continuing what had been instituted in the covenant with Abraham, Gen. 17:13-14 — see Exodus 12:48-49, Leviticus 12:3, and Joshua 5:2-8). During the period reflected in the second half of the Book of Acts, a transition of the covenants was taking place, in which practice was lagging behind teaching. The New Covenant had begun, but many were still clinging to the Old.

The change process likely paralleled what happens today with regard to the adoption of new technology. Some were early adopters who led the way in adopting the change, such as those who already were abandoning physical circumcision and Jewish customs (see Acts 21:21). Into this group, we should probably put Stephen and later Paul, who was at the leading (“bleeding”?) edge. Others, such as Peter and John, were middle-of-the-road: they acknowledged the change but did not push it like Paul did. Still, others were late adopters, like James the Elder (half-brother of Jesus), though it may be that James remained in this group only to help the others along (Acts 15:12-21 and 21:22-26; yet see Galatians 2:12).

Paul’s teaching about the Law of Moses

As one who perhaps saw the change more clearly than others, Paul sought to explain the transition in as forceful a way as the scruples of his Jewish fellow-Christians would allow. If he had not struggled with this concern, his teachings may have been more explicit. Nevertheless, he certainly was plain enough for us to understand a change in the covenants was underway. The following are some of the clearest passages, taken in chronological order.

In Galatians, perhaps the earliest of Paul’s letters (c. 50 CE), Paul says the law was our “pedagogue to lead us to Christ” (Galatians 3:24). In Greek culture, the pedagogue was a family slave assigned the task of getting the child to and from school each day. He was also expected to impart practical moral principles that would help the child mature. Paul says the Law had for us a similar function: preparing us for the coming of the Messiah. In the next verse, Paul adds, “Now that faith [i.e., the object of our faith] has come, we are no longer under the supervision of the law” (Galatians 3:25). In this metaphor, Paul pictures the relationship between the Law and the Christ as a cooperative one. The Law performs its function, accomplishes its goal, and then steps aside.

In the next chapter of Galatians, Paul turns up the heat. He compares the two covenants, the Mosaic Covenant and the New Covenant, to the relationship between Hagar and Sarah (see Genesis chapter 16 and 21:8-21). He depicts a stormy relationship between the children of the two covenants: “The son born in an ordinary way [representing the unbelieving Jews] persecuted the son born by the power of the Spirit [representing the Christians]. It is the same now.” Then Paul unleashes a thunderbolt: “But what does the Scripture say? ‘Get rid of the slave woman and her son, for the slave woman’s son will never share in the inheritance with the free woman’s son.'” Since the slave woman represents the Mosaic covenant, Paul is using the quoted verse, Genesis 21:10, to say, “Get rid of the Mosaic covenant and its adherents [the Jews who have rejected Jesus as Messiah], for the [‘children’ of the Mosaic covenant] will never share in the inheritance with the [Christians, the ‘children’ of the New Covenant].”

Paul wrote First Corinthians in about 55 CE. In chapter 9 he describes his willingness to be “all things to all men” for the sake of saving some of them. In particular, he says, “To the Jews I became like a Jew, to win the Jews. To those under the law, I became like one under the law (though I myself am not under the law), so as to win those under the law. To those not having the law, I became like one not having the law (though I am not free from God’s law but am under Christ’s law), so as to win those not having the law” (verses 20 and 21).

In Second Corinthians, written around 55 CE, in chapter 3, Paul compares the old and new covenants by recalling the shining face of Moses (see Exodus 34:29-35). The Old Covenant he calls letters written on tablets of stone and “the letter” and the ministry of death and of condemnation. By contrast, he describes the New Covenant as written on tablets of human hearts and “the Spirit” and the ministry of righteousness” (verses 3, 6-9). Paul compares the Old Covenant to the radiance on the face of Moses, which was glorious at first and then faded away. In contrast, under the New Covenant, we experience an ever-increasing glory, which comes from our God (verses 9-18). At the time Paul wrote Second Corinthians, then, the Law, represented by the radiance, was fading away.

Paul wrote Romans around the year 57 CE. In chapter 7, verses 1-6, Paul pictures the Christian as a woman and the Law as her husband. The couple fails to have any children, and after the husband’s death, the widow marries a new husband, who symbolizes Christ. With her new husband, the woman has a baby, which apparently represents a righteous heart and life (the “fruit to God” of verse 4). Paul does not directly say that the Law has died, only that she is bound to her husband as long as he is alive and is released from her ties to him when he dies. He then speaks of her release but carefully avoids saying that the Law has died, only that she died to the Law.

This reflects the situation at the time Romans was written. Even though the New Covenant had already been in force for 25 years (ever since the resurrection of Christ and the outpouring of the Spirit on that first post-resurrection Day of Pentecost), people, even Christian Jews, were still clinging to the Law–offering sacrifices, paying tithes, keeping festivals, obeying the kosher laws, circumcising their sons. Yet the Law was dead. Not only was it dead, but it had failed to produce “fruit to God” in the body of the believer. To remain married to a corpse is a grotesque situation Paul does not linger to contemplate. He merely says, “We have been released from the law so that we serve in the new way of the Spirit, not in the old way of the written code” (Romans 7:6).

Paul wrote Ephesians in about the year 63 CE, some six years after Romans. In chapter 2, Paul just comes out and says that Christ united Jew and Gentile by destroying the “barrier, the dividing wall of hostility, by abolishing in his flesh the law with its commandments and regulations” (2:14-15). As a result, Jews and Gentiles connected to Christ are “fellow citizens” and “co-members of God’s household,” built together as a new temple for God “in which God lives by His Spirit” (2:19-22). The verb translated “abolishing” (water geo) means “to do away with, use up, render ineffective.”

In Colossians, written at about the same time as Ephesians, Paul says that Christ “canceled the written code, with its regulations, that was against us and that stood opposed to us: he took it away, nailing it to the cross” (2:14). Christ’s death on the cross is what canceled (exhale pho–wiped out, removed, destroyed) and took away (Cairo–removed, set aside) the “written code, with its regulations.” We know this “written code” is referring to the Law because of the verses that follow, which refer to the observances required by the Law: “Therefore do not let anyone judge you by what you eat or drink, or with regard to a religious festival, a New Moon celebration or a Sabbath day. These are a shadow of the things that were to come: the reality, however, is found in Christ” (Colossians 2:16-17). Because Christ’s death canceled the Law and took it away, these regulations no longer apply.

Hebrews on the Change of Covenants

No book of the Bible more clearly teaches that the Law of Moses is no longer binding on God’s followers today. In fact, that is the basic message of the Book of Hebrews, probably written shortly before the destruction of Jerusalem in 70 CE. Its original readers were tempted because of persecution (see Hebrews 10:32-34) to forsake Christ and return to Judaism. The message of Hebrews is that Christ is better than Moses, better than the angels who mediated the Mosaic Covenant, better than Aaron the high priest under Moses, and offers a sacrifice infinitely better that those offered under Moses. Hebrews 8 calls up the prophecy of the New Covenant (Jeremiah 31:31-34), concluding in verse 13: “By calling this covenant ‘new,’ he has made the first one obsolete; and what is obsolete and aging will soon disappear.”

This prediction of the disappearance of the covenant of Moses found fulfillment when the Jewish nation rebelled against Rome in the war of 67-73 CE. (You can read about this war in the detailed, eye-witness account. The Jewish War by Flavius Josephus.) The Jewish nation lost its temple and its priesthood in that war. Afterward, it was impossible to keep the Law of Moses. The covenant curses for the nation’s disobedience, as recorded in Deuteronomy 28 and Leviticus 26, came true.

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Conclusion about the Law of Moses

Some scholars argue that the Law of Moses continues to be valid as far as its moral code is concerned even though its temple, priesthood, and sacrificial system has ceased to exist. But there is no biblical basis for cutting up the Mosaic Covenant, throwing part of it away while trying to keep the rest of it on life support. In fact, James 2:10-11 argues for the integrity of the whole law and against attempts to keep only part of it (see also Galatians 5:3).

The Unbreakable Laws of the Universe

To live a harmonious life, you must not only abide by the laws of your country, but also by the natural Laws of the Universe. If we transgress, there will be consequences. Like any country, the universe is also governed by certain laws. We refer to these as Universal Laws or Laws of Nature, ‘whose content is set by nature and is therefore universal.

