CV fraud is rampant and upfront checking of all claimed qualifications and references is of course always your first and best line of defence.

If, however you do get caught out, take some heart from a recent High Court decision that an employee, who had forged a degree certificate and falsified his university academic record, had to repay to his employer every cent he had earned as a result of his fraud.

Not only did the Court order the deceitful employee to repay eight years’ worth of salaries amounting to over R2.2m, but it also allowed the employer to access his pension fund (such funds are normally protected from all creditor claims) for the purposes of making recovery.

“Oh, what a tangled web we weave when first we practice to deceive” (Sir Walter Scott, quoted in the judgment below)

It’s a sad fact of life in today’s business world that as an employer you must remain constantly on guard against the dangers of “CV fraud”.

First prize of course must always be prevention – verify all claimed qualifications and work experience, accept nothing on trust. But if you do get caught out, our courts will help you if they can, as witnessed by a recent High Court case.

The “graduate” who forged a B.Sc degree

• An employee was found to have been employed, and to have been accepted into his employer’s graduate development programme, on the basis of forged qualifications in the form of a forged B.Sc degree (in Chemical Engineering) and a falsified academic record.
• His fraud was only discovered after some 8 years, and when he resigned (after disciplinary proceedings against him began) his employer reclaimed the +R2.2m it had paid him over the years.
• The employee objected, claiming that he had provided value to his employer in his work. The Court was unimpressed, no doubt at least in part because of the employer’s evidence that, as it was a bulk supplier of water to millions of people, having an unqualified person working for it (performing calculations on the type and quantity of chemicals to be added to the water) “could potentially have incredibly serious consequences for the general populace.”

“Fraud unravels everything” – goodbye R2.2m and a pension fund

Held the Court (quoting from a well-known English case on fraud): “No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything.” (Emphasis added)

The employee, said the Court, “set out to deceive and wove his web accordingly. He achieved his goal. He has now become entangled in a web that he alone devised and cannot now be heard to complain of the consequences that must follow.”

Not only must he now repay every cent of the R2,203,565.04 he earned through his fraud, plus interest, but his pension benefits (which are normally secure from creditor claims) can be used for the purpose. To rub a final dose of salt into his wounds, he must also pay legal costs on the punitive attorney and client scale – no doubt the Court’s findings as to his untruthfulness as a witness contributing to that result.

Your neighbour starts building an apartment block next door – without approved building plans. What can you do about it?

We address that question with reference to a recent High Court case in which two neighbours asked the Court to order a property owner to demolish a multi-story apartment block he had been building in contravention of municipal “stop building” orders.

The outcome, and the Court’s reasons for granting the demolition order, hold valuable lessons both for owners wanting to build on their properties, and for their affected neighbours.

“The approval of building plans is not a mere formality in town planning and compliance with building standards promote public safety … The courts should not permit landowners to erect illegal structures on their land and then present the authorities with a fait accompli created by their illegal actions” (Extracts from judgment below)

What do you do if your neighbour starts building next door without municipal plans? A recent High Court decision confirms your right to apply for demolition.

The pensioner who built an apartment block illegally

• A property owner decided to build a multi-story block of eight apartments on his land. According to media reports he is a pensioner who spent his R900,000 pension payout on the project and planned to live off the resultant rentals of some R40,000 p.m.
• The building, which he had told his neighbours was just going to be a garden cottage, was illegal on four counts –

1. No building plans were approved by the local Council,
2. The structure encroached on building line restrictions imposed in the Town Planning Scheme,
3. The structure did not comply with the zoning of the property,
4. A restrictive condition in the title deed was contravened in that the title deed permitted only one dwelling on the property and the owner was erecting a second.

• The owner failed to comply with two “stop building” orders from the Council. Then he undertook to cease the works but instead accelerated them.
• Two of his neighbours urgently applied to the High Court to interdict further building, and the Court ordered the owner to demolish the building.
• The owner appealed this order to a “full bench” of the High Court asking for the demolition order to be postponed whilst his application to the Council for rezoning and removal of the restrictive conditions was finalised.
• Although the Council had approved the rezoning of the property it had specifically noted that it did not condone the partly constructed building, which was illegal because no building plans had been approved and the building encroached on the building lines.
• The neighbours, held the Court, had standing to apply for a demolition order, in that although their land had not been encroached upon, their rights had.
• In deciding to exercise its discretion in favour of demolition, the Court noted that the neighbours had taken steps to protect their rights immediately it became apparent that the owner was not constructing a garden cottage but an apartment block. They reported the illegal structure to the Council, and it weighed heavily with the Court that the owner carried on building even when he knew it was an illegal structure.
• The owner must demolish the building.

