LET THE BUYER BEWARE … OF VOETSTOETS CLAUSES, APPROVALS, CGT AND DEADLINES

Friday, April 09, 2010
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Prudent property buyers are aware of how critical it is to inspect the property carefully by running the taps, flushing the loo, turning on the lights, and checking for signs of damp, leaks and recent repairs.
Next, they ensure that the offer is subject to a bond clause (if in need of finance) and that beetle and electrical clearances are to be provided.
They submit their offer in the correct name and refrain from making the offer in their own name only if they want the property registered in the joint names of themselves and their spouse.
They understand exactly how the financial arrangements are to work, how much the costs will be and when they will need to be paid.
Yes, it is all a matter of practical common sense; plain sailing in fact. But just when you thought it was safe to enter the water, along come the legislature and the High Court. Suddenly there are a few other obstacles to navigate; some that might not have been mentioned in the introductory articles on home buying but that could have serious consequences for the purchaser.
As a general rule, every deed of sale will contain a clause that the seller is not liable for defects in the property, whether patent or latent. In other words, the sale is “voetstoets”, meaning that the buyer takes the house “as it stands” on the date that the deed of sale is signed.
Thus: 

patent defects in the property (defects obvious to someone carrying out a reasonable inspection) will be the buyer’s responsibility unless the deed of sale provides specifically that the seller will carry out certain repairs; and
the seller is also exempted from liability for latent defects (defects that cannot be seen despite a reasonable inspection) unless the buyer can show not only that the seller actually knew of the latent defect and did not disclose it to the buyer, but also that the seller deliberately concealed it with the intention of defrauding the buyer.

 
It is difficult for a buyer to prove this and many a claim relating to latent defects has failed because the buyer cannot prove deliberate concealment with intent to defraud.
 
 
So what happens in the case where the seller carries out extensions to the property without obtaining proper municipal approval and does not disclose this to the buyer?
 
 
Ostensibly, the seller cannot escape liability by relying on a voetstoets clause.
 
 
However, the Appeal Court recently held that while the seller’s failure to obtain the necessary approval for building alterations did constitute a latent defect, provided the seller had not willfully concealed the defect from the buyer, the seller could rely on the voetstoets clause and hence escape liability. The proviso was that failure to obtain approval rendered the property unfit for the purpose for which it was bought and sold.
 
 
This decision could have serious consequences for the buyer of a property because  most unauthorised extensions to houses will not render the property unfit for occupation as a residence. Accordingly, the seller could escape liability unless the buyer can prove willful non-disclosure with the intention to defraud.
 
 
A buyer should protect himself by inserting a clause in the offer that the seller warrants that all buildings and other structures on the property have been erected in accordance with approved building plans.
 
 
Capital gains tax (CGT), broadly speaking the tax levied on the difference between the amount paid for a property and the amount for which it is sold, is the responsibility of the seller.
 
 
When CGT was introduced in 2001, the Income Tax Act imposed CGT on the sale of immovable property regardless of whether or not the seller was tax-resident in South Africa. However, the Act failed to provide any mechanism for CGT to be deducted before the proceeds of the sale were paid out to a non-resident seller.
 
 
The result was that non-resident sellers who had no further assets in South Africa took the full proceeds of the sale out of South Africa as soon as transfer was registered and SARS was unable to recover the CGT.
 
 
Consequently, the Income Tax Act was embellished by Section 35A, which imposes an obligation on the purchaserof a property costing more than R2 million, where the seller is a non-resident, to deduct an amount from the purchase price and to pay it to SARS as an advance payment of the seller’s CGT liability.
 
 
The amount to be deducted is: -
 

5% of the purchase price if the non-resident seller is a natural person;
7,5% of the purchase price if the non-resident seller is a company; and
10% of the purchase price if the non-resident seller is a trust.

 
There is an obligation on both the estate agent and the conveyancer to establish whether or not the seller is non-resident for tax purposes and to advise the buyer if the seller is non-resident.
 
 
In practice the conveyancer will see to the deduction of the necessary tax and the payment to SARS. But if you are buying from a non-resident and the price is more than R2 million, you need to make sure that the conveyancer will make the necessary deduction and pay it over to SARS. Failure to deduct the tax and to pay it over will render you liable for the tax even if you have paid over the full purchase price.
 
 
Most deeds of sale state that the sale is subject to the granting of a bond; a clause that usually specifies a date by which the bond must be approved and that if the bond is not approved by the specified date, the sale automatically lapses.
 
 
In practice, the bond approval may take longer than anticipated. and often the formal letter of approval is not issued by the bank until a day or two after the deadline expires. As soon as the approval is received it is faxed to all and sundry and, because both the buyer and the seller want to proceed with the sale, in the bond approval euphoria, everyone overlooks the fact that it was approved one or two days late.
 
 
It is crucial to appreciate that if the bond is not approved in time, there is no longer any agreement between the seller and the buyer, as it lapsed when the deadline passed. A verbal agreement to extend the bond date is of no value.
 
 
The agent, aware that there is a problem, may present the parties with an addendum to the deed of sale after the deadline has passed; an addendum purporting to extend the date for obtaining the bond approval.
 
 
Alas, this, on its own, is not sufficient. Such an addendum, signed before the deadline date, is fine but once the date has passed and the sale has lapsed, it is not sufficient to revive the dead sale.
 
 
The parties must actually sign an agreement with each other that the sale is to be re-instated (“novated”) on the same terms and conditions as were contained in the original agreement save that the date for bond approval is extended. Such a document will bring about a new sale between the buyer and the seller and will be binding on both parties.
 
 
Very often no remedial action is taken and the transfer proceeds without a hitch.   However, if, before the transfer is registered, the seller receives another, higher, offer for the property the deed of sale will be critically examined.
 
 
Should  a golden opportunity to get out of the sale without penalty on the grounds that the bond was not obtained in time suddenly present itself, the seller will take the gap and the buyer will find himself without a property.
 
 
If, before the deadline expires, you are not able to get an addendum signed that extends the date for bond approval and you are forced to rectify the situation after the deadline date, do so at the earliest possible opportunity.
 
 
Don’t wait until a problem arises and one of the parties wants to get out of the sale, as it will then be too late. Deadlines are there for a purpose and failure to comply can have serious consequences.
 
 
If you want your transfer to proceed smoothly, be aware of what has to be done, by when and by whom, and take steps in good time to make sure that everything happens when it should.