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the stage of surplus is reached, where he can start recovering the excess over minimum
rent. Short workings can only be recouped from the transactions relating to future royalty
payments only, not backward. Depending on the terms of the royalty contract, the lessee
can start paying for the actual royalty after full or partial recovery of short workings.

Rights of recoupment
FOR ONLINE READING ONLY
Right to recoupment in any royalty agreement can either be fixed right or floating right: -
Fixed right: The lessee has the right to recoup short workings for a fixed time period. In
this case the lessor agrees to compensate the lessee for the losses incurred in the previous
years, by allowing him to recover the difference between actual royalty and minimum
rent for a fixed number of years. For example, the lessor may agree to compensate the
LANGUAGE EDITING
lessee for the short workings only during the first five years, after which any balance of
short workings not recouped will be transferred to the statement of profit or loss as an
expense to the lessee and an income to the lessor.

Floating right: In this case, the lessee has a right to recover the short workings of any
year during the next agreed number of years, following the payment of short workings.
This means the short workings of each year if not recovered, will be carried forward not
further than the next agreed number of years. For example, if the recoverable agreed
period is two years, short workings of the first year can be recouped in the second and/
or third year. Similarly, short workings of the fifth year, can be recouped during the
sixth year and/or seventh year. If it is not possible to recoup the short workings during
the agreed period, the short workings not recouped will be transferred to statement of
profit or loss as an expense to the lessee and an income to the lessor.

Example: 6.2
The following table shows the actual royalty, minimum rent, royalty paid and short
workings. The lessee had the right to recoup short workings during the first three (3)
years:

Short
Actual Minimum rent Royalty paid Short
Year royalty workings workings
recouped
TZS TZS TZS TZS TZS
2022 2,400,000 4,000,000 4,000,000 1,600,000 -

2023 3,600,000 4,000,000 4,000,000 400,000 -

2024 4,800,000 4,000,000 4,000,000 - 800,000

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