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The Law of Gravity is an example of a Universal Law. So is the Law of Conservation of Energy, that is, energy cannot be created or destroyed, only transformed from one form to another. However, unlike human laws, which can vary from country to country, Universal Laws are consistent and unchanging. You interact with these laws with every breath you take. They govern your existence.

Nothing about your life has been casual or accidental!

The Universal Laws seem to be mysterious. They have hidden truths. When you identify these hidden truths and utilise them correctly, miracles or amazing results occur in your life. It may manifest as suddenly having money when you need it the most, reversing a life-threatening disease, or succeeding in a particular endeavour. These ‘miracles’, no matter how incredible they might be, are not unbelievable outcomes. They are natural outcomes based on the correct application of specific laws of nature.

Unfortunately, some of the Universal Laws are not as clear-cut as they might seem. There are unnoticed subtleties to the Universal Laws which, when understood and applied, can make all the difference between happiness and misery, prosperity and poverty, peace and conflict, ease and struggle.

It’s easy to think that some people are born to affluence and all good things happen to them. The truth is, these people aren’t simply lucky; good things don’t just ‘happen’ to them. They’re just applying the Laws of the Universe more effectively, whether they’re aware of it or not. The laws are flawless; they work perfectly every time, all the time. If you seem to be doing all the right things, but your results are poor, consider the Laws of the Universe and how you are applying them. This book will help you.

How many laws are there? Many.

These laws govern every aspect of our existence. The supreme Law of the Universe is the Law of Cause and Effect, also referred to as karma or the parable of ‘reaping what you sow’. For every effect there is a cause; for every action there is a reaction. Positive action equates to a positive result. The Law of Cause and Effect transcends time, space or form.

It operates whether you are aware of it or not.

Every human thought, word or deed is a cause that sets off a wave of energy throughout the universe, resulting in desirable or undesirable effects. If there are undesirable effects, it simply means that at some time in the past, there was a thought, word or deed that caused a wave of undesirable energy. As normal, fully-functioning people we are quite literally responsible for everything in our lives. The following excerpt illustrates this concept.

This is the suggestion a man gave to his subconscious mind over a period of about two years: “I would give my right arm to see my daughter cured.” It appeared that his daughter had a crippling form of arthritis together with a so-called incurable form of skin disease. Medical treatment had failed to alleviate the condition, and the father had an intense longing for his daughter’s healing, and expressed his desire in the words just quoted.

One day the family was out for a drive. Their car was involved in a head-on collision. The father’s right arm was torn off at the shoulder. When he came home from the hospital, he discovered that his daughter’s arthritis and skin condition had vanished.

Everyone is subject to these same natural Laws of the Universe, regardless of race, colour, creed or gender. The laws exert their influence without our consent or awareness. When we choose the behaviour, we choose the consequences. Interestingly, the people who are frustrated in life consistently try to defy the natural laws. And, not surprisingly, successful people live in harmony with the natural Laws of the Universe.

Deepak Chopra, an authority in mind-body medicine, identified these issues in his bestselling book, The Seven Spiritual Laws of Success, saying ‘no debt in the universe ever goes unpaid. There is a perfect accounting system in this universe, and everything is a constant “to and fro” exchange of energy’.

All of life is connected; what we do to others, we do to ourselves. According to the principle of karma, any negative or positive thought or action remains that way, until it expends (uses up) its energy by acting upon the originator. The energy you create through your thoughts, words and deeds – either negative or positive – will rebound and act on YOU. But, as it is the nature of energy to expand when it is put out into the world, you will at some point experience much more than you caused others to experience.

If you cause others to experience prosperity and wellbeing, it will come back to you and you will experience it as well, often multiplied. In like manner, if you hurt someone, the energy will eventually return and cause you even greater hurt, unless of course you make amends in some way.

Eighteenth-century German poet and philosopher, Wolfgang Von Goethe wrote:

Nature understands no jesting; she is always true, always serious, always severe; she is always right, and the errors and faults are always those of man. The man incapable of appreciating her, she despises and only to the apt, the pure, and the true, does she resign herself and reveal her secrets.

The Law of Cause and Effect is the IRON LAW of the universe. It is unyielding. If you defy this law, there will be consequences – no ‘ifs, ands, or buts’ about it. It’s fascinating (and often tragic) to observe how many of us try to defy this law, especially when we pursue quick and easy gains. Often we strive for what we want by doing the exact opposite of what is in our best interest.

This beautiful fable illustrates the mystifying and sometimes illusive nature of the Law of Cause and Effect.

The Secret to Creating Affluence

A young man went to the forest and said to his spiritual master, ‘I want to have unlimited wealth, to help and heal the world. What is the secret to wealth?’

The spiritual master said, ‘There are two Goddesses that reside in the heart of every human being: the Goddess of WEALTH and the Goddess of KNOWLEDGE’.

‘Although you love both, you must pursue one of them to the exclusion of the other. Pursue her, love her, and give her your attention. Understand that only the Goddess of Wealth can give you wealth, and you may pursue only one Goddess, not both’.

‘But, here is the secret: If you pursue the Goddess of Wealth, she will be pleased with you because she loves to be chased. The more you pursue her the more she will elude you. However, if you pursue the Goddess of KNOWLEDGE, the Goddess of WEALTH will become extremely jealous and pay more att ention to you. In fact, the more you seek the Goddess of Knowledge, the more the Goddess of Wealth will seek you. She will never leave you. She will constantly shower you with material blessings just to win your attention, and the wealth you desire will be yours forever’.

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The human tendency is to pursue the Goddess of Wealth, which seems like the logical choice. However, wealth is simply an effect, and like any effect it has a cause. In the fable, pursuing one goddess gets you the best of both worlds; wealth comes from the acquisition and proper application of knowledge.

So let’s be clear: your goals and dreams will manifest when you and the Laws of the Universe are in harmony!

It’s a scientific fact that the universe operates in absolute harmony with IRREVOCABLE natural laws and principles that have NEVER varied throughout all time. These laws prevail regardless of whether we heed them or not. Those individuals who live in harmony with the Laws of the Universe will emerge victorious. Bestselling author, Bob Proctor, summed it up perfectly when he said,

You are living and working in a dynamic global marketplace that leaves little room for error. In future, only those individuals whose beliefs are sound, in harmony with the laws of the universe, and have been integrated with their behavior, will emerge as real winners.

This much we know with certainty: you have unlimited potential and you can tap into and harness this potential by combining:

1. a deeper understanding of yourself (your power of attraction) with

2. specific efforts towards a desired outcome (your power of action).

In other words, you’ll experience the rewards (the Law of Receiving) when you truly understand that you have immense, untapped ability, and you combine that understanding with deliberate application of the Law of Attraction and the Law of Action.

Getting the Real Truth in Commercial Property Inspections

When looking at a new commercial or retail investment property for the first time, it is wise to have some form of checklist and system which assists you in the process. We have created this checklist to help get you on the right track.

When inspecting the property is almost like having your own due diligence process underway. Do not believe everything you see and certainly investigate anything of question. Anything of importance that someone tells you about the property should be investigated.

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Having a keen eye for property detail and a diligent record keeping process as you walk around is the only way to inspect investment property. It is remarkable how these records have to be revisited at a later time for reassessment.

So let’s consider the following as some of the basic issues to review in your property inspection process.

