This section attempts to answer the typical questions a buyer or seller is likely to have regarding instalment sale contracts in terms of the The Alienation of Land Act 68 of 1981 ("ALA").
It has been developed from our deep understanding of the Act which we have acquired from extensive experience in applying it in literally hundreds of ALA transactions over a significant period of time.
We have, however, attempted to keep the explanations as simple as possible without the use of legal 'jargon'.
Answers are general in nature, and typically relate to the most common situations.
Your personal situation may be different to the typical one assumed so please consult us directly should you wish to discuss any particular aspect, as it relates to your situation, in more detail.
For simplicity sake, the male gender has been used - "he/his" should be understood to imply either that or "she/her".
FREQUENTLY ASKED QUESTIONS
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- 1. The instalment sale concept
- 2. Time now to conclude an instalment sale
- 3. The term/duration of an instalment sale
- 4. The financial terms of an instalment sale
- 5. The costs of concluding an instalment sale
- 6. The ongoing costs associated with an instalment sale
- 7. The title deed
- 8. Compliance certificates
- 9. Future buyer bond
- 10. Buyer rights
- 11. Buyer responsibilities
- 12. Seller rights
- 13. Seller responsibilities
- 14. Property insurance
- 15. Tax
- 16. Buyer default
- 17. Seller insolvency
- 18. Death and life insurance
- 19. Encumbering the property, e.g. registering new bonds against it
- 20. National Credit Act
- 21. Additional seller bond finance
- 22. Role of attorneys
- 23. Role of Propsolve
Click on a question to view answer.
1.1. What is an instalment sale in the context of the Alienation of Land Act (ALA)?
This is the sale of a residential property, where payment for the property is made in two or more instalments over a period exceeding a year. Transfer of the property into the name of the buyer is only registered at the end of the agreed term, after the full purchase price has been paid. However, the contract must be recorded against the title deed of the property, by way of an endorsement, in the deeds office, within 90 days from signature of the contract. From the date of occupation, as agreed upon in the contract, the buyer effectively assumes all benefits and risks/responsibilities associated with the property. The seller's obligations to the bank holding a bond over the property (mortgagee), however, remain in place until the bond has been paid in full.
1.2. Where else can reference be found to instalment sales in the context of the ALA?
A full copy of the Act can be found here: www.plato.org.za/pdf/legislation/Alienation%20of%20Land%20Act%2068%20of%201981.pdf Regarding instalment sales, although not everyone knows about them, they are certainly starting to be seen in the industry as the answer to the current property finance logjam. See the following article that appeared as the lead story in the Real Estate Investor Magazine, SA’s largest property investor magazine: http://www.joomag.com/magazine/real-estate-investor-magazine-march-2014/0926873001393583373
1.3. Can non-residential properties be sold on instalment sale?
Yes. In most cases though, the ALA does not apply. However, even in those cases, most of the elements of the ALA can be incorporated into the instalment sale contract. One exception here relates to the recordal process which cannot be included in a non-ALA instalment sale. Small holdings and agricultural holdings do fall under the ALA, however farms and commercial property do not.
1.4. Can farms be sold on instalment sale?
Yes. There are several methods available for the sale of farms on instalments: A delayed payment contract (this can include most of the terms of an ALA contract except recordal); A lease option (where some of the payments go towards paying down capital) - this is a lease which incorporates an option which itself incorporates the terms and details of the future sale agreement; and A "Kustings Brief" - transfer takes place but a bond is registered in the name of the seller - this is usually only possible if there is no bond in the name of the seller.
1.5. Can land be sold on instalment sale?
Yes, any land can be sold on instalment sale. However if it is to fall under the ALA the land must be zoned for residential housing.
1.6. Can shares in a shareblock scheme be sold on instalment sale?
Yes, but not in terms of an ALA contract.
1.7. Can businesses be sold on instalment sale?
Yes, but not in terms of an ALA contract. There are certain circumstances where it makes sense to sell the business premises separately from the business itself. This is often determined by the VAT status of the parties. For the protection of the seller, the deal is structured in such a way that the seller has control over a process that allows them to have the shares/membership share transferred back into their name should the buyer default on payments at any time.
