Conveyancing Process

PROPERTY SALES GUIDE
SHORT VERSION

1. OBJECTIVE

The objective hereof is to provide a short, but reasonably comprehensive guide to the business of buying and selling immovable property to estate agents, buyers and sellers.

2. ESTATE AGENTS

2.1 The Basics

In order to practise, an estate agent must hold a fidelity fund certificate issued by the Estates Agents’ Board. Without this, an agent is not entitled to charge commission.

Buyers or sellers should select an agent who has experience:

● In the sector in which you wish to deal, i.e. housing or industrial property; and
● Of the locality in which you would want to buy or sell.

One should feel safe in the hands of an agent as he or she will broker a deal which is going to cost a great deal of money and for which service both the seller and purchaser will pay in one way or another.

2.2 Formalities

Usually the seller of a property contracts with an agent to find a buyer for an agreed commission. A buyer of property can, likewise, hire an agent, although this is not common.

2.2.1 Mandates

The contract between an agent and a seller (or buyer) of property, to sell (or buy) at a fee or commission, is known as a mandate. Generally speaking, giving an agent a mandate to sell does not preclude the seller from selling his own property. A so-called sole mandate (often) has the effect of reserving the right to sell through a specific agent, or agency, which results in the commission being earned even if the property is sold by someone else inside the period of validity of that mandate.

2.2.2 Commission

The agent’s fee or commission is determined in his mandate from his or her client.

There is no longer a “fixed” commission and the sum thereof may be negotiated with the agent. Be sure to check if the commission excludes or includes VAT.

Generally speaking, commission is expressed as a percentage of the purchase price of the property to be bought or sold. If the agent is retained by a would-be buyer, we would recommend a fixed commission (lest the agent brokers only expensive deals for the broker’s own benefit!).

An estate agent’s commission is earned when a property sale is concluded as a result of that agent’s efforts, even though the sale follows much later. One cannot, for instance, necessarily escape liability when a would-be purchaser is found by an agent, but the conclusion of the sale takes place after the lapse of the agent’s mandate.

Services such as obtaining a bond, arranging pest certificates and keeping the client abreast of developments, are provided as (mainly) a public relations exercise but do not follow from the agent’s mandate contract.

Estate agent’s fees are usually paid only on transfer of the property sold.

3. CONTRACT OF SALE

In order to sell property validly, the buyer and seller (or their agents) need to contract, in writing, to buy and sell that property for a price. These will be dealt with below together with an explanation of the terms offer, option and rights of first refusal.

3.1 Types of agreement

3.1.1 Offers

A contract for the purchase and sale of property usually consists of two actions, a written offer by one party, which becomes a contract on acceptance, without changes, by the other.

Signing an offer means that, if accepted by (usually) the seller, the parties will be bound to a contract of purchase and sale. An offer may be withdrawn before acceptance by simply calling the agent or the other party.

3.1.2 Options

An option is a contract between a seller and a would-be buyer, that the seller offers to sell a property at a price, which offer will be held open for acceptance by that buyer for a period of time. An option does not need to be in writing, but the offer (which is the subject of the option) must be contained in a document which will give rise to a valid contract on acceptance. In other words; one can give an option orally, but the intended offer must then already be in writing.

Never sign an offer if uncertain. Ask time to have it vetted by a professional. Berrange Inc will do so, free of charge, if we are the nominated conveyancers.

3.1.3 Rights of first refusal

A right of first refusal is a contract, between the seller and the would-be buyer, to the effect that the seller will not sell, unless he or she offers the property to the holder of the rights of first refusal first. Usually the agreement is that the seller will give the holder of the right of first refusal, the opportunity to buy on the same terms as those in any other offer received by him or her.

A contract of right of first refusal does not need to be in writing, but the resulting offer must be.

3.2 Parties

The parties to a contract of sale and purchase of property are usually identifiable. Beware of selling to Mr X or his nominee, as SARS could view such a contract as two distinctive contracts, a sale to X and a following assignment of rights and obligation from X to his nominee. This would give rise to taxation on both transactions, and two transfers.

Agents of parties need written authorization by their principals.

Representatives of legal persons, such as companies, trusts and associations should ideally, be authorized in writing by those entities to sign an offer. Do be careful when selling a property out of any company where the property is the only asset in that company as there are statutory limitations thereto. Likewise, take legal advice when buying the shares or interest in a property-owing company, as there are statutory restrictions on financing such a purchase by bonding the property held by the company.

A purchaser may act as trustee for a to-be-formed company. Do consult an expert, as there are several variations on this theme. For instance, one cannot act as trustee for a to-be-formed company and then buy an existing shelf company to act as the company thus represented.

3.3 Property

The property sold must be identifiable with reference to the contract only. Given the size of the commission payable to the agent, ask that he or she goes the second mile and adds a deeds office as well as a street address.

All fixtures not specifically excluded are deemed to be part of the property. What are fixtures? Discuss this with the agent, or, even better, specify items sold or not sold in the contract, if any doubt exists.

3.4 Price

The price for the property must be fixed or determinable and in money.

If the seller is a VAT vendor for purposes of the property, the price may be stated as being exclusive of VAT. If this is not done the price will be deemed to be inclusive thereof, resulting in a possible 14% loss to the seller. Some properties can be sold as a ‘going concern’ (together with the business thereon) at a zero VAT rate. Such transactions are the province of specialists and advice should be taken from a commercial specialist agent or a commercial attorney.

It is not necessary to pay a deposit. If stipulated, a deposit should be held in an interest-bearing trust account with the conveyancers.