  1. A copy of the land title records is fundamental to your inspection before you even start. As part of this process, also seek out a copy of the survey records and any existing leases or licences. Also seek out any unregistered interests that may not appear on the title to the property. If in doubt seek a good property solicitor to help.
  2. Take care to understand the location of the property boundaries and look for the survey pegs relevant to the survey plan. If in doubt seek a good surveyor.
  3. Within the property land title there can be a number of easements, encumbrances, and other registered interests which need fully investigating. These interests can impact the price that the property achieves at the time of sale and can also impact of the method of lease occupancy. If any registered interests exist on the property title, a copy of the relevant documentation is the first stage of the investigation which should then be followed by questions.
  4. Local council records may also have impact on the property. Are there any orders or notices that have been issued or are outstanding on the property, and can these things be of concern to the potential investor?
  5. The zoning for the property and the zoning activity or changes in the precinct can impact a property. As part of this process, it is wise to include neighbouring properties and inspect them to ensure that they have little or no effect or impact on your subject property.
  6. Copies of the local town plan will help you understand current planning issues. A discussion with the local planning office or planning officer can put you on the right track and explain any current issues or matters that may arise. In this process, it is wise to keep records of the discussions and the findings.
  7. If copy of lease documentation is available for neighbouring properties then seek it out and review it. It is always good to know what the neighbouring tenants are doing and how long they will be there.
  8. The local topography and plans across the immediate area will help you understand the fall of the land and the impact of any slopes and natural drainage. Look at the location of any water courses and flood plains. Seek out the history of any flooding in the area.
  9. Supply of electricity into and across the area should be understood. If your property is an industrial property then the supply of energy to the property will be strategically important to any industrial tenant. If any easements or encumbrances exist across the property for electricity, then seek to understand the rights and obligations that these documents create on the property owner.
  10. Services and amenities to the investment property will impact the future operations and interest from the business community. To the question to ask here is the nature of these services and amenities and whether they are well maintained.
  11. Look for changes in road and transport corridors that impact the property or region. Any change in roads can dramatically shift the way in which property is used.
  12. Look for the location of public transport and its potential to enhance your property function. Many businesses need stable and frequent public transport to help employees access their jobs.
  13. Look at the community and business demographics of the region. The growth patterns for the last 5 to 10 years will help you understand the future of the property.
  14. Other property valuers in the area are a good source of market intelligence. They can usually tell you the history of the area and the current business sentiment. Rental levels, incentives, and sale prices per square metre are valuable elements of market intelligence. They will all have impact on the yield that the property presents to any property investor.
  15. Look around the area to see how many other properties are currently available for sale. Seek details of these properties and the prices being sought. If these properties have been on the market for a long time it will give you an idea of just how acceptable the regional prices and business sentiment is at the time of your inspection.
  16. Look around the area to see how many properties are currently vacant. With reference to each particular vacant property, get details of the rental being sought and the time that the property has been on the market. You will need to form their own judgment on whether these rentals are relevant and reasonable in the current marketplace.
  17. The supply and demand of vacant space by property category is an investigation to be undertaken in the region. What you want to know is exactly how much space is coming into the market in the future and how much space exists now for tenants to occupy.
  18. Check out any new property developments that could be in the early stages of consideration and development approval. The key question here is the impact that these properties may have on your property.
  19. The history of the area is always of high value to you. In commercial, industrial, and retail investment property, the history that you are after is the last five years. It is remarkable how much information you can glean from regional property sales and rental trends. Given that commercial and retail investment property works on the cycle of rise and fall, it is the history that can open up your understanding of what’s been going on and where things are headed.
  20. With any property investigation, and particularly with properties that are complex and large, it is wise to seek out the comments of architects and engineers. What you need them to do here is comment on the structural integrity of the property and its future usable life. Also seek to identify how the property may be expanded or refurbished when times require.
  21. Chase down the tenancy schedules for other properties in the area. Whilst these are not always easily obtained, they are of high value. They will tell you so much about the activity in other properties and buildings that may impact your future leasing strategy or property sale. What you do not want is a significantly high vacancy factor near your property when you are trying to lease it.
  22. Review the local precinct for the larger businesses and how they operate. In doing this, you can understand who are the major business players and the major employers. Having these companies in the area is good thing, but losing them can be a major threat to the region. We call this the business stability factor. It should form part of your investment property assessment for the future.
  23. Review the other major tenancies in the area and see how they operate. They can both stress and enhance the area depending on how they operate and the times of day that they do so. Of prime example is a transport company that has vehicle access peaks at certain times of the day. This can challenge the other businesses in the area and how they operate.
  24. Walk around the precinct and the property taking many photographs for later investigation. It is surprising how useful photographs become for the reassessment of the property inspection. Walking through the streets in the region allows you to get a feel for the function of the streets and the neighbouring properties. It puts you in greater perspective for the services and amenities, and the function of all local surrounding businesses. A tip in the keeping of digital photographs for later evidence is the reversion of the important photos to ‘gif’ type files. This format is not easily changed and therefore more stable as court evidence of critical matters. Property
  25. Knock on the doors of the other local businesses and talk to them about how things operate locally for them. Other tenants and businesses in the region will tell you so much and put you on the track of challenges and problems in the region.

Financial Modeling: Investment Property Model

Building financial models is an art. The only way to improve your craft is to build a variety of financial models across a number of industries. Let’s try a model for an investment that is not beyond the reach of most individuals – an investment property.

Before we jump into building a financial model, we should ask ourselves what drives the business that we are exploring. The answer will have significant implications for how we construct the model.

Property

Who Will Use It?

Who will be using this model and what will they be using it for? A company may have a new product for which they need to calculate an optimal price. Or an investor may want to map out a project to see what kind of investment return he or she can expect.

Depending on these scenarios, the end result of what the model will calculate may be very different. Unless you know exactly what decision the user of your model needs to make, you may find yourself starting over several times until you find an approach that uses the right inputs to find the appropriate outputs.

On to Real Estate

In our scenario, we want to find out what kind of financial return we can expect from an investment property given certain information about the investment. This information would include variables such as the purchase price, rate of appreciation, the price at which we can rent it out, the financing terms available fore the property, etc.

Our return on this investment will be driven by two primary factors: our rental income and the appreciation of the property value. Therefore, we should begin by forecasting rental income and the appreciation of the property in consideration.

Once we have built out that portion of the model, we can use the information we have calculated to figure out how we will finance the purchase of the property and what financial expenses we can expect to incur as a result.

Next we tackle the property management expenses. We will need to use the property value that we forecasted in order to be able to calculate property taxes, so it is important that we build the model in a certain order.

With these projections in place, we can begin to piece together the income statement and the balance sheet. As we put these in place, we may spot items that we haven’t yet calculated and we may have to go back and add them in the appropriate places.

Finally, we can use these financials to project the cash flow to the investor and calculate our return on investment.

Laying Out the Model

We should also think about how we want to lay it out so we keep our workspace clean. In Excel, one of the best ways to organize financial models is to separate certain sections of the model on different worksheets.

We can give each tab a name that describes the information contained in it. This way, other users of the model can better understand where data is calculated in the model and how it flows.

In our investment property model, let’s use four tabs: property, financing, expenses and financials. Property, financing and expenses will be the tabs on which we input assumption and make projections for our model. The financials tab will be our results page where we will display the output of our model in a way that’s easily understood.

Forecasting Revenues

Let’s start with the property tab by renaming the tab “Property” and adding this title in cell A1 of the worksheet. By taking care of some of these formatting issuing on the front end, we’ll have an easier time keeping the model clean.

Next, let’s set up our assumptions box. A few rows below the title, type “Assumptions” and make a vertical list of the following inputs:

Purchase Price
Initial Monthly Rent
Occupancy Rate
Annual Appreciation
Annual Rent Increase
Broker Fee
Investment Period

In the cells to the right of each input label, we’ll set up an input field by adding a realistic placeholder for each value. We will format each of these values to be blue in color. This is a common modeling convention to indicate that these are input values. This formatting will make it easier for us and others to understand how the model flows. Here are some corresponding values to start with:

$250,000.00
$1,550.00
95.00%
3.50%
1.00%
6.00%
4 years

The purchase price will be the price we expect to pay for a particular property. The initial monthly rent will be the price for which we expect to rent out the property. The occupancy rate will measure how well we keep the property rented out (95% occupancy will mean that there will only be about 18 days that the property will go un-rented between tenants each year).

Annual appreciation will determine the rate that the value of our property increases (or decreases) each year. Annual rent increase will determine how much we will increase the rent each year. The broker fee measures what percentage of the sale price of the property we will have to pay a broker when we sell the property.

The investment period is how long we will hold the property for before we sell it. Now that we have a good set of property assumptions down, we can begin to make calculations based on these assumptions.

A Note on Time Periods

There are many ways to begin forecasting out values across time. You could project financials monthly, quarterly, annually or some combination of the three. For most models, you should consider forecasting the financials monthly during the first couple years.

By doing so, you allow users of the model to see some of the cyclicality of the business (if there is any). It also allows you to spot certain problems with the business model that may not show up in annual projections (such as cash balance deficiencies). After the first couple of years, you can then forecast the financials on an annual basis.

