EY Suart Attorneys

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THIS MONTH:

(1)  SECTIONAL TITLE LEVY COLLECTIONS AND LEGAL COSTS

(2)  IMPLICATIONS OF NOT REGISTERING AS A CREDIT PROVIDER, AS PROVIDED BY THE NATIONAL CREDIT ACT

(3)  IMPLICATIONS OF THE VOETSTOOTS CLAUSE IN AN IMMOVABLE PROPERTY SALE AGREEMENT

(4)  ABOUT US

1)  SECTIONAL TITLE LEVY COLLECTIONS AND LEGAL COSTS

For many years bodies corporate have, with specific regard to legal costs, enjoyed the protection of the Sectional Titles Act, Act 95 of 1986 (“STA”).

Prescribed Management Rule 31(5) (Annexure 8) – Now repealed – stipulates that:

 “An owner shall be liable for and pay all legal costs, including costs as between attorney and client, collection commission, expenses and charges incurred by the body corporate in obtaining the recovery of arrear levies, or any other arrear amounts due and owing by such owner to the body corporate, or in enforcing compliance with these rules, the conduct rules or the Act”. (own underlining)

The importance of the now repealed PMR 31(5) is that it entitled bodies corporate to recover legal costs on the higher scale and therefor bodies corporate could recover all of its legal costs from a defaulting owner. 

The following table provides a brief comparison and description of the different legal costs scales.

Party and party scale costs:

• costs are awarded against an unsuccessful party in litigation on a party and party scale in the absence of legislation (in this case the “STA”) or an agreement between the parties providing for costs on the higher scale.

• less than attorney-and-client scale costs.

• taxed in accordance with the prescribed tariff of the relevant Court.

Attorney and client scale legal costs:

• costs are awarded against an unsuccessful party in litigation on attorney-and-client scale where legislation or agreement between the parties provided therefor.

• higher than party and party scale costs

• higher tariffs are allowed by the taxing master – as opposed to those on a party and party scale

• items not provided for / allowed on a party and party scale may be allowed by the taxing master

As a result of the protection afforded to bodies corporate i.r.o. legal costs many attorneys were willing to render collection services on the basis that the attorney would recover his/her legal fees directly from the defaulting owner.

Action instituted against a defaulting owner was a low risk. If an owner failed to pay his levies and legal costs, the owner’s unit could, as a last resort, be sold on auction to recover the legal costs (and any other amounts due and owing to the body corporate).

With the Sectional Titles Schemes Management Act, Act 8 of 2011 (“STSMA”) we enter a new era where the extent of the protection previously afforded to bodies corporate (with specific reference to legal costs) are substantially limited.

Prescribed Management Rule 25(4) and 25(5) (Annexure 1 of the Regulations) stipulates that:

25(4) "A member is liable for and must pay to the Body Corporate all reasonable legal costs and disbursements as taxed or agreed by the member incurred by the Body Corporate in the

collection of arrear contributions or any other arrear amounts due and owing by such member to the Body Corporate, or in enforcing compliance with these Rules, the Conduct Rules or the Act. [Own underlining]

25(5) A Body Corporate must not debit a member’s account with any amount that is not a

contribution or charge levied in terms of the Act or these Rules without the member’s consent or the authority of a judgment or order by a Judge, Adjudicator or Arbitrator.” (own underlining)

PMR 25(4) provides only for “reasonable legal costs” and therefor bodies corporate are no longer automatically entitled to legal costs on the higher scale (attorney client costs).

The former practice of debiting untaxed legal costs, or legal costs that was not consented to by the member, against the owner’s levy account is now specifically prohibited in terms of PMR 25(5).

Bodies corporates transgressing this provision will have to face the consequences, which may include applications to the Community Schemes Ombud Service.

Once a cost order is granted against a defaulting owner the legal costs are subject to taxation by the taxing master. It is the taxing master that would determine what would be allowed as being ‘reasonable”.