1.8. Can fractional ownership shares be sold on instalment sale?
Yes, but not in terms of an ALA contract.
1.9. Can juristic persons (e.g. companies or trusts) buy on instalment sale?
Yes they can, even under the ALA.
1.10. When should a juristic person be used to buy on instalment sale?
This depends on a number of factors, but suffice to say that there are often advantages to buying in a legal entity like a company or a trust, e.g. asset protection, tax optimisation, succession planning, and when unable to trade or raise loans in one's own name.
1.11. Can foreigners buy on instalment sale?
A foreigner with permanent residency or a work permit can qualify for a 100% bond, and therefore in terms of an instalment sale, does not need to put down any more of a cash deposit than a SA citizen. However, a foreigner without permanent residency or a work permit can buy property on instalment sale if they put down a cash deposit of at least 50%. Where a foreigner buys a property together with other individuals/entities, either in partnership or using a company, the foreigner needs to put down a cash deposit equal to at least 50% of his share. It should also be noted that a foreigner cannot become a director of a new company unless/until he has obtained permanent residency, or a work permit, or a business permit. However, once the company has opened a bank account, the foreigner can register as a director. The foreigner will not be able to get signing power on the company bank account though, unless/until he has obtained permanent residency, or a work permit, or a business permit.
1.12. Can syndicates buy on instalment sale?
1.13. Can a seller under debt review sell via instalment sale?
Yes it is technically possible to do such a deal where the seller is in arrears, or in debt review and has a "catch-up" agreement with the bank. This of course will be subject to bank approval and the deal would need to be structured in such a way that the instalment payments were sufficient to cover the total bond and recovery payments. There would however be additional legal costs, not huge, involved to get the bank's approval.
1.14. Why should a seller finance a buyer in this way if a bank will not?
Bank processes are typically conservative and banks tend to apply one set of rules to all clients. In a seller financed deal like an instalment sale, the seller is free to consider the specific fundamentals applying to a potential buyer. Also, with a bank, the consequences of a default are generally a lot higher. Default to a bank often triggers a process culmintaing in a sale in execution which results in huge losses for both the bank as well as the buyer.
1.15. Can one do an instalment sale where there is an existing bond in place?
Yes. In fact most transactions take place where an existing bond is in place. It is however, important that this is properly catered for in the instalment sale agreement.
1.16. Can a buyer negotiate an instalment sale to meet the shortfall resulting from a new bond that does not fully cover the sale price?
No. This will not be acceptable to the new bank.
1.17. Can one do an instalment sale with an existing tenant in place?
Yes, this is a common occurrence, especially where investment properties are involved. It is however important that this is properly catered for in the instalment sale agreement.
2.1. How long does it take to conclude an instalment sale?
An instalment sale agreement can be drafted and concluded within a few days, but usually takes between one and two weeks. This legally binding contract is then subsequently recorded against the title deed at the deeds office. On condition that the process is not delayed by unforeseen events, the whole process from signature of the instalment sale agreement until recordal takes approximately 6 to 8 weeks.
3.1. What is the term of an instalment sale?
There is a great degree of flexibility and the options are almost endless. Examples of typical terms include: A fixed term equal to the remaining term of the seller's bond; A fixed term which extends beyond the remaining term of the seller's bond, on condition that the monthly instalments are adequate to cover the seller's bond instalments, e.g. in instances where the outstanding bond amount is substantially less than the purchase price; A fixed term (e.g. 5 years) which is shorter than the remaining term of seller's bond, where the instalment is adequate to cover the interest on the purchase price and the seller's bond instalment does not exceed the instalment payable by the buyer. The remaining balance of the purchase price is then payable on/before the expiry of the term, as a balloon payment. This structure is used when the buyer wishes to build a credit history (e.g. in a newly registered trust), or needs to save towards costs/deposit, but is assured of his/her/its ability to obtain a bond within the following 5 years; or A fixed term (e.g. 5, 10 or even more years) where the seller does not have a bond.
3.2. Why has a perception been created that the term of an instalment sales cannot exceed 5 years?
It is a common misinterpretation of the ACT that an ALA transaction cannot have a term greater than 5 years. In fact, the 5 year limit is only to do with land for which you have no title at the specific time of entering the contract. So this would apply to someone selling off a sectional title unit before actual registration of the sectional title scheme and units or even sale of a sub-divided portion of land before the sub-division had been processed and a unique title deed issued for the sub divided portion.