Bottom line – if your neighbour starts building illegally, take immediate action!

What do you plan to gift your family this Festive Season?

What about giving them the prospect of financial freedom? Of course, we’d all like our legacy to future generations to be about more than just the financial aspects but freeing our heirs from the prospect of money problems is a great starting point.

With that in mind we’ll address the importance of putting your will at the heart of your overall estate plan. We’ll also share some thoughts on how to go about your financial planning so as to maximise the benefits to your spouse, your children and your grandchildren – and hopefully even beyond.

“Are we being good ancestors?” (Jonas Salk)

What do you plan to give your family this Festive Season? Now’s the time to think beyond the brightly wrapped gifts under the tree and get started on an estate plan which will leave your loved ones the lasting gift of financial freedom.

Estate planning involves a lot more than just executing a valid will, but let’s start off with a reminder that a will must always be your top priority.

Your will is the heart of your estate plan

You will have heard this many times before, but it bears repeating. Your will (“Last Will and Testament”) could well be the most important document you ever sign. Without executing a will, you forfeit your right (and duty) to decide how your assets will be distributed so as to ensure the future happiness and well-being of your loved ones. You lose your opportunity to choose an executor you can trust to wind up your estate professionally and efficiently. And no matter your age or state, it cannot wait – no one knows when the fateful day will dawn.

Most importantly, your will lies at the heart of your entire estate plan. It underpins and powers it. So, if you don’t yet have a will in place (or if your will needs updating) make your number one priority: “Book an appointment with my lawyer. Now.” Then ask your lawyer to draft your will to form the core of your overall estate plan.

What is an estate plan and why should you have one?

Your estate plan is your roadmap to creating wealth, to protecting it, and to transferring it to the next generation (or beyond). It is the only sure-fire way of ensuring your own comfortable retirement and of providing for the financial wellbeing of your loved ones after you are gone.

It incorporates your overall financial strategy, answering questions such as how you will save and invest, what investment options you will choose, how you will acquire assets, how you will provide for tax and other liabilities, how you will ensure effective succession planning in your business, how you will transfer your wealth to the next generation and so on.

Bring your family in early

It’s never easy contemplating one’s own mortality but in fairness to your loved ones make sure that as soon as they are old enough to participate, everyone is part of the process. Bring them in on everything you can and keep them in the loop when you are tracking progress or thinking of changing anything.

Questions to ask yourself

As the old adage has it “Failing to plan is planning to fail”. So plan. Start by asking yourself (and your family) these questions –

• What is our end goal?
• How much wealth do we need to build up?
• What is our target date for reaching that goal?
• How will we achieve it?

Now formulate your financial mission statement

Use your answers to those questions to formulate a “financial mission statement” and a detailed strategy to get there. As always with goal setting, break the big goals down into little ones, with target dates for achieving them and ways of tracking your progress.

Done and dusted! But wait, how will you actually transfer that wealth to the next generation (or beyond)?

Preserving your wealth for the next generation – and beyond

For many, it’s only realistic to plan one or two generations ahead. But whether your aim is to provide financial cover for just your spouse and children, or for your grandchildren as well, or (let’s aim high here!) for your great grandchildren and beyond, your estate plan should lay out a clear strategy for preserving your wealth down the generations.

Trusts are often recommended for generational wealth preservation and transfer, and whilst they have pitfalls and should only be considered with professional advice, they can certainly provide a powerful solution. In particular they could result in substantial estate duty savings for many generations down the line. Similarly, corporate structures (companies, company/trust combinations and the like) are often used for this purpose, particularly when trading businesses are involved. Donations during your lifetime may be suggested but beware the tax implications. Living annuities enable you to nominate beneficiaries to receive the benefits (with a tax incentive for them to leave at least part of the funds invested). There may be other niche solutions to suit your particular needs.

The bottom line

There are many complex decisions to be made and there is no “one size fits all” solution. Every family’s situation and needs will be unique. Every class of asset and every wealth-transfer vehicle carries with it particular requirements, benefits, risks and cost and tax considerations.