For our purposes, annual projections will cut down on the complexity of the model. One side effect of this choice is that when we begin amortizing mortgages later, we will wind up incurring more interest expense than we would if we were making monthly principal payments (which is what happens in reality).

Another modeling choice you may want to consider is whether to use actual date headings for your projection columns (12/31/2010, 12/31/2011,…). Doing so can help with performing more complex function later, but again, for our purposes, we will simply use 1, 2, 3, etc. to measure out our years. In Excel, we can play with the formatting of these numbers a bit to read:

Year 1 Year 2 Year 3 Year 4…

These numbers should be entered below our assumptions box with the first year starting in at least column B. We will carry these values out to year ten. Projections made beyond ten years do not have much credibility so most financial models do not exceed ten years.

On to the Projections

Now that we have set up our time labels on the “Property” worksheet, we are ready to begin our projections. Here are the initial values we want to project for the next ten years in our model:

Property Value
Annual Rent
Property Sale
Broker Fee
Mortgage Bal.
Equity Line Bal.
Net Proceeds
Owned Property Value

Add these line items in column A just below and to the left of where we added the year labels.

The property value line will simply project the value of the property over time. The value in year one will be equal to our purchase price assumption and the formula for it will simply reference that assumption. The formula for each year to the right of the first year will be as follows:

=B14*(1+$B$7)

Where B14 is the cell directly to the left of the year in which we are currently calculating the property value and $B$7 is an absolute reference to our “Annual Appreciation” assumption. This formula can be dragged across the row to calculate the remaining years for the property value.

The annual rent line will calculate the annual rental income from the property each year. The formula for the first year appears as follows:

=IF(B12>=$B$10,0,B5*12*$B$6)

B12 should be the “1” in the year labels we created. $B$10 should be an absolute reference to our investment period assumption (the data in our assumption cell should be an integer even if it is formatted to read “years,” otherwise the formula will not work). B5 should be a reference to our monthly rent assumption, and $B$6 should be an absolute reference to the occupancy rate.

What this function says is that if our investment period is less than the year in which this value is to be calculated, then the result must be zero (we will no longer own the property after it is sold, so we can’t collect rent). Otherwise, the formula will calculate the annual rent, which is the monthly rent multiplied by twelve and then multiplied by the occupancy rate.

For subsequent years, the formula will look similar to:

=IF(C12>=$B$10,0,B16*(1+$B$8))

Again, if the investment period is less than the year in which this value is to be calculated, then the result will be zero. Otherwise we simply take the value of last years rental income and increase it by our annual rent increase assumption in cell $B$8.

Time to Exit

Now that we have forecasted property values and rental income, we can now forecast the proceeds from the eventual sale of the property. In order to calculate the net proceeds from the sale of our property, we will need to forecast the values mentioned above: property sale price, broker fee, mortgage balance and equity line balance.

The formula for forecasting the sale price is as follows:

=IF(B12=$B$10,B14,0)

This formula states that if the current year (B12) is equal to our investment period ($B$10) then our sale price will be equal to our projected property value in that particular year (B14). Otherwise, if the year is not the year we’re planning to sell the property, then there is no sale and the sale price is zero.

The formula to calculate broker fees takes a similar approach:

=IF(B18=0,0,B18*$B$9)

This formula states that if the sale price for a particular year (B18) is equal to zero, then broker fees are zero. If there’s no sale, there’s no broker fees. If there is a sale then broker fees are equal to the sale price (B18) multiplied by our assumption for broker fees ($B$9).

Our mortgage balance and our equity line balance we will calculate on the next worksheet, so for now we will leave two blank lines as placeholders for these values. Our net proceeds from the property sale will simply be the sale price less broker fees less the mortgage balance, less the home equity line balance.

Let’s add one more line called “Owned Property Value.” This line will show the value of the property we own, so it will reflect a value of zero once we have sold it. The formula will simply be:

=IF(B12>=$B$10,0,B14)

B12 refers to the current year in our year label row. $B$10 refers to our investment period assumption, and B14 refers to the current years value in the property value line we calculated. All this line does is represent our property value line, but it will show zero for the property value after we sell the property.

On to the Financing

Now let’s model how we will finance the property acquisition. Let’s name a new tab “Financing” and add the title “Financing” at the top of the worksheet. The first thing we need to know is how much we need to finance.

To start, let’s type “Purchase Price” a few lines below the title. To the right of this cell make a reference to our purchase price assumption from the “Property” tab (=Property!B4). We will format the text of this cell to be green because we are linking to information on a different worksheet. Formatting text in green is a common financial modeling convention to help keep track of where information is flowing from.

Below this line, let’s type “Working Capital.” To the right of this cell, let’s enter an assumption of $5,000.00 (formatted in blue text to indicate an input). Our working capital assumption represents additional capital we think we’ll need in order to cover the day-to-day management of the investment property. We may have certain expenses that aren’t fully covered by our rental income and our working capital will help make sure we don’t run into cash flow problems.

Below the working capital line, let’s type “Total Capital Needed” and to the right of this cell sum the values of our purchase price and working capital assumption. This sum will be the total amount of capital we will need to raise.

Capital Sources

A couple lines below our “Total Capital Needed,” let’s create a capital sources box. This box will have six columns with the headings: source, amount, % purchase price, rate, term and annual payment. Two typical sources of capital for acquiring a property are a mortgage and an equity line of credit (or loan). Our final source of capital (for this model anyway) will be our own cash or equity.

In the sources column, let’s add “First Mortgage,” “Equity Line of Credit,” and “Equity” in the three cells below our sources heading. For a typical mortgage, a bank will usually lend up to 80% of the value of the property on a first mortgage, so let’s enter 80% in the line for the first mortgage under the % purchase price heading (again, formatted in blue to indicate an input value).

We can now calculate the amount of our first mortgage in the amount column with the following formula:

=B5*C11

B5 is a reference to our purchase price and C11 is a reference to our % purchase price assumption.

In the current market, banks are reluctant to offer equity lines of credit if there is less than 25% equity invested in the property, but let’s pretend that they are willing to lend a bit. Let’s assume that they will lend us another 5% of the property value in the form of an equity line. Enter 5% (in blue) in the equity line of credit line under the % purchase price heading.

We can use a similar formula to calculate the equity line amount in the amount column:

=B5*C12

Now that we have the amount of bank financing available for our purchase, we can calculate how much equity we will need. Under the amount heading in the row for equity, enter the following formula:

=B7-B11-B12

B7 is our total financing needed. B11 is the financing available from the first mortgage and B12 is the financing available from the equity line of credit. Again, we’re assuming that we’ll have to cough up the cash for anything we cannot finance through the bank.

The Cost of Capital

Now let’s figure out what this financing is going to cost us. For interests rates, let’s assume 5% on the first mortgage and 7% on the equity line. Enter both of these values in blue in our rate column. For terms, a typical mortgage is 30 years and an equity line might be 10 years. Let’s enter those values in blue under the term heading.

The annual payment column will be a calculation of the annual payment we will have to make to fully pay off each loan by the end of its term inclusive of interest. We will use an Excel function to do this:

=-PMT(D11,E11,B11,0)

The PMT function will give us the value of the fixed payment we will make given a certain rate (D11), a certain number of periods (E11), a present value (B11) and a future value (which we want to be zero in order to fully repay the loan). We can then use the same formula in the cell below to calculate the payment for the equity line.

Now we’re ready to map out our projections. Let’s start by copying column headings from the property tab (Year 1, Year 2, etc.) and paste them on the finance tab below our capital sources box. Let’s also pull the owned property value line from the property tab (marking the values in green to show that they come from a different sheet).

Now let’s forecast some balances related to our first mortgage. Let’s label this section of the worksheet “First Mortgage” and below it add the following line items in the first column:

Beginning Balance
Interest PMT
Principal PMT
Ending Balance

Post Sale Balance

For year one of our beginning balance, we will just reference our first mortgage amount (=B11). For years two and later, we will simply reference the previous years ending balance (=B25).

To calculate the interest payment for each year, we simply multiply the beginning balance by our assumed interest rate (=B22*$D$11). B22 would be the current year’s beginning balance and $D$11 would be our assumed interest rate.

To calculate each year’s principal payment, we simply subtract the current year’s interest payment from our annual payment (=$F$11-B23). $F$11 is the annual payment we calculated before, and B23 is the current year’s interest payment.

Our ending balance is simply our beginning balance minus our principal payment (=B22-B24).