4.1. How are the monthly instalments calculated?
The monthly instalments are calculated in exactly the same way that a bank calculates the payments required on a mortgage bond. ----------------------------------------------------------------------------------- THE BANK FOLLOWS THESE STEPS IN THE CALCULATION PROCESS: Confirms the bond amount, e.g. R1 million Confirms the interest rate, e.g. Prime + 1% (this is effectively the interest that will be charged on the outstanding balance at any point in time) Confirms the time period over which the full bond amount is to be fully paid off in monthly payments, e.g. 25 years or 300 months Calculates the fixed monthly payments required (assuming that the Prime interest rate remains constant at 9.25% in this case), R9,185 given the assumptions stated above. You can use an online bond calculator to do the calculation for yourself, e.g.: 1. http://www.betterbond.co.za/mortgage-calculators/?gclid=CPe8-sbIvsQCFSrMtAodXk0APw#bondcalculator; 2. http://www.absa.co.za/Absacoza/Calculate# (click on the monthly home loan repayment calculator) ------------------------------------------------------------------------------------------------------ THE MONTHLY PAYMENTS TO THE BANK CONSTITUTE A COMBINATION OF INTEREST AND CAPITAL REPAYMENT: In the beginning, the monthly payments are comprised mostly of interest. Gradually, as the outstanding balance reduces, the interest portion of the monthly payment reduces. By the end, the final monthly payment will be almost all capital repayment At any time, the outstanding balance is calculated by taking the initial bond amount and subtracting all of the “capital repayment” portions from the monthly payments made to date If, at any time, the property owner wanted to settle the bond in full, they would have to come up with a cash amount for the outstanding balance. In this example, the outstanding balances after 5 years would be would be R943,707. ------------------------------------------------------------------------------------------------------------------------------------------------------ THIS IS ALMOST IDENTICAL TO THE PROPSOLVE APPROACH: The principles are applied in exactly the same way to calculate the instalments for a Propsolve instalment sale, as they are to calculate the payments due for a mortgage bond from a bank The key difference is that a Propsolve contract usually specifies a time frame by which the full outstanding balance must be settled, and in most cases this is 5 years (Propsolve calls this the final (balloon) instalment) In the case of the example above, this would be an amount of R943,707 after 5 years After payment of the final (balloon) instalment, the property can be transferred into the name of the buyer
4.2. Why is the balloon so high?
As explained previously, the balloon payment amount in an instalment sale is the outstanding capital balance at the balloon time, say after 5 years. -------------------------------------------------------------------------------------------------------------------------Assuming the same interest rates (i.e. for the instalment sale and the subsequent bond acquired by the buyer), a buyer buying a property on instalment sale with a 5 year balloon and then obtaining a 20 year bond from a bank to meet this balloon payment, would be in exactly the same position from a total payments point of view as buyer buying a property conventionally from the outset with a 25 year bond from a bank. In the former situation, the balloon amount would be exactly the same as the outstanding balance with the 25 years bond after 5 years has past. ---------------------------------------------------------------------------------------- In essence then, the advantage of an instalment sale for a buyer, is that you get to move into a home of your own sooner than otherwise would have been possible if you had to qualify for and obtain a bond from the outset, and therefore also benefit from any rising property prices. In most cases you would also be able to spread your payments out over a longer period of time, say 25 years (5 years of instalments + 20 years of bond payments) instead of over just 20 years with a traditional purchase with a bank bond.
4.3. What additional constraints are there regarding the monthly instalments and balloon amount?
The monthly instalments must be determined using a market related interest rate. The deal must be structured in such a way that the monthly instalments must also always exceed the seller's monthly bond payments, and the balloon amount must also exceed the bond settlement figure at the time the balloon payments is due.
4.4. Is the instalment sale interest rate fixed or variable?
If there is an existing bond in place it must be the same, i.e. either fixed or variable. However if there is no bond in place it can be either depending on the agreement between the buyer and seller.
5.1. What are the costs to both seller and buyer of entering into an instalment sale?
The costs to both parties are summarised on the website, on the page that details the instalment sale process.
