Marius van Rensburg – Author
Current economic conditions will likely lead to more property owners being in financial distress. This article will identify and explain the phases related to financially distressed sales.
A distressed sale occurs where the seller must sell due to circumstances, such as impending repossession by the bank, a divorce, relocation, financial distress or any other such pressure. A distressed property is usually sold by the owner to prevent repossession of the property by the bank as a result of having fallen into arrears on the home loan.
Private Distressed Sales
Property owners may try sell the property on their own and thereby avoid bank action and in such cases control the process and appoint their own estate agents and conveyancers, alternatively they may apply to be part of a bank assisted sale program. It must be understood that while property owners are free to sell their properties, banks (as bond holders) can refuse to consent to the cancellation of the mortgage bond unless the bank has a guarantee for the full amount due on the mortgage bond.
Bank Assisted Sales
Most banks have bank assisted or distressed sale programs where the bank will assist the owner to put the house on the market to recover the debt owed. The various bank programs have different benefits such as inter alia a discount on the capital owed and or the right to pay any shortfall interest free after transfer. It is important that property owners investigate the benefits.
If the bank assisted program route is taken, depending on the bank, the property is objectively valued, and an agreement is reached with the bank whereby the property is to be marketed for sale. The property owner is obliged to accept any offers at or above the valuation, failing which the banks can in some cases (depending on the program) use a Power of Attorney given to the bank by the owner as part of the program, to accept the offer to purchase. Banks have designated panels of estate agents for the purpose of obtaining valuations and marketing the property for sale.
After sale, conveyancers are appointed by the bank to transfer the property. If the property owner does not co- operate, the bank can sign the transfer documents using the Power of Attorney referred to above.
Shortfall / Acknowledgment of Debt
As part of this process, the shortfall (if applicable) between the purchase price less the bond amount due and other expenses such as estate agents commission, rates and taxes, cost of compliance certificates, is calculated. The property owner signs an acknowledgement of debt in favour of the bank to pay the shortfall after transfer (usually interest free).
It must be noted that the bank makes a concession in these cases and allows the cancellation of the bond on strength of the acknowledgment of debt. The bank assumes a risk in having a debt unsecured by the bond over property. On the other hand, banks recognize that if the property owner cannot pay the bond or the costs of owning the property, the property owner goes more into arrears and the banks’ situation worsens.
Shortfall Distressed Sales – Bond not in Arrears
There are cases where a property owner is in financial distress and sells a property resulting in a shortfall between the sales price less expenses, where however the property owner is not in arrears with the mortgage bond. It should be noted that in such cases the bank may refuse to allow the cancellation of the bond based on an acknowledgment of debt inasmuch as there is no arrears on the bond.
SALE IN EXECUTION
Should the owner be unable to sell the property to satisfy the outstanding loan, the bank may then elect to institute legal action against the owner. Legal action commences with a letter of demand sent in compliance with the loan
agreement and the National Credit Act. If the default is not rectified or an arrangement with the bank not made (which may include selling through a bank assisted program), the bank will terminate the loan agreement and begin the legal process.
The bank will institute legal action by issuing a summons or a court application. If this is not defended, the bank will take default judgment. The bank will thereafter proceed to execute on the judgment. Execution of the judgment can be done by instructing the Sheriff of the Court to attach and sell movable assets of the owner and if permitted by the default judgment or by a court order, the immovable property can be sold on auction by the sheriff.
The court rules relating to the sale of residential immovable property have been amended since the decision of Absa Bank Ltd v Mokebe 2018 (6) SA 492 (GJ) which held that where execution is sought against a primary residence, the claim for the monetary judgment and a claim to have the property sold in execution must be brought at the same time. Residential property cannot be sold in execution without a specific court order authorising this.
In making application for judgment in the case of residential property, the banks must advise the court of all relevant facts typically required for a sale in execution order including, the market value of the property, rates, levies and bond outstanding, equity in the property, whether occupied and by whom, whether a primary residence or not. The court then makes a decision and can direct a reserve price for the property. The court may also postpone the matter to arrange a payment plan with the owner and reinstate the bond, if it is not satisfied that an order of foreclosure is appropriate.
This prevents the sale a primary residence where the owner thereof is to be severely prejudiced by the sale. The above does not apply in the case of commercial properties sold in execution. If the property is sold in execution, the owner remains liable for the payment of any shortfall, as well as the legal costs incurred by the bank in enforcing its rights including the costs to sell the property. This will only be done by the bank when there is no other alternative.
If during the above process, the property owner sells the property privately, the legal process can be halted by agreement with the bank. In the alternative the property owner may negotiate with the bank to enter into a bank assisted sale program and thereby halt the legal process.
Should the reserve price not be met by a third party at the sale in execution, the bank has the option to bid for the property and buy back the property itself at the reserve price. i.e. the property is repossessed and the bank becomes the registered legal owner.
The bank will then put the repossessed property on the open market and purchasers interested in the property will have to make an offer directly to the bank or its appointed Estate Agent. The bank can then accept or decline any of the offers made, but since this is the very end of the sales process, the bank would want its money back and consider any reasonable offers.
With repossessed sales the bank will settle all arrears rates and taxes on the property, in addition to paying all rates and taxes due until the date of registration. To make the process even easier on the pocket, there is no transfer duty payable by the purchaser when buying a repossessed bank property as the bank is a registered VAT vendor.
The banks’ voluntary sales programmes for defaulting homeowners are growing throughout the country and remain the most beneficial alternative to alleviate financial stress, expensive recovery costs and adverse credit records. Ultimately, it’s critical for a home owner to consult with experts and to seek help immediately.
Banks are loathe to take legal action and property owners who are in financial distress should communicate with their bank as early and as clearly as possible in order to get assistance from the banks. This is particularly true in the current economic climate where various concessions are being made re payment holidays etc.