Instalment Sale Agreements - a Solution to the Credit Crunch?

Private Property South Africa
Karien Hunter

Selling property in the current market can prove to be frustrating. Many property sales are collapsing because the potential buyer is unable to obtain the necessary bond to cover the purchase price.

In fact, as many as 50% of all bond applications are unsuccessful, mostly because of the implementation of the National Credit Act, as banks now have to focus more on qualifying the buyer as opposed to qualifying the property for the loan, and are subject to penalties should they be found negligent in their lending policy. Banks are also no longer able to simply attach and sell a property in execution on loans granted after June 2007 if a home owner defaults on his or her bond instalments, as the court may make a finding that the bank had lent out money recklessly.

In instances where finance is being rejected by the lending institutions, some sellers are looking at disposing of their properties on an Instalment Sale basis, which means that the seller effectively becomes the credit provider. In these cases, the seller remains the legal owner of the property, and the buyer pays the purchase price off in instalments. The buyer then re-applies for finance with a bank at a later point in time, when interest rates have come down or when the buyer’s financial position has improved.

The instalments paid by the buyer would usually be sufficient to cover the seller’s bond instalments, and may include a deposit paid upfront to cover the agent’s commission should the property not be sold privately. What many of these sellers are unaware of is that they will face the same difficulties and be subject to the same laws that the banks are facing, as they have now become the credit provider. In the event of a default, the buyer can raise as a defence that the seller was reckless in extending credit to purchase the property by means of the Instalment Sale Agreement, and the court will have the power to suspend the provisions of the Instalment Sale Agreement.

In addition, the seller is not legally able to extend credit in excess of R500 000 unless he or she registers as a credit provider with the National Credit Regulator first. This is not practically feasible, as the seller is not really in the business of lending out money!

It’s important to note that a property is sold on an instalment sale basis to a corporate entity (for example, a CC, company or a trust) with an asset value of R1m or more, is not subject to the same provisions. The purpose of the NCA is to protect consumers, not business entities.

If you are a seller who is really feeling the squeeze, we suggest that you should look at entering into a lease agreement with a potential buyer, with an option to purchase. You should be able to charge a slightly higher rental in this case, as the buyer will obtain the property at today’s prices but will only have to come up with the purchase price when he or she takes transfer at the end of the lease period, which could be a year or two from now. The NCA does not apply to property rentals, and provided the seller has also taken a rental deposit, his risks in the event of a default on the lease are minimised.

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