Finally, our post sale balance is simply our ending balance for each year or zero if we have already sold the property (=IF(B19=0,0,B25)). This line will make it easy for us to represent our debt when we go to construct our balance sheet later on.

We now repeat the same lines and calculations for projecting our equity line of credit balances. Once we are done with these two sources, we have completed our financing worksheet.

Taking a Step Back

We can now drop in our mortgage and equity line balances back on the property tab in order to calculate our net proceeds. For the mortgage balance we use the formula:

=IF(B18=0,0,Financing!B22)

B18 refers to the current year’s property sale value. If the value is zero, then we want the mortgage balance to be zero, because we are not selling the property in that particular year and don’t need to show a mortgage balance. If the value is not zero, then we want to show the mortgage balance for that particular year which can be found on the financing tab (Financing!B22).

We use the same formula for calculating the equity line balance.

On to Expenses

Let’s label our expenses tab “Expenses” and add the same title to the top of the worksheet. This worksheet will be simple and straightforward. First, let’s create an assumptions table with the following input labels:

Tax Rate
Annual Home Repairs
Annual Rental Broker Fees
Other Expenses
Inflation

Next to each of these cells, let’s enter the following assumption values in blue:

1.10%
$800.00
$100.00
$50.00
1.50%

Each of these assumptions represents some component of the ongoing costs of managing a property. Below our assumptions box, let’s again paste our year headings from one of our other worksheets (Year 1, Year 2, etc.).

Let’s drop in a line that shows our owned property value that we calculated earlier and format these values in green. We will need these values in order to calculate our tax expense, so it’ll be easier to have it on the same worksheet.

Below this line, let’s add a few line items that we’ll be forecasting:

Home Repairs
Rental Broker Fees
Other Expenses

Taxes

Our first year of home repairs will simply be equal to our annual assumption (=B5). For subsequent years, though, we will need to check to see if we still own the property. If not, our cost will be zero. If so, we want to grow our home repairs expense by the inflation rate. Here’s what the function for subsequent years should look like:

=IF(C$13=0,0,B15*(1+$B$8))

In this case, C$13 is the current year’s property value, B15 is the previous year’s home repair expense, and $B$8 refers to the inflation rate. For rental broker fees and other expenses, we can use the same methodology to forecast these expenses.

For taxes, we will need to use a different calculation. Property taxes hinge on the value of the property, which is why we have used a percentage to represent the tax assumption. Our formula to calculate taxes will be as follows:

=B13*$B$4

Since our taxes will be zero when our property value is zero, we can simply multiply our property value (B13) by our assumed tax rate ($B$4). And now we have forecasted our expenses.

Putting It All Together

Now comes the fun part. We need to put all of our projections into presentable financial statements. Since this will be the part of the model that gets passed around, we’ll want to make it especially clean and well formatted.

Let’s label the tab “Financials” and enter the same title at the top of the worksheet. A couple lines below, we’ll start our balance sheet by adding a “Balance Sheet” label in the first column. Just below this line, we’ll drop in our standard year headings, only this time we want to include a Year 0 before the Year 1 column.

Along the left side of the worksheet just below the year headings, we’ll layout the balance sheet as follows:

Cash
Property

Total Assets

First Mortgage
Equity Line of Credit
Total Debt

Paid-In Capital
Retained Earnings
Total Equity

Total Liabilities & Equity

Check

Our cash value in year zero will be equal to the amount of equity we plan to invest, so we will reference our equity value from the finance worksheet (=Financing!B13) and format the value in green.

Property, first mortgage, equity line and retained earnings will all be zero in year zero because we haven’t invested anything yet. We can go ahead and add in the formulas for total assets (cash plus property), total debt (first mortgage plus equity line), total equity (paid-in capital plus retained earnings) and total liabilities and equity (total debt plus total equity). These formulas will remain the same for all years of the balance sheet.

For the year zero balance for paid-in capital, we’ll use the same formula as cash for year zero (=Financing!B13).

Returning to cash, we will use this line as our plug for the balance sheet since cash is the most liquid item on the balance sheet. To make cash a plug, we make cash equal to total liabilities and equity minus property. This should ensure that the balance sheet always balances. We still need to watch to see if our cash is ever negative, which could present a problem.

On a balance sheet, property is usually represented at its historical value (our purchase price), so we will use the following formula to show our property value and format it in green:

=IF(C5>=Property!$B$10,0,Property!$B$4)

C5 represents the current year. Property!$B$10 is a reference to our investment period assumption and $B$4 is a reference to the purchase price. The value of the property will be either zero (after we have sold it) or equal to our purchase price.

Our first mortgage and equity line balances we can simply pull from the post sale balance on the finance tab. We format each line in green to show that it is being pulled from another worksheet.

Paid-in capital, will be equal to either our original investment (since we won’t be making additional investments) or zero after we have sold the property. The formula is as follows:

=IF(C5>=Property!$B$10,0,$B$16)

C5 represents the current year. Property!$B$10 is a reference to our investment period assumption and $B$16 is a reference to the year zero value of our paid-in capital.

We will have to skip the retained earnings line until after we have projected our income statement as it hinges on net income.

The check line is a quick way of telling if your balance sheet is in balance. It is simply equal to total assets minus total liabilities and equity. If the value is not equal to zero, then you know there’s a problem. As an extra bell and whistle, You can use conditional formatting to highlight any problems.

Property

Calculating the Bottom Line

Below the check line, let’s set up our income statement in the same way we set up our balance sheet – with an “Income Statement” label followed by our year column headings. We will layout our income statement as follows:

Rental Income
Proceeds from Sale
Total Revenue

Home Repairs
Rental Broker Fees
Other Expenses
Total Operating Expenses

Operating Income

Interest Expense
Taxes

Net Income

Rental income, proceeds from sale, home repairs, rental broker fees, other expenses and taxes can simply be pulled from the other worksheets where we have calculated them (and formatted in green of course). Interest expense is simply the sum of the interest payments for both the first mortgage and the equity line on the financing tab.

The other line items are simple calculations. Total revenue is the sum of rental income and proceeds from sale. Total operating expenses is the sum of home repairs, rental broker fees and other expenses. Operating income is total revenue minus total operating expenses. Net income is operating income minus interest expense and taxes.

Now that we have our net income figure, we can jump back up to our retained earnings line in our balance sheet to finish that up. The formula for retained earnings starting in the first year and going forward should be as follows:

=IF(C5>=Property!$B$10,0,B17+C43)

Again, the IF function looks at the current year (C5) and compares it to our investment period (Property!$B$10). If it is greater than or equal to the investment period, then we have closed our our investment and the value is zero. Otherwise, the formula for retained earnings is the previous year’s retained earnings balance (B17) plus the current year’s net income.

And Now for Cash Flow

To answer our original question of what our return on this particular investment is going to be, we need to project the cash flow to the investor. To do so, let’s create another section below the income statement called “Investment Cash Flow,” which also has our year column headings. We’ll also want to add the following lines:

Initial Investment
Net Income
Cash Flow

Our initial investment line will only have a value in the first year zero cell, and it will be equal to our paid in capital only negative (=-B16). Our initial cash flow is negative because we make the equity investment to finance the project.

The rest of our cash flow comes in the form of net income. Since we have the net proceeds from the sale of the property flowing through net income as well, we can simply set the net income line equal to net income from our income statement. To maximize our potential return, we will assume that net income is paid out each year rather than being retained (this could result in some negative cash balances, but for simplicity’s sake, we’ll make this assumption).

Cash flow is simply the sum of the initial investment and net income for each year. The result should be a negative cell followed by some negative or positive net income figures (depending on our model’s assumptions). Now we’re ready to calculate our return.

 

Choosing a Commercial Property With Financial Advantage

When assessing commercial real estate, it is necessary to understand the financial factors that the property creates. This is before you price the property or consider it suitable for purchase. In doing this, it is not only the financial factors today that you need to look at, but also those that have formulated the history of the property over recent time.

Property

In this case, the definition of ‘recent time’ is the last three or five years. It is surprising how property owners try to manipulate the building income and expenditure at the time of sale; they cannot however easily change the property history and this is where you can uncover many property secrets.

Once the history and current performance of the property is fully understood, you can then relate to the accuracy of the current operating costs budget. All investment property should operate to a budget which is administered monthly and monitored quarterly.