6.1. What are the expenses a buyer will be responsible for when buying on instalment sale, and how are they paid?
Payments are typically made as follows: Monthly instalments: if there is bond the buyer makes two payments each month, the first directly to the bank for the monthly bond payment due, and the second for the balance directly to the seller (the total of the two payments is the monthly instalment amount); if there is no bond the buyer makes only one payment directly to the seller Rates to the Municipality: the seller pays this and is reimbursed by the buyer (this is because the seller is still on the title deed) Levies to the Body Corporate (applicable to sectional title properties): the buyer pays this directly and copies of the accounts/statements are sent to the seller Electricity and other services to the Municipality: the buyer pays this directly (the name on the account is changed at the Municipality) Insurance premiums in respect of cover for the building to the insurer (applicable to free hold properties): the seller pays this directly to ensure that the property always remains insured. When the buyer pays his monthly instalments to the seller, he pays an additional amount to cover the cost to the seller of such premiums.
7.1. Will the buyer obtain the title deed in respect of the property?
The buyer will only receive the title deed upon full payment of the agreed purchase price. Payment of the final amount due typically occurs at the end of the term of the instalment sale. At that point the property is transferred to the buyer and the buyer receives the title deed. However, to protect all parties in the interim, the contract is recorded at the deeds office against the title deed. If the seller does not have a bond, the buyer has the right to insist on transfer once 50% or more of the capital that has to be paid on instalments, has been paid, and in such a situation will obtain the title deed. At the same time the seller has the right to hold a bond for the balance due to him, to protect his rights in the event of default by the buyer in the future.
8.1. What compliance certificates does a seller need to obtain prior to occupation, in the context of an instalment sale?
Whenever a property is sold and transferred the traditional way, the law requires the seller to deliver such compliance certificates prior to transfer. For the sake of convenience, and to avoid disputes later on, our standard contracts provide for delivery of such certificates prior to occupation.
9.1. When does a buyer need to get a bond (from a financial institution or elsewhere)?
Unless a buyer can source the money elsewhere, he will need to get a bond when: The term of the ALA contract (e.g. 5 years) and amount of the instalments result in a "balloon payment" at the end of the contract term. Then the buyer must be able to obtain finance prior to expiry of the contract term; or The buyer wishes to take transfer during the term of the ALA contract (e.g. 5 years into the 15 year term), i.e. prior to expiry of the original term.
9.2. How likely is the buyer to get a bond later to meet the balloon payment if they cannot get a bond today?
The buyer who buys a house today, can already afford the monthly payments, but just cannot get a bond today. He typically has 5 or 10 years to get his house in order (formalise his affairs so that the bank will recognise his income) before needing to get the bond. In that time a number of things are likely to change which will increase the chances of the buyer getting a bond: The buyer will have consistently made payments for an extended period of time, and in the process established a solid track record of making such payments (probably even higher than will need to be made for a bank bond, i.e. the bank interest rate is likely to be lower); The property in all likelihood will have appreciated in that time, meaning that the loan that the buyer is applying for is now also less, relative to the value of the house; The amount of capital required by way of a bond will have reduced slightly, given that a small component of the instalments will have actually served to reduce the capital owing; The buyer may well have saved some money in that time and made additional capital payments on top of the monthly instalments, further reducing the capital owing; Inflation would have taken its toll too, making the value of any outstanding capital balance less in real terms; and The buyer will also have likely increased his earnings, at least in nominal terms. There are however no guarantees and anything can change in the next 10 years.
9.3. What happens if the buyer fails to secure finance from a financial institution, when such finance is required?
If a bond cannot be secured, in order to avoid having to return the property to the seller, the buyer will either have to come up with the cash, or to sell the property prior to expiry of the allotted time, provided the proceeds are sufficient to cover all amounts owing to the seller. Alternatively, assuming a willing buyer and a willing seller, the term could be extended by mutual agreement of both parties. This extension could be made at an increased interest rate. If everything above fails, the buyer will have to hand back the property to the seller. In so doing, the buyer effectively will have to forfeit the deposit and all monthly instalments paid. This could be considered in hind sight as the equivalent of a rather expensive "rental" experience.