Professional advice specific to you and your family is essential!

If you are one of the many “Festive Season Sellers” taking advantage of the December/January holidays to look for the best price for your house, remember to plan your finances so you aren’t ambushed by unexpected expenses down the line.

An expense not always understood, nor adequately planned for, is the possibility that you will be liable for capital gains tax on the sale. We discuss the concepts of “base cost”, “capital gain” and “primary residence” before explaining – with the help of a useful example – how you can actually go about calculating your likely liability.

Paying tax is never a happy exercise but there is also a measure of good news – we’ll share it with you…

December and January have always been prime months for selling residential property in South Africa, and if you are a “Festive Season Seller”, here are two really important tips for you.

1. Plan your finances
   Understand and plan for all the financial implications, not just the legal ones.

   Prepare a cash-flow forecast so that you know what you will receive and when, and what you will have to pay and when. Your forecast will tell you what funds you must have available at all stages of the sale and transfer process, and it will answer your bottom-line question – what will be left in your pocket at the end of it all?

2. Don’t forget your CGT liability
   There are many expenses you should provide for (ask your lawyer to help you list them), but in this article we’ll only address one of them – the CGT (Capital Gains Tax) aspect.

   This is vital – if you made a “capital gain” on the sale (more on how to calculate that below) you could be liable to pay CGT. If so, it could well be a substantial liability, and not planning for it will leave you in a world of pain because if you can’t pay your tax bill SARS will be after you with a big stick (SARS has extensive powers when it comes to debt collection).

   There is a bit of good news: The advantages of owning your own family home, and the value of property generally as an investment channel, will for most people outweigh the pain of having to pay tax when you eventually sell. Plus, as we shall see below, paying CGT on a property sale is not nearly as painful as it would be to pay income tax on it. Indeed, if the capital gain on your primary residence is R2m or less, your CGT bill is nil!

How does CGT on a property sale work?

This is a complex topic, so what follows is of necessity a summary of general principles only – there is no substitute for specific professional advice here!

• What is Capital Gains Tax? CGT forms part of your income tax and is a tax on any “capital gain” you make on an asset, in this case a property. The capital gain is the difference between your base cost and the proceeds of your sale.
• What is “base cost”? This is what your property cost you to acquire (including transfer costs, transfer duty and the like) when you bought it. Note that CGT only kicked in on 1 October 2001, so if you bought the property before then it is the property’s value at that date that you will use. Qualifying improvement costs (extensions, additions and the like but excluding maintenance or repair costs) are also added to your base cost, so keep a separate note and proof of these as you incur them over the years. Our example calculation below assumes a homeowner who bought a number of years ago for R4m inclusive of transfer costs and duty, then spent a total of R500k on improvements (perhaps adding an extra room and a swimming pool).
• How do you calculate the “sale proceeds”? From the sale price you can deduct any costs of selling which are directly related to the sale, such as agent’s commission, advertising, legal costs and so on. In our example we assume net sale proceeds of R7m.
• How do you calculate the “capital gain”? This is the difference between the base cost and the proceeds of the sale (R2.5m in our example, before the primary residence exclusion).
• What can you deduct from the capital gain? If the property is in your personal name and is your “primary residence” (i.e., where you normally live) you can deduct a R2m exclusion from the capital gain. Note that if you used your house for business purposes or if you didn’t reside in it for the whole period of ownership, you need to take specific advice on how much (if any) of the exclusion is available to you. You can also deduct an “annual exclusion” of R40,000. In our example we assume the seller is entitled to both exclusions in full, resulting in a net capital gain of R460,000.
• How are you taxed on the net capital gain? The example below will help clarify this. Your capital gain is added to your annual income tax liability at the “inclusion rate” applicable to you. Individuals and special trusts have an inclusion rate of 40%, whereas other trusts and companies have an inclusion rate of 80%. You will then pay tax on that amount at your marginal tax rate (18% – 45% depending on your taxable income). In our example we assume an individual taxpayer paying tax at the highest marginal rate of 45%, the resulting tax liability of R82,800 amounting to just under 1.2% of the net sale proceeds. Our seller’s profit on the sale net of tax would then be R2,417,200.

So how much CGT will you actually pay?

For an individual your calculation is: Capital Gains Tax = Capital Gain x 40% inclusion rate x your marginal tax rate.

