L2. The CPA and Residential Property Sales

Residential property buyers are being led to believe more and more that their interests in their sales are fully covered by the Consumer Protection Act and they are boldly challenging their sellers to conform to the provisions of the Act. They have been spurred on by certain sections of the media and releases by the Estate Agency Affairs Board which have both promoted the view that the Act covers all normal property sales. Are ordinary sellers of residential homes now obliged to provide full disclosure certificates of all defects on their properties and can their buyers hold their agents accountable for undisclosed defects? Has the voetstoots clause become redundant?

1. Disclosure Certificates and Other Encumbrances

The EAAB has sent a disclosure form to all its registered agents, compelling them to use these in all property sales. In articles enclosed in its Agent magazine at the time the CPA was introduced, the EAAB strongly promoted the view that voetstoots clauses no longer had the relevance or effectiveness that they used to have and that all property buyers were now protected by the provisions of the Act. Coupled with this is the similar viewpoint that all residential property leases also fall within the ambit of the Act and that tenants are entitled to cancel their leases without offering any justification at any time on twenty working days’ notice to their landlords.

The vast majority of conveyancers, however, who are fully qualified property lawyers, believe the EAAB and all other role-players promoting the same line have got it horribly wrong. What the Board seems to have failed to realise is that, by prescribing to their agents that their disclosure certificate must be used in every sale, it is actually obliging every seller represented by an agent to do likewise.

Irrespective of whether the Act covers normal sales or not, the Board has no authority, power or control over individual sellers and cannot force them to use its certificates.

2. Who Exactly is Bound by the CPA’s Provisions?

The definitions at the beginning of the Consumer Protection Act define a consumer as someone who deals with a supplier in the normal course of the supplier’s business. One has to do no more than applying the simplest principles of interpreting the English language to realise that this definition has two immediate implications. The consumer must be dealing with a supplier who provides goods for sale on an ongoing basis and that this must be done not just in the normal course of business, but in the course of the supplier’s business. This means that the transaction must have the essential characteristics of a normal business sale.

It is not easy to draw the dividing line here, and the Act does not even remotely attempt to define its implications for property sales, but by applying certain basic principles it is not hard to see where the plumb line should be. One-off sales of any residential property would not fall within the provisions of the Act or its supplier-consumer definitions. An elderly couple living in the same home for forty years, who finally decide to sell it so that they can move into a retirement home, obviously are not engaging in an ongoing business transaction! No definition of a business sale can possibly be applied to such a sale.

But even people who invest in four or five homes which they intend to hold onto until retirement, selling them off then to acquire capital for retirement income, are also not engaging in a business enterprise.

Property developers, however, and owners of many properties who buy and sell on a regular basis for profit-making purposes as well as landlords who do likewise in letting out a series of homes, will fall within the Act as these can clearly be defined as enterprises of a business nature.

3. Distinguishing Residential and Business Properties

What is particularly important here is the well-defined distinction in legal practice between residences and businesses. Firstly, properties zoned for business purposes are rated on a higher scale than normal residences. The same applies when consent use is given to run a business from a residence – higher assessment rates will be imposed. Private property sales just do not have the same character as business sales and many laws recognise this. There has to be something public about a venture for it to be identified as a business enterprise. Private sales between parties just will not fall within this range unless the seller markets his properties regularly on a public basis.

The ordinary sale of the property also does not have a supplier-consumer factor. The CPA sees suppliers as conductors of business ventures which can victimise unwary consumers. The Act clearly treats the two as operating on different levels of influence. Consumers can be disadvantaged by suppliers who market and produce brand new products that are defective. An average property sale, however, is between two people who are invariably negotiating on the same level. The buyer has the means to purchase the seller’s asset. It’s a simple quid pro quo situation. Once the buyer takes transfer of the seller’s property, he substitutes himself as to its new owner and assumes all the powers of ownership and ancillary rights which the previous owner enjoyed. There is no supplier-consumer disadvantage here. This is more like a sale where the buyer purchases the seller’s actual business rather than products which the seller is selling in the normal course of his business and from his business.

The Act was not intended to cover situations where the buyer is in the same position as the seller and is taking over the seller’s product (thereby becoming a supplier himself) and is being placed in the same position the seller was in beforehand.

4. How our Tax Laws Distinguish Residences from Businesses

The Value-Added Tax Act clearly distinguishes business properties from residential properties.

No Vat is payable on rentals accruing from the latter no matter how many an individual owner may be letting.

VAT only applies to business properties. Here it is quite clear that ownership of a residential property does not constitute a business enterprise. The VAT Act draws this distinction in other areas as well. If an individual person conducts a business from his private home, he will only be liable for VAT if he is using more than 50% of his property for this purpose. Otherwise, if he for example is only running his business on 40% of the property’s area, the property itself is still treated as a residential property. Once again residential properties are clearly excluded in such cases from any form of ‘business’ definition.

When it comes to Capital Gains Tax, primary residences enjoy a R2 million abatement which is never applied to business properties. Our tax laws clearly do not regard ownership of a normal residence as in any way having a business character unless the owner buys and sells properties on an ongoing basis as a clearly defined business enterprise.

Hopefully, when our High Courts finally have to make a decision in cases like these, they will have the good sense to realise that normal property sales were never in their legislator’s minds when distinguishing and protecting consumers from business-operating suppliers.

Once the new Property Practitioners Bill comes into effect then the seller will be obliged by law to produce a disclosure document. While this Bill has been signed by the President it has not yet been Gazetted. Only once it has been Gazetted will the relevance of a disclosure document be enforceable.

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