Let the buyer beware

So you have decided that it is time to venture into the property market. You have read the practical literature distributed by estate agents and attorneys and know that you need to do the following:

Inspect the property carefully:- run the taps, flush the loo, turn on the lights, check for signs of damp, leaks and recent repairs.

Make sure that the offer is subject to a bond clause (if you need finance) and that beetle and electrical clearances are to be provided.

Submit the offer in the correct name:- don’t make the offer in your name only if you want the property registered in the joint names of yourself and your spouse;

Make sure that you understand exactly how the financial arrangements are to work, how much the costs will be and when these will be required to be paid.

Yes, it all sounds pretty good:- practical common sense, plain sailing in fact. But just when you thought it was safe to go into the water, along come the legislature and the High Court and suddenly there are a few other obstacles for you to navigate. Some of these might not have been mentioned in the introductory articles on home buying but they could have serious consequences for you as the purchaser.

The “Voetstoets” clause

As a general rule every deed of sale will contain a clause that the seller is not liable for defects in the property, whether patent or latent and that the sale is “voetstoets” i.e. the buyer takes the house “as it stands” on the date that the deed of sale is signed.

This means that:

patent defects in the property (defects that are obvious to someone carrying out a reasonable inspection of the property) will be the buyer’s responsibility unless the deed of sale provides specifically that the seller will carry out certain repairs;  and

the seller is also exempted from liability for latent defects, (those defects that cannot be seen despite a reasonable inspection) unless the buyer can show not only that the seller actually knew of the latent defect and did not disclose it to the buyer, but also that the seller deliberately concealed it with the intention of defrauding the buyer. It is very difficult for a buyer to prove this and many a claim relating to latent defects has failed because the buyer cannot prove deliberate concealment with intent to defraud.

So what happens in the case where the seller carries out extensions to the property without obtaining proper municipal approval and does not disclose this to the buyer? One would have thought, and in fact the courts had initially held, that the seller could not escape liability by relying on a voetstoets clause in such a case. However, in a recent case on the point, the Appeal Court held that while the seller’s failure to obtain the necessary approval for building alterations did constitute a latent defect, provided the seller had not willfully concealed the defect from the buyer, the seller could rely on the voetstoets clause and hence escape liability, unless the failure to obtain approval rendered the property unfit for the purpose for which it was bought and sold.

This decision can have serious consequences for the buyer of a property because in all likelihood the majority of unauthorized extensions of houses will not render the property unfit for occupation as a residence which means that the seller can escape liability unless the buyer can prove willful non-disclosure with the intention to defraud.

For protection a buyer should accordingly insert a clause in his/her offer that the seller warrants that all buildings and other structures on the property have been erected in accordance with approved building plans.

Capital Gains Tax ( CGT)

CGT which is, broadly speaking, the tax levied on the difference between the amount paid for a property and the amount for which it is sold, is the responsibility of the seller. When CGT was introduced in 2001 the Income Tax Act imposed CGT on the sale of immovable property regardless of whether the seller was tax-resident in South Africa. However, the Act left a loophole the size of a barn door in that it failed to provide any mechanism for CGT to be deducted before the proceeds of the sale were paid out to a non-resident seller. The result, of course, was that non-resident sellers who had no further assets in South Africa took the full proceeds of the sale out of South Africa as soon as transfer was registered and SARS was left with no practical way of ever recovering the CGT.

In order to close this loophole, Section 35A was introduced into the Income Tax Act which imposes an obligation on the purchaser of a property costing more than R2 million, where the seller is a non-resident, to deduct an amount from the purchase price and to pay it over to SARS as an advance payment of the seller’s CGT liability.

The amount to be deducted is: -

  • 5% of the purchase price if the non-resident seller is a natural person
  • 7.5% of the purchase price if the non-resident seller is a company
  • 10% of the purchase price if the non-resident seller is a trust.

There is an obligation on both the estate agent and the conveyancer to establish whether or not the seller is non-resident for tax purposes and to advise the buyer if the seller is non-resident. In practice the conveyancer will see to the deduction of the necessary tax and the payment to SARS but, if you are buying from a non-resident and the price is more than R2million, you need to make sure that the conveyancer will make the necessary deduction and pay it over to SARS as failure to deduct the tax and to pay it over will render you liable for the tax even if you have paid over the full purchase price of the property.

Bond Approval

Most deeds of sale contain a clause to the effect that the sale is subject to the granting of a bond. This clause usually specifies a date by which the bond must be approved and goes on to provide that, if the bond is not approved by the specified date, the sale automatically lapses.

In practice what often happens is that the bond approval takes longer than anticipated. The estate agent and/or bond originator are running around frantically as the deadline approaches trying to get the letter of approval from the bank. The agent is then told telephonically before the deadline that the application is in order but the formal letter of approval is not issued by the bank until a day or two after the deadline expires. As soon as the approval is received it is faxed to all and sundry and, because both the buyer and the seller want to proceed with the sale, in the euphoria that the bond has been approved, everyone overlooks the fact that it was approved one or two days late.

It is very important that all parties appreciate that if the bond is not approved in time, there is no longer any agreement between the seller and the buyer as it automatically lapsed when the deadline passed. A verbal agreement to extend the bond date is of no value. Sometimes the agent, being aware that there is a problem, will present the parties with an addendum to the deed of sale after the deadline has passed which purports to extend the date for obtaining the bond approval. This, on its own, is not sufficient. Such an addendum, signed before the deadline date, is fine but once the date has passed and the sale has lapsed, it is not sufficient to revive the dead sale. The parties must actually sign an agreement with each other that the sale is to be re-instated (“novated”) on the same terms and conditions as were contained in the original agreement save that the date for bond approval is extended. Such a document will bring about a new sale between the buyer and the seller and will be binding on both parties.

Very often no action whatsoever is taken to remedy the fact that the bond was granted late: both parties are keen to proceed with the sale and the transfer proceeds without a hitch.   However, if, before the transfer is registered, the seller receives another offer for the property that is substantially higher than the price that the buyer is paying, you can be sure that the deed of sale will be examined with a fine-tooth comb and if a golden opportunity to get out of the sale without penalty on the grounds that the bond was not obtained in time suddenly presents itself, you can be equally sure that the seller will take the gap and the buyer will find himself without a property.

If, before the deadline expires, you are not able to get an addendum signed that extends the date for bond approval and you are forced to rectify the situation after the deadline date, do so at the earliest possible opportunity. Don’t wait until a problem arises and one of the parties wants to get out of the sale as it will then be too late. Deadlines are there for a purpose and failure to comply can have serious consequences. If you want your transfer to proceed smoothly, be very aware of what has to be done, by when and by whom and take steps in good time to make sure that everything happens when it should.