Have a look at the example below which assumes an individual home seller entitled to the full R2m primary residence exclusion and paying tax at the highest marginal tax rate of 45%. Then use your own figures and make your own calculation.

(Source: Adapted from SARS examples)

The Promotion of Administrative Justice Act (PAJA) gives muscle to our Constitutional right to fair, lawful and reasonable administrative action.

Considering how seriously bureaucratic decisions can impact us, not only financially but also in our personal lives, it’s important to know that PAJA is available to protect us whenever our rights are negatively impacted by such a decision.

Let’s have a look at how our courts can use PAJA to come to our assistance in a practical sense. We’ll refer to a recent High Court order against a municipality which had, through an “error in law”, rejected a service station’s building plans. We conclude with a warning to act quickly so as not to miss the time limits for taking action.

“The Constitution guarantees that administrative action will be reasonable, lawful and procedurally fair. It also makes sure that you have the right to request reasons for administrative action that negatively affects you.” (Department of Justice and Constitutional Development)

Bureaucratic decisions can and do have far-reaching consequences for us, both financially and in our personal lives. It’s good to know therefore that whenever your rights are affected by any such decision, you have access to the protections set out in PAJA (the Promotion of Administrative Justice Act).

In a nutshell, PAJA provides that “administrative decisions” by government departments, parastatals and the like must be fair, lawful and reasonable. Decision makers must follow fair procedures, allow you to have your say before deciding, and give you written reasons for their decisions when asked.

If a decision goes against you, your first step should be to use any internal appeal procedures. Ultimately you can go to court, although often a lawyer’s letter or two will solve the problem without the need for litigation.

A recent High Court decision illustrates one way in which PAJA can help you if all else fails –

A service station’s building plans rejected

• A service station submitted to its local authority building plans for a proposed refurbishment.
• After a series of meetings with the municipality and alterations to the plans as various issues were raised and resolved, the service station owners thought they were home and dry. But in the end the plans were not accepted on the basis that the application was for an extension of the service station which could not be approved in terms of the local Town Planning Scheme.
• The High Court however found that factually there was no “extension” involved and that the municipality had therefore made an “error in law”.
• That opened the door for the Court to review the municipality’s decision, which it duly set aside. In referring the decision back to the municipality for reconsideration, the Court directed it to make a decision within 21 days, and without regarding the proposed refurbishment as being an extension of the building.

A final thought – strict time limits apply with PAJA, so if a decision goes against you seek professional help without delay!

Buying and selling property is a big deal, and things can go wrong in the blink of an eye unless both buyer and seller understand exactly what their sale agreement says, and then either meet all deadlines or extend them as set out in the agreement.

We discuss the dangers of not doing so with reference to a recent High Court decision in which a seller and buyer came to blows over the R600,000 deposit paid by the buyer to the estate agent involved.

The buyer wanted his R600k back, the seller wanted it paid to him. The outcome of this dispute, and the Court’s reasoning in arriving at its decision, hold valuable lessons for us all.

“I love deadlines. I love the whooshing noise they make as they go by.” (Douglas Adams)

Here’s yet another reminder from our courts on the danger of not complying strictly with every provision in a property sale agreement. Don’t be like Douglas Adams and listen to the deadlines go whooshing by – missing a property sale deadline is a mistake, probably an expensive one. The deadline set by every bond clause is no exception…

Sale’s a dead duck. Who gets the R600,000 deposit?

• A property sale agreement contained a standard “suspensive condition” in the form of a bond clause making the sale conditional upon the buyer obtaining R1.5m in bond finance by a specified date. The buyer could waive the benefit of this clause, and if it wasn’t fulfilled or waived by the deadline date the sale would become null and void – in which event the deposit, with interest, was to be repaid to the buyer within 5 business days.
• The buyer paid the R600,000 deposit to the estate agent, but had difficulty in raising finance and (before the deadline expired) asked for more time to get the necessary bond approval. Both parties assumed that an extension of the deadline had been validly granted, but in fact there was never any compliance with the requirement in the bond clause that any extension be by “written agreement”. In other words, the sale had lapsed, but neither the seller nor the buyer realised that – they both thought they still had an agreement in place.
• Two months later, thinking that the sale was still alive and well, the buyer signed a waiver giving up the benefit of the bond clause and stating that the agreement was no longer subject to the suspensive condition.
• Another two months down the line the buyer told the seller he was no longer proceeding with the purchase (his wife had in fact bought another property in the interim). The seller took that as a repudiation of the contract and cancelled the sale.
• The buyer demanded his deposit back. The seller wanted it forfeited to him. Off to the High Court they went.

