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CAN THE NCA APPLY TO A PROPERTY SALE?

Posted By: Hanlie Walker on 04 October 2011

With the recent credit crunch and purchasers’ difficulties in obtaining credit from banks to assist in their acquisition of property, potential purchasers and sellers are curious about the alternative possibility of buying land in instalments. The Alienation of Land Act allows the purchase of land in instalments, but contains lengthy requirements for such agreements in order to protect purchasers, who have been paying instalments, where sellers become insolvent or sell the property to third parties.

1.  Instalment agreements under the Alienation of Land Act

The Alienation of Land Act defines a contract as a deed of alienation in terms of which land is sold against payment by the purchaser to the seller for an amount of money in more than two instalments over a period exceeding a year.

2.  The difference between a conventional sale agreement and an instalment sale agreement is therefore-

In terms of a typical, conventional sale of a property, the land is sold on the basis that the seller receives the net proceeds of the sale on the date of transfer, which follows shortly after the date of agreement. 

In an instalment sale it will work as follows:

• The purchase price is paid to the seller over a period of time (more than 12 months but less than 5 years), in instalments. The instalments will usually be an amount sufficient to cover the seller’s bond repayments. (There is no obligation to pay a deposit, but it may be advisable to include a deposit so as to cover possible estate agent’s commission, if applicable.)

• Transfer is only passed after the full purchase price has been paid.

• The sale agreements must be recorded against the title deed of the property by registration in the Deeds Office within 90 days of signature of the agreement. The seller may not receive any payment in terms of the agreement before the recordal has been registered against the title deed in the Deeds Office.  The seller’s bank (if the property is mortgaged) is, in addition, advised in writing of the sale and is given the purchaser’s details and address.  These procedures ensure that the seller cannot take out any further bonds over the property or sell the property without the buyer’s consent, thereby safeguarding the purchaser’s interests.

• Transfer duty must be paid by the purchaser to SARS within a period of six months from the date that the sale agreement is concluded in order to avoid penalties.

• Should the purchaser default in any monthly payments, payments made by him may be forfeited as damages to the seller (if the agreement so provides) and the property will revert to the seller.  However a court may, on application by the purchaser, grant an order that the amount forfeited is out of proportion to the prejudice suffered by the seller and that a lesser amount be forfeited.

• If the seller is declared insolvent, the purchaser will have a preferent claim in respect of the proceeds of the sale of the property.

3.  Right to demand transfer once purchaser has paid 50% (or more) of the purchase price

Section 27 of the Alienation of Land Act further provides that if a purchaser of land in instalments has already paid 50% or more of the purchase price, then (and if the land is registrable) the purchaser may demand that the seller pass transfer to him. The purchaser must then, simultaneously with transfer:

·      pay the balance of the purchase price; or

·      register a mortgage bond in favour of the seller over the property in order to secure payment of the balance and interest to the seller.

Should the seller refuse or fail to transfer the property to the purchaser within three months after such a demand, the purchaser may cancel the sale agreement. The provisions of section 27 do however not apply in respect of an instalment sale agreement in terms of which the state or a local authority is the seller.

4.  When does an instalment sale of property require compliance with the National Credit Act?

The NCA regulates the granting of credit to consumers and, for this purpose, contains definitions of transactions that will constitute ‘credit agreements’ for purposes of the Act.  For our purposes section 8(4)(f) is relevant. It 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 therefore constituted 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).

Therefore, if the agreement only provides for the deferment of the payment of capital, and no interest, fees or other charges are levied in respect thereof, then the NCA does not apply to the sale agreement. 

One might wonder when a court may consider what constitutes a ‘charge, levy or interest’. The NCA does not define these terms, but it is considered probable that a court will interpret a selling price that is in excess of the true value of the property as a ‘charge or fee’, in which event the provisions of the NCA will apply to such agreement.  A seller should accordingly not attempt to avoid the NCA by loading the purchase price in an instalment sale, because our courts will look at the true nature of the agreement: if it appears there has been a charge or levy in respect of the deferred payment, a court will endorse the protection of the consumer and require that the provisions of the NCA be complied with.

5.  So the NCA applies, but what does it mean?

Purchaser’s safeguards:

The NCA gives various forms of protection for consumers. In the context of instalment sale agreements, the following is most relevant:

(i)    A credit provider (i.e. the seller) is required to conduct a proper investigation into a purchaser’s ability to service the debt.  If this is not done and it appears that the credit facility was granted in circumstances where the purchaser may not have been able to repay the loan, the credit can be regarded as reckless lending.  A court may then set aside all or part of the borrower’s (buyer’s) obligations under the agreement or the court may even suspend the force and effect of the instalment (credit) agreement. For example, the court might order that the purchaser would not be required to make any payments until such time that his/her financial situation improves.

(ii)    Furthermore, even if the granting of the credit was not reckless at the time, the purchaser may still apply for debt review if he cannot maintain the instalment payments after showing that he has become over-indebted. In such an event, if the purchaser’s proposed payment plan to creditors is accepted, the amount of the instalments will be reduced.

Seller’s obligations:

From a seller’s perspective, it must further be remembered that the NCA requires a credit provider to register as such if credit is extended in excess of R500 000 (or if he has 100 or more credit transactions).  The registration as credit provider must occur within 30 days after the date of the sale transaction, failing which the agreement is null and void.  Therefore, if the sale agreement in instalments provides for the payment of more than R500 000 in instalments (which, in the sale of land scenario, will often be the case), the seller will have to register as a credit provider.
The credit provider (seller) must also, before concluding the sale, give the potential purchaser (i) a pre-agreement statement, and (ii) a quotation in the prescribed form.

6.  Are there any exceptions to when the NCA will apply?

There are certain exceptions to the application of the NCA and in the following instances the provisions of the NCA will not apply to the instalment agreement:

• the purchaser (consumer) is a juristic person with a turnover or asset value above R1 million;
• the seller and purchaser are not at arm’s length (i.e. where they are related, are friends or partners);
• where the credit provider (seller) is outside South Arica; or
• where the credit provider (seller) is the State.
If any of the above qualifications apply to the transaction, the requirements of the NCA need not be complied with. The Alienation of Land Act will however remain applicable inasmuch as the transaction is a sale of land and its provisions with regard to instalment sales must be complied with.
And remember, if no interest, levy or fee is charged in respect of the instalment agreement, the agreement will not be considered to be a ‘credit agreement’ for purposes of the NCA, and the Act’s provisions will then not be relevant to the instalment sale. (The provisions of the Alienation of Land Act remain applicable nonetheless.)

In summary:

• The NCA does find application to certain agreements for the sale of land;
• These are agreements in instalments (i.e. a deferred payment) in which the purchaser pays a fee, interest or charge in respect of the deferment of the payment.
• In such a scenario, unless one of the exceptions to the NCA is applicable (see paragrapgh 6 above), the provisions of the NCA need to be complied with.

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