Unintended consequences?

The Property Practitioners Act, 22 of 2019: Some unintended consequences for property developers?

My Italian developer client once told me, in his Italian accent: “In-a Eetali, when-a you are a developer, they roll out da red-a carpet. In-a South Africa, they roll out da red-a tape!”

It’s tough to be a property developer in South Africa. It just got tougher.

Apart from a myriad of other laws and regulations, developers are now subject to the Property Practitioners Act, 22 of 2019, which was published on 3 October 2019 and will come into operation on a day to be proclaimed by the President. While the stated intentions of the Act (with transformation of the industry, regulation of property practitioners and consumer protection at the forefront) are to be applauded, there seems to be a number of unintended consequences particularly for developers.

The definition of a “property practitioner”, has now been extended to include property developers (with other new faces being bond originators, office managers, bridging finance institutions, auctioneers, property managers, agents selling time-share and so forth). The expanded definition would then also include all directors of a company, members of a CC and trustees of a trust which offers such services as property developer, in short being a person who sells any part or unit or section of a property or property development. Also included in the definition would then be a developer’s in-house marketing team.

What are the consequences, intended or otherwise?

1. The Definition of a Property Practitioner
The full definition in par (b) reads as follows:
“includes any person who sells, by auction or otherwise, or markets, promotes or advertises any part, unit or section of, or rights or shares, including time share and fractional ownership, in a property or property development”.

Property development is not defined - It is clear that a developer who is in the business of developing residential or commercial property for re-sale, would fall under paragraph (b) of the definition. Considering however the wording of the paragraph, ( “.. any person who sells… or markets or promotes … any part, unit or section of a property or property development”), read with sections 2 and 3(h) of the Act, it appears to also include “build to let”- developers.

The question is whether, by virtue of the references to a “part, unit or section” of a property or development, this would exclude a developer who develops a property to be sold as a whole/single entity, say for instance an office block sold to a single user?

The reference to “shares in a property” also raises questions. Would this mean that a developer who wants to syndicate its development and attract investors by offering shares would have to obtain an FFC before it can receive any monies from its investors?

2. Fidelity Fund Certificate
Chapter 8 of the Act deals with Fidelity Fund Certificates and provides that every property practitioner must be in possession of an FFC. Section 48 then provides that, if the practitioner is a company, close corporation, trust or partnership, every director/member/ trustee or partner must be issued with an FFC. Section 50 (b) (ii) and (iii) then disqualify these persons should they not comply with the prescribed standard of training, and/ or not have the practical experience determined by the Board.

Neither the prescribed standard of training nor the required practical experience is apparent from the Act, and I assume this will be regulated by regulations to be promulgated. The worrisome question is however how this will be applied in a property development company, where the board in many instances consists of people who are specialists in their own right, but not in the specific discipline of selling or letting property. So for instance, they may be accountants, engineers or even only investors. How will this be accommodated?

3. Trust Accounts
It is noted that a property developer will be obliged to open a trust account. This will be quite handy for a developer who is marketing a future development, and wishes to take deposits from clients, something which in the past was reserved to attorneys and estate agents. Will the provisions of Section 26(3)(a) of the Alienation of Land Act 68 of 1981 be similarly amended? (Incidentally, section 54(1) requires every property practitioner to open and keep a trust account. The intention is apparently that this should only apply to a principal/owner of a business conducting the service of a property practitioner, and not each and every marketing agent in its employ; the section should be amended.)

4. Tax Clearance Certificate
Section 50 (a) (vii) of the Act prohibits the Board from issuing an FFC to a person who is not in possession of a valid tax clearance certificate. In the world of property development it oftentimes happens that disputes are raised with SARS on not only income tax, but also VAT. Pending resolution of these disputes, it may be that tax clearances are withheld by SARS. Will there be a process to accommodate this?

5. Withholding of Payment
The issues raised in paragraphs 2 and 4 above, become even more relevant when one looks at the provisions of section 48 (4) (“any amount received in respect of or as a result of any property transaction” needs to be repaid) and 56(5) (“a conveyancer may not pay any remuneration or other monies to a property practitioner” not in possession of an FFC). Will these “other monies” include also the consideration paid to the developer for the unit sold?

Furthermore, in the case of the developer winding down its business, does it need to remain registered with an operative FFC simply because it has for example five units left in its development which for whatever reason does not sell, after having sold off the other 95?

6. Appointing service providers
Section 58(1) can be interpreted to prohibit the developer/ property practitioner from appointing for instance a specific attorney on a project as a whole, say a new sectional title scheme. Was this the intention? Similarly, developers would often prescribe that only certain subcontractors be employed, for instance to supply kitchens, carpets, tiles and so forth. Is this now also prohibited? If so, the results would be chaotic.

7. Insolvency
Curiously, section 59(1)(a) and (b) deal with the disqualification of a property practitioner who “commits an act of insolvency” or “is insolvent”, and not one who is declared insolvent. (that is found in section 59(1)(c)). It is submitted that the section as it currently reads will lead to much (unnecessary) litigation. Section 59(1) provides that a property practitioner who commits an act of insolvency or “is insolvent”, is immediately disqualified to hold an FFC. This is questionable: an act of insolvency in terms of the Insolvency Act is simply prima facie proof of insolvency which still stands to be proven in court. Furthermore the reference to “is insolvent” should refer to “sequestrated” or “declared insolvent by a court of law.”