The law, and the result

• The general rule in our law is that no agreement comes into existence unless and until all suspensive conditions are fulfilled. So the seller has no claim against the buyer unless either the sale agreement provides for such a claim (unlikely) or “where the party has designedly prevented the fulfilment of the condition.”
• That, in lawyer-speak, is the legal principle of “fictional fulfillment of a suspensive condition”. In lay terms – the law protects the seller and doesn’t allow the buyer to escape from the sale by deliberately ensuring that he doesn’t get a bond.
• The seller argued that that was exactly what the buyer in this case had done; that he had breached the agreement and had deliberately frustrated the fulfilment of the bond clause.
• On the facts however, the Court held that both seller and buyer had remained committed to the sale, blissfully unaware that in law the sale agreement was already a dead duck. The buyer only decided to get out of the agreement after it had already lapsed.
• The buyer gets his deposit back with interest, and the seller is left with an unsold property and a large legal bill.

Buyers – your risk

As the Court put it, what saved the buyer in this case was a lack of evidence that the buyer had – by commission or omission – prevented the necessary finance from being granted. In other words, you risk being sued (which will put your deposit at risk) if you don’t make a genuine effort to get the necessary bond finance by the due date.

Sellers – keep an eye on the bond clause deadline

The seller on the other hand is left to lick his wounds after all the delay, cost and effort this dispute has caused him. He could have avoided all that pain by keeping an eye on the due date and ensuring that the deadline extension was agreed to in writing before it expired. As the Court pointed out “The contract was readily available to all involved and the requirements of clause 6.3 pertaining to an extension were available for all to read. A simple investigation would have revealed what was required.” (Emphasis added).

Leaving South Africa for foreign climes, whether permanently or for an extended period, probably means leaving behind unfinished business or financial affairs, and/or property or other assets needing to be dealt with.

And whilst it is certainly possible for you to sign documentation, contracts and the like whilst in another country, the inconvenience and costs likely to be associated with the necessary authentication procedures – to meet local requirements – are avoidable.

We discuss what a power of attorney (POA) is, the difference between a “special” power of attorney and a “general” one, what they involve, why and when you should consider signing one (or several), and how to structure each one to be valid and fit-for-purpose.

If you are emigrating, or perhaps just going overseas for an extended holiday or work contract, you may well leave behind some form of “unfinished business”. Perhaps you own a property, other assets or bank accounts needing attention, or have outstanding tax/business/financial affairs, or contracts to be signed, cars to be licenced, or something else unresolved that requires your future agreement or signature. Even if you can’t think of anything specific, consider executing (before you leave of course) an appropriate power of attorney in favour of someone you trust to act for you.

What is a power of attorney?

A Power of Attorney (“POA”) a document you sign authorising someone else to manage your affairs on your behalf as your agent. You can grant it for a specific purpose as a “Special Power of Attorney” or it can be a widely worded “General Power of Attorney”. In theory you can grant power of attorney orally, but in practice no one will (or should) act on that.

You must be at least 18 years old to execute a POA, and it remains valid only for so long as you have “legal capacity”.

You can terminate the POA at any time.

Why is a power of attorney important?

You can in a pinch execute and sign contracts, legal forms and the like whilst in a foreign country, but it can be a real mission. Depending on the circumstances, you may need to find (and pay) a notary public or embassy/consular official to authenticate documents, your signature, copies of papers etc. If it’s an embassy or consulate you need, you could find yourself travelling to another city, perhaps even another country. And if everything isn’t done exactly right the first time (a particular risk if you are dealing with someone not fully versed in South African law and procedure), you could find yourself repeating the process – perhaps even more than once in a sort of “Ground Hog Day” scenario. All avoidable if you leave behind in South Africa a valid and correctly structured POA.

How should you structure it?

