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Sellers contemplating an instalment sale agreement containing interest charges should take careful note of the steps to be taken before concluding the sale agreement

The National Credit Act No 34 of 2005 has some wide-ranging applicability on immovable property instalment sale agreements.

Here is a case study to illustrate and understand the implications of The National Credit Act  based on an inquiry our office received this last week :

“I own a property in Muizenberg, Cape Town. A buyer is interested in buying my flat. Her bank is not prepared to give her a loan because she is paying off a few personal loans, but she is prepared to enter into an instalment sale agreement to pay the purchase price in instalments over a period of time, much like a rental. I like the idea of at least getting a monthly income, but I am worried whether I can do this and charge interest on the instalments, particularly as it will take a few years for her to pay the price in full?”


In this blog we will try and address these issues:

The two primary pieces of legislation that should be considered in this situation are the following:

  1. Firstly; one must look at Act No 68 of 1981, as amended, namely, The Alienation of Land Act; and
    2.  Secondly, one must also bear in mind, Act No 34 of 2005, as amended, namely, The National Credit Act.

The Alienation of Land Act regulates the requirements for the sale of immovable property where the purchaser agrees to pay the purchase price to the seller in more than two instalments over a period exceeding one year. 

This type of transaction is often referred to and known as an instalment sale agreement.

 

 

The National Credit Act, on the other hand, regulates credit agreements, i.e. agreements that provide for: 

• A deferral of the payment to be made by the purchaser to the seller in terms of an agreement; and
• A charge, levy or interest that is payable by the purchaser to the seller as a result of the deferral of payment. 

If an agreement therefore only provides for the deferment of the payment of capital, and no interest, fees or other charges are levied in respect thereof, then the National Credit Act No 34 of 2005 does not apply to the sale agreement. Be careful because the inflation of the purchase price over and above the market value of the property sold can be viewed as a charge or a fee which may make the National Credit Act applicable.

In this situation, should the seller therefore not charge any interest, charges or fees on the purchase price or if the seller does not inflate the purchase price above the market value the National Credit Act will not apply. 

However, should the seller wish to add interest, charges or fees on the purchase price or inflate the purchase price above the market value, the National Credit Act of 2005 will apply.

The National Credit Act No 34 of 2005 provides various forms of protection for consumers.

In the context of an instalment sale agreement, as envisaged above, the following issues then become relevant:

• The seller will have to investigate the purchaser’s ability to service the “debt” ie. Can she afford the instalments, or else the seller runs the risk of it being regarded as participating in reckless lending if he fails to do so and should the purchaser subsequently not be able to repay the debt or afford the instalments.
• Also, even if the “credit” provided by the seller to the purchaser, in our example, was not recklessly provided, the purchaser may be able to access the remedies available to over-indebted persons under the National Credit Act of 2005, such as debt review where she cannot maintain the instalment payments.

As a seller contemplating an instalment sale agreement containing interest charges, it is important that you take careful note of the steps you have to take before concluding an instalment sale agreement and accordingly conduct the necessary investigations into the buyer’s ability to repay the debt.

This advice should also be brought to the attention of any Estate Agent acting for either party in such a contemplated transaction.

 

Please visit our website at www.legaladviceoffice.co.za or send us an email to This email address is being protected from spambots. You need JavaScript enabled to view it. and we will respond to your legal queries within 48 hours.

About our author:

Hugh Pollard (Legal Consultant), has a BA LLB and 42 years’ experience in the legal field. 22 years as a practicing attorney and conveyancer; and 20 years as a Legal Consultant.

082-0932304 (Hugh’s Cell Number)

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