Walkers Attorneys

This month Walker’s Talking Point concentrates on the property market and, in particular, on legal aspects of the eternal question: to buy or to rent?”  We, the public get bombarded with gratuitous advertising proclaiming that now is the time to buy through a specially structured investment scheme.  It is the perennial problem, guessing when the market is at the bottom or its apex. When asked how he had made his fortune, Lord Rothschild replied that he had always sold too soon!  Assisting as we do, a number of high net worth individuals and Trusts, we find it noteworthy that many are interested in purchasing property again.  We concentrate on this market and, in particular, whether it now makes sense to buy to rent.

On a wider perspective we conclude with an article by Guy Antonier on the merits of investing off-shore.

by Renier Kriek

The Consumer Protection Act, which came into force on 1 April 2011, will apply to all contracts in which the consumer is a natural person, and therefore to the vast majority of residential leases. With this article, we endeavour to provide a rough guide to the most important and pressing issues arising from the Act. We seriously suggest that all landlords read it carefully. Please note that this article is intended only as an overview of the matters we consider the most pressing, and by no means exhaustively deals with the Act or its effects on residential leases.

As a residential landlord, we strongly suggest that you keep the following in mind:

1. Remember that the CPA trumps the provisions of your lease contract. The lease agreement is therefore not the only source rights and obligations arising from the lease.
   
   
2. Contact your attorney to draft a lease agreement that complies with the provisions of the CPA and affords you the maximum protection. Also, liaise with your attorney as quickly as possible once a dispute arises relating to the effect or application of the CPA.
   
   
3. Your lease may not contain any clauses which are unfair, unjust or unreasonable, even if the tenant expressly agrees to them.
   
   
4. There is no use in agreeing to a lease for more than 2 years. Any lease with a consumer for the purposes of the Act will be considered to be a lease for two years, which thereafter continues on a month to month basis. Indefinite leases terminable on notice, however, are not covered by these provisions and will remain enforceable as such.
   
   
5. Occupation of the property must be given on the date agreed. If not, the tenant may refuse delivery, and may then cancel the lease agreement without penalty. Late occupation may also result in a tenant occupying without the obligation to pay rental.
   
   
6. You must give prior notice to your tenant of the impending expiry of the lease of not more than 80 business days (4 months) and not less than 40 business days (2 months). You must include changes to the terms of the lease, such as the amount of rental, which will be occasioned by the renewal.
   
   
7. If the lease term expires without a renewal by the tenant then the lease continues on a month-to-month basis, subject to any changes of which you have given notice. This means that the tenant may remain in occupation at the expiry of the lease, unless you or the tenant have given notice to cancel.
   
   
8. It is possible to cancel a lease before its expiration, notwithstanding the wording of the lease agreement. You may do so on 20 business days notice if there has been a material failure by your tenant (such as not paying the rent). The tenant is entitled to do so for any reason, provided that you become entitled to a 10% cancellation penalty. This is calculated on the amount for which the tenant would otherwise have been liable
   
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9. Make sure that at the time of the tenant’s occupation, the premises have no major defects that may cause loss of limb, death or serious damage to property, as you will be liable for any damages caused as a result (notwithstanding the provisions of any lease agreement, and notwithstanding the absence of negligence). Consider liaising with your insurers in this regard.
   
   
10. Small maintenance and repair issues should be dealt with swiftly, or your tenant may claim abatements of rental, notwithstanding the provisions of the lease agreement. Should you be unsure whether you are liable to repair or maintain in particular instances, consult your lawyer.
    
    
11. Be careful of the promises made by the real estate agent prior to the signing of the lease, as these may have consequences for you, including the tenant’s right to reduce the rental. You should obtain an indemnity from the agent for any statements made which have an adverse effect on your position as landlord. Contact your attorney to draft such a document.

by Lauren Whate

The Consumer Protection Act (“the CPA”) regulates all transactions between suppliers and consumers in South Africa.

A supplier is defined as a person who markets any goods or services, and goods is defined to include an interest in land or any other immovable property. Further, where the supply of goods or services is part of a transaction, that is, in the ordinary course of business, the provisions of the CPA apply.

By virtue of the aforegoing, the CPA will not apply to the once off sale of a property from a seller to a purchaser, but the CPA will apply to the sale of properties by property developers and others who sell property in their ordinary course of business. Furthermore, as estate agents market property in the ordinary course of their business and as such they fall into the definition of suppliers.