10.1. Is the buyer entitled to make payments before the due date(s) and to make larger payments than what is required by the contract?
Yes. There are no penalties, and interest due will be recalculated according to the new balance of the capital outstanding.
10.2. Can the buyer get his own bond at some point?
Yes, at any time he chooses to.
10.3. Can the buyer resell the property if the purchase price is not yet settled in full and transfer has not taken place?
Yes, the buyer may sell the property, subject to the rights of the seller, i.e. so long as the outstanding balance for the instalment sale can be settled in full.
10.4. When can a buyer transfer the property into his name before the final payment has been made?
Typically the property is only transferred into the name of the buyer once the full outstanding balance has been paid, i.e. at the end of the term. However, the buyer can insist on transfer taking place once 50% of the balance to be paid on instalments has in fact been paid, provided there is no existing bond on the property. This is a very unlikely event especially in the case where a balloon payment is due after only 5 years. After 5 years much less than 50% of the price (i.e. capital) would have been paid through the monthly instalments and at this point the buyer must pay off the outstanding balance fully. If however this was to materialise, and the the buyer was able to come up with 50% of the capital prior to the end of the term, the seller would then be required to register a mortgage against the property for the balance owing, i.e the seller would become the bond holder with the same rights that a bank would have over any other property for which it is the bond holder, including the right to foreclose on the buyer if the bond payments are not made.
11.1. Does the buyer take full responsibility/accountability for the maintenance?
Yes, from the date of occupation or recordal which ever takes place first.
11.2. How can the seller be sure that the buyer is making the necessary bond, rates, levies, services and other payments, and not jeopardising the seller's credit record?
The buyer is responsible for providing the seller with proof of such payments on a monthly basis. In the case of rates, as the registered owner of the property, the seller invariably has to pay this directly and is reimbursed by the buyer.
11.3. Is occupational interest/rent payable prior to recordal?
11.4. Who is responsible for, and when is transfer duty payable?
The buyer is responsible for transfer duty which must be paid to SARS within six months from signature of the contract, where after the buyer will be liable for a 10% penalty charge per year, calculated on the amount of transfer duty payable.
12.1. When does the seller receive the deposit?
As per all traditional property transactions funds are only released from the attorney’s trust account after actual recordal of the contract in the Deeds Office.
12.2. How can the seller be sure that the buyer maintains the property appropriately?
The seller or the seller's agent has the right to regularly inspect the property. Any issues arising should be addressed promptly.
12.3. Can the seller force the buyer to get his own bond at some point?
Yes, if the seller can source a bond on behalf of the buyer, and so long as it is on terms that are as good as or better than those of the instalment sale agreement.
12.4. Can a seller who is in debt review sell their property on instalment sale?
A seller who is in debt review can sell their property (if there is a bond) on instalment sale under the following circumstances: the debt counsellor approaches the court to amend the content of the debt review order before then writing a letter stating that he/she has no objection to the property being sold on instalment sale. He/she will ordinarily only do this if this does not prejudice one or more creditors. In most cases an instalment sale will be to the benefit of the bank holding the bond, and not prejudice the other creditors.
13.1. Who is responsible for accounting for the instalment sale payments and outstanding balance?
The seller must regularly (at least once a quarter) notify the buyer of the outstanding balance, as well as adjustments required to the instalments in line with changes in the interest rate as per the contract. (Propsolve has a tool that sellers can use to assist them with this function.)
13.2. Who is responsible for latent defects?
The seller is liable for latent defects, until date of occupation by the buyer, upon exactly the same legal principles applicable to transactions where the seller gives transfer to the buyer in terms of a standard deed of sale.
13.3. What happens regarding any arrears on the existing bond, rates, levies, etc. should there be any such arrears amounts?
By the time recordal takes place, the seller needs to have settled any such arrears in full. In certain circumstances however, where agreed to by both parties, the buyer may agree to the seller using some/all of the deposit to settle the arrears.
14.1. Who is responsible for insuring the property?
The body corporate if the property is sectional title; and The buyer, from date of occupation, in the case of conventional title. However, where there is a bond registered over the property, the seller is compelled, by virtue of the loan agreement with the bank, to ensure that the property is insured and that such insurance is maintained. In this event, the contract should provide for the premium to continue to be paid by the seller, but for the seller to be reimbursed monthly by the buyer. Even where there is no bond, Propsolve would still recommend such an arrangement, to ensure that the seller is never left exposed by non-payment of premiums by the buyer.