8. Candidate Property Practitioners
The Act provides little guidance on the position of candidate property practitioners, other than in the definitions and section 64. The latter provides that a candidate property practitioner may not draft or complete any document or clause in a document relating to the sale or lease of a property. Although the heading of the section refers to “supervision”, and it is understood that the section was meant to say that a candidate may not without supervision perform these functions, the section does not say so. This provision will in particular be bothersome to many property developers, who has people in their employ who are simple “order takers”, not necessarily under the constant or direct supervision and control of the developer. How is it intended to train these candidates?

9. Further anomalies

  1. Paragraph (a) (v) (bb) of the definition of a property practitioner excludes “a natural person, and that person in the ordinary course of business offers a property for sale which belongs to him or her in his or her personal capacity.” 

    Two questions arise: does this mean that a property practitioner/broker (whose ordinary business it is to sell) is excluded/exempted from the Act when selling his or her own home? Secondly, why exclude legal entities in the same position?

  2. The cross- reference to section 46 in paragraph (e) of the definition is clearly wrong and should read section 47.

  3. Section 44(2) cross-references to section 33, which relates to something completely different.

  4. Section 47(3) (b) refers to disqualification in terms of section 48. Disqualification is however dealt with in section 50.

  5. In terms of section 47 it appears that an FFC will be valid for three years. The wording of section 47(3) should therefore be amended to refer to “31 December of the third year to which such appreciation relates.”

  6. Section 49 provides the good news that the PPRA must, within 30 working days, consider an application for an FFC, and should it fail to do so, the application will be deemed to have been approved. It is then obliged to issue the FFC within 10 working days of request. Be however mindful of the following: a total of 40 working days equals two months. The definition of “days” in the Act then excludes “the period between 15 December to 15 January of the preceding (sic) year.” Curiously though, it refers to calendar days. Does this mean I have to apply by at least mid- October to receive my FFC by mid- December, lest I have to wait until 16 January of the next year, or can I expect it by 31 December, the period of exclusion not affecting working days?

  7. The wording of section 50(d) is jumbled and should refer to “a member of a close corporation.”

  8. A failure to comply with section 50 or 51 is considered to be sanctionable conduct (section 62(1)(f)). The two sections however deal with disqualification to hold, and amendment to an FFC, all of which is in the hands of the PPRA. As it now reads, failure to comply is impossible and will never occur. It is unclear to which sections it was meant to refer.

  9. Sanctionable conduct includes (in section 62(1)(j)) distinguishing or excluding on the basis of gender, sex and so forth. Will this mean that separate men’s and women’s residences at universities can no longer be marketed as such?

  10. Section 69 provides that a property practitioner owes a buyer and a seller a duty of care. Does this, in accordance with the maxim inclusio unius est exclusio alterius mean that no such duty of care is owed to a lessor and lessee?

10. The Good News
I communicated the bulk of my concerns as articulated above to the EAAB, and was fortunate enough to be invited to discuss these issues with Advocate Jan Tladi in person. He was aware of most of the discrepancies, and grateful for having been alerted to certain practical problems, specifically as far as property developers are concerned. He also indicated that most of these matters will be dealt with in the regulations, which are in the process of being drafted. Furthermore, he referred me to the provisions of section 4 of the Act, which provides for applications for exemption. It is intended that this section be utilised by specifically developers and other practitioners where directors are not involved in the day to day selling and letting of property. It was also pointed out that exemption can be partially or fully, and subject to certain conditions.

The required qualifications for practitioners will also be dealt with in the regulations, as will mentorship programs for candidates.

Lastly he assured me that the question about the SARS clearance was discussed at length with SARS, who has indicated that this will be issued upon request, and not be withheld due to disputes.

Schalk van der Merwe
VFV Attorneys

Reader Comments:

Laurence van Blerck 12/11/2019:

Lastly he assured me that the question about the SARS clearance was discussed at length with SARS, who has indicated that this will be issued upon request, and not be withheld due to disputes. Can you please clarify this sentence, I don't understand how SARS will issue a tax clearance certificate if there is a dispute?

Deon Welz 12/11/2019:

Thank you for the insightful article. I agree that the Act will have many unintended consequences and that the drafting is shoddy. I also raised many of the same issues in my submissions on the Bill, but it seems we were all ignored. I doubt that all of the poor drafting can be remedied by way of regulations. I am however not convinced that property developers will be included in the definition of Property Practitioner. I am of the opinion that sub-section (b) of the definition can be interpreted to fall within the ambit of sub-section (a), and if this is the case, a developer would only fall within the definition of Property Practitioner if the developer "for the acquisition of gain" ... holds themselves out … as a person who carried out the listed functions or duties "on the instructions of or on behalf of any other person.". On this interpretation a property developer dealing with their own stock will be excluded.

I do not believe that it was the intention of the legislature to include property developers under the definition, even though this is clearly ambiguous. I do hope that my interpretation is accepted by the courts when this is tested. I am flabbergasted by our government that seeks to increase participation in this sector of the economy by making the entrance requirements more onerous.

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