The question reads as follows:
The purchase price of a property is R1 000 000.00, but the parties agree that the price be increased to R1 050 000.00 (so as to include transfer and bond registration costs). The seller then initially pays the costs on behalf of the purchaser, but is reimbursed with the R50 000.00 upon registration of the property.
- Defraud the financial institution granting the loan, in that more money is granted than what the property is worth?
- Superficially increase the value of the property to such an extent that properties are OVER-valued when subsequent purchasers want to purchase the same property?
- Does the National Credit Act come into effect in the form of an incidental loan?
Comments and answers would be appreciated.
This is defrauding of the financial institution and would also be overstepping the boundaries as set forth by the Law Society of South Africa. The financial insitutions are aware of this problem and it is for this reasons that Conveyancers are obliged to furnish a Conveyancer Certificate of confirmation of the purchase price and that no costs, ie transfer or bond, is included in the purchase price. This is a quagmire any Conveyancer worth his money should know better. At our firm this will not be allowed and disclosures will be made to the bank and SARS. The R50 000,00 will be declared as an additional amount being obtained by the Seller.
The bondholder is granting a loan on the strength of the value of the property and the price is taken into account in that regard. The bank is being induced to grant a loan on the strength of representations relating to the sale price and the parties know that such representations are false. How can it not be fraud?
This is definitely fraud and if you are on that banks's panel you run the risk of being removed. As much as it is tempting to assist the parties because you might end up losing the instruction. Don't do it.
Surely it can only be fraud if it is not disclosed to the Bank that these charges are included in the purchase price!
Undoubtedly fraud on the bank and therefore unprofessional conduct that brings the Profession into disrepute, meriting a striking application by the Law Society. Christina has set out the position clearly
I think Gerhardt is closest to being correct. Provided full disclosure of the arrangement is made in the deed of sale i.e:
1) the purchase price is reflected as R1 050 000 and
2) it is specifically recorded that the price includes costs and that the seller will disburse the costs and then be reimbursed on registration.
I do not believe that anyone is being defrauded. The deed of sale is submitted to the bank together with the application for the loan(bond) so there is disclosure to the bank. The bank's valuer values the property prior to loan approval and the bank will be able to make an informed decision on whether there is sufficient value in the property notwithstanding the arrangement regarding costs. SARS will receive it's full dues in respect of transfer duty. The Conveyancers Certificate will obviously have to state that costs are included (these certificates in fact contain the option:"costs included/not included").
Just a small point that easily escapes the attention of attorneys and conveyancers. In law it is the liability of a seller of any goods, including immovable property, to make delivery and that means delivery at the sellers cost. It is for this reason that it is necessary for an agreement of sale to specifically state that the transfer cost are for the account of the purchaser if the seller is to avoid having to pay. I do not lose sight of the fact that transfer duty is the liability of the purchaser in terms of the Transfer Duty Act.
Like Donald Moore, I just want to add one point. Christina is mistaken when she says that conveyancers are obliged to furnish the certificate as to the purchase price. There is NO obligation on any transferring conveyancer, or any other conveyancer, to do this at any time. I, in fact ,don't generally to it - because it is not something that I am capable of certifying - but when I am under pressure to do so, I qualify it to such an extent that it becomes meaningless. The banks seem to be happy with this!!!
The Bank's should immediately be advised in instances such as this. They consider these to be "loaded deals" and will immediately either withdraw from the bond or reduce the bond amount.
It is not fraudulent for the seller to undertake to pay the costs if that is recorded in the agreement. This is often done by a property developer. The bank will take into account the costs paid by the seller when valuing the property. Sars will receive additional transfer duty. A purchaser pays costs only if the agreement requires the purchaser to pay. What the banks are concerned about is where the price is artificially inflated by say R100 000 which the seller secretly agrees need not be paid by the purchaser. The parties thereby lie to the bank and the purchaser is granted a larger loan. That is fraud.
I think it was implicit in the question that the bank would not be notified of the fact that the price includes costs. The question uses the word "reimbursed" which creates the implication. If the agreement is clear that the seller will pay the costs then there will be no fraud provided of course that the costs are equal to the increase in the price and there is no refund of any surplus to the purchaser.
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