The CPA will not apply to certain juristic persons with an annual turnover or net asset value which exceeds the prescribed threshold of R2m. Consequently where an estate agent acts on behalf of a purchaser in a transaction for the purchaser and sale of immovable property, and the purchaser is a large corporation such as, for example, Shoprite, the CPA will not apply.

A supplier is furthermore prohibited from making any agreement with a consumer subject to any terms in terms of which the consumer is required to waive any rights in terms of the CPA, or in terms of which the supplier avoids any of its obligations in terms of the CPA. Any such agreement, to the extent that it contravenes the Act, is deemed to be void.

Pre-CPA, all immovable property was sold “voetstoots”. Effectively, save to the extent that latent defects existed in the property of which the seller was aware, and which the seller deliberately failed to disclose to the purchaser, the risk in any and all defects in the property was passed to the purchaser. In terms of the CPA however, all goods are sold subject to an implied warranty that the goods are reasonably suitable for the purpose for which they are generally intended, are in good working order, of good quality and defect-free.

To the extent that defects subsequently emerge in the property, irrespective of whether the Seller deliberately withheld the same from the purchaser, the Seller would be liable for such defects. The Act in fact goes so far as to state that the Seller remains liable for such defects irrespective of whether the defect was latent or patent.

The only way to exclude the seller’s liability for defects is if the same is disclosed to the purchaser and the purchaser accepts the defects. The onus is accordingly on the seller to make full disclosure to the purchaser of all defects. By virtue of the fact that neither the consumer’s rights nor the seller’s obligation may furthermore be waived, the seller continues to be liable for such defects even if the same was not known to him.

The power play between consumers and suppliers has clearly changed. The consumer now enjoys greater protection. However, as with any new legislation; there remains to be seen what the actual benefit to the consumers on the ground will be once the grey areas are filled in through interpretation by the courts and the consumer tribunal. For the moment one thing is clear though, the CONSUMER IS KING!

by Liesl Winter

In 2004 the Income Tax Act created a new incentive for investors. The intention was to rejuvenate the inner cities’ economies and the method was to entice investors to buy residential property in defined areas called Urban Development Zones, UDZs.

UDZs, areas with high population potential and close proximity to public transport, have been demarcated in the Metro municipalities. In Cape Town, the UDZs include parts of the CBD and East City, Salt River, Woodstock, Observatory, Maitland up to the railway bridge, Mowbray, Athlone and Gatesville, and the Voortrekker Road vicinity in Bellville.

In the UDZs an allowance is granted to purchasers who intend to rent the property out. In essence the allowance is an accelerated depreciation. Normally, depreciation can only be claimed over an extended period of time, usually based on the useful life of the asset. But within a UDZ, depreciation is higher in the first few years of the asset’s lifespan, bringing the taxable income of the investor down during that period.

The allowance is the percentage of the purchase price deemed to be attributable to the cost of refurbishment or construction. In the case of a new building, a whopping 55% of the purchase price is not taxed. For refurbishing an existing building, 30%.

There are down sides. An investor who sells the property will lose the UDZ allowance (as of the assessment year after the year of sale), and allowances already received are subject to recoupment and to CGT.

Furthermore, an investor who ceases to utilise the property solely for the purposes of trade – ie one who occupies it personally -- will no longer be able to claim the allowance.

What the allowance achieves, when combined with mortgage finance, is that investors (with a steady rental inflow) can enjoy a capital appreciation without spending a cent!

This year’s Budget creates a further incentive with a reduction in Transfer Duty. For purchases in excess of R1.5 million, individuals achieve a saving of R28 000, and corporate entities R83 000!

by Taryn Herbert

Thinking that buying a residential property would be an excellent investment? Please take a moment to read the following on the legal framework regarding evictions to avoid future frustration, lengthily delays and large legal bills.

As its name suggests, the Prevention of Illegal Eviction From and of Unlawful Occupation of Land Act 19 of 1998 (‘the Act’) was introduced to prohibit illegal evictions and to provide procedures for lawful eviction. Although this Act was welcomed by tenants, it has been a thorn in the sides of landlords who own residential property.

Whilst the Act does not deprive the landlord of any of his rights, it severely delays his ability to enforce his rights. A landlord may not, for example, merely decide to evict the person living in their premises. In order to achieve this objective, the landlord must firstly comply with a number of procedural requirements set out in the Act and lastly secure a court order evicting the person from his premises.

