An Offer to Purchase (OTP) is a legal agreement between a buyer and seller relative to the sale of immovable property. As with most legal contracts, there are pitfalls to be aware of, which are addressed here by Pauline Sannasi-Pillay, Senior Legal Counsel: Absa Home Loans.
Q: What do buyers need to ensure before signing an OTP?
Most importantly is the need to ensure that buyers have had an adequate opportunity to inspect the property before signing an OTP. They also need to ensure that all conditions, requirements or material aspects negotiated upon have been incorporated into the OTP, as a condition or suspensive condition to the agreement.
Buyers also need to review the OTP, its terms and conditions, and specifically the due date for performances to ensure they will be able to comply timeously to safeguard against being in default of the agreement.
Q: Once signed, how binding is the contract, and for how long?
The Alienation of Land Act provides protection to purchasers who are natural persons and who purchase residential property for R250k or less, by stating that such purchases are subject to a ‘cooling off period’.
The ‘cooling off period’ allows such Purchaser to revoke or terminate a sale agreement within five (5) days from date of entering into the agreement, by providing written notice to the Seller.
The ‘cooling off period’ is not applicable to sale agreements where the purchase price exceeds R250k or where the purchasers are trusts or juristic persons, or where a previous agreement has been entered into on substantially the same terms by the same parties or the property has been purchased through a publicly advertised auction.
In the event that the sale is not subject to a ‘cooling off period’, the sale is binding until transfer of the property or termination of the agreement.
Q: If signed and there is a change of heart, can a person retract?
Once an agreement becomes unconditional, all rights and obligations become fully enforceable against the parties thereto. A purchaser may retract from the sale, during the cooling period (if applicable) within the five (5) day time frame.
Should a purchaser wish to retract from an unconditional agreement, after the cooling off period (if applicable) penalties by way of damages by seller and/or agent and/or attorneys will be payable by a purchaser.
Q: How does the Consumer Protection Act (CPA) impact on an OTP?
A private sale, between a seller who does not sell property in the ordinary course of his or her business and a purchaser, is excluded from the ambit of the CPA.
The CPA does however provide protection to purchasers of property from a developer, or from a seller who is in the business of buying and selling property.
Further to note is that the CPA does not afford protection to all purchasers, and that if a purchaser is a juristic person whose asset value or turnover exceeds R2-million, such purchasers do not enjoy the protection under the CPA and the voetstoots clause in an agreement would therefore apply.
Q: What are the various clauses that are contained within an OTP?
This is not an exhaustive list, and parties may negotiate and agree on any terms which can be included in an offer to purchase, however, for ease of discussion and regular practice followed, some points are discussed below:-
- The parties to the contract
- Description of the property being sold
- Purchase price, including details of how the purchase will be paid, and when payment is due.
- Suspensive conditions, such as obtaining finance/mortgage bond or sale of an existing property.
- The agreement also includes the obligations of the seller and purchaser in respect of the agreement, such as :-
a. The seller is responsible for all rates and taxes up until transfer and is obliged to provide an electrical compliance certificate prior to transfer, and if applicable the following certificates:
- Electrical fence certificate and gas compliance certificate.
- For coastal properties, an entomologist certificate would need to be obtained by the seller and possibly a water compliance certificate. b. Obligations of a purchaser usually include signing of documents, payment of costs and transfer duties, when requested to do so by the conveyancer.
- Details of the attorneys appointed to attend to the registration of the transfer, and on whose behalf such attorney acts or represents.
- Where a non-resident sells immovable property in excess of R2-million in SA, this detail must be confirmed in the agreement of sale as transfer is subject to withholding tax.
- Income tax status or provisions relating to the parties SARS income tax act compliance.
- Occupation and Possession
- Possession usually coincides with date of transfer, however if occupation will be taken by the Purchaser prior to transfer, the agreement must include a provision for occupation rental payable.
- Estate Agent - clause regulating payment of agents commission.
- Default and consequences of default– clause regulating rights and obligations in the event of a non-adherence to the contract.
- This clause dictates the process to be followed if a party is in breach of their obligations under the agreement.
