Legal Talk – Real Estate Transactions in South Africa

Real Estate Transactions in the Republic of South Africa

PURCHASE AND SALE AGREEMENTS

All agreements for the disposal of land (real estate) in the Republic must, by virtue of the provisions of the Alienation of Land Act No. 68 of 1981 as amended, be in writing and signed by the parties thereto or by their agents acting on their written authority, failing which such agreements are of no force or effect. This requirement does not apply to the sale of land by public auction.

LEASES

As a rule leases in respect of land need not be in writing. It is however advisable, for evidential purposes, for leases to be reduced to writing.

Because of the South African legal principle "huur gaat voor koop" (translated "lease goes before sale") a lease (whether or not in writing) is binding on the owner of the land and on his successors in title to the land. Accordingly if an owner of land which is subject to a lease sells such land to a third party, the third party purchases the land subject to the lease and is bound thereby.

Leases for periods of longer than 10 years must, in order to be binding against a creditor or a successor in title of the owner for a period of longer than 10 years, be in writing and registered in accordance with the provisions of the Deeds Registries Act 47 of 1937 as amended. If such leases are not in writing and/or are not so registered they remain valid and binding, but only for a period not exceeding 10 years.

Leases attract stamp duty in an amount equal to 0,5% of the total rental payable.

REGISTRATION SYSTEM AND LEGISLATION

Land registration in the Republic is based on a cadastral system where every portion of land is represented by a diagram which is registered in the office of a Surveyor General. Title to land is registered in a deeds registry in accordance with the provisions of the Deeds Registries Act. The Deeds Registries Act governs all acts of conveyance of land in the Republic including the registration of transfers thereof, the registration of mortgages there over and the registration of servitudes, encumbrances and other transactions applying thereto.

The procedure for the subdivision of land differs in the various provinces in accordance with the requirements of the relevant provincial legislation. Those procedures may be relatively simple in the case of minor subdivisions of urban stands, but can become complex and time consuming in the case of such larger developments and the establishment of townships. In the case of larger developments, consents are often required in terms of environmental legislation which may require the undertaking of "scoping exercises" (and investigation and public consulting procedure) and detailed environmental impact assessments. The decision of the environmental authority concerned is customarily referred to as a "record of decision" which will contain various restrictive conditions imposed by the environmental authority that must be complied with.

In addition to the environmental issues, the relevant provincial governments may, when application is made for the establishment of a township, impose "conditions of establishment" when approving any such application. Those conditions of establishment will customarily contain various "pre-proclamation conditions" relating to the installation of services, the payment of service contributions and other conditions that must be complied with before a township, having been approved, may be proclaimed. It is only after proclamation of a township that the stands comprising the township become transferable.

Certain provincial legislation prohibit the sale of stands in unproclaimed townships.

In terms of the Deeds Registries Act, ownership of land passes (and can only pass) against registration of transfer of the relevant land in accordance with the provisions of the Deeds Registries Act. Similarly mortgages and other encumbrances become effective only against such registration. Notably land cannot be transferred from one person to another unless every existing mortgage over that land is cancelled or otherwise discharged.

Procedurally the required documentation is prepared by a conveyancer (being a practising attorney who in addition holds a special conveyancing qualification) and is lodged in the relevant deeds registry for examination and registration. After lodgement the documents go through an extensive examination procedure often lasting some two weeks whereafter (if the documents are in order) they are registered. Actual registration of the deeds requires the deeds to be signed by both the conveyancer and the Registrar of Deeds concerned. After such registration the records of the relevant Registrar of Deeds are updated to reflect the relevant transactions. This "cross –writing" procedure can take some months and it is only after that procedure is completed that the registered deeds will be delivered to the lodging conveyancer.

It is the responsibility of the conveyancer to ensure that all relevant laws applying to the conveyance of land or registration of the mortgage or other registration (as the case may be) are complied with. It is because of this substantial responsibility that conveyancing fees are customarily and to a large extent based on the transaction value.

Although registration of transfer or mortgage does not constitute absolute proof of ownership or vesting of the mortgage, as the case may be, it does constitute extremely strong evidence thereof. It is only in very rare instances that such transfer or mortgage is set aside by the courts.

The South African land registration system is generally recognised as being one of the most advanced and reliable in the world. It is because of the integrity of the South African land registration system that title searches and title insurance are extremely uncommon. Purchasers and lenders alike derive considerable comfort from the integrity of the South African land registration system, but are nevertheless advised to make use of the services of reputable conveyancers who will protect their interests.

Land use in the Republic is governed partly by the conditions of title (being conditions of ownership recorded in the relevant title deeds) and partly in terms of town planning or zoning schemes. Both the registered conditions of title and conditions of the relevant town planning or zoning scheme must be complied with. Effectively therefore the more onerous provisions will apply.

All improvements of a permanent nature forming part of land accede thereto. Accordingly the owner of the land is automatically and by operation of law the owner of the improvements thereon.

FORMS OF OWNERSHIP

In addition to the conventional land registration, the division of buildings and registration of "units" is permitted by way of sectional title ownership.

Furthermore there are various forms of indirect land ownership including share block schemes in terms of which land is registered in the name of a company and a shareholder is entitled to the use of the land by virtue of his ownership of shares in the company.

WHO MAY OWN LAND

There are currently no restrictions with regard to land ownership in the Republic by foreign nationals. A person domiciled in another country is free to acquire land in the Republic. If a foreign company has established a place of business in the Republic then that company has to register its Memorandum and Articles of Association in the Companies Office as an "external company" before it may acquire ownership of land in the Republic.

COSTS

The property market in South Africa is covered by a network of estate agents whose activities are regulated by an Estate Agents Board. Commissions charged by estate agents vary depending on the nature of the land, but generally approximate 7% of the purchase price. Such commissions are however negotiable.

Tax is payable on property transactions in the form of either value added tax or transfer duty. If the seller is a registered vendor (for VAT purposes) VAT at 14% of the purchase price is payable and is deemed to be included in the purchase price unless the contrary is specified. If the seller is not a VAT vendor, transfer duty is payable by the purchaser at the rate of 10% of the purchase price for corporate entities. In addition conveyancing fees are payable on a sliding scale ranging from roughly 0,5% to 1% of the purchase price.

In urban areas rates and taxes are payable for municipal services such as water, electricity, sewerage and refuse removal. Such rates depend on the value of the land and must be paid before transfer of the land in question can be registered.

FINANCE

Land can serve as security for debt and is capable of being encumbered by means of a mortgage bond which is registered over the title deed to the property.

Foreign companies require the approval of the South African Reserve Bank before they may incur borrowings against the security of a mortgage bond.

CAPITAL GAINS TAX

Capital gains tax applies when a disposal of immovable property by a South African taxpayer occurs. Private homes owned by individuals, which qualify as primary residences, are exempt from the payment of capital gains tax up to the first R1 million of the capital gain. This exemption does not apply if the home is registered in the name of a company, trust or other corporate entity.

Courtesy: Frans van Hoogstraten from Bowman Gilfillan

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