Thinking of buying property? – Then this is a must-read as the rules have changed offering a number of different options for both buyers and sellers.
A series of articles recently published on the Ghost Digest website, explored the various choices available to purchasers when buying fixed property. The focus was on the array of financial options that are now available. Both the National Credit Act 34 of 2005 (NCA) and Consumer Protection Act 68 of 2008 (CPA) have dramatically changed the playing field and financing property transactions has become a complex matter. Whether you are a buyer or seller, it is extremely important that you understand the implications of these two new laws so that you can choose the buying option that works best for you. We will now highlight a few practical considerations thereof.
Previously, the most preferred method when buying or selling property was the conventional method. All one needed was a Deed of Sale, Offer to Purchase or Sale Agreement. (These documents are all the same). This ensured that you secured a property via an agreement between the seller and the purchaser; paid a deposit to show your “good intent” and then arranged the finance to pay the balance – either in cash or with a bank loan (mortgage bond).
Nowadays, however, for most people it is extremely difficult, if not impossible, to obtain said bank loan. The restrictions imposed by FICA, the NCA of 2005 and the banks’ own risk management control measures have ensured that this particular option is no longer easily accessible to the public at large.
In 1981, the Alienation of Land Act 68 of 1981 (the Act) introduced the option of Instalment Sales. In this instance, the seller and purchaser agree in writing to sell and buy the property, but instead of obtaining a bank loan, the seller grants the purchaser the opportunity to pay off the purchase price and interest over a period of time. This agreement must comply with certain requirements set out in the Act. To protect the purchaser and notify third parties, this agreement is registered against the title deed of the property.
This option will only benefit the buyer and seller if the transaction is less than R500 000.00 as, the NCA requires that the seller must be registered as a credit provider in certain instances for any loan that exceeds R500 000.00. Even if the price remains below R500 000.00, the NCA holds the seller responsible for ensuring that an affordability assessment is done to ensure that the purchaser can in fact afford the repayments.
Due to its possible devastating consequences, it is extremely important to note that a sale would be declared void if the seller agrees to an instalment sale over the sum of R500 000.00, but fails to register as a credit provider with the National Credit Regulator.
On a positive note, if the sale (buyer being a natural person) is below R500 000.00 the transaction will be exempt from transfer duty.
As trusts with three or more trustees are exempt from the impact of the NCA, a proposed solution was to introduce a trust as purchaser. The downside of this is that the transaction is not exempt from transfer duty. In fact, the rate of transfer duty payable is much higher than that of an individual purchaser. Buyers have also been discouraged from following this route because they lose out on inter alia the capital gains tax exemption available for a primary residence.
Besides the fact that not many sellers are willing or in a financial position to enter into an agreement of this nature, occupation granted prior to registration is even more dangerous than before. The CPA has included immoveable property under the definition of Goods. This means, for example, that even if registered, the property can be handed back within a period of 6 months, if it is deemed that is not “useable and durable “. There is no existing judicial precedent for the interpretation of this phrase. It goes without saying, that as a seller, this constitutes a huge risk and careful consideration needs to be given before choosing this particular option.
Rent to buy or lease to own
The third option sees the seller and purchaser enter into a written agreement which allows the purchaser to rent the property for a specific period with the right, but no obligation, to buy the property before the end of the lease period. The recommended lease period is between 6 months and 24 months, but can be longer if certain conditions apply in favour of the Purchaser
Although it can be disadvantageous for the purchaser if the seller becomes insolvent, such surprises can be avoided if due diligence precedes the signature of the rent to buy option. Increased rental payments directly into the bond account of the seller will also to help in averting this possible minefield.
Also to be noted, the CPA states in addition to the above-mentioned that if both the landlord and the tenant are not juristic persons (businesses with separate legal personality), the tenant can cancel the lease at any time (subject to a reasonable cancellation fee) by giving 20 business days notice. However, as a formula for the calculation of this fee does not exist, many landlords are under massive risk of being seriously financially prejudiced in this situation.
Again, not many sellers are in a financial position to enter into this kind of agreement.
Now that there are so many more additional options to consider when buying or selling a fixed property, it is of the utmost importance that you approach your attorney for sound advice and to assess the tax implications involved.