What is an Instalment Sale Agreement?
Instalment sale Agreements generally becomes more popular during periods of an economic slowdown. In some cases, buyers are unable to access financing due to loan restrictions by the NCA. It is then that an instalment sale agreement can be used as a viable alternative/option to secure and purchase a residential property. The process is much like obtaining a bond from a bank, although the approval process is more attuned to your unique circumstances.
It’s important that the instalment sale agreements meet the criteria of the Alienation of Land Act (ALA) 68/81 which governs instalment agreements in South Africa. But, this is best left to a qualified attorney to advise on, as well as have the contract drawn.
Simply put, for a purchase to be considered an instalment sale, the purchase price must be paid by way of two or more instalments over a period of at least twelve months. Ownership only fully transfers to the buyer once the final payment has been made.
Why Would a Seller use an Instalment Sale Agreement?
Instalment Sale agreement (also called ALA agreement) is a great way for a seller to increases his/her chances of actually getting the property sold. The seller can also generate “cash flow” by receiving both rent and capital over the term of the agreement. The agreement, once concluded, is not subject to suspensive conditions, so the purchaser is committed to taking transfer of the property.
Other Benefits to Seller:
- The purchaser, who has taken occupation of the property, is an even better tenant as he/she is committed to the transaction by the payment of capital to the seller before registration of transfer and tends to take good care of the property as the purchaser has a vested interest.
- “Troubled sellers” now have the option to utilise the ALA to manage their existing debt with the bondholder and by doing so, prevent foreclosure.
Why Would a Purchaser Choose an Instalment Sale Agreement?
Because the bank approval process is something of a “blunt instrument” many people applying for bonds fall through the cracks. These include the self-employed, freelancers, those who do regular contract work offshore, and people with no established credit record.
Benefits for the Purchaser?
- All purchasers can now acquire the property.
- No deposit required unless parties agree that a deposit needs to be paid.
- The purchaser can sell the property at any time during the course of the agreement.
- The purchaser can attempt to purchase the property at the current value and if he/she succeeds, it would make for an even better proposition at the end of the term.
- The purchaser need not apply for a bond on the conclusion of the instalment sale agreement.
Things to Consider with Instalment Sales Agreements
For an instalment sale to work the National Credit Act has stipulated that if the amount 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. The major hurdle here is that very often one wants to conclude an instalment Sale Agreement because of the fact that the purchaser could not obtain a loan through a financial institution.
In most instances, the purchaser should be in a position to pay a substantial deposit, mitigating the sellers’ risk. Ideally, the purchaser will be in a position to sustain above-average monthly rental instalments.
But, If an agreement 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 does not apply to the sale agreement. However, Inflation of the purchase price over and above the market value of the property can be viewed as a charge or a fee which may make the National Credit Act applicable.
In your situation, should you therefore not charge any interest, charges or fees on the purchase price or you don’t inflate the purchase price above the market value the National Credit Act will not apply.
What is the Process for an Instalment Sale Agreement?
Step 1: The buyer and seller have to agree on the purchase price and the deposit required, as well as on the monthly instalments. Much will depend on how long the two parties agree the instalment period will run (between 12 and 60 months). Issues such as who is liable for the rates and taxes on the property as well as other legalities also need to be agreed upon.
Step 2: Once an agreement has been reached, An attorney will draft a contract that meets the criteria set by the Alienation of Land Act 69/61. He or she will then inform the current owner’s bank (the bondholder) of the conclusion of the agreement.
Step 4: The attorney registers the sale at the Deeds Office that an instalment sale is in progress. This means that the title deed is being endorsed so as to reflect that an agreement has been concluded between the seller and the purchaser. This offers protection to the purchaser, stopping the vendor from selling the property on to a third party.
Step 5: The payments become due and payable upon the agreement being recorded. And transfer duty needs to be paid within the first 6 months on the contract being concluded.
Other Considerations in an Instalment Sale Agreement
- The seller remains the owner of the property.
- The bondholder has no right to refuse the conclusion of the agreement
- The purchaser takes occupation on the agreed date and pays the seller occupational rental, unless otherwise stipulated.
- The purchaser is usually liable to pay rates and taxes from the date of occupation, unless otherwise stipulated.
- The seller receives the deposit together with all capital instalments, on the due dates, on condition that Section 20 endorsement is registered against the title deed of the property, thus creating cash flow.
- The purchaser takes transfer at the end of the agreement term, but may elect to take transfer sooner, on condition that the full purchase price is secured to the seller.
- The purchaser may sell the property at any time during the period of the ALA agreement, on condition that the seller’s purchase price is secured and paid on the transfer date.
- The agreement has no suspensive conditions relating to the purchaser having to have completed approval of a bond by a certain time.
- The ALA agreement does not fall within the ambit of the NCA legislation and the purchaser therefore does not have to adhere to strict lending criteria to be able to conclude the agreement.
- The purchaser usually accumulates a 20% deposit over the term, making it easier to get bond approval at the end of the term of the ALA agreement.
- A purchaser with an adverse credit record can utilise the term of agreement to rectify their credit status, if they wish to apply for a bond to be able to take the transfer.
- The purchaser is not liable to pay for a debt which he was not aware was due and payable.
- If the purchaser defaults on the agreement, the purchaser could seek recourse which can result in the seller taking back possession of the property. the Seller can institute a Civil Action to reclaim the property because he/she is still the owner.
- The monetary amount of the instalments is irrelevant. If instalments are not payable with deferral but by a lump sum on a specific date, then it is not an Instalment Agreement.
- Typical Instalment Sale Agreements will contain a clause reserving ownership until the final instalment is paid. This serves as security for payment of the purchase price.
Considering, there are numerous formalities that must be complied with in order to make the contract valid. It is wise to ensure that a qualified attorney drafts the actual contract to ensure that the statutory requirements are all fulfilled.
The property market has changed and will continue to do so for some time to come. Our capacity to adapt to these changes, will determine the measure of our successes going forward. Which is why an instalment sale agreement is such a useful tool.
The information and material published on this website is provided for general purposes only and does not constitute legal advice. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to the full disclaimer on the website.