The structure you will need depends on what affairs you need dealt with and why. It can be difficult to decide whether a POA is appropriate for a particular purpose, and if so how wide or how restricted you should make the powers you are granting to your agent. It can also be a challenge to find the correct wording to satisfy the requirements of whichever authority or other party is involved – for instance, specific forms are required by the Deeds Office, SARS, and banks. You might also need to leave behind more than one POA, each structured for a particular purpose. Similarly, you may be uncertain as to who to appoint as your agent, who is best qualified for each purpose, even perhaps who can you trust to act professionally and honestly.

There is no prescribed form and no list of required formalities for a valid POA but there are many possible permutations and legal risks involved, so the only way to ensure that it is valid and fit-for-purpose is to seek professional assistance specific to your circumstances.

Building your own home in a residential complex of your choice is an attractive proposition on many levels. Just make sure up front that you will actually be ready to build within whatever deadlines the HOA (homeowners’ association) specifies.

Otherwise, as we shall see from a recent High Court dispute, you could end up paying levies at a penalty rate – if, that is, the developers don’t first demand re-transfer of the plot back to them, at your expense.

And the penalty levies will be substantial – 5 times the normal rate in the case in question, with other cases involving 8 or even 10 times normal levies. As the Court pointed out, penalty levies can’t be too moderate without losing their “persuasive sting”.

“… had the respondent imposed more moderate penalties, it would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.” (Extract from judgment below)

Buying “plot and plan” in a residential complex allows you the freedom to build your own dream house in a secure environment, quite apart from providing what is likely to be sound long-term investment. Just make sure that you will actually be ready to build within the time frame required by the HOA (homeowners’ association). If you don’t, you risk having to transfer the plot back to the developer (a costly exercise), or you could be lumbered with penalty levies many times higher than normal levies.

You can ask a court to reduce the penalty, but…

Our law gives us general protection from excessive “out of proportion” penalties by means of the Conventional Penalties Act, which in the section headed “Reduction of excessive penalty” provides that –

“If upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but every other rightful interest which may be affected by the act or omission in question.”

However, as a recent High Court decision illustrates, you will have your work cut out for you if you want the court to exercise that discretion in regard to penalty levies.

• The HOA of a “luxury/ultra-luxury” residential estate required in its constitution that –

  – Each owner must start construction within one year of transfer,

  – Should construction not commence timeously the developer had the option to require re-transfer of the erf to it,

  – If the developer did not exercise this option, the HOA could “impose whatever penalties it deems appropriate in its sole discretion” on the owner.

• When several erf owners failed to build within the one-year deadline, the HOA passed resolutions imposing penalty levies on them until they started construction.
• These levies started off at 2x the normal levies, and over an eight-year period were increased in stages to 5x the normal.
• The HOA sued the defaulting owners in the Regional Court to recover these levies, winning both in that Court and on appeal to the High Court.
• It was, held the High Court, up to the owners challenging the amount of the penalty to prove –

  – What prejudice the HOA suffered,

  – That the penalty was disproportionate to that prejudice, and

  – The extent to which the penalty should be reduced.

• In addition to the actual monetary prejudice (damages) suffered by the HOA, it was said the Court necessary to consider the HOA’s other “rightful interests” that might be affected by the failure to build, such as problems with security, nuisance, aesthetics, damage, and value loss caused by extended building activities. In this case, one of the additional reasons for the penalty provision was to discourage speculation in the erven by buyers intending to re-sell the plots for profit rather than build and live in the estate.
• There was prejudice to the HOA even though the penalty provision was intended to create a deterrent rather than compensation for default – the prejudice was to the HOA’s “right to enforce concerted action for the common good, and to its interest in obtaining concerted action”.
• Whether the penalty was “out of proportion” to the prejudice could be assessed in three ways:

1. By looking at comparable situations where the desired result was achieved (the Court compared another similar matter in which a 10x normal penalty was reduced by the Court to 8x normal, much more than the 5x imposed here),
2. By looking at the size of this penalty and the penalties in general in relation to the income and expenditure of the HOA, and
3. “By exercising one’s sense of fairness and justice.”

• The HOA had been fair and reasonable in phasing in the increases over an eight-year period.
• Imposing more “moderate” penalties “would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.”

In the end result, the owners must pay the full penalty levies, interest, and costs on an attorney and client scale.

