Property

“I love deadlines. I love the whooshing noise they make as they go by.” (Douglas Adams)

Here’s yet another reminder from our courts on the danger of not complying strictly with every provision in a property sale agreement. Don’t be like Douglas Adams and listen to the deadlines go whooshing by – missing a property sale deadline is a mistake, probably an expensive one. The deadline set by every bond clause is no exception…

Sale’s a dead duck. Who gets the R600,000 deposit?

• A property sale agreement contained a standard “suspensive condition” in the form of a bond clause making the sale conditional upon the buyer obtaining R1.5m in bond finance by a specified date. The buyer could waive the benefit of this clause, and if it wasn’t fulfilled or waived by the deadline date the sale would become null and void – in which event the deposit, with interest, was to be repaid to the buyer within 5 business days.
• The buyer paid the R600,000 deposit to the estate agent, but had difficulty in raising finance and (before the deadline expired) asked for more time to get the necessary bond approval. Both parties assumed that an extension of the deadline had been validly granted, but in fact there was never any compliance with the requirement in the bond clause that any extension be by “written agreement”. In other words, the sale had lapsed, but neither the seller nor the buyer realised that – they both thought they still had an agreement in place.
• Two months later, thinking that the sale was still alive and well, the buyer signed a waiver giving up the benefit of the bond clause and stating that the agreement was no longer subject to the suspensive condition.
• Another two months down the line the buyer told the seller he was no longer proceeding with the purchase (his wife had in fact bought another property in the interim). The seller took that as a repudiation of the contract and cancelled the sale.
• The buyer demanded his deposit back. The seller wanted it forfeited to him. Off to the High Court they went.

The law, and the result

• The general rule in our law is that no agreement comes into existence unless and until all suspensive conditions are fulfilled. So the seller has no claim against the buyer unless either the sale agreement provides for such a claim (unlikely) or “where the party has designedly prevented the fulfilment of the condition.”
• That, in lawyer-speak, is the legal principle of “fictional fulfillment of a suspensive condition”. In lay terms – the law protects the seller and doesn’t allow the buyer to escape from the sale by deliberately ensuring that he doesn’t get a bond.
• The seller argued that that was exactly what the buyer in this case had done; that he had breached the agreement and had deliberately frustrated the fulfilment of the bond clause.
• On the facts however, the Court held that both seller and buyer had remained committed to the sale, blissfully unaware that in law the sale agreement was already a dead duck. The buyer only decided to get out of the agreement after it had already lapsed.
• The buyer gets his deposit back with interest, and the seller is left with an unsold property and a large legal bill.

Buyers – your risk

As the Court put it, what saved the buyer in this case was a lack of evidence that the buyer had – by commission or omission – prevented the necessary finance from being granted. In other words, you risk being sued (which will put your deposit at risk) if you don’t make a genuine effort to get the necessary bond finance by the due date.

Sellers – keep an eye on the bond clause deadline

The seller on the other hand is left to lick his wounds after all the delay, cost and effort this dispute has caused him. He could have avoided all that pain by keeping an eye on the due date and ensuring that the deadline extension was agreed to in writing before it expired. As the Court pointed out “The contract was readily available to all involved and the requirements of clause 6.3 pertaining to an extension were available for all to read. A simple investigation would have revealed what was required.” (Emphasis added).

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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“… had the respondent imposed more moderate penalties, it would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.” (Extract from judgment below)

Buying “plot and plan” in a residential complex allows you the freedom to build your own dream house in a secure environment, quite apart from providing what is likely to be sound long-term investment. Just make sure that you will actually be ready to build within the time frame required by the HOA (homeowners’ association). If you don’t, you risk having to transfer the plot back to the developer (a costly exercise), or you could be lumbered with penalty levies many times higher than normal levies.

You can ask a court to reduce the penalty, but…

Our law gives us general protection from excessive “out of proportion” penalties by means of the Conventional Penalties Act, which in the section headed “Reduction of excessive penalty” provides that – “If upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but every other rightful interest which may be affected by the act or omission in question.” However, as a recent High Court decision illustrates, you will have your work cut out for you if you want the court to exercise that discretion in regard to penalty levies.

The ‘persuasive sting’ of 5x normal penalties

• The HOA of a “luxury/ultra-luxury” residential estate required in its constitution that –
  • Each owner must start construction within one year of transfer,
  • Should construction not commence timeously the developer had the option to require re-transfer of the erf to it,
  • If the developer did not exercise this option, the HOA could “impose whatever penalties it deems appropriate in its sole discretion” on the owner.
• When several erf owners failed to build within the one-year deadline, the HOA passed resolutions imposing penalty levies on them until they started construction.
• These levies started off at 2x the normal levies, and over an eight-year period were increased in stages to 5x the normal.
• The HOA sued the defaulting owners in the Regional Court to recover these levies, winning both in that Court and on appeal to the High Court.
• It was, held the High Court, up to the owners challenging the amount of the penalty to prove –
  • What prejudice the HOA suffered,
  • That the penalty was disproportionate to that prejudice, and
  • The extent to which the penalty should be reduced.
• In addition to the actual monetary prejudice (damages) suffered by the HOA, it was said the Court necessary to consider the HOA’s other “rightful interests” that might be affected by the failure to build, such as problems with security, nuisance, aesthetics, damage, and value loss caused by extended building activities. In this case, one of the additional reasons for the penalty provision was to discourage speculation in the erven by buyers intending to re-sell the plots for profit rather than build and live in the estate.
• There was prejudice to the HOA even though the penalty provision was intended to create a deterrent rather than compensation for default – the prejudice was to the HOA’s “right to enforce concerted action for the common good, and to its interest in obtaining concerted action”.
• Whether the penalty was “out of proportion” to the prejudice could be assessed in three ways:
  1. By looking at comparable situations where the desired result was achieved (the Court compared another similar matter in which a 10x normal penalty was reduced by the Court to 8x normal, much more than the 5x imposed here),
  2. By looking at the size of this penalty and the penalties in general in relation to the income and expenditure of the HOA, and
  3. “By exercising one’s sense of fairness and justice.”
• The HOA had been fair and reasonable in phasing in the increases over an eight-year period.
• Imposing more “moderate” penalties “would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.”

