The Problem with Installment Sale Agreements

A person wishing to purchase a property in South Africa may conclude what is known as an “Installment Sale Agreement” (Instalment Sale Agreement) in terms of which the purchase price is paid in installments.  

The contract provides certain protection to the parties in that the contract itself may be registered at the relevant deeds office. In order to conclude an Installment Sale Agreement the property which is to be sold must be residential property which then obviously excludes commercial, agricultural, industrial and other properties.  In addition the purchase price must be paid by way of two or more instalments over a period of at least twelve months. There are numerous formalities which must be complied with in order to make the contract valid.  Accordingly it is wise to ensure that an attorney drafts the actual contract to ensure that the statutory requirements are all fulfilled.
 
Various information must be disclosed in the Installment Sale agreement including obviously the names of the buyer and the seller, the purchase price and the description of the property but also other information such as the name of the mortgagee and the transfer duty payable. Because of the fact that transfer duty must be paid within 6 months of the contract being concluded, one must remember to do so otherwise the purchaser will pay penalties plus interest.  The penalty is normally 10%.
 
Whilst, on the face of it, the Installment Sale Agreement would appear to be the solution where one cannot pay for the purchase price of a property shortly after the contract is signed, unfortunately, because of the introduction of the National Credit Act, there are a number of problems in relation to concluding an Instalment Sale Agreement. Effectively the seller is providing credit to the purchaser and therefore has to comply with the National Credit Act.  

This means that if the amount which is being paid off is more than R500 000, the seller has to register as a credit provider. In addition, because the seller is providing credit, the seller must therefore ensure that the purchaser can in fact afford to pay the monthly instalments and other amounts due in terms of the Instalment Sale Agreement otherwise it could amount to “reckless lending”.  

This means that the seller must assess the financial situation of the purchaser including the purchaser’s income and expenditure. The major hurdle here is that very often one wants to conclude an Installment Sale Agreement because of the fact that the purchaser could not obtain a loan through a financial institution.  

The question which arises is, why the purchaser can afford to pay the seller if the financial institution made the decision that the purchaser could not afford to pay the monies due in terms of the loan which was going to be secured by a mortgage bond registered over the property. This is almost an indication that the purchaser does not qualify for the credit and that the conclusion of the Installment Sale Agreement by the seller may amount to reckless lending. This obviously is not always the case as different criteria may apply and the interest rate which the seller is prepared to charge may be lower than the interest rate which the financial institution would charge.
 
This is an indication of why the National Credit Act should never have applied to South African property. Whilst many people have argued that the National Credit Act helped saved South Africa from a worse financial crunch, it is quite clear that the banks were not lending monies recklessly prior to the National Credit Act being concluded in regard to property transactions.  The National Credit Act should have applied to wasting assets such as cars and furniture but never to property.  

The result is that the Act has now hurt the very people it was supposed to protect. Because of the National Credit Act, many people cannot obtain mortgage bonds which not only has the effect of reducing the value of properties in general, but more importantly has the effect that such persons cannot buy houses in South Africa. They are accordingly forced to rent properties and because this increases the demand for rentals, it means that rentals are higher than they would have been had more people bought properties.  The result is that the very people that were supposed to be protected are now suffering because they cannot buy houses and at the same time are paying higher rentals than they would otherwise have paid.
 
It is therefore unfortunately a fact that because of the National Credit Act, one often cannot conclude an Installment Sale Agreement and that as a result much fewer Installment Sale Agreements are being concluded than would otherwise be the case.