The quarterly monitoring process allows for adjustments to the budget when unusual items of income and expenditure are evident. There is no point continuing with the property budget which is increasingly out of balance to the actual property performance. Fund managers in complex properties would normally undertake budget adjustment on a quarterly basis. The same principle can and should apply to private investors.

So let’s now look at the main issues of financial analysis on which you can focus in your property evaluation:

  1. A tenancy schedule should be sourced for the property and checked totally. What you are looking for here is an accurate summary of the current lease occupancy and rentals paid. It is interesting to note that tenancy schedules are notoriously incorrect and not up to date in many instances. This is a common industry problem stemming from the lack of diligence on the part of the property owner or the property manager to maintain the tenancy schedule records. For this very reason, the accuracy of the tenancy schedule at time of property sale needs to be carefully checked against the original documentation.
  2. Property documentation reflecting on all types of occupancy should be sourced. This documentation is typically leases, occupancy licences, and side agreements with the tenants. You should expect that some of this documentation will not be registered on the property title. Solicitors are quite familiar with the chasing down all property documentation and will know the correct questions to ask of the previous property owner. When in doubt, do an extensive due diligence process with your solicitor prior to any settlement being completed.
  3. The rental guarantees and bonds of all lease documentation should be sourced and documented. These matters protect the landlord at the time of default on the part of the tenant. They should pass through to the new property owner at the time of property settlement. How this is achieved will be subject to the type of rental guarantee or bond and it may even mean that the guarantee needs to be reissued at the time of sale and settlement to a new property owner. Solicitors for the new property owner(s) will normally check this and offer methods of solution at the time of sale. Importantly, rental guarantee and bonds must be legally collectable by the new property owner under the terms of any existing lease documentation.
  4. Understanding the type of rental charged across the property is essential to property performance. In a single property with multiple tenants it is common for a variety of rentals to be charged across the different leases. This means that net and gross leases can be evident in the same property and have different impact on the outgoings position for the landlord. The only way to fully appreciate and analyse the complete rental situation is to read all leases in detail.
  5. Looking for outstanding charges over the property should be the next part of your analysis. These charges would normally stem from the local council and their rating processes. It could be that special charges have been raised on the property as a Special Levy for the precinct.
  6. Understanding the outgoings charges for the properties in the local area is critical to your own property analysis. What you should do here is compare the outgoings averages for similar properties locally to the subject property in Propertywhich you are involved. There needs to be parity or similarity between the particular properties in the same category. If any property has significantly higher outgoings for any reason, then that reason has to be identified before any sale process or a property adjustment is considered. Property buyers do not want to purchase something that is a financial burden above the industry outgoings averages.
  7. The depreciation schedule for the property should be maintained annually so that its advantage can be integrated into any property sales strategy when the time comes. The depreciation that is available for the property allows the income to be reduced and hence less tax paid by the landlord. It is normal for the accountant for the property owner to compile the depreciation schedule annually at tax time.
  8. The rates and taxes paid on the property need to be identified and understood. They are closely geared to the property valuation undertaken by the local council. The timing of the council valuation is usually every two or three years and will have significant impact on the rates and taxes that are paid in that valuation year. Property owners should expect reasonable rating escalations in the years where a property valuation is to be undertaken. It pays to check when the next property valuation in the region is to be undertaken by the local council.
  9. The survey assessment of the site and tenancy areas in the property should be checked or undertaken. It is common for discrepancies to be found in this process. You should also be looking for surplus space in the building common area which can be reverted to tenancy space in any new tenancy initiative. This surplus space becomes a strategic advantage when you refurbish or expand the property.
  10. In analysing the historic cash flow, you should look for any impact that arises from rental reduction incentives, and vacancies. It is quite common for rental reduction to occur at the start of the tenancy lease as a rental incentive. When you find this, the documentation that supports the incentive should be sourced and reviewed for accuracy and ongoing impact to the cash flow. You do not want to purchase a property only to find your cash flow reduces annually due to an existing incentive agreement. If these incentive agreements exist, it is desirable to get the existing property owner to discharge or adjust the impact of the incentive at the time of property settlement. In other words, existing property owner should compensate the new property owner for the discomfort that the incentive creates in the future of the property.
  11. The current rentals in the property should be compared to the market rentals in the area. It can be that the property rent is out of balance to the market rentals in the region. If this is the case it pays to understand what impact this will create in leasing any new vacant areas that arise, and also in negotiating new leases with existing tenants.
  12. The threat of market rental falling at time of rent review can be a real problem in this slower market. If the property has upcoming market rent review provisions, then the leases need to be checked to identify if the rental can fall at that market review time. Sometimes the lease has special terms that can prevent the rent going down even if the surrounding rent has done that. We call these clauses ‘ratchet clauses’, inferring that the ‘ratchet’ process stops lower market rents happening. Be careful here though in that some retail and other property legislation can prevent the use or implementation of the ‘ratchet clause’. If in doubt see a good property solicitor.

So these are some of the critical financial elements to look at when assessing a Commercial Investment Property. Take time to analyse both the income and expenditure in the property before you making any final choices regards property price or acquisition.

Mallorca Property Market Report

1. Underlying values to bottom out at current levels
2. The evolution of asking prices to vary dependent upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in property values.
3. Future growth in values to be non existent in the short term and very limited and restricted to underlying inflation in the medium term ie no real growth in the next couple of years. Modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%
4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term.
5. Land values to hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels for the medium term. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca and Manacor, should see values rise

Property

Alongside these conclusions I set out a few “tips” or recommendations for both owners and potential investors of Mallorca residential property:

1. If you are a lifestyle purchaser or investor with an income return bias start to look at the emerging buying opportunities BUT..
2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties.
3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
4. Look at properties with “defensive” qualities, as set out in (4) above, for greater short term security
5. Look at land to hold as a long term investment / to build a home. Particularly rural plots, front line or with very good sea views etc

Market Update March 2010 – October 2010

So what has been the reality of the last 6 months? Have my conclusions been largely borne out or has hindsight led us to see that we should have reached alternative conclusions?

Lets start by reviewing the statistics and data that have emerged since the March 2010 report and what the so called specialists have been saying. But before that let’s enjoy the headline that greeted me this week that none other than the Spanish Prime Minister had just called the bottom of the property market in Spain! While I am immediately cynical when it comes to anything said by a politician, particularly when it is a Foreign PM talking to US investors in a desperate attempt to convince them to buy bundles of government bonds at the lowest possible yield, he did seem to be confirming what I said, namely that we are at the bottom and although it is true that I said it 6 months ago, if prices have largely remained unchanged over that period, then it could be said that it was the bottom then as well as now!

The problem for me is that Zapatero then proceeded to get over excited, quoting official statistics that appeared to indicate that in many areas of Spain prices were starting to rise ie we had touched bottom and wey hey we are on an upward trajectory again! So let’s look at the emerging data, starting with ZP’s own Housing Ministry.

National Institute of Statistics (INE) According to new figures from the INE, Spanish property prices rose (quarterly) for the first time in 3 years. More specifically these figures claim that average prices at the end of June were 1.6% higher than at the end of March although over 12 months prices are still down but by just 0.9%. For the Balearic Islands / Mallorca the statistics weren’t quite as rosy but still offered “some positive” news for those desperate to call the end of anything called recession / crisis / market crash etc! Here the overall figures put property values unchanged for the last quarter but down 2% for the year. For new build property it appears there is a “rebound” with prices up 1.4% even though for the last 12 months prices remain 2.5% down. Second hand property values were down 1% for the last quarter and 1.6% over 12 months.

Interestingly only Navarra in Northern Spain came out with worse data with a small fall of 0.1% in the last quarter. In other words what the INE is suggesting is that in all regions, bar Navarra and the Balearic Islands / Mallorca, property prices grew in the last quarter!

The trouble is it is very difficult to take seriously figures which tell us that overall Spanish house prices have only fallen 10-12% since their peak in 2007. The fact that the index suggests prices may have started to rise is not in itself that surprising had the index registered price falls of 30% or more. The problem is that we are expected to believe that, having barely fallen since the peak, prices are now rising again (at least on a quarterly basis) while we are still living out the consequences of the worst recession in living memory, a severe credit crunch, 20% plus unemployment, and a glut of 1 million new homes sitting there empty!

