Most South African properties are purchased with a loan, whether it be 100% of the purchase price, or a lesser percentage where they are able to pay a deposit.
The loan is secured by a mortgage bond which is normally registered at the same time as the transfer to the purchasers is registered in the Deeds Office. The mortgage bond is the security the lender has and binds the property. Contrary to what some believe, the fact that a mortgage bond is registered over the property does not mean that the bank owns the property – the registered owner is still the owner and the bank enjoys a preferential claim against the property in the event of the owners coming into financial hardship.
When 2 or more people buy a property together and a mortgage bond is registered to secure the loan of the purchase price or a part of it, the new owners are jointly and severally liable to repay the bank installments. If one of the parties does not pay their portion, the others are liable for that portion also. In your case study, the parties separated but they were still liable to repay the loan in instalments, and if one party failed to pay, the other party was still liable to pay both parts of the instalment.
The banks will not lightly execute on a mortgage bond – acquiring properties from customers who are in financial trouble is certainly not their core business and they really don’t want to have to maintain and provide security for all the homes which their customers can no longer afford. Because of this all the main banks in South Africa have developed schemes to assist their financially distressed customers to either repay their loans by way of reduced installments, perhaps over a longer period, or to reduce the instalments for a limited period whilst the customer is able to recover financially. The banks also have schemes which promote a much faster sale of the property, often at below value, on the basis that once the property is sold, the bank will write off a percentage of the amount still owing, and accept an acknowledgement of debt whereby the customer agrees to pay off the balance of the outstanding debt over a period of time.
There is also the option of applying for debt management which would usually assist with saving one’s home, but this is an entirely different subject.
It is therefore clear that following the foreclosure process where a customer is struggling with their finances is really a very last resort for the bank.
Where the customer is unwilling or unable to be part of the bank’s relief options, the bank will serve a notice in terms of Section 129 of the National Credit Act on the customer/s. This is a demand to settle the arrears on the loan and a suggestion to consider alternative ways to deal with the arrears. If the customer does not follow the notice and contact the bank, the bank will instruct its attorneys to issue summons against the customer for the total debt outstanding. The bank’s attorneys then apply for default judgement against the customer and a warrant of execution against the property is served by the sheriff on the customer.
The Courts are then requested to determine by way of a Rule 46A application, what the reasonable reserve price of the property would be if the whole process to a Sale in Execution was completed. This is to prevent the bank from authorising the sale of the property at a ridiculous price, leaving the customer with a big shortfall they will still be liable for.
In most cases if the property is purchased by a third party at the Sale in Execution, the new buyer will be compelled to pay all outstanding monies owed to the municipality and any body corporate or homeowners’ association. Sometimes these outstanding debts are considerable and may be nearly as much as the purchase price of the property at the Sale in Execution.
The problem is that very often the debtor does not move out of the home and this becomes the new owner’s problem. In South Africa the eviction process can take a year or more and may cost the new owner anything up to R150,000.00 or more in legal costs. When one considers this hidden expense, together with the sometimes high municipal and body corporate debts, it really is very unfair on the new owner for the previous defaulting owner to not vacate the property. Most of these costs are also recorded as a debt against the original owner’s name, sending them much further into financial distress.
As one can see there are many ways for an owner to save their home, or at least what they have invested in their home if they cannot save their home when in financial distress. Owners should really consider all options before forcing a bank to foreclose on their property.
Andrew Smith has 30 years of conveyancing experience, including subdivisions, township developments, sectional title developments, servitudes, usufruct transfers, general transfers, mortgage bonds, and uses his tax background to structure complicated transactions in the most tax efficient manner.