15.1. Is the seller taxed on the monthly instalments?
Only the interest component of the instalments received, less any interest paid in respect of a bond, is taxable.
15.2. How is capital gains calculated for the seller?
In principle, this is calculated on the date of the signature of the instalment sale but a major benefit to the seller is that it is only payable on actual transfer on the property into the name of the buyer which typically happens many years later. This also enables the seller to make provision for such a tax, e.g. by making regular payments into an investment account and taking advantage of the natural effects of compounding.
15.3. What is a developer's situation re income tax?
For a developer who's business is developing and selling property, all receipts, i.e. both the capital and interest portions of instalments when selling on instalment sales, are considered to be income and are taxable, and recognised in the time periods in which the instalments are received.
15.4. What is a developer's situation re VAT?
VAT is triggered (for the full sale price) at the time of sale, more specifically the date of recordal. Prior to recordal, payments are for occupational rent/interest, and as such are zero rated for VAT purposes. Ideally, the deposit for the instalment sale agreement, should at least equal the output VAT so that the developer is not left out of pocket from a cash flow point of view.
15.5. How is the sale price determined by SARS where the transaction is not deemed to be at arm's length?
If the transaction is between unrelated parties, SARS accepts the sale price as the market value. However, if it is between related parties, the seller needs to get three valuations from registered estate agents, and SARS will then accept the average of those. The seller can however make it clear to the agent that they are looking for the lowest price possible to affect a quick sale.
16.1. How likely is a buyer to default?
Buyers seldom default on their instalments. They are highly motivated as they stand to lose their significant deposit and all instalments paid up until that point in time if they default, and return possession of the property to the seller. A proper due diligence (creditworthiness and affordability check) up front further minimises this risk.
16.2. What happens if the buyer defaults in terms of the agreement, e.g. with respect to payments due?
If a buyer defaults on an instalment payment, the seller has the right to issue the buyer with a letter demanding that the buyer rectifies the default within a period of 30 days failing which the seller is entitled to cancel the contract and take back possession of the property. See Section 19(2) of the Act.
16.3. What claims and counter claims may arise after cancellation of a contract due to non-performance by a buyer?
In such an event, all payments made by the buyer to the seller up until that point are put at risk. Although the buyer can make a claim from the seller for the deposit and instalments paid, and other costs* incurred, the seller is able to make a counter claim in respect of costs incurred by the seller in connection with the agreement, and benefits derived form the property by the buyer. (*Taxes in the form of rates and levies are paid by the buyer to their benefit in support of their occupation of the property and cannot form part of the costs claimed from the seller.) See Section 28 of the Act. Costs include items such as the commission paid to Propsolve, any legal costs incurred, any increased costs that will be necessary in reselling the property, the "cost" of any capital losses that could result from having to resell the property at a lower price, and any costs incurred in restoring the property to its original condition should this be necessary. In all probability, should such claims and counter claims ever come about in the first place, a counter claim from the seller will cancel out the initial claim from the buyer, and in some cases can even exceed it. It should also be noted: 1. That the onus is on the buyer, who has been unable to fulfill their payment obligations, to take the first step and lodge a legal claim at their own cost, and 2. That there is no restriction on the seller regarding what they do with the monies received from the buyer, including the deposit.
16.4. What happens to a buyer's credit record in the event of default?
In the event that the buyer should ever default, and the contract ultimately be terminated, their credit history would not be destroyed and they would not be held liable for the debt as they would if they had obtained a bond from a bank. The seller would normally just take back the property and find another buyer.
16.5. What happens if the buyer at any point in time looks as though he is heading towards debt review or sequestration?
The seller is advised to act immediately if a buyer ever defaults on part of, or the full monthly instalment, or any other expenses owed, to enable the seller to retake possession and occupation before the buyer is placed under debt review. The process for getting into debt review takes some time, usually at least 30 days, giving the seller time to act. At this point the contract can no longer form part of any debt review. In the case of an investor buyer, it would be preferable in any event for the property to have been purchased using a more appropriate investment vehicle or legal structure such as a company or trust, or even a combination of the two. In that event, the death of the "buyer", in his capacity as director of the buyer company (or trustee of the buyer trust), will have no impact at all on this agreement.