The same INE statistics, but this time for land values, paint on the surface of things a similar picture but equally show where future on going price weakness in the market may come from. According to these figures released earlier this month land prices in Spanish cities fell 14.9% over 12 months to the end of June, although the figures for the first quarter of this year indicate a small 3% rise. That said this 15% annualised fall in Q2 was the biggest fall on record since the Ministry of Housing started publishing this data in 2005. This put the average cost of building land in Spanish cities at 210.7 €/m2. With land values accounting for 30 – 50% of the final value of a property it is clear that while this trend continues the floor under the market for new build housing will remain weak something which effects the wider market as well. In other words with land values falling developers, when they decide to build again, will be able to do so much more cheaply and thus offer them for sale at much lower prices possibly even lower than what they can today for the existing stock! With the stock of available properties still so high and the prospect that new housing can come on stream profitably at lower levels it is easy to conclude that general growth in the market (ie values starting to rise), as we said in March, is still some way off. Obviously where the supply side is constrained because of the location eg front line properties, or type eg rural fincas where planning laws are getting much tighter, both of which are very relevant factors in Mallorca, then the outlook may be a little brighter.

Tinsa (Property Valuation Company): According to Tinsa average Spanish property prices fell 4.6% over 12 months to the end of August. Furthermore after 9 months of trending towards smaller price declines, this is now the second consecutive month in which the index shows price falls accelerating, from -4% in June, to -4.6% in August. For the Balearic / Mallorca and Canaries Islands the fall was a little larger and stood at minus 5.3% taking the overall fall in the index for the Islands down 16% since 2007 compared to 17% for Spain as a whole and nearly 22% % for the Mediterranean coastal areas. While the differences are what might be expected ie the mainland coastal areas, which bore the brunt of the speculative development boom, have suffered most, all the anecdotal evidence including actual sales prices would suggest that at best the market has fallen by 25%-30% and some what more in the worst effected areas. (important note: many properties were historically over inflated in terms of asking price at the height of the market, and remain so even as we speak today, so here an adjustment might even have to be be as high as 50% to get back to true underlying value. Obviously where a property was appropriately valued at the peak a 25% reduction might be perfectly reasonable to reflect true current value)

It is important to note that Tinsa’s figures are based on subjective valuations and in most cases these are calculated using asking prices of comparable properties in the region. By nature therefore these valuations are likely to lag the market, some say by anything between 12-24 months. In other words we could quite realistically assume that if Tinsa says the market is still falling and that the pace of fall has started to increase again, then in all likelihood this trend in falling values could well continue for a few months yet. Where I might differ is not with where the figures are going but the time it is taking for the likes of Tinsa to reflect what has really happened ie they are indeed probably at least 12 months behind the times. Since they base their valuations on asking prices it is hardly surprising! In other words the Tinsa figures may call the bottom of the market 12 or 24 months after we really have seen values touch bottom.

Idealista (Real Estate Portal): The latest data for the end of the 3rd quarter and released on 1st October, suggested that in Spain as a whole prices had accelerated their fall to a quarterly figure of 2.7% leaving the average value at 2,309€ m2. While this negative statistic was reflected in most regions of Spain, the Balearic Islands / Mallorca saw property price rises both generally and in the various towns (but not all) for which the web portal quote statistics. Here the overall figure stood at 2,371 €m2 in September 2010 compared to 2,286 €m2 at the end of the previous quarter and 2,228 €m2 in September 2009 ie an annual rise of 6.4% and last quarter increase of 3.7%.

Specifically they highlight statistics for the following towns / areas (First figure shows average value per m2 at September 2010, 2nd figure the change over last quarter and last the annualised change. Please note statistics are based on average of offer prices in each area and are not the values at which a willing seller and willing buyer might necessarily agree a sale):

Calvia 3,052€ m2; +11%; +12.5%

Palma de Mallorca 2,446€ m2; +4.8%; +10.7%

Marratxi 2,080€ m2; +2.4%; n/a

Inca 1,580€ m2; +2%; -0.5%

Santa Ponsa 2,568€ m2; -3.7%; n/a

Llucmajor 2,140€m2; +9.9%; +8.2%

Looking at these figures you might well assume that things are really beginning to take off and in many respects with a good sample size in each area one can not be fully dismissive of the findings. By way of comparison, although admittedly with a much smaller sample size, the web portal Facilisimo contrasts and quotes a fall in prices within the Baleraic Islands of 5.3% for the year to date.

Bankinter Spanish Real Estate Market Report: interestingly reported in September 2010 that what they expected was the market to bottom out but also future growth to be very limited, much along the lines of my March 2010 report and my continuing view. The bank feel that, taking the market as a whole, prices could still fall marginally further, circa 6%, over the next 9-12 months, with the market staying at that level until end 2013, beginning 2014, when some modest growth could return i.e. we are going to bump along the bottom, or as they put it be “walking through the desert”, for some time yet!

In line with my own opinion they also question the Ministry of Housing figures that tell us that prices have only fallen by 12% since the peak, while in reality the Bank feels this should be 20%+ (as you know I would go further than that in many circumstances!).

It is important to put this report in context as it covers the whole of Spain and thus is clearly dominated by the dynamics of the locally driven market, not by a mixture of local and international, like in Mallorca or many parts of the Mediterranean coast. Clearly in Mallorca if there is, for example, a return of consumer confidence in countries like Germany, the UK, Scandinavia etc this may encourage buyers from those destinations to bring forward buying decisions even if in Mallorca itself the local consumer remains weighed down by the fear of unemployment, the impending loss of mortgage tax breaks and the simple lack of household income / savings to meet the demands for larger deposits as banks reduce their loan to value ratios. Generally if buyers from outside Mallorca see the property markets improving in their own countries they are more likely to consider that the time is right to purchase here or at least that the Mallorca market will quickly follow suit. In many respects they are right. We live in a globalised economy and just like I always maintained in the boom years that Mallorca is “on planet earth” when told repeatedly that “prices don’t drop in Mallorca things are different here”, the flip side now is that when the global economic climate improves so will the situation in Spain and Mallorca even though most of us expect it to lag other parts of Europe. What this means in practice is that buyers, in my opinion, have a little more time to look at the options, do market research, identify good buying opportunities etc before there is any risk of the market running away ahead of them! There is always the risk that a buyer may loose out on that one “perfect” property, because another buyer has come in before hand, but in general buyers can afford to be patient.

Inversion magazine September 2010: If you want to read an article full of caution regarding the Spanish property market as a whole then read this article. Like I was pointing out above, this article emphasis the real underlying weakness of the domestic property market dragged down by huge unemployment number (over 20% and with even the most optimistic predictions setting it at no less than 18% for 2 further years); a financial sector either unwilling or unable to release liquidity into the market and at risk to reductions / removal of the ECB existing liquidity support measures; a mammoth supply over hang (unlike for example the markets in the United States or UK); and a financial sector holding a very large portfolio of repossessed properties which although not currently being flooded on to the market, could be if some smaller entities run into liquidity problems when the ECB cuts the current support measures. All in all the article concludes that not only do they foresee prices continuing to fall they concur that the future upside is a long way off. Patience and market research is their recommendation!

Although regular readers will know I am not a born optimist when it comes to my views on the Mallorca property market I have equally always maintained that it does have some important defensive qualities that should see it suffer less on the downside and recover a little better /quicker when the overall economic environment improves. The supply side is some what better than many other areas of the mainland, having suffered less of a speculative development boom; planning regulations and land zoning are stricter, further restricting the supply side; demand is more widely based (it includes a large number of international buyers in addition to the main local market); and economic improvements in Northern Europe should bolster tourism in the Island and thus put a floor under the unemployment figures. The Mallorca “brand” is also strong amongst the wealthy and there are always new buyers wanting to taste!

Other Press Reports: In the press there have been a steady trickle of agents, developers and industry representatives that are all supporting (understandably!) the thesis that prices have stopped falling and buyer interest is up within the second home market in particular. Interestingly most concur that prices have fallen by 15-35% depending on the area and the type of property, while others talk of prices going back to the levels of 6-7 years ago, in other words back to the levels before the very largest year on year price increases were delivered. If I had to comment I would argue that while they may be correct in relation to asking prices when they quote 15-35% I think they are much nearer the truth when they talk of values returning to 2003-2004 levels which in most cases would need to see falls of 25%- 40%.

