Tag Archives: National Credit Act

MUST I REGISTER AS A CREDIT PROVIDER WHEN SELLING MY FARM?

A2bPurchasers have increasing difficulty obtaining financing for the purchase of farms and other agricultural land. Many sellers of these properties consider granting the purchaser a bond for the purchase amount, to be paid off over a period of time. Worse, some accept an acknowledgement of indebtedness and consent to judgment as sufficient protection, prior to shaking hands and signing off on the transfer agreements.

Previously, the mere registration of the bond or the notice confirming the instalment sale of a property registered at the Deeds Office was sufficient. Together with the required written agreement, it constituted protection to the incidental money lender in the event of a defaulting purchaser.

The National Credit Act

The National Credit Act has changed everything. The Act provides, inter alia, that in any credit agreement where the credit amount exceeds R500 000, the lender is to be registered as a credit provider. This includes the occasional private farm seller, even if it is a once-off arrangement with no intention by the seller to provide credit to any other person ever again. Failure to register as a credit provider prior to a transaction that can be defined as a “credit transaction” is a transgression of the Act.

The consequences

Should the credit provider not be registered and the purchaser defaults on the payment agreement, section 89(5) of the National Credit Act is unequivocally prescriptive on how the courts are to deal with such circumstances. The credit agreement is void as from the date it was entered into. The credit provider must refund all payments made in terms of the agreement together with stipulated interest. Most importantly, all purported rights of the credit provider to recover any money paid or the goods that were delivered to the consumer, are cancelled, or the property forfeited to the state, unless a court finds that such forfeiture will unjustly enrich the purchaser.

Many sellers, and even attorneys, are either unaware of this provision or blatantly flaunt the requirement as they “trust” the purchaser and “know” that the full repayment will be made, including the interest. The problem only manifests when the worst case scenario does occur and the well-known and trusted purchaser defaults on the payments. Many of the sellers who acted as credit providers relied on such repayments and interest either to fund another farm purchase or worse, their retirement.

Forfeiture of property

The Constitutional Court previously considered the validity of this section of the National Credit Act and specifically of the clause relating to forfeiture of the property to the state in the light of the Bill of Rights, regarding the right not to be arbitrarily deprived of property and the so-called Limitation clause. J van der Westhuizen delivered a majority judgement on 10 December 2012 which declared the arbitrary forfeiture of property to the state prescribed in section 89(5)(c) of the National Credit Act to be inconsistent with section 25(1) of the constitution, and thus invalid.

This judgement should, however, sound an urgent alarm to any and all unregistered credit-providing farm sellers. The intention of the National Credit Act is to discourage the provision of credit outside the framework set by the legislature. The Act thus has to punish those that do not comply with the requirements thereof, and the punishment is severe.

The punishment

Should the farm seller therefore not have registered as a credit provider, and the purchaser defaults on his payments, the seller is at risk – a very real and serious risk. Unless a court orders that the circumstances will unjustly enrich the purchaser, the seller may not only forfeit all payments and interest, but will have to obtain a court order that the seller is entitled to recover the farm from the defaulting purchaser.

If the credit agreement is unlawful as from inception in terms of the National Credit Act, the agreement cannot be enforced and the defaulting party cannot be compelled to perform. In the law, pursuance of such agreement must then be made in terms of unjustified enrichment, and specifically the conditio ob turpem vel iniustam causam. In short, the requirements are that the ownership must have passed with transfer, transfer must have taken place in terms of an unlawful agreement, and the claimant must tender back everything received.

However, to be successful the claimant must be able to prove that he acted free of turpitude and show that the actions were not dishonourable. The banker-playing credit-providing farm seller might not forfeit the farm as the court’s discretion has been unconstitutionally curtailed in section 89(5)(c), but is still far from the position he could have been in had he simply registered as a credit provider.

Conclusion

Civil obedience regarding the legislation of the country creates a stable, safe, just and equitable society with a strong economy and an affinity with investors. Compliance with the National Credit Act not only ensures confidence in immovable property as an investment, but will protect those who want to play banker.

For further reading see National Credit Regulator vs Fillippus Albertus Opperman and others, case number CCT34/12 [2012] ZACC 29 and case law quoted by both the majority judgement and descending judgment written by J Cameron.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SALE OF IMMOVABLE PROPERTY AND THE NATIONAL CREDIT ACT

It often happens during a sale of immovable property that the parties agree to a deferred payment of the purchase price. The purchaser will then pay the purchase price in instalments and the seller will charge interest on the outstanding amount from time to time. Sometimes the parties even agree to the registration of a bond over the property to secure the payment of the purchase price.

What the parties don’t keep in mind, however, is that this agreement between the parties constitutes a credit transaction as defined in the National Credit Act (hereinafter called the Act) and that in certain circumstances the seller will have to register as a credit provider in terms of the Act.

To establish if the Act will be applicable and if the seller should register as a credit provider one should carefully consider the following:

  1. The Act will apply to all written credit agreements between parties dealing at arm’s length. This is probably to curb underhand dealings between family members at the peril of other third parties.
  1. Arm’s length transactions are not defined in the Act but they exclude, for example, transactions between family members who are dependent or co-dependent on each other and any arrangement where each party is not independent of the other and does not strive to obtain the utmost possible advantage out of the transaction.

The Act does not apply where:

  1. The consumer is a juristic person whose annual turnover or asset value is more than R1m.
  1. The purchaser is the State or an organ of the State;
  1. A large agreement (i.e. more than R250 000, such as a mortgage) is entered into with a juristic person whose asset value or turnover is less than R1m.

A credit agreement includes a credit facility, credit transaction and credit guarantee or a combination of these. The relevance is the following:

  1. A credit facility requires fees or interest to be paid.
  1. A credit transaction does not necessarily require interest or fees to be paid. An instalment agreement would suffice to qualify as a credit transaction.
  1. An instalment agreement is defined and relates only to the sale of movable property.
  1. A credit transaction also includes any other agreement where payment of an amount owed is deferred and interest or fees are charged.

A mortgage agreement qualifies as a credit transaction [Section 8(4)(d)] and the importance is that mortgage is defined in the Act as a pledge of immovable property that serves as security for a mortgage agreement. Mortgage agreement is also defined as a credit agreement secured by a pledge of immovable property.

Section 40 of the Act requires one to register as a credit provider should you have at least 100 credit agreements as credit provider OR if the total principal debt under all credit agreements exceeds R500 000. Principal debt means the amount deferred and does not include interest or other fees.

It follows that if you sell your home to an individual in a private sale (i.e. where he does not get a bond from the bank) and you register a bond as security, you have to register as a credit provider UNLESS the principal debt is less than R500 000 or the buyer is a juristic person and the price is more than R250 000.

The implications for the seller could be far-reaching if he is not registered, as the agreement will be unlawful and void, and a court must order that:

  1. The credit agreement is void as from the date the agreement was entered into;
  1. The credit provider must refund to the purchaser any money paid by the purchaser under the credit agreement, together with interest;
  1. All the purported rights of the credit provider under the credit agreement to recover any money paid or goods delivered to, or on behalf of the purchaser in terms of the agreement, are either cancelled or forfeited to the State.

The application form to register as a credit provider and also the calculation of the registration fee that is payable to the National Credit Regulator (NCR) can be found on the NCR’s website. If the seller has not registered by the time he enters into the loan agreement he may still register within 30 days after entering into the loan agreement.

Sellers, be careful when you enter into these types of agreements, as non-compliance with the Act could be a costly exercise.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.(E&OE)