Certain withholding taxes may be payable by the conveyancers to SARS if the seller is a foreigner.
3.5 Incidental stipulations

The above three headings (§§3.2, 3.3 and 3.4) represent the minimum necessary for a valid contract. Additional matters that are customarily arranged, are the following:

3.5.1 Conditions

A condition is a term in a contract which suspends the contract partially until they are fulfilled. Typically a suspensive condition is inserted, allowing the purchaser to obtain a loan (via a bond) of at least a specified sum. If the loan does not materialise, the purchaser may withdraw from the sale.

Sometimes so-called resolutive conditions can undo contracts, i.e. ”If the R/US$ price rises above R8 to the $, this sale shall be void!”

3.5.2 Conveyancing and costs

A conveyancer is an attorney who has obtained a further professional qualification. With very few exceptions, all property transfers are done by or with the assistance of a conveyancer.

Conveyancing fees are negotiable – more so at the upper end of the scale – as, at the other end of the scale, there is a limit below which the work cannot be undertaken profitably.

Conveyancing costs comprise of:

● The conveyancer’s fees (typically about 1% of the value of the property);

● Associated expenses such as the cost of searches, rates certificates, electronic instructions and like;

● Rates (and taxes) due to the relevant municipality, as these have to be paid in advance for any transfer of property to take place and;

● Transfer duty, which varies between 0% – 8% of the purchase price – depending on the value of the property and the identity of the purchaser. No transfer duty is payable on VAT-able sales. Development sales which are advertised as “transfer duty fee” usually include 14% VAT, which is the higher tax. Banks are happy to finance VAT (that is part of the purchase price) but are often loath to lend money for transfer duty.

Value of property (R) Rate

0 – 600 000 0%
600 001 – 1 000 000 3% of the value above R600 000
1 000 001 – 1 500 000 R12 000 + 5% of the value exceeding R1 000 000
1 500 001 and above R37 000 + 8% of the value exceeding R1 500 000

 

The last two items (rates and transfer duty) above make up the lion’s share of conveyancing costs.

3.6 Occupation and Risk

Because of the delay between the sale of property and the date of transfer (or ownership) thereof, occupation thereof is often given prior to transfer. This should only be done if it is reasonably certain that the sale will result in transfer of the property, as it can be awkward, time-consuming and costly to evict an unwilling occupant!
Prior (to transfer) occupation of property has the advantage that both parties can plan on moving on a fixed date. So-called “occupational interest” is usually charged for the value of the occupation of property prior to transfer thereof. This is collected by either the seller or the conveyancer.

Risk is the term used to indicate who will be liable for rates and taxes due on and any damage (or profit) accruing to the property sold. If the contract does not specify that risk shall pass on (usually) the date of occupation, then risk passes only on transfer.

3.7 Voetstoots

To buy voetstoots means that one buys the property “as (it) is”. Such a clause typically excludes the liability of the seller for all defects that can be found by reasonable inspection only. One can also contract to exclude liability for latent defects (i.e. defects that cannot be found on reasonable inspection), but one cannot so exclude defects which the seller knows about.

One should never buy a brand-new building voetstoots from a builder. The National Housing Regulations gives buyers from a registered builder certain follow-up rights.

3.8 Other clauses

Some of the usual clauses cover :

● The sellers liability to provide an entomologist and electrical compliance certificate; and

● The shifting of commission liability to the purchaser if he or she cancels the contract without legal clause.

3.9 Things to check

3.9.1 When buying a flat or sectional title unit :

● Check the management and housekeeping rules for restrictive conditions; and

● Make sure that the body corporate is financially sound.

3.9.2 When buying a commercial property, a great many other considerations apply, such as for instance:

● The value of existing leases and cost of maintenance contracts;

● Rates, which can severely impact upon profitability;

● Zoning considerations; and

● Compliance with fire, health and similar legislation.

3.9.3 When buying a farm, the nature of the farming business conducted on the farm will determine the incidental contents of the contract. Some of these are :

● Water abstraction rights and levies;

● Land claims against the farm;

● Labourers and tenants on the property may have rights of residence etc, and

● Whether the farming operation will be sold together with the land as “a going concern”.

Generally speaking, commercial and farm sales contracts should be drawn by a specialist agent or an experienced conveyancer.

4. The Conveyancing Process

On the next two pages follows a schematic exposition of a simple basic conveyancing transaction. Typically such a series of actions could take 6 to 10 weeks, depending upon many factors. A cash sale could take less time and a highly complex transaction where State consents and the like are required, many months.

The transferring attorneys co-ordinate and arrange the whole series of actions, and would typically update the parties and the estate agent often via access to a web-site, e-mail, or the like.

After registration, the seller’s bonds are paid off and he generally receives a repayment from the bank for overpaid bond instalments. Both parties should receive final accounts detailing costs, fees and sums paid to all and sundry, from the conveyancers involved

The titles are released some time afterwards, and, if bonded, sent to the bonding bank for safekeeping.

Typically the conveyancing is done by the seller’s conveyancer. As such, the seller is liable for the conveyancing fees, unless the contract makes the purchaser liable therefor.

5. Bonds

The bond registration process is schematically shown above.

A bond may be described as a recordal of money to be lent or of facilities granted, coupled with that fact being noted against the title deeds of a property. A bond grants the lender certain rights of preference against (the proceeds of) a property, even on insolvency.

Bonds are essentially the security against which money-lenders or banks lend money or extend credit facilities.

Bonds are sourced from banks or credit granters, directly or via mortgage bond originators.

An originator is paid between 1.5% and 2.8% of the value of the bond for his or her services. This is paid for by the borrower as these costs are factored into the bond repayments.

Most estate agents are contracted to bond originators and would refer the sale particulars to a bond originator. The originators obtain personal financial information from the purchaser and obtain quotes which are then presented to the purchaser, who selects a lender. The process, described above, is then initiated.

Bonds are also registered only by conveyancers, and the fees are negotiated. Bond fees are typically about ⅔% of the capital lent.