Buying a property with the ALA method

by Hanli-Mari Durow – Jacobs Robbertse Attorneys

Alienation of Land Act 68 of 1981

Property Sale

Recent challenging financial times and stringent credit requirements by Banks, have resulted in difficulty for purchasers (especially Trusts) to obtain credit from banks in order to purchase property.  Therefore, potential purchasers and sellers are investigating the alternative possibility of buying land in instalments. The Alienation of Land Act allows for the purchase of land in instalments, but contains lengthy requirements for such agreements in order to protect both parties.

The Alienation of Land Act defines a contract as a deed of alienation in terms of which land is sold against payment by the purchaser to the seller for an amount of money in more than two instalments over a period exceeding a year. The act defines land as:

Land which is intended to be used mainly for residential purposes, must be registered under a separate title deed (or capable to be registered under a separate title deed within a 5 year period) and it includes a Sectional Title unit. Farmland is excluded for purposes of the Act.

During a typical conventional sale of property, the seller will receive the full purchase price at the registration of the property into the name of the purchaser, which is normally shortly after the signature of the contract.  An instalment sale agreement allows for a much longer contractual relationship, however, the longer the period of the contract, the more can go wrong.  Consider risks such as default by the purchaser in payments, the seller becoming insolvent or in the case of death of the parties and make sure that the instalment sale agreement addresses these scenarios.

In the case of Instalment Sale Agreements:

  • The purchase price is paid in instalments (usually an amount sufficient to cover the seller's bond instalments).
  • Transfer to the purchaser only takes place after the full purchase price has been paid.
  • The Seller's bank (If the property is mortgaged) must be informed of the contract and requested to release the title deed for endorsement purposes.
  • The title deed of the property must be endorsed in terms of Section 20 of the Act, recording the instalment sale agreement between the parties (this recordal is NOT A FORMAL TRANSFER of the property).
  • Transfer duty (if any) is payable to SARS within 6 months from the date of the contract.
  • The contract may allow for the purchaser to take occupation of the property and in this case usually stipulates that the purchaser takes over the payment of rates and levies on the property as well.

Other scenarios to take into consideration:

  • Should the purchaser default in any monthly payments, payments made by him may be forfeited as damages to the seller (if the agreement so provides) and the property will revert to the seller. However, a court may, on application by the purchaser, grant an order that the amount forfeited is out of proportion to the prejudice suffered by the seller and that a lesser amount be forfeited.
  • If the seller is declared insolvent, the purchaser will have a preferent claim in respect of the proceeds of the sale of the property.
  • In the case of death of any one of the parties, the executor of the deceased estate has to honour the deceased's obligations or rights in terms of the Agreement, which could result in drastic delays in the finalization the deceased estate.

The act further stipulates:

  • If a purchaser of land in instalments has already paid 50% or more of the purchase price, the purchaser may demand that the seller pass transfer to him. The purchaser must then, simultaneously with transfer pay the balance of the purchase price by tendering cash or a guarantee or register a mortgage bond in order to secure payment of the balance purchase price to the seller.

National Credit Act:

Another important factor to consider is that Instalment Sale Agreements qualify, in certain circumstances, as Credit Agreements, which are regulated by the National Credit Act and  requires the Seller to register as a credit provider. Confirm with your legal practitioner before entering into your instalment sale agreement whether the National Credit Act is applicable to your agreement.

Further reading on the topic is available in the Wealth Mastery Online Course:

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