Although PMR 25(4) provides for legal costs to be “agreed” by the member, owners are - in our experience - usually reluctant to agree on a reasonable amount i.r.o. legal costs and legal costs are therefor, more often than not, taxed.

Bodies corporate are therefor no longer in the comfort zone where all of its legal costs could be recovered from the defaulting owner, as the taxed “reasonable legal costs” are in many instances far less than the attorney and client fees charged by attorneys. In practice bodies corporate will have to finance the “attorney-client” fee component of legal costs.

The security which bodies corporate previously enjoyed to receive payment and to recover all arrear levies and legal costs, also fell away due to new case law, where bondholders enjoy preference and where it is not always possible to sequestrate a defaulting owner. 

Prudent Trustees should, in our opinion, provide for legal fees in their budget/s.

Should the amount set aside for this purpose not be utilised, it may simply be added to the reserves for the following year.

Provision for legal fees assists to make the financial stability of the body corporate sound and to ensure that those defaulting owners themselves contribute to the legal fees through their pro-rata contributions.

Provision for legal fees will enable a body corporate to obtain adequate legal advice if required and also to bridge the gap between “reasonable legal costs” recoverable from an owner and the “attorney client” costs payable by the body corporate.

Annelize Joubert - Associate

2) IMPLICATIONS OF NOT REGISTERING AS A CREDIT PROVIDER, AS PROVIDED BY THE NATIONAL CREDIT ACT  

National Credit Act, Act No. 34 of 2005 (“NCA”), provides that a credit agreement can only be concluded where a registered credit provider lends money or sells goods to a consumer.   The consumer is expected to agree to terms and sign the agreement, which agreement will address terms such as the repayment period, instalments, interest, fees and the consequences, should the consumer fail to repay the debt on the relevant terms.

Who Needs To Register?

Section 40 of the NCA provides that any person or entity (“lender”) with a principal debt owed to them in terms of any credit agreement in excess of the threshold is required to register. 

Before the 2016 amendment of the NCA, the threshold used to be R500,000.00 which excluded most casual lenders from having to register.  However, in May 2016, the Minister promulgated amended Regulations which reduced (eliminated) the threshold to zero. 

The general rule is that, if you want to lend someone money  where the debt is repaid in instalments, and where interest is charged (therefore extending credit), no matter how little, you must be a registered credit provider failing which the credit agreement is void and not enforceable.  There are however, as it is with general principles, a few exceptions, which will be discussed in a follow-up article.

The Supreme Court of Appeal’s judgment in  De Bruyn v Karstens (Du Bruyn NO and Others v Karsten (929/2017) [2018] ZASCA 143; 2019 (1) SA 403 (SCA) (28 September 2018), finally clarified one of the most contentious interpretations of the NCA of when it is obligatory to register as credit provider. It ruled that it is obligatory to register as a credit provider even in the instance of a single provision of credit if the amount is more than R500 000,00 (the then threshold before the 2016 amendment dropped it to zero) and is an arm's length transaction, despite the fact that the lender is not an active participant in the credit industry.

The case involved a dispute after a business fall-out in 2012 between Mr De Bruyn and Mr Karstens, who was like a ‘son’ to the De Bruyns. Following the operational conflict, Mr De Bruyn then offered to purchase Karstens’s interests in three entities for R2 million, payable in instalments plus interest.  Karstens was at the time not a registered credit provider under section 40 of the NCA when the sales were concluded.

Mr Karsterns had applied to be one in October, 2012 but became registered only in November, 2013.  In May 2013, De Bruyn defaulted on instalment payments and Karstens sued for the balance of purchase price, plus interest of R1,133,169. 

The Supreme Court of Appeal found Karstens’s late registration as a credit provider insufficient and that he was therefore non-compliant with Section 40(3) and 40(4) of the NCA, which voided the agreements, including the mortgage bond registration and the suretyship undertakings. The application was dismissed with costs.

The court relied on a strict interpretation of the NCA, which requires obligatory registration as a credit provider, even for a once-off provision of credit, if the amount was not less than R500 000 (the threshold in 2013, when the credit was extended) and is an arm’s length transaction, despite the fact that the lender is not active participant in the credit industry.

