General

Instalment sales

A question amongst property investors is “How can I purchase property for investment purposes if I have little or no money?”

One of the answers to this question is purchasing the property on instalments in terms of the provisions of the Alienation of Land Act, 68 of 1981 (the Act). In this article we will determine what property can be sold in terms of this act, what are the formalities of such a contract as well as the advantages and disadvantages of such a transaction.

The Act came into effect on 19 October 1982, in order to protect the consumer as there were a number of transactions where a purchaser would pay the monthly instalments and the seller would fraudulently sell the property to another person, effect transfer to such person and retain all instalments received, or the seller would heavily mortgage the property after conclusion of the sale to such an extent that the purchaser would not be able to take transfer of the property as the bond could not be settled and thereby cancelled.

What are the formalities under the Act?
In order for the Act to apply the contract for the sale of land, which contract must be reduced to writing and signed by the parties thereto or their authorised agents (acting on their written consent), must be for more than 2 instalments which are payable over a period exceeding one year. The land being purchased must be used or intended to be used mainly for residential purposes. Agricultural and state-owned land are excluded. The date stated in the contract in terms of which the purchaser will take transfer of the property may not be later than 5 (five) years from the date of the contract. If the purchase price is for R250 000.00 (two hundred and fifty thousand rand) or less then the contract must contain the “cooling-off clause”.

In the case where the property is bonded the seller must within 30 days after conclusion of the contract provide the purchaser with a certificate indicating the amount outstanding on the bond together with interest. This certificate must not be older than 4 months. The certificate will bind the bondholder for a period of 4 (four) months meaning that the bond holder cannot change the amount owing on the bond for a period of 4 months. In the event of the seller failing to issue the certificate or in the instance where the amounts owing are greater that what was indicated in the contract, the purchaser may within 14 (fourteen days) cancel the contract.

The Act further places an obligation of the purchaser to inform any bondholder of the contract and to provide such bondholder with his contact details and any other information relevant to the contract. Where a purchaser has contacted the bank as aforesaid, the bank will not be entitled to institute legal action against the seller in the event of default on their bond, unless the bank has given 21 days prior written notice to the purchaser. This will enable a purchaser to intervene in order to prevent foreclosure of the bond.

A purchaser is entitled to apply for a certificate of balance from the relevant bondholder, which certificate must be provided by the bondholder within 21 days of such request, but the bondholder will not be obliged to do so more than 3 times in a calendar year.

How are the interests of the purchaser protected?
In terms of Section 20 of the Act, the seller must within a period of 90 days from the date of signature of the contract cause the contract to be noted against the title deed of the land at the relevant Deeds Office. The noting is done by way of an endorsement on the title deed. A contract which has been noted as aforesaid will enjoy preferential treatment. This means that in the event of the property being sold in execution or the seller becoming insolvent the purchaser will have a preferent claim in respect of the proceeds of the sale, such claim ranking immediately after any claim by a bondholder who’s bond was registered prior to the recording of the contract.

Should the seller fail to record the contract within the 90 (ninety) day period the purchaser may elect to cancel the contract or have the contract recorded at the Deeds Office himself. In terms of Section 26 of the Act, the seller will not be entitled to receive any consideration until the contract has been noted.

It is important to note that in terms of the Transfer Duty Act 40 of 1949, transfer duty is payable by the purchaser within 6 (six) months of conclusion of the contract, failing which, penalties will apply.

Section 27 of the Act provides that a purchaser who has paid 50% or more of the purchase price is entitled to demand transfer of the land from the seller on condition that simultaneously with the transfer the purchaser registers a bond over the property in favour of the seller for the balance of the purchase price. The conditions of the bond may not be more onerous than the conditions agreed to in the contract.

The advantages of such a transaction are:

  1. The purchaser who does not have sufficient funds or who is unable to acquire bond finance is still able to purchase a property;
  2. The purchaser gets security by the endorsement of the title deed of the land;
  3. The purchaser receives preference on proceeds of the sale in the event of a sale in execution or the insolvency of the seller, however, this is limited as stated in the article.
  4. The purchaser benefits through increase in value of property purchasing by purchasing at the value at time of entering into the contract and only taking transfer at a later date.

The disadvantages are:

  1. In the event of insolvency of the seller, where the purchaser is not in the position to immediately make payment of the balance owing or obtain bond finance for the amount, the trustee of the insolvent estate can sell the property on public auction.
  2. Limited security for proceeds of a sale after settlement of the bondholder. In other words, should the sale in execution or by public auction not result in sale proceeds after settlement of the bondholder the purchaser will have lost all instalments paid.
  3. Seller must wait for funds.
  4. In the event of the contract providing for interest to be paid on the purchase price the agreement may be subject to the National Credit Act.

In conclusion purchasing a property in terms of the Act is a viable option to those purchasers who do not have access to immediate funds and sellers who are willing to wait for payment. The parties must however ensure that their contract is drafted in accordance with the provisions of the Act in order to avoid the contract being declared null and void. Parties must be aware of the obligations imposed on them by the relevant legislation and must also take note of the advantages and disadvantages of each case on its own merits. It is highly recommended that a professional is consulted before entering into such a contract. Should you require more information as to how you can enter into such a contract contact Ramirez Attorneys via email [email protected] or via our website http://www.ramirez.co.za.

Sascha Ramirez-Victor
Ramirez Attorneys 

Reader Comments:

J du Plessis 16/05/2019:

Not a comment but a question: If interest is payable when will the NCA be applicable?

Sascha Ramirez-Victor 16/05/2019:

If interest is charged then it may be that the NCA will be applicable. Section 8(4)(f) defines a credit agreement to include “any other agreement …in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider in respect of – (i) the agreement; or (ii) the amount that has been deferred.” A credit agreement is thus concluded where the agreement provides for- • a deferral of payment; and • a charge, levy or interest that is payable as a result of the deferral of payment (or a discount given where there is a prepayment). However there are exceptions. Each matter will have to be looked at on its own merits.

Robert 16/05/2019:

J du Plessis. The NCA will apply the moment interest forms part of the agreement, and if the buyer, is a consumer, in terms of the Act. Then the seller becomes a credit provider in every sense and the agreement must then comply with both ALA and NCA red tape.

Anna 16/05/2019:

We were advised by Alan West that all instalment sales, regardless of whether interest is charged or not falls under the NCA and so the seller must register as a credit provider. Accordingly it is never suggested that one facilitates these Agreements. Please advise.

Memory 17/05/2019:

If I enter into an Instalment sale agreement of a house worth R800 000.00 over 8 years. Is it allowed for the seller to charge me 100% interest on the selling price over the 8 years?

Ona Nell 17/05/2019:

We agree with Alan West, in that ALL instalment sale Agreements, whether or not interest is payable, are subject to the NCA, unless one of the other exceptions is applicable.

John Christie 23/05/2019:

I can think of a number of instances where the NCA would not apply to a transaction like this.

TANIA 24/05/2019:

John Christie, could you please elaborate?

monica 24/05/2019:

The bondholder refuses to release the Title Deed for endorsement and the Deeds Office does not want to endorse the deeds office copy without client's copy. What to do?

robert 26/05/2019:

I would like to know on what basis the NCA will apply if no interest is levied at all?

Allen West 27/05/2019:

Monica on what grounds can the bondholder refuse to release the title deed for purposes of recordal of the contract. In the past Registrars applied their discretion to endorse the office copy and note a caveat as same is a requirement to secure the rights of a purchaser.

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