New Act to clamp down on financial ‘kick-backs’
MAIN IMAGE: Robert Krautkramer, director with Miltons Matsemela.
The new Property Practitioners Act will make it illegal for a property practitioner to receive a financial incentive, better known as a ‘kick-back’, in return for recommending that clients make use of a specific service provider such as a transferring attorney. Robert Krautkramer, director with legal firm Miltons Matsemela, explains how this will work once the Act becomes effective.
This is an exceptionally welcome change, if ever there was one in South African legislative history. It is unfortunately rife in the estate agency industry, for some estate agents to literally demand “kick-backs” from attorneys, before they are willing to recommend that attorney to a seller (where the seller has no relationship with an attorney of his own), or, for some attorneys, to offer financial incentives (bribes) to estate agents, in return for their support.
This practice will have to stop once the new Act commences.
Limitations on relationships with service providers
Under the new Act a property practitioner (PP) may not enter into any arrangement whereby a consumer is obliged or encouraged to use a particular service provider – including the services of an attorney. Although there is no definition of the word “arrangement”, it is my belief that this must be interpreted to mean a “financial incentive”, of any kind whatsoever. This therefore means that the PP may not for example be offered, or receive, any form of payment; reward; or fee sharing (commission) from mortgage bond originators; bridging companies; compliance companies, or attorneys, in return for which, the PP recommends that person’s services to a seller for example.
Attorneys have, for centuries, been forbidden from “buying work”; soliciting for business, or “touting”. Their profession requires that they obtain business through word of mouth and conservative marketing efforts – not through the sharing of professional fees or paying estate agents for support. This Act now mirrors this prohibition.
In other words, if a PP who sells a house recommends a conveyancer because the conveyancer pays the agent’s office rent; or “desk fees”, petrol money; or pays the PP a percentage of the transfer fee, or anything similar, it will now be a criminal offence, as being in contravention of the Act. Any attorney who does this, is guilty of unprofessional conduct and can be disbarred from practising. It can be seen as commercial bribery.
Of great significance is that if a consumer finds out that the PP was involved in such an arrangement, the PP must repay any such remuneration, together with interest within 30 days if requested to. Failure to refund commission will also constitute a criminal offence.
A PP may not in any way offer or receive a financial or other incentive to influence a compliance certificate service provider. A property practitioner who does so, or a compliance person who accepts any such incentive is guilty of an offence. Nor may a PP in any way interfere with the issuing of such a certificate.
Mandatory disclosure forms
The Act provides that a property practitioner must not accept a mandate unless the seller or lessor has provided a fully completed and signed mandatory disclosure in the prescribed form. (The form must still be published.)
This form must then be presented to any potential buyer or tenant as part of the agreement. If no such disclosure accompanies the sale or lease, it must be interpreted as if no defects or deficiencies of the property were disclosed to the purchaser.
A PP who fails to comply with this may be held liable by an affected consumer.
What exactly does this mean?
Unlike some reports in the media, it does not mean, that a buyer can now suddenly hold a PP liable for any and all defects that he/she discovers after transfer. All it means is that if a PP wishes to argue that he/she DID disclose a defect, if this was not contained in a condition report, the law will presume that it was not disclosed. End of story!
In other words, this clause issues a stern warning to PPs that if they sell or rent out a property without such a form there will be a statutory presumption that the buyer/tenant was not advised of any defects.
If a PP wants to then allege disclosures, he will have to prove it beyond a reasonable doubt – not an easy thing if the law presumes against you.
The main purpose of this document is therefore to protect PPs.
If a PP wants to market a property without such a form, say because the seller refuses to complete it, as he hasn’t set foot in the house for a long time, then the PP must insist that the seller provides an indemnity and, the PP must provide the buyer/tenant with a blank disclosure, with a line drawn through it, marked “SELLER/LANDLORD refuses to complete”. Above all, whatever a PP tells a buyer or tenant about a property, make sure you record this in writing before an offer is made.
Also read: It pays to be honest about your home’s flaws
What does ‘duty of care’ mean?
In terms of the Act, a property practitioner will also owe a buyer and a seller (probably also intended to include a landlord and tenant) a “duty of care”. What exactly does this mean?
In layman’s terms: A PP has a legal duty to act with reasonable care, skill and diligence. This means that he/ she must at all times take reasonable steps to ensure that a consumer does not suffer damages due to an oversight on the PP’s behalf, under circumstances, when it was not only reasonably foreseeable that such conduct could result in damages, but where it was also reasonably avoidable. A duty of care thus means that a PP must for example:
- explain all the material terms of a contract to ensure that his client understand each and every term;
- ensure that the buyer or seller’s true intention is reflected in the contract and that the words used are clear, accurate and easy to understand;
- tell the buyer/tenant everything that he/she either actually knows about a property and which could be of importance to the buyer/tenant, or, which he/she could reasonably be expected to know about the property. This will depend entirely on the circumstances – i.e.
- what does your client intend to do with the property – have you determined whether the property is zoned for its intended use?
- have you at least attempted to ask the seller/landlord whether there are any hidden defects that he/she knows about?
- have you enquired about the existence of approved building plans?
- have you made the conduct rules available if you are selling in a sectional title scheme, or of the constitution, if selling in a homeowner’s association?
- have you determined whether the seller actually has exclusive use or just ordinary use over a parking bay in a sectional scheme?
- It also means that you should restrict your opinions to what you actually know, and not what you might presume, and never express an opinion if you are not qualified to give one. For example, do not attempt to interpret title deed conditions or value a unique property, unless you have the experience to back it.
This the last article in the series by Robert Krautkramer on the new Property Practitioners Act. In the first article he explained who will qualify as property practitioners under the new Act and showed how the new Act offers more protection to homebuyers. In the second article he illustrated the new mandatory requirements upon the regulating body to issue Fidelity Fund Certificates within shorter timeframes while the third article looked at the new BEE regulations that will be enforced to further much-needed transformation in the real estate sector.
About the author: Robert Krautkramer has been a partner at Miltons Matsemela Inc since 2011, a boutique law firm that focusses almost exclusively on property law. He has 23 years’ experience all in all as an admitted attorney and regularly presents seminars to estate agents on contract law; the Estate Agent’s Code of Conduct and new relevant legislation, such as the PPA; the Expropriation Bill; and FICA. In 2019 alone he says he addressed around 2000 estate agents on these three topics.