A landlord who fails to abide by this procedure and evicts without a court order, can be held liable for either a fine or to imprisonment.

The landlord is therefore forced to rely on an Act which seems to not only perpetuate his loss of rental income but cause him to incur further costs in the form of legal fees. This Act therefore seems to be failing in its obligations towards assisting the party who is acting legally in this relationship, the landlord.
Help for the landlord, however, seems to be on the way in the form of the Act’s Amendment Bill. There is much hope that this Amendment will restore the speedy assistance that the landlord seeks from the law in this situation.

But, until then, if you wish to invest in property on a buy to rent basis, perhaps a more rewarding and less frustrating route to go, would be to rather invest in commercial property and thereby avoid having to rely on the Act discussed above.

Andrew Duncan

Assets owned by a Trust escape the consequences of taxation that otherwise apply on death of an owner. On the death of a  natural person, Estate Duty at the rate of 20% on the market value of the property  would be payable , together with C GT on the profit since purchased ( or as of October 2001) at a rate of not more than 10%.

The same applies if the property is purchased through a company or close corporation and the shares are held by an individual.  The appreciating value of the property translates to the value of the shares or interests held.

If the corporate entity disposes of the property, the CGT consequences are onerous in that the rate of 14% applies, together with STC of a further 10%, resulting in a total tax charge of approximately 22%.

If the shares/interests in the property owning company/close corporation are disposed of, the CGT rate is lessened to 10% but against a base cost of the share issue price which will often equate to a similar CGT to the entity selling the property.

Trusts bring a greater flexibility in that if the property is sold, the capital gain can be distributed to an individual Beneficiary so that the rate does not exceed 10%.

Alternatively, at worst, if retained in the Trust, the rate would amount to 20% which is still less than if held via a company/close corporation. The moral being to put your trust in Trusts when investing!

Guy Antonier

For the past year many of the country's top fund managers have been saying the same thing: that globally-linked investments are offering better long term value than local investments. Despite this, local investments continue to strengthen and outperform their globally-linked competitors, and the Rand does the same. Have these guys gone mad? Don’t they know that things have changed? We’re an emerging economy. Emerging economies are where the growth is! For a decade already, it has been 'local is lekker.’

Unfortunately every good party does come to an end. The US housing market had more than a decade of growth so superior that almost everyone in the US was convinced it could not end. This is why the masses invested in it and why when it did end, everyone was burnt. Housing prices in parts of the USA are back to 1992 levels; twenty-year lows.

The lesson is simple, yet one which we as individuals do not want to learn. Hence we continue to believe that this time is different, this market is too good to end. And we continue to be caught by media hype and by the latest craze, chasing short term outperformance at any cost. We refuse to learn the simple lesson.

The “lunatic” fund managers are the likes of Allan Gray, Coronation and Foord; the likes of Clyde Rossouw and John Biccard at Investec; people with proven track records of consistent long term outperformance. They have shown that they have expertise in selecting assets in which to invest. If all of them are telling us the local party is almost over, we should take heed and restructure our portfolios accordingly, and we should do it before the party ends -- while the Rand is strong and local equity markets are bullish.

One reason it is hard for the man in the street to learn the simple lesson is that it is so opposite to our recent reality. Our terms of reference are a decade of excess in South Africa versus a decade of no growth globally.

Another reason is that many investors in South Africa were burnt by investing globally a decade ago, after global equity markets grew fantastically throughout the 90s. When the Rand tanked to R12/$, SA investors were convinced that global was lekker and SA was doomed. After ten years of living with the consequences of that decision, they don’t want to hear the word “global”.

And the cycle continues, as do the losses. With them comes the blame game. It’s the banks, it’s Zimbabwe, it’s the government …

The reality is that we are the only ones to blame.

Yes, these fund managers could be wrong. But all of them? So suddenly? The key ingredient in following their advice is patience; being able to remain committed to your investment strategy until it pays off. This may take a year or two or longer, it may result in relative short term underperformance yet we feel the consequences of not adhering could result in significant capital loss going forward.

In the end, successful investing is all about balance, time and not being too greedy. Our message is not to sell all your local assets and invest globally but rather to ensure that your portfolios are sufficiently diversified in line with your investment objective. To consider that the winners of the past may not be the same in the future and to accordingly and appropriately realign your portfolios.