This article is important to you if you are about to lend money to (or do business with) someone who says “don’t worry, I’m good for it, I own a valuable house.” Or perhaps you have a claim against a recalcitrant debtor and have finally managed to take judgment so you can sell the debtor’s house. Maybe you, or a friend or relative, live in a house threatened with sale in execution. The “owned by a trust” angle (more on that in the article) could also be relevant to you if you are wondering whether to put a residential property into your own name or into a trust (or perhaps a company).

We discuss, with reference to a recent Supreme Court of Appeal decision, why taking judgment against a debtor doesn’t automatically clear you to sell it in execution. Even if the house is owned by a trust or a company.

“A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted” (High Court Rules)

Selling a house in execution is not as simple as getting judgment and sending the Sheriff of the Court off to arrange a sale.

This article is important to you if –

• You are about to lend money to, or do business with, an individual (or a trust or company) that you feel comfortable dealing with because they own a substantial asset in the form of a house.
• You are trying to enforce a judgment against a recalcitrant debtor by selling the debtor’s house.
• You live in a house threatened with sale in execution (or are trying to help a friend or relative in that position).
• The “owned by a trust” angle (more on that below) will also be relevant to you if you are wondering whether to buy a residential property in your own name or in a trust or company.

The “judicial oversight” rule means delay and risk for the creditor

High Court Rules provide that “A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted.”

This is to give effect to the right to have access to adequate housing which is enshrined in section 26 of our Constitution, and the court will look at whether the property is the primary residence of the debtor, at whether there may be an alternative means of satisfying the judgment debt, and at a host of other relevant factors.

Bottom line is that the court will not order an execution sale if it concludes that execution isn’t warranted or will deprive the debtor of adequate housing. Even a successful application for execution will involve cost and delay, whilst an unsuccessful one will be a body blow to the creditor’s prospects of recovering the debt.

That’s clearly a factor to bear in mind when lending to, or transacting with, an individual. But what if the house is owned by a trust or company?

The case of the trust-owned wine farm

• A bank loaned R8.5m to a trust operating as a wine farm, wine cellar, wine merchant and restaurateur. The loans were secured by mortgage bonds over the property. Trustees, trust beneficiaries and trust employees occupied the house and cottages.
• When the trust failed to repay the loans, the bank took judgment against it and applied for an order to sell the property in execution, an application vigorously opposed by the trustees.
• The High Court held that the judicial oversight procedure only applies when a property is the debtor’s primary residence. In other words, it wouldn’t apply in a case such as this where, although the debtor is a trust, the actual occupants are individuals.
• Not so, held the Supreme Court of Appeal on appeal: “Due regard must be had to the impact that the sale in execution is likely to have on vulnerable and poor beneficiaries who are occupying the immovable property owned by the judgment debtor, who are at risk of losing their only homes.” Moreover, the fact that the farm was used commercially did not deprive the occupants of constitutional protection.
• “Judicial oversight” was accordingly necessary despite the properties being owned by a trust and not by the occupants themselves. Note that there are indications in the judgment that although this case concerns trust-owned property, the oversight principle is likely to apply equally to the occupants of company-owned properties.
• On the facts however, the trustees had failed to show that “as a result of indigence, the beneficiaries will be left vulnerable to homelessness if the farm in question is sold in execution. On the contrary, the farm is valued at between R35 million and R40 million, and the reserve price was fixed at a minimum of R21 million; the ability to acquire alternative accommodation is unquestionable.” Also relevant – at one stage of negotiations, the trustees had actually consented to the judgment and to the property being declared executable.

The practical result is a win for the bank and the farm can now be sold in execution. But the principle remains – don’t assume that lending money to, or transacting with, a home-owning trust or company is a safe bet because of the value in the property. It carries the same risk as if the property were owned and occupied by an individual debtor.

Property can provide much more than just a roof over your head – it can also be an excellent investment for you, your family, and your business. But it’s becoming increasingly expensive, and for some first-time buyers the only way to bring it within reach is to pool resources and buy jointly with a friend or partner.

Joint ownership will also appeal to many couples and business partners as a practical way of sharing in a property’s costs and upside potential. But beware, it has its risks.

We discuss the two types of co-ownership and the risks inherent in any form of joint ownership before discussing how to lessen these risks in the context of a recent High Court fight between “romantic partners” who split up then came to blows over their 50/50 owned property.

“Co-ownership is the mother of disputes” (old Roman law maxim)

There can be big advantages to buying property jointly but be aware of the risks and take steps to lessen them before you put pen to paper.