In the end result, the owners must pay the full penalty levies, interest, and costs on an attorney and client scale. Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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“Co-ownership is the mother of disputes” (old Roman law maxim)

There can be big advantages to buying property jointly but be aware of the risks and take steps to lessen them before you put pen to paper. The problem comes if there is a falling-out with your co-owner. Perhaps you come to blows on your usage of the property, or on the incurring of expenses, or on whether it is time to sell, or perhaps you are splitting from each other entirely. That could be a business partnership terminating, or a marriage ending in divorce, or (as in the case we discuss below) a failed romantic relationship. Our courts must regularly resolve bitter joint-ownership disputes between ex-spouses, ex-friends, ex-colleagues, siblings, and close relatives – none of whom dreamed they might ever come to blows when they first hatched plans to buy property jointly. If a dispute does arise, how will you resolve it? And if you split up, who keeps the property? Or do you sell it jointly, and if so how, and when? How will the bond and other property debts be settled? The good news is that by and large the risk of dispute can be reduced with a bit of foresight and planning. Preferably with professional advice and assistance – this is after all likely to be an important asset in both your estates. Let’s have a look at a recent High Court case to illustrate –

A breakup and a fight

• A couple in a “romantic relationship” co-habited in a house of which they were the joint registered owners in undivided half shares.
• When the relationship broke down irretrievably, the partners were unable to agree on a method of ending the property ownership. One partner moved out and the other, after changing the locks, applied to the High Court for an order terminating the joint ownership and appointing a receiver/liquidator to sell it.
• The other party fought this application, contending that the couple had, in addition to being in a personal relationship, also been in a “universal partnership” which still existed.

A co-owner can normally insist on partition of the property at any time

The general rule in our law is this: “No co-owner is normally obliged to remain a co-owner against his will.” Thus “every co-owner of property may insist on a partition of the property at any time. Even if there is an agreement to constitute perpetual joint ownership, the co-owner may demand partition at any time. If the co-owners cannot agree on the way the property is to be divided, then the Court is empowered to make an order which appears to be fair and equitable.” That opens the door to a wide range of options for the court, but often it means an order for sale of the property (possibly by public or private auction) and division of the net proceeds between the joint owners.

But is it “bound” or “free” co-ownership?

But it’s more complicated than that. Our law recognizes two types of co-ownership –

1. In a “free” co-ownership, the co-ownership is the only legal relationship between the co-owners. In this event, the rule above applies – either joint owner can insist on division at any time.
2. In a “bound” co-ownership however “there is a separate and distinct legal relationship between them of which the co-ownership is but one consequence. Co-ownership is not the primary or sole purpose of their relationship”.

In this event, the co-ownership can only be dissolved when the primary relationship is terminated. In this case, the party opposing the court application said that no order of division could be made until the “universal partnership” between the parties had ended. The Court found that there had indeed been a universal partnership in existence, in other words that this had been a case of “bound” co-ownership. But it also held (on the facts) that both the romantic relationship and the universal partnership had ended when the parties stopped living together. The romantic relationship was the ‘tie’ between the parties and when it came to an end, any situation of bound co-ownership became a free co-ownership to which the “end at any time” rule applied. The result – the Court ordered the joint ownership terminated and appointed a receiver and liquidator to sell the property, pay all the property debts, and divide the proceeds between the parties.

The remedy

So the risk is finding yourself in the same unhappy position as the ex-partners in this case, having to ask the High Court to sort out your dispute for you. Happily however there is a simple remedy. Before you buy property jointly, have a professional draw you a full agreement setting out (at the very minimum) –

• The nature of your relationship. In a co-habitation scenario you should probably also have a full “co-habitation” agreement, whilst a business scenario should be linked to your existing arrangement.
• The best vehicle for co-ownership – for some, a simple “let’s put the house in both our names” will be enough, for others a company or a trust may be better.
• Who will own what percentage of the property.
• Who will contribute what to the costs of purchase and to the property expenses and upkeep.
• Who will have what use of the property.
• What will happen if one or both of you wants to leave the relationship, dies, or is incapacitated.
• And so on – every situation will be unique.

If the parties in this case had put such an agreement in place, they might well have saved themselves the stress, wasted time and legal costs of a protracted and complex dispute. The liquidator/receiver’s charges for selling the property and paying out their shares to them will no doubt rub a lot of salt into all those wounds. A final thought: Having a formal contract in place is not a forecast that things will go wrong between you – on the contrary, it should greatly reduce the risk of any dispute or unhappiness arising in the first place. Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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