Economic times are tough! Interest rates are high! Inflation is stubborn!

You come across a house you really like but you neither have the cash nor do you qualify for finance from a bank to buy it. Your prospective seller is happy to sell you the house on the basis of an instalment sale. Is this allowed in law? What is it that can be done to protect your interest as the purchaser whilst you pay monthly instalments pending transfer? The Alienation of Land Act No. 68 of 1981 (“the Alienation Act”) defines a contract as a “deed of alienation under which land is sold against payment by the purchaser to, or any person on behalf of, the seller of an amount of money in more than two instalments over a period exceeding one year”.

Section 6(1)(q) of the Alienation Act provides that “a contract shall contain, if the land is not subject of a separate title deed at the time the contract is concluded, the latest date at which the land shall be registrable in the name of the purchaser”.

Section 6(4) of the Alienation Act provides that “the date stated in a contract referred to in Section 6(1)(q) shall not be later than 5 years from the date of the contract”.

Section 26 of the Alienation Act provides a welcome protection to purchasers in that it says “no person shall by virtue of a deed of alienation relating to an ERF or a unit receive any consideration until :-

1. Such ERF or unit is registerable (inserted to protect purchasers who buy properties / units off-plan); and
2. The contract is recorded in terms of Section 20 of the Alienation Act”.

To protect the purchasers who buy residential immovable properties in instalments, Section 20 of the Alienation Act (“Section 20 Recordal”) obliges the seller to record such a contract against the title deed of the seller’s own property. This is to inform the entire world that the property in question has been sold in instalments, and in the event of the seller being declared insolvent prior to the property being transferred to the purchaser, the purchaser’s claim shall be a preferent claim which rank below any mortgage bond registered over the property prior to the contract being recorded.

So, what lessons emerges from above?

1. You may buy an immovable property in instalments. The contract in this regard must be in writing and signed by the parties (seller and purchaser);
2. The purchase price must be payable in more than two instalments over a period exceeding one year but not exceeding five years in order for the contract to qualify as an instalment sale contract which qualifies for protection in terms of the Alienation Act;
3. The seller is not entitled to payment unless the property is registrable, and the section 20 Recordal is registered in the Deeds Office;
4. The Section 20 Recordal is important for the purchaser as it notifies the entire world of the purchaser’s interest in the property, and in the event of the seller being declared insolvent, the purchaser enjoys a preferent claim after the mortgagee if the property bought in instalments was subject to a bond when the contract was registered in the Deeds Office.

What are other issues to look out for in concluding an instalment sale of an immovable property?

1. Firstly, the seller is allowed to charge interest. If the seller chooses to charge interest, it is my view that such a seller must comply with the National Credit Act No. 34 of 2005 (“the Credit Act”). This is so because the Credit Act defines a “credit transaction” as “any other agreement in terms of which payment of an amount owed by one person to another is deferred and a charge fee or interest is payable”. If the seller is not registered as such, the instalment sale where interest and other charges are payable could be declared an unlawful agreement. So, sellers be warned!
2. If transfer duty is payable, it must still be paid within 6 months from the date of conclusion of the sale, irrespective of when the transfer will actually go through.

Should you require property law related advice, please contact me, Silindile Lembete on 031 575 7539 / Silindile.lembete@wylie.co.za.