Purchasing Immovable Property through an Instalment Sale Agreement “The Upside and Remedies in play”

In the previous article, we established that the Alienation of Land Act 68 of 1981 (“Act”) makes it possible to purchase immovable property through an Instalment Sale Agreement.  Again, it is appropriate to mention that it is essential for the Seller and the Purchaser to know what legal requirements need to be satisfied to enter into an agreement of this nature.

WHAT HAPPENS WHEN THE SELLER DOESN’T COMPLY WITH ITS OBLIGATIONS AND TERMINATES?

As far as the Seller is concerned, there is a negative upside and a positive upside. As far as the negative upside is concerned, given the current socio-economic environment we find ourselves in as a result of the Covid pandemic, many property owners have been placed in a position where they face possible unemployment, retrenchment and salary cuts. Unfortunately, property owners who are unable to find alternative financial support to meet their mortgage bond payments have no choice but to scale down, which means selling their property.  While some financial institutions have taken the view that property repossessions are a last resort, everything must still be done to ensure that the property is sold before that milestone is reached.

The last thing any property owner would want is for the property to be sold in execution based on a low reserve price. With that said, once a Seller has reconciled himself to the possibility that it is better to sell the property and avoid repossession, he becomes a “distressed seller” (D-Seller).

As time is not the friend of the D-Seller, he will need to do everything reasonably possible to have the property sold.  This means that the possibility exists that he/she/they may have to accept a lower purchase price, less than the market-related value.

If the D-Seller doesn’t want to lose all the equity that has been built up over the years, but has reconciled himself/herself that the property must still nonetheless be sold, a better option would be to enter into an Instalment Sale Agreement.  This option caters to the purchaser to pay a significant deposit (which can be used to cover the arrear mortgage bond payments that the D-Seller owes), and also accept instalment payments which will be no less than the bond payments.

If one considers this option, although the full purchase price may be paid over a period of time, the D-Seller is not so desperate anymore, as equity in the property can still be retained, particularly in a situation which on the face of it, did not look so good, to begin with.

As a property owner, you may ask yourself what is the upside of entering into an Instalment Sale Agreement, when one could just have a straight out-and-out sale. Well, it depends on the circumstances of the Seller and the Purchaser but more importantly, the agreed terms of the Instalment Sale Agreement, such as the payment of the purchase price and cancellation or penalty clauses.

The Purchaser needs to make the Instalment Sale Agreement attractive to the Seller by offering favourable payment and cancellation terms. You must remember that the property only transfers to the Purchaser once the final instalment is paid, so ownership is retained by the Seller for the duration of this agreement.

What happens if the Purchaser defaults on payments? The Seller would be entitled to cancel the Instalment Sale Agreement if the breach remains unremedied by the Purchaser. The cancellation provision can provide that in these circumstances, all monies which have been paid by the Purchaser, the Seller can retain as a penalty.

WHAT HAPPENS WHEN THE SELLER DOESN’T COMPLY WITH ITS OBLIGATIONS AND TERMINATES?

You will recall in the previous article that the moment the Seller and Purchaser enter into an Instalment Sale Agreement, S20 of the Act places an obligation on the Seller to ensure that the agreement is recorded against the title deed within 90 days.  If the Seller has not done this, the S20 (1)(b) (aa) provides that the Purchaser has the option to either cancel the Instalment Sale Agreement within 14 days and the provisions set out in Section 28 (1) apply. Alternatively, the Purchaser can take steps to cause the Instalment Sale Agreement to be recorded in terms of Section 20(1)(b)(bb).

It is also important for a Purchaser to be aware that the Seller is not entitled to cancel the Instalment Sale Agreement if the Seller himself failed to comply with S20 of the Act – this was established in the case of Chetty v Erf 311, Southcrest CC [2018/15109] [2019].

There are additional remedies that the Act provides, which are available to a purchaser, these are:

Key Take-Aways

We can now see that the law makes provision for parties to enter into an Instalment Sale Agreement with upside and downside. The terms ultimately have to be agreed upon between the parties under the principle of “willing seller” and “willing buyer”.

If this is something you as a potential seller or potential purchaser wish to consider, don’t hesitate to contact BBP Law Attorneys