They are referred to by various common terms in the real estate industry. The official term is a deed of sale under the Alienation of Land Act 1981 (because this Act is the fundamental legislation defining terms deeds of sale) but most agents, and the general public, casually call them ‘selling on the deed of sale’.
This is a bit of a misnomer because all normal cash sales and cash-and-bond sales are also forms of ‘selling on the deed of sale’ (all property sale agreements are deeds of sale), but everybody seems to know what is being referred to. It is a sale agreement by which the seller sells on a long-term basis. He gets a deposit upfront (usually about 10% of the selling price) and then allows the buyer to pay off the balance of the purchase price over a period of time, usually between three and five years.
In tough times this type of deed of sale is often resorted to, especially when the buyer is willing to put down a fairly large deposit. Sellers who are desperately trying to sell their properties will welcome a cash deposit to help them pay off the arrears on their bonds while estate agents are also tempted to take their share of the cake, namely their commission which becomes payable on the signature of the agreement. No matter what the short-term advantages may be, all parties need to be warned up front as to what the backlash may be from such sales.
Many sellers and buyers have come to deeply regret ever entering into a terms deed of sale.
1. The Prescribed Formalities affecting Terms Deeds of Sale
When the old Sale of Land on Instalments Act was introduced in 1971 its intention was to protect buyers from unscrupulous sellers. Too many cases were known of sellers taking huge deposits from buyers, only to sell to other cash purchasers thereafter without advising either party of the circumstances. Without knowing about the second sale, terms buyers faithfully continued paying off their purchase prices unaware that their sellers had already transferred their properties to other cash purchasers who had paid them in full. The Act was introduced to protect buyers against this type of abuse. Its terms were incorporated into the Alienation of Land Act of 1981 which is the law that covers all terms sales to this day.
Unfortunately, the lawmakers went overboard protecting buyers and the law today favours them considerably at the expense of their sellers who are usually unaware of their obligations under the law.
No one advises them that they have to furnish their buyers with an annual statement disclosing all payments made and any interest accruing on the balance of the purchase price from month to month. (If they don’t, they can lose all future interest on the balance owing to them). Often, they are not aware of the buyer’s rights under the Act to record their sale against the seller’s title deed in the local deeds office under Section 20 of the Act. (Only residential properties, that is, those being used for residential purposes, are affected by this provision).
They are also often not advised that they may not take out further bonds or act in any other way with the result that the amount owing under their bonds may exceed what their buyers still owe them. In getting into this position in any way, such sellers are committing a criminal offence. When their buyers can finally pay their sellers in full, the latter may not be able to clear their bonds and give the transfer of their properties.
Added to this is a severe restraint on all sellers if their buyers fail to pay any instalments on time. They have to give them no less than 30 days written notice to pay the overdue instalment before they can cancel their sales. By this time their buyers will be a further month in arrears.
2. Watch out for the National Credit Act!
When such sales are concluded, and an initial deposit is paid, the balance of the purchase price will be invariably more than R500 000. If the agent concluding the sale is not careful, the seller will have to register as a credit provider under the National Credit Act. This also obliges him to provide separate statements of account to his buyer annually and to comply with all sorts of other obligations. Some agencies even advise their sellers that they must go ahead and do the necessary to get properly registered under the NCA. Only sometime thereafter will they find out just how much they have let themselves in for.
Agents must be wide awake here. Any mention of interest payable monthly on the outstanding balance of the purchase price will oblige sellers to become registered credit providers (eina!) under the Act. The contract must avoid any mention of interest if the balance owing exceeds R500 000.
The proper alternative and this is perfectly acceptable in terms of our laws, is to supplement accruing interest with occupational rental.
A fixed monthly rental, relative to what the monthly interest would have been, must be inserted in its place and it must be officially described as occupational rental. It’s perfectly legal – it simply reflects the rental value of the balance of the purchase price still owing to the seller.
3. When the Time Comes for the Purchaser to Pay
One of the worst problems with terms deeds of sale is that, when they expire, the buyer is usually no more capable of paying what is still owing to the seller than he was when he first bought the property.
Invariably a terms deed of sale was drawn because the buyer couldn’t get a bond for the balance of the purchase price at the time. The sale was concluded on the assumption that the buyer would be able to get his act together later, even though there was no guarantee of this at the time. The seller now wants his money and to be done with the deal. The buyer has paid plenty to him and is very concerned about the possibility that he may lose everything in his predicament. It happens all too often.
To make matters worse the Act provides that the buyer may take transfer of the property once he has paid off 50% of the purchase price. He may now own the property without being able to pay the balance owing to the seller (who will also, in all probability, not be able to clear his bond and give transfer anyway). The buyer’s right to take transfer has to be disclosed in the sale agreement. So many complications can arise with terms deeds of sale and agents must foresee and anticipate them before they conclude such sales.
4. The Conventional Penalties Act – Another Red Herring
There’s more to come. A piece of legislation hardly known to estate agents (and many conveyancers!) is the Conventional Penalties Act. This law provides that, when a sale is cancelled, the seller may not summarily expropriate everything that has been paid to him.
Even if your contract says he can do all this and keep it as rouwkoop, the High Court, on application by the defaulting buyer, may assess the real damage suffered by the seller and reduce the actual amount owing by the buyer to a more reasonable amount. This applies to cash sales as well. The problem here is that the buyer is usually obliged, in terms of a deed of sale, to pay all capital repayments directly to the seller as the years go by. If he has paid, say, 40% of the purchase price but cannot raise the balance when his repayment term expires, he will have to apply to the High Court to reduce the amount owing under the Conventional Penalties Act and then sue the seller for the difference! The amount may be substantial, causing much inconvenience to both parties.
The potential for prejudices, injustices and sheer opportunism with terms deeds of sales are prolific. If the buyer is going to pay substantial amounts reducing the purchase price, these should be kept in trust in the relevant conveyancer’s trust account to protect the buyer from exploitation if he cannot meet his obligations when the time comes for him to do so.
Estate agencies need to be extremely cautious when recommending a terms deed of sale, even if the opportunity to secure early payment of a commission from the sale is extremely tempting. Avoid these types of sales!