17.1. How likely is a seller to go insolvent?
A credit check (including a check on any judgements) on the seller will largely mitigate this eventuality.
17.2. What happens if the seller is declared insolvent?
In the event that the seller becomes insolvent: The seller must inform the trustee of the insolvent estate, within 14 days after the trustee's appointment, of the name and address of the buyer in the instalment sale; The mortgagee (seller's bank, holding the bond) must inform the trustee, within 10 days after receiving notice of the insolvency, of the name and address of the buyer in the instalment sale; The trustee must, as soon as practicable, notify the buyer of his right to take transfer of the property. The notice must be in writing and handed to the buyer or sent to him by registered post; The buyer may then take transfer after he has made arrangements for the payment of all costs in connection with the transfer, including the outstanding capital in terms of the contract. The arrangements must be made, to the satisfaction of the trustee, within such period as the trustee may allow, which period shall not be less than 30 days; but If the buyer is not able to take transfer of the property, he will become a preferential creditor in terms of claims on the estate.
18.1. What happens if the buyer dies?
Where the buyer is a natural person, the buyer's rights and obligations in terms of this contract will be assumed by the executor of the estate and ultimately the buyer’s heirs. This is achieved by the combined effect of the provisions of the Act and the terms and conditions of the contract. If the buyer had sufficient insurance (life cover) to settle the amount owing on the property, transfer could be taken straight away. If not, the executor and the heirs would be faced with several choices, including settling the remaining balance with or without raising a bond, or selling the property, either conventionally or via a further instalment sale.
18.2. What happens if the seller dies?
The provisions of the Act and the contract provide mechanisms to deal with the event of the demise of the seller, thereby safeguarding the rights of the buyer and facilitating ultimate transfer of the property to the buyer. The rights and obligations of the seller will be assumed by his estate, and ultimately passed on to his heir(s) by the executor. The seller should ensure sufficient liquidity on death to settle any outstanding bond, as this will be demanded by the bank concerned. If there is not sufficient liquidity, the executor will be forced to sell off certain assets to provide such liquidity. The recordal against the title deed makes it impossible for anyone to transfer the property outside of the terms of the contract and the Act, thus protecting the buyer.
18.3. Is life insurance recommended?
It is strongly recommended that the seller has sufficient life cover to settle the bond, so that in the event of the death of the seller, his estate can settle the bond and continue to derive the income from the instalment sales agreement, but now without any deductions for bond payments. There is also considerable advantage in many circumstances to the buyer taking out cover on the life of the seller. In the event of the death of the seller, the instalment sale agreement can be paid up, in turn making the bond paid up. The buyer will then own the property outright with no further instalments due. It is also recommended that the buyer take out life cover so his estate can make the instalment sale agreement paid up in the event of the death of the buyer. Alternatively, if there are insufficient assets in the estate, the executor of the buyer's estate could by way of election, ensure the continuity of the instalment sale agreement, by delegating the rights and obligations to an heir. The cost of all of the insurance cover above, should such cover not already be in place, should not be seen as merely a cost of doing an instalment sale, as it will result in a significant increase in the net asset value of the parties’ estates in the event of their deaths.
19.1. Can the property be further encumbered after an instalment sale has been put in place?
The property can only be further encumbered, if agreed to in writing by the buyer.
20.1. Do instalment sales fall under the National Credit Act?
There is considerable debate in legal circles regarding the answer to this question, and it still needs to be tested in court. Propsolve takes a conservative approach to such questions and assumes that the National Credit Act does apply except under the following circumstances: where there is zero interest associated with the contract; where the buyer is a juristic person (e.g. a company or a trust, the latter with at least three trustees); or where the seller and buyer are related entities.
20.2. Do sellers need to register as credit providers in terms of the National Credit Act?
Yes, sellers who are subject to the Act need to register, except where the purchase price of the property in question is less than R500,000.
