Part of a regular feature on the in's and out's of property law. In this edition, we look at things options available for buyers who are unable to secure bond finance, specifically Instalment Sale Agreements and Rental with an Option to Purchase.
A common problem being experienced at the moment is that there is a ‘willing seller’ and a ‘willing buyer’, but the buyer is unable to obtain bond finance. It’s important to be able to conclude a sale, so there are various options that can be considered:
INSTALMENT SALE AGREEMENTS
This is a valid option, but there are a few golden rules:
The buyer should be able to put down a substantial deposit to cover the commission, if applicable, and give the seller some comfort;
The seller cannot charge interest on any of the instalments as the agreement will then fall foul of the National Credit Act;
The agreement must not be indefinite, in other words, the full purchase price should be paid within a defined period of say no more than three years and the buyer must be confident that he or she will be able to come up with the balance of the purchase price by the end of that period, by way of cash or a bond;
An instalment sale agreement should never be subject to any suspensive conditions and all the terms and conditions of the agreement should be clearly set out and must contain certain information which is set out in the Alienation of Land Act in order for it to be valid.
Should the buyer fail to come up with the balance of the purchase price, he or she will have to move out and all payments made (deposit paid and monthly instalments) will be forfeited to the seller.
RENTAL WITH AN OPTION TO PURCHASE
In this scenario, the buyer concludes an option to purchase which he or she can exercise within a stipulated time period whilst they are renting the property. The golden rules:
Provide for a non-refundable option price, which should at least cover the agent’s commission, if applicable, and provide a small deposit;
There must be a proper written lease in place for the duration of the option period, or longer;
The option agreement will have attached to it an agreement of sale that will kick in once (and if) the option is exercised;
The sale agreement can be structured in such a way that the monthly rentals will be deducted from the purchase price, should the option be exercised.
In the event that the buyer elects not to exercise the option to purchase the property, he or she can simply move out when the lease period expires.