When looking to buy a home, most turn to the traditional home loan model, where a buyer approaches a bank, which provides a loan to the buyer who agrees to repayment terms. As the buyer pays off the loan, they own more equity in the property. An instalment sale, however, does not involve the bank. Instead, the buyer reaches an agreement with the seller.
“An instalment sale agreement is a contract in which the buyer of a property agrees to pay the purchase price to the seller in multiple instalments over a period of time, rather than as a lump sum payment,” explains Fhumulani Denga, a senior associate at CMS (https://cms.law/en/zaf/about-cms/about-us), a law and tax legal firm. “This arrangement enables buyers to acquire property without the need for a full down payment or a traditional mortgage, while allowing sellers to defer receipt of the full purchase price. It offers a flexible alternative for buyers, particularly when conventional financing is not feasible.”
Many are wary because historically instalment sales have been burdened with risks for buyers, particularly because sellers in such transactions retain ownership pending full payment. Denga explains that in light of this, the South African legislature enacted the Alienation of Land Act 68 of 1981 (the “Act”) (https://www.gov.za/documents/alienation-land-act-24-mar-2015-1035), with section 20 specifically addressing the terms and enforcement of instalment sale agreements.
“As contemplated in the Act, an instalment sale refers to the sale of immovable property used for residential purposes (and not property held in trust by the State or a Minister for any person or agricultural land), in which the purchase price is payable by the buyer in more than two instalments over a period exceeding one year,” says Denga. “Legal ownership of the property remains vested in the seller until a substantial portion or the full purchase price has been paid. These agreements differ from conventional deeds of sale by virtue of their deferred payment structure and the extended financial risk borne by the buyer.”
Formalities required by section 20 of the Act
Section 20 prescribes several formalities that must be complied with for an instalment sale agreement to be valid and enforceable, namely: The agreement must be reduced to writing and signed by all parties. Oral agreements or informal undertakings pertaining to the alienation of property on instalment terms are rendered null and void under the Act.
The agreement must clearly and unambiguously set out the following essential terms:
A full description of the property;
The purchase price;
The amount and frequency of instalments;
The applicable rate of interest (if any);
The date on which payments become due and payable;
Any default provisions; and
Any other conditions agreed upon between the parties.
“These requirements serve to enhance certainty and transparency and prevent exploitative practices arising from undisclosed or ambiguous terms,” says Denga.
Suspensive conditions
Where the agreement is subject to a suspensive condition or extends over a significant period, the seller is required to register the contract against the title deed of the property in the Deeds Registry within 90 days of the conclusion of the sale agreement. “This requirement protects the buyer’s equitable interest by ensuring that any subsequent transactions involving the property are subject to the registered instalment sale,” says Denga.
“Failure to register such an agreement may render the buyer vulnerable to third-party claims, especially in instances where the seller becomes insolvent or attempts to sell the property to another buyer. Should the contract not be registered within the stipulated time frame, the buyer may have the right to cancel the sale agreement.”
Default and remedies
In the event of a breach of an instalment sale by the buyer, the seller may not unilaterally terminate the agreement or enforce any acceleration or forfeiture clauses. Instead, the Act places an obligation on the seller to first issue a written notice of breach, affording the buyer a reasonable period to remedy the default. “It is only after the expiry of this notice period and failure by the buyer to comply that the seller may proceed with cancellation or initiate legal action. This provision ensures that the principle of fairness is adhered to and allows buyers a final opportunity to comply with their contractual obligations before facing significant legal consequences,” Denga confirms.
Obligations and risks for sellers
“While the Act affords considerable protection to buyers, it does not do so at the expense of contractual justice. Sellers retain the right to enforce their contractual remedies in the event of default, provided they adhere strictly to the procedural requirements set out in the Act. Non-compliance with these requirements, particularly failure to provide proper notice or register the contract, may have adverse consequences for sellers, including unenforceability and exposure to competing claims.”
Value of section 20
Section 20 of the Act seeks to strike a fair balance between safeguarding the interests of buyers and preserving the legitimate rights of sellers. By mandating formalities, requiring disclosure, and regulating the enforcement of rights and remedies, the legislature has sought to mitigate the inherent risks associated with instalment sale transactions.
“Section 20 is a crucial tool in promoting equitable and transparent property transactions in South Africa and continues to have its place in modern conveyancing and property law,” says Denga. She reiterates that instalment sale agreements require careful navigation and cautions buyers to obtain proper legal advice before entering into an instalment sale. “This is a legally complex area, and while it can offer a pathway to homeownership, it also carries risks that must be clearly understood by both sellers and purchasers,” she says.
“Failing to consult legal professionals can result in parties overlooking key statutory requirements, misunderstanding their rights and obligations, or entering into unenforceable agreements, often with significant financial consequences. In my experience, the most successful instalment sales often occur between parties who share a strong relationship of trust, such as family members, friends, and close associates.”