20.3. What does registration entail and how difficult is this?
The registration process is a simple one that the attorneys will undertake on the seller's behalf. As a credit provider, the seller needs to assess the creditworthiness (credit history and judgements) and affordability of the buyer. This is a process that Propsolve will conduct on behalf of the seller, leaving the seller to make the final decision as whether to extend the credit or not. Propsolve is there every step of the way to make this step easy for the seller.
21.1. How will selling a property on instalment sale affect a seller's prospects of raising additional bond finance for additional properties?
All of the following factors support a seller’s case when it comes to raising further bond finance from a bank in respect of another property: When a seller sells a property on an instalment sale contract, the instalments the seller receives in terms of the contract are always sufficient to cover the bond instalments; The buyer is also liable for all of the costs associated with the property, like rates, levies, maintenance, insurance, etc.; An instalment sale agreement is a medium to long term agreement governed by the Alienation of Land Act (“ALA”) - Chapter II in particular - and the National Credit Act. Consequently, the buyer has a vested interest in the property, by virtue of the provisions of the ALA and recordal thereof in the Deeds Office against the original Title Deed. Thus, the buyer stands to suffer a significant financial loss if he defaults - completely unlike a rental agreement which is practically the opposite; and A defaulting buyer can be very quickly and easily ejected after cancellation of the contract by virtue of the cancellation of the contract (being one of sale of the property) and the recordal against the Title Deed. The buyer’s position in law is therefore quite unlike that of a tenant who occupies the property merely by virtue of a lease agreement, rendering the property available for resale on a further instalment sale, upon cancellation. If when approaching a bank for additional bond finance, the seller finds that the individual at the bank does not understand the instalment sale process for some reason, he is welcome to refer them to either Propsolve or GCS Attorneys. What is more, Propsolve would be willing to provide the seller with a written explanation of the above, for submission together with a bond application, or for use in a prior discussion with the bank on this matter. As is the case with any bond application however, there are no guarantees of success.
22.1. What are the responsibilities of the attorneys in the contract?
The Attorneys will: Draft the contract and ensure that it is legally sound and binding; Apply for the registration of the seller as a credit provider in terms of the National Credit Act (NCA); Notify the seller's bank of the transaction, provide the bank with the information required by the Act and request the original deed of transfer; Draft the application for recordal of the contract against the title deed, tend to the signature thereof and lodge the application in the deeds office for registration; Receive in trust and disburse the deposit, if any, in terms of the provisions of the contract; Facilitate payment of the transfer duty and acquire a transfer duty certificate; Provide a service to register juristic entities if the buyer wishes to purchase in a Company or Trust - this will be at an additional cost; Provide additional legal advice at an additional cost; and
23.1. What are the responsibilities of Propsolve in the contract?
Propsolve will: Market/advertise the property through Propsolve's own website and emails to their existing database of buyers/investors, as well as through the other main property portals, like Property24, Private Property and Gumtree; Explain the details of the whole process to both buyer and seller, addressing all reasonable questions in the process; Collect and collate all information relating to the parties to the agreement, the property and current mortgage loan; Perform credit and affordability checks on the buyer; Perform credit checks on the seller for the protection of the buyer; Assist with the commercial structuring of the instalment sale agreement, including consideration of different options; Co-ordinate viewing of the property, liaising with the buyer and the seller in the process (Propsolve does not show the property to prospective buyers as it is an online business, without an agency force on the gound, thus enabling it to keep its costs and hence its fees low); Draft the MoU (all of the key elements of the agreement) and obtain signatures from both the seller and buyer, for use by the attorneys in drafting the full and final Instalment Sale Agreement Liaise with the attorneys through to completion of the deal Propsolve will not: Get involved in ensuring monthly payments of the instalments as we are not able to get access to your bank account to see that the amounts have been received. This is something that you would need to do each month (i.e. just check that you have been paid). We do however give you a very simple tool to manage all the instalments and outstanding balance, etc. Rest assured though that the consequences of default for a buyer are severe, so defaults by buyer are not at all common.
23.2. Does Propsolve require a sole mandate?
No, although we do ask for exclusivity in marketing the property for sale on an instalment sale basis. The seller is always able to advertise for a conventional sale privately or through other agents at the same time.
23.3. Are there any costs for advertising?
No, these are borne by Propsolve.