I also caution against taking too seriously comments about asking prices and the need to buy now before prices rise. Many “warn” clients not to sit out waiting for more price falls and owners now prepared to sit out for the right buyer to come along rather than reduce prices further. While I would not disagree that underlying values are at or near the bottom, as I maintained in March, my experience is that few if any buyers are purchasing at asking prices and that many deals are being done well below asking prices. Only recently I asked a reputable agent what he thought various properties would sell for (all had been on the market for some time) and I was given figures between 20% and 35% less than the prices that were being quoted. I am not suggesting this is “proof” of anything in particular but I would say it supports my belief that “buyer beware” is the name of the day and not because you need to buy quickly before the market takes off but because asking prices can be very misleading!

What I am saying is that values are at or near the bottom of the cycle, that pressures for prices to grow are still some way off, with time is on the buyer’s side, but that if you are interested in buying I would definitely be in the market now looking and negotiating. Much better to negotiate now while there are still gloomy economic clouds offering uncertainty yet, sentiment is stabilising, than when everything is looking much rosier in say 12 or 24 months time. It is not that prices will rise during that time but simply that vendors may hold out a little more at or near there asking prices while today most if not all will want to do a deal rather than wait for another buyer that might not come around for many months or more!

At a regional and individual town level in Mallorca here are the views of what one major agent is saying has happened to prices, since the top of the market, along with my own comments:

Palma City / Old Town & Portixol: prime prices down by around -25% (Note: Supply is by nature limited and long term there must therefore be a firm floor under this market. Proposed improvements to the Playa de Palma area, tram infrastructure etc should all help but be patient for anything requiring public investment!)

Palma outskirts and Paseo Maritimo: Apartments down by -25-30% although villas with sea views in Genova, Bonanova etc have seen values fall some what less.

Son Vida: it is claimed that prices have held up and fallen only by 10-15% although they then “admit” deals have been done at levels that are up to 35% down (Note: what does that tell you? Asking prices are unrealistic and out of line with underlying values. The real market is about the value of done deals not asking prices! That said Son Vida will remain a prime address so again there is a floor under the market)

Puigpunyent, Esporlas etc: prices down circa -25%

Santa Ponsa: Prices down by around -15% (Note: With a lot of supply deals are being done some what lower than this figure suggests and with the Port Adriano super Yacht marina development taking shape it is not a bad time to be looking at this area and taking advantage of the weak market to get in to what long term looks an interesting area – luxury marina, 4 golf courses etc)

Andratx, Port Andratx: Prices down by -20%. (Note: This remains a sought after area despite much of the over development allowed by the previous, corrupt, Town Hall administration. Despite the poor quality of some infrastructure and public spaces in the Ports urbanisations demand is likely to remain long term and should be supported by promises, and hopefully the reality, of improvements agreed by the new Administration).

Dei, Valldemossa, Sller & Puerto de Sller: It is claimed that prices have held up here simply because owners have been less willing to negotiate ie there have been few transactions / an illiquid market. (Note: Another area with supply very restricted, a quite spectacular natural environment and a “brand name” with an international reputation all of which support the market and make it a good long term investment. The Jumeirah 7* hotel opening in Puerto Soller next year is the sort of investment to further add to the areas “cache”)

Central Mallorca: Prices are said to be down circa 10-15%. (Note: this is a large area and thus it is difficult to generalise but even in the historically stronger areas, on the Tramontana mountain fringe, eg Alaro, Santa Maria, Binissalem, Campanet, Buger etc deals can be done at up to 25% below asking prices)

Pollensa & Puerto Pollensa: Prices down by up to 30%. (Note: Anecdotally this area was hit as hard as any in terms of the demand tap simply drying up at the height of the crisis while in reality this has always been one of Mallorca’s strongest niche markets. The draw amongst “Pollensa devotees” remains and when demand returns, as it is starting to do, it should return in the long term as a top destination. With this in mind it could well be a place to start looking while prices remain under pressure and “deals” can be done.)

Property

Alcudia & Puerto Alcudia: Prices down by circa 25%

North East (Arta, Canyamel, Costa de los Pinos, Cala Bona etc): Prices down circa -10% (Note: While historically a lower price area, due to it’s relative remoteness from Palma, the new motorway from Palma transformed the area just before the recession got to grips with the market and thus the “re-rating” that some, including myself expected, never took place. This explains in part why values have not fallen as much. The market remains weak however, there are deals to be done and this may well be a good time to get into the area before prices move more in line with other areas of the Island. Costa de los Pinos and Canyamel offer a lot for the discerning buyer looking for quality property, sea views and a tranquil environment)

South East: similar to the North East with prices historically lower and thus having less far to fall!

Conclusions and Recommendations

As can be seen we have reports saying prices are falling, reports that they are stable and some that they are rising! That all said, and talking of Mallorca specifically, I remain of the opinion that underlying values have bottomed out and that we are now in the low activity / no price change period prior to growth returning.

In effect my conclusions are fairly similar if not identical to what I said in March! For completeness:

1. Underlying values should continue to bottom out at current levels. There are downside risks but in Mallorca I see these fairly much under control and unlikely to exceed 10%. Buyers should be aware of this at the time of negotiating the final purchase price and in that way can “manage out” some if not all this risk.
2. Whether asking prices continue falling will all depend upon whether they have been set realistically / adjusted sufficiently to account for the significant falls in underlying property values. In other words do research and know whether the property you want to buy is realistically priced or not. In that way you will know whether you are talking about negotiating a “bit” or are looking to take off a “wholesale chunk” to arrive at the final agreed purchase price.
3. Don’t expect a sharp rebound in property prices! Future growth in values is likely to be non existent in the short term and very limited and restricted to underlying inflation in the medium term ie no real growth through 2011 and 2012 at least and only modest growth over above general inflation levels in the economy to follow thereafter at levels of 1-3%. If I was to change my view at all it is that perhaps real growth is some 12 months further off than I suggested in March.
4. Special properties with “unique” qualities – front line; very good sea views; restrictive planning conditions – rural fincas; high quality developments etc to perform better / out perform the market in the medium / long term. I strongly believe there is a floor under this market but equally I do not believe that is the same as saying that the prices of these properties should not have been adjusted downwards, just that the extent of the adjustment may have been less and the downside risk of further falls much less likely. That said all depends on whether they were correctly priced at the outset. Some of these properties were ridiculously priced at the height of the boom so need severe price reductions to account for the initial over pricing and now the falling market. It is all property specific and be aware of over generalizing and then over paying for a property however “prime” and unique it is!
5. Land prices have come down significantly and will stay low in line with the wider market. Land values will hold down prices in the medium term as developers take advantage of cheaper land to sell at these new lower levels. Long term shortage of supply, save for those in urban areas and for “mid range” apartments, like Palma, Inca and Manacor, should see values rise. It could well be a good time to get in now buy a well priced plot and build your dream home rather than search endlessly for the finished article which is never “quite right”!

And in terms of where I would be looking to buy, and what I would be doing, again not much has changed over the last 6 months but to reiterate I would refer to the following “tips” and recommendations:

1. If I were a buyer I would start to be actively in the market now particularly if you area a lifestyle purchaser or investor with an income return bias. By “in the market” I mean starting to look, getting a feel of what is available, seeing what you like and starting to understand what is available and at what price. Make sure you either do your own research or use a Property Finder / Buyers Representative that can impartially help advise and guide you (don’t expect an estate agent to!) They want a sale of one of their properties while a Property Finder wants a sale but doesn’t mind which one so are impartial at the time of choosing and advising. As I said 6 months ago…
2. “BUYER BEWARE” it is all about value and ensuring that you buy at an appropriate level and don’t over pay on unrealistically priced properties. Understand who is selling, why and how motivated they are. Understand what the property is really worth and whether there can be a “meeting of minds” in this regards. If not walk away and find another property. If the owner is unrealistic all the best valuation advice in the world won’t get you the property at a realistic price!
3. Look at new build where good discounts are available (but beware of off plan unless your deposit(s) are backed with a bank guarantee)
4. Look at the properties with “defensive” qualities, identified in (4) above, for greater short term security and long term capital growth
5. Land could well be a good buy now. Look at it either as a long term investment or to build a home. Particularly rural plots, front line or with very good sea views etc but most good plots are worthy of serious consideration, if of course the price is right.