The critical issue is that if you are obliged to register as a “credit provider” in terms of the NCA, you should do so. If you don’t, any credit agreement by way of which you lend money can be declared void. Though you can ask a court to exercise its discretion to allow you to recover your loan, the court may well decline to do so, in which event you will not recover your loan. 

If one cannot heed to the famous Shakespearian quote: Neither a borrower, nor a lender be; for loan oft loses both itself and friend and you wish to extend credit to an employee, business friend or colleague, then get legal advice to help you alleviate the potential pitfalls inherent in concluding credit agreements.  

            Ednah Museva - Candidate Attorney

3)  IMPLICATIONS OF THE VOETSTOOTS CLAUSE IN AN IMMOVABLE PROPERTY SALE AGREEMENT

When a person purchases an immovable property, an implied warranty exists that the property is sold free of any defects. However, this warranty can be excluded by making provision for a “voetstoots” clause in the sale agreement.

The voetstoots clause releases the seller from liability in respect of both patent (visible defects – such as a crack in the wall or broken fittings) and latent (hidden defects – such as damp- or a leaking roof) defects in the property.  This is because the voetstoots clause means that the property is sold ‘as is’.

However, the seller may under certain instances not enjoy the protection afforded by the voetstoots clause, and be liable for the defects in the property, if the purchaser who bears the onus can prove that:

1. the seller was aware of the defect and did not disclose it to the purchaser; or

2. the seller deliberately concealed the defect and did not disclose the defect to the purchaser; or

3. the seller made an innocent or fraudulent material misrepresentation.

The purchaser cannot hold the seller liable for non-disclosure of patent defects, but may however do so if latent defects were not disclosed.

Where latent defects are present, the purchaser may then either cancel the sale agreement or claim a reduction of the purchase price, or claim damages suffered as a result of the latent defects (such as costs to repair the defect).

Furthermore, should the seller undertake to repair any defects, it is important that the parties agree on a suitable standard of repair and for the contractor who effected the repairs to provide a warranty that the repairs effected are in accordance with industry standards.

It is advisable for a purchaser to insist on a home inspection report from the seller or its agent and/or appoint the services of an independent property inspector, who will establish the condition of the property sold before entering into the sale agreement. When purchasers enlist the services of an independent property inspector it serves as a protective measure to safeguard against the voetstoots clause, but it must not be seen as an absolute warranty that the property is free of any defects.

A purchaser must also insist that the seller or its agent to provide confirmation that certain documentation is in place. Examples of documentation which the purchaser must insist on, but not limited to, is an occupation certificate, approved building plans, compliance certificates in respect of electrical reticulation, electric fences and/or gas installations and a copy of the title deed. The purchaser can also make the sale conditional upon the delivery of these documents.

Purchasers must bear in mind the risks associated with an immovable property sale transaction, especially in light of the fact that the Consumer Protection Act 68 of 2008 does not apply to ordinary immovable property sale transactions.

Similarly, a seller cannot be indemnified from liability by merely inserting a voetstoots clause in the sale agreement. The seller has a duty to disclose the existence of any latent defects of which he is aware of at the time of sale to the purchaser.

To summarize – a purchaser must conduct a thorough inspection of the property and obtain all relevant information and documents (building plans, compliancy certificates, etc.) before signing the purchase and sale agreement, or to ensure that the sale agreement provides adequate protection.

  Ziegh Steenkamp - Candidate Attorney

4)  ABOUT US

 

To view our previous newsletters, please visit our website on http://www.eyslaw.co.za.

Kind regards,

EY STUART INC.

 

Disclaimer: The information disclosed herein is not intended to constitute legal advice and is not guaranteed to be correct, complete, or up-to-date. You should not act or rely on any information emanating from this Newsletter without seeking the advice of an Attorney, as the facts relating to your circumstances may influence any advice or information conveyed herein. Should you require legal representation, then please do not hesitate to communicate with us for further information and our standard mandate terms.