The days when 100% loans could be easily obtained are long gone and many would-be buyers find that they cannot purchase the properties they would like to buy on a cash-and-bond basis. One option out is to negotiate a terms sale agreement where the buyer puts down a deposit (usually between 10% and 15% of the purchase price) and then pays off the balance in monthly installments. Legal expert John Gilchrist explains why estate agents should be cautious with such agreements, even when both parties are willing to negotiate one.
The prescribed formalities for terms sales
Since the introduction of the Sale of Land on Instalments Act in 1971 (replaced by the Alienation of Land Act in 1981) terms sales have been heavily regulated by law. The purpose was to protect buyers from what had become fairly regular exploitation by their sellers and estate agents. All too often the seller would take a deposit of about 15% of the purchase price and then resell the property to someone else. The original buyers would only later discover their loss, invariably after the seller had emigrated.
The buyer’s interests in these sales are now heavily protected. If the buyer fails to pay an installment on time, the seller must first give 30-days written notice to pay before he can act to either cancel the sale or demand specific performance. The effect of the legislation today is that the sellers have now become prejudiced by many of the provisions of the Act and can find it difficult to continue with the sale when the buyer fails to pay overdue installments. The sale contract also has to be recorded in the deeds office and this can be a problem, especially when the bondholder is unwilling to release the title deed to the seller and thinks it has the right to withhold it if it doesn’t like the transaction.
Protecting the seller from pitfalls
The next problem is the provisions of the National Credit Act of 2005. If the seller requires the buyer to pay interest on the balance of the purchase price as it is paid off in monthly installments he will first have to register as a credit provider under the Act. This process, and later deregistration, can be very cumbersome, especially as there are annual obligations on the seller which have to be complied with. The only way around this problem is to make the buyer pay occupational rent each month and not interest on any outstanding balance.
Far too often the buyer finds that, when the terms time period is up, he cannot fund the balance of the purchase price. Every agent must ask, in advance, why the buyer will be able to do this at a later date if he cannot pay the full purchase price at the time of sale. Agents must also be aware of the provisions of the Conventional Penalties Act of 1962. Virtually all terms sales provide that the seller can retain all payments made by the buyer as rouwkoop if the buyer defaults in his monthly instalments. Very often all payments made by the buyer have already been paid over to the seller. If the sale is cancelled in these circumstances the seller cannot simply appropriate all payments made. He must come to an agreement with the buyer on the actual amount of damages he may have suffered or obtain a court order to this effect. This places a further burden on the seller when the buyer defaults.
Estate agents are strongly urged to keep away from terms sales. The temptation to get their commission on the sale paid upfront is high, but experience shows that most terms sales cause major problems for the parties involved as time passes and these can often be difficult to resolve.
About the author: John Gilchrist is the director of Property Law Publications.
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