The problem comes if there is a falling-out with your co-owner. Perhaps you come to blows on your usage of the property, or on the incurring of expenses, or on whether it is time to sell, or perhaps you are splitting from each other entirely. That could be a business partnership terminating, or a marriage ending in divorce, or (as in the case we discuss below) a failed romantic relationship. Our courts must regularly resolve bitter joint-ownership disputes between ex-spouses, ex-friends, ex-colleagues, siblings, and close relatives – none of whom dreamed they might ever come to blows when they first hatched plans to buy property jointly.

If a dispute does arise, how will you resolve it? And if you split up, who keeps the property? Or do you sell it jointly, and if so how, and when? How will the bond and other property debts be settled?

The good news is that by and large the risk of dispute can be reduced with a bit of foresight and planning. Preferably with professional advice and assistance – this is after all likely to be an important asset in both your estates.

Let’s have a look at a recent High Court case to illustrate –

A breakup and a fight

• A couple in a “romantic relationship” co-habited in a house of which they were the joint registered owners in undivided half shares.
• When the relationship broke down irretrievably, the partners were unable to agree on a method of ending the property ownership. One partner moved out and the other, after changing the locks, applied to the High Court for an order terminating the joint ownership and appointing a receiver/liquidator to sell it.
• The other party fought this application, contending that the couple had, in addition to being in a personal relationship, also been in a “universal partnership” which still existed.

A co-owner can normally insist on partition of the property at any time

The general rule in our law is this: “No co-owner is normally obliged to remain a co-owner against his will.” Thus “every co-owner of property may insist on a partition of the property at any time. Even if there is an agreement to constitute perpetual joint ownership, the co-owner may demand partition at any time. If the co-owners cannot agree on the way the property is to be divided, then the Court is empowered to make an order which appears to be fair and equitable.”

That opens the door to a wide range of options for the court, but often it means an order for sale of the property (possibly by public or private auction) and division of the net proceeds between the joint owners.

But is it “bound” or “free” co-ownership?

But it’s more complicated than that. Our law recognizes two types of co-ownership –

1. In a “free” co-ownership, the co-ownership is the only legal relationship between the co-owners. In this event, the rule above applies – either joint owner can insist on division at any time.
2. In a “bound” co-ownership however “there is a separate and distinct legal relationship between them of which the co-ownership is but one consequence. Co-ownership is not the primary or sole purpose of their relationship”.

In this event, the co-ownership can only be dissolved when the primary relationship is terminated. In this case, the party opposing the court application said that no order of division could be made until the “universal partnership” between the parties had ended.

The Court found that there had indeed been a universal partnership in existence, in other words that this had been a case of “bound” co-ownership. But it also held (on the facts) that both the romantic relationship and the universal partnership had ended when the parties stopped living together. The romantic relationship was the ‘tie’ between the parties and when it came to an end, any situation of bound co-ownership became a free co-ownership to which the “end at any time” rule applied.

The result – the Court ordered the joint ownership terminated and appointed a receiver and liquidator to sell the property, pay all the property debts, and divide the proceeds between the parties.

The remedy

So the risk is finding yourself in the same unhappy position as the ex-partners in this case, having to ask the High Court to sort out your dispute for you.

Happily however there is a simple remedy. Before you buy property jointly, have a professional draw you a full agreement setting out (at the very minimum) –

• The nature of your relationship. In a co-habitation scenario you should probably also have a full “co-habitation” agreement, whilst a business scenario should be linked to your existing arrangement.
• The best vehicle for co-ownership – for some, a simple “let’s put the house in both our names” will be enough, for others a company or a trust may be better.
• Who will own what percentage of the property.
• Who will contribute what to the costs of purchase and to the property expenses and upkeep.
• Who will have what use of the property.
• What will happen if one or both of you wants to leave the relationship, dies, or is incapacitated.
• And so on – every situation will be unique.

If the parties in this case had put such an agreement in place, they might well have saved themselves the stress, wasted time and legal costs of a protracted and complex dispute. The liquidator/receiver’s charges for selling the property and paying out their shares to them will no doubt rub a lot of salt into all those wounds.

A final thought: Having a formal contract in place is not a forecast that things will go wrong between you – on the contrary, it should greatly reduce the risk of any dispute or unhappiness arising in the first place.