- The clause will also reserve certain rights to an aggrieved party such as to cancel the agreement and/or retain any monies paid or claim for damages suffered or compel the purchase to perform in terms of the agreement.
- It will usually provide for a notice to be sent (default notice) and when delivery of such notice takes place. The notice will afford the defaulting party a certain period (as agreed to in the contract) to remedy the breach, failing which the aggrieved party may elect how to proceed in terms of the breach.
- Also important to consider, is should the agreement cater for penalties in the event of delays caused by a party, a purchaser may be held liable for any delays cause by him or her.
Q: What sort of other information is required to complete an OTP?
Information relating to the loan account of the seller, to be settled prior to transfer (if applicable), as well as contact details, marital status, and income tax numbers of all the parties.
Q: What happens if the offer lapses, and what are the circumstances that would cause a lapse?
An offer would lapse, if a suspensive condition has not been fulfilled, such as the granting of a mortgage bond, within the time frame provided for in the agreement. An offer would also lapse if the occurrence of a future event has not occurred, in the case of a resolutive condition. For example, should the seller not become the registered owner with a stipulated period of time, the agreement will be of no force or effect.
Should an offer lapse for the above reasons (non-fulfilment of a suspensive or resolutive condition) the parties are placed in the same position they would have been had there been no agreement. No party will have a claim against the other should an offer lapse for such reasons.
Q: How do patent and latent defects impact on an OTP?
In order to prove a latent defect, a purchaser would need to prove that the seller was aware of the latent defect, failed to disclose such defect/s to the purchaser, and had the intention to defraud the purchaser.
The onus rests on the purchaser to prove the above, in order to be successful in a claim against the seller for a latent defect. In the event that the purchaser is able to prove the above requirements, a seller would not be able to rely on the voetstoots clause in an agreement to avoid a claim for damages.
In the event of a patent defect that has been identified, a purchaser will be able to claim against the seller for damages suffered, however it may be difficult to enforce against a seller after the agreement has been entered into and furthermore if transfer has been registered. If such defect has been recorded in the agreement with a corresponding obligation on the seller to repair there will be no room for dispute or refusal by seller to attend to repairs. It would therefore be best to raise such defects identified to negotiate on the purchase price, alternatively provide for repairs to be concluded before the registration of the transfer as a condition of sale.
Q: Can a signee specify conditions in terms of OTP?
In order for a party who wishes to specify conditions in an agreement, the conditions must be specific and have a time frame for deliverance in order to hold the other party accountable for same. For example, the seller to provide purchaser with approved municipal plans within 5 days of acceptance.
Such conditions therefore become suspensive condition to the agreement, and it is the duty and responsibility of the conveyancers to ensure compliance on or before the due date, before proceeding further with the transaction.
Q: What is the 72-hour clause, and its impacts?
Usually a seller reserves his/her rights to market the property until such time as the agreement becomes unconditional. For example, where a purchaser needs to obtain finance, the seller reserves the right to market the property until the purchaser obtains a bond grant.
Should the seller receive another offer, and if this offer is unconditional or is more favourable to the seller, the seller will be entitled to accept the second offer (unconditional or more favourable offer) subject to providing the purchaser (of the first instance) with a copy of such competing offer and afford the purchaser with 72 hours in which to comply with the suspensive condition or to waive the right to the suspensive condition, thereby making the agreement unconditional.
Should the purchaser not waive his/her rights or fulfil the suspensive condition, within the 72 hours, the agreement will lapse and be no force or effect on the parties.
Q: Does the seller have recourse if an OTP is cancelled? (eg: bond is not granted to the buyer).
It must be stated in the agreement that finance through a mortgage bond is a suspensive condition to the sale. Should the agreement not cater for specific wording ensuring that the obtaining of finance is a suspensive condition, a bond grant would be seen as a condition of sale, and the default clause would therefore dictate what process must be followed and what remedies may be available to a seller in such instance.
If the sale is cancelled by the purchaser at any time after fulfilment of suspensive conditions, the seller will have recourse against the purchaser and those remedies include common law rights and/or rights reserved in the agreement.