There is a way to rescue the sale of a property when the buyer’s home loan application has been rejected. It’s called a Kustingsbrief, a Dutch word that literally translates into 'kissing letter'. Essentially, it is a type of mortgage bond whereby the purchaser registers the bond in the name of any third party - most often the seller - who lends money to the purchaser, but only if the purchaser can pay a 50% deposit of the purchase price.
By way of example: Mr A wishes to buy Mr B’s property for R1-million. Mr A pays a R500 000 deposit but cannot obtain a loan from a bank for the balance of the purchase price. Mr B agrees to finance the balance of the mortgage, which requires Mr A to register a Kustingsbrief in favour of Mr B, which stands as security for the remainder of the purchase price, which is paid by Mr A in instalments.
The Kustingsbrief is helpful in that it avoids third-party loans and high interest rates, as well as the possibility of incurring additional costs such as a further bond. It provides high protection and assurance that the purchase price will be paid in full and that the property transaction is secure.
Like most legal agreements, the Kustingsbrief has both pros and cons:
- The sale is rescued to everyone's benefit, and buyers are assured they have secured finance.
- The buyer can negotiate the interest rate and repayment terms with the seller.
- Kustingsbrief is considered the strongest form of security because the bond is registered at the Deeds Office at the same time as the property transfer. Should the buyer be sequestrated or be unable to repay the loan, the Kustingsbrief is considered the ‘first’ bond on the property, regardless of any further bonds registered later.
- SA courts define Kustingsbrief as ‘a superior front-ranking form of security.’
- Few sellers are in a position to finance the buyer’s mortgage bond.
- Sellers providing this form of assistance must register as a credit provider in terms of Section 40(1) of the National Credit Act 34 of 2005, which can delay the process. There are exemptions that may be applicable, such as lending money to a family member. However, these must be considered from a legal perspective and require consultation with a lawyer/attorney.
- Sellers only receive funds over a period of time as per the agreed instalments; in some cases, this may be up to 20 years.
- Sellers will have to administer the collection of the payments.
- Sellers also need to be assured that the buyer is creditworthy, especially considering traditional bank financing has been rejected, and may request other forms of security or suretyships.
How Kustingsbrief works
The Alienation of Land Act No 68/1969 governs Kustensbrief, particularly Section 27 subsection 1, which states that a purchaser who has paid at least 50% of the purchase price is entitled to an early transfer of the property if the property is registrable. The seller consequently receives a Kustingsbrief over the property as security for the balance of the purchase price.
This type of transaction needs to transfer into the new owner's name within three months. However, the transfer can only occur if an existing bond in favour of the seller is paid up and cancelled. Purchasers are entirely within their rights to insist on seeing bank statements relative to the current bond status on the property.
Failure to ensure the transfer of the property within the three months does not necessarily mean the entire deal is cancelled, although the purchaser does have the right to cancel the agreement at this point and can recover all payments and associated interest.
Another remedy was highlighted in a Constitutional Court case, Botha and Another v Rich NO and Others 2014(4) SA 124 (CC). The Court confirmed that the common-law right of 'specific performance' is available to the purchaser. Specific performance is a remedy in which a court orders a party to act on its promise - or as close as possible - when there is a breach of contract.
In a real estate contract, in terms of Kustingsbrief, the obligations between the parties need to be mutual; in other words, the performance of one cannot be claimed without the performance of the other. So, the purchaser cannot insist on the transfer if he has not paid the purchase price or the deposit as agreed. The seller can, in this case, raise a defence of counter-performance. This means the defaulting purchaser can reinstate the agreement, but only if paying all arrears.
A Kustingsbrief is a viable option if a purchaser is fortunate enough to find a seller willing to consider this type of transaction. However, the information provided is a brief overview and should by no means be relied upon as accurate. Private Property highly recommends consulting with a legal expert before even suggesting Kustingsbrief as an alternate route to secure property finance.
Writer: Kerry Dimmer