I15. Occupational Rent

Paying occupational rent and the consequences of failing to do so should be as simple as paying your bond every month, but all too often other issues arise to complicate matters, usually because buyers and sellers have all sorts of preconceived notions about the laws governing occupational rent which invariably works in their favour alone. It is important to know what the myths are in this field and what the proper course of action must be in any given situation. It is always better to anticipate potential problems than to try and solve them later when they inevitably cause major headaches.

  1. Buyers Refusing to Pay Occupational Rent

This is a common problem when the transfer is being delayed through circumstances on the seller’s side. So often one hears buyers saying: ‘I was told this transfer would be registered within three months. I would not have taken occupation if I had known it was going to be delayed because of some problem on the seller’s side. So, I am refusing to pay any further rental and the seller must get his act together.’

Are they allowed to do this? Most sellers still have to pay their bond instalments monthly and, if the buyer defaults on his rental payments, the seller will be severely prejudiced financially. It will not help the buyer to say he could have obtained a cheaper rental elsewhere pending the transfer of the property.

Most importantly, however, is the law in this case. Anyone occupying another person’s property on an agreed monthly rental is paying it because he is enjoying the full beneficial use of the property.

Defaulting buyers think they can continue benefiting from this use without having to contribute towards it. No law exists to allow them to do this just because the transfer is being delayed. If buyers don’t want to pay occupational rent, then they mustn’t take occupation of the property. They have no legal right to stay in the property at no expense to themselves. It’s a typical quid pro quo situation – I pay you a rental relative to the value of the property for the privilege of beneficially occupying it prior to transfer.

Our courts have consistently held that if the seller can resolve any delays in his transfer within a reasonable period of time without any real prejudice to the buyer (and paying extended occupational rental is not regarded as prejudicial), the buyer is not entitled to cancel the sale or deny his occupational rental obligations. In one case the transfer had already been delayed for nine months and, as the buyer could not show any real prejudice to himself, the Court decided that the sale remained valid with all its terms and conditions.

  1. Cancelling the Sale Because of Non-Payment

Most sellers, attorneys and estate agents believe that, if the buyer defaults on occupational rental, the seller can automatically cancel the sale if the buyer fails to remedy his breach of the contract once he has been placed on terms to do so.

A court decision said that a failure to pay occupational rental may well be a material term of a contract, but unless it strikes at the root cause of the contract (which is highly unlikely in most property sales), the sale may not be cancelled if the buyer has complied with all his other terms and conditions to ensure that transfer can still go through smoothly. The Seller retains the right to sue for the outstanding rentals at any time and he will know where to find the buyer’s property if he needs to attach it to gain security for his claim.

Sellers need to be cautious in allowing buyers to take occupation prior to transfer.

As a rule of thumb, agents should do all they can to make sure that occupation may only be taken earlier in exceptional cases. Early occupation always gives the buyer time to discover all the latent defects on the property and buyers often react by threatening to cancel the sale or to use the next month’s rental to pay for the necessary repairs.

Even when occupation will only take place on transfer, your sale agreement should state what the rental will be if the parties agree to an earlier occupation.

This often happens when the sale is delayed for any reason and the parties have already made arrangements to move in and out by the anticipated date of registration. Too often they come to a private agreement about this without determining what the rental will be, creating problems when the seller wants to know when his first month’s rental will be paid!

  1. Evicting the Defaulting Buyer

What happens when a buyer is in occupation of the seller’s property prior to transfer and the seller takes steps to cancel the sale because the buyer is in serious breach of contract for other reasons?

Even if the breach strikes at the root cause of the contract (a failure to pay the agreed cash deposit, for example), the seller cannot simply force the eviction of the buyer from the premises. It is true that an obligation to pay occupational rental does not create a tenancy if the contract stipulates this (this can even be argued without that stipulation), but this will not automatically allow the seller to sue for any outstanding rental and for an eviction order solely on the grounds that he gave the buyer sufficient notice to remedy his breach of contract and when he failed to do so, also gave him written notice that he was cancelling the sale.

If the buyer contests the seller’s right to cancel, the seller will have to make an application to the High Court for an order declaring the sale properly cancelled.

Only if he succeeds may he also proceed to get an eviction order. He can make a single application for both the declaration of the sale’s cancellation as well as an order to evict the buyer, but he must get this order before he can boot the defaulting buyer out of his property.

In the interim, however, the buyer will remain liable for the full amount of occupational rental payable monthly if he chooses to remain in the property.

  1. VAT and Interest

Two other matters, affecting other amounts that may be payable, need to be covered as well. Firstly, if the sale is of a business, industrial or other types of property other than a residential property and the seller is a VAT vendor, he will probably have to pay VAT on the rental coming to him each month. This includes occupational rental. The test is whether the property is part of the seller’s business enterprise, and in most cases, it will be deemed to be so, especially if the seller is a juristic person (company, trading trust, etc). VAT is payable on business rentals and you may need to make provision for this when concluding a business (or industrial) property sale.

Secondly, sellers cannot summarily claim interest on the occupational rental if it is not paid timeously and the contract makes no provision for this (and that is the case with most property sale contracts). Only when the seller issues a summons can he claim the current prescribed rate of interest over and above the rental outstanding. The interest obligation commences on the date when the summons is served on the buyer.

All these issues serve to back up the basic principle regarding early occupation mentioned earlier. It should only be agreed to by the seller when it is crucial to the conclusion of the sale. In all other cases, the seller’s best interests will only be looked after if the occupation is to be taken no earlier than registration of transfer into the buyer’s name.

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