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Eversheds Global Estate Management

South Africa

Real Estate Guide

Principles of ownership

Principles of ownership

This is a high level review of relevant issues relating to property in RSA. Parties entering the property market in the RSA are encouraged to seek specific advice relating to the transaction in question.

The majority of property in RSA is held by freehold title (the property) registered in the relevant deeds office. Ownership is unlimited in time. The owner may choose to occupy the property or may grant a lease to a tenant enabling that person to occupy it. After the lease expires the right to occupy terminates and reverts to the owner. It is possible to sell the property with either no tenants or subject to current leases. However, if there is a lease over the property, then the tenant’s rights (including the right to occupy) will, in terms of the current common law, continue and bind the new owner subject to the tenants’ rights of cancellation as recorded in the Consumer Protection Act (see the section below on the CPA).

Leasehold - leasehold ownership is for a limited period specified in the lease and known as the term. The term may be a long period (e.g. 99 years) or a shorter period (e.g. one to 25 years). If the term is long, the annual rent is usually a nominal amount (e.g. ZAR 1,000-00) and a premium (i.e. a once off payment) close to the value of the property is paid on the signing of the lease alternatively a percentage of the value of the property is paid at regular intervals during the term. If the term is short the annual rent is usually the full market rate. Subject to the terms of the lease, the lease can be assigned (i.e. sold) to third parties or else a sublease with a term that is shorter than the lease can be created out of the lease. The lease can also be mortgaged to a bank to raise debt.

Common owners – it is possible to have more than one owner registered on the title deeds. These owners will hold undivided shares (i.e. those shares cannot be specifically identified with reference to a part of the property) but will hold a percentage of the property as a whole. A variation of this common ownership concept occurs in an estate where owners will each have a share in a non-profit company that manages the common parts of the property and recovers levies from the owners for the maintenance of these areas.

Condominium ownership - not applicable.

Utilisation right - not applicable.

Registration - freehold land and any lease with a term in excess of nine years and eleven months must be registered at the relevant Deeds Registry. The register is public, provides a guarantee that the person registered as proprietor owns the land, shows a description of the land, and lists any rights that the land has over adjoining land or any rights that third parties have over the land. There are different qualities of title that are applied to registered land but the title that a purchaser will expect to see is “title absolute”.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

There are no restrictions on foreign individuals or corporations buying, holding or selling RSA property. The foreign corporate purchaser will need to provide documentation to the conveyancer attending to the registration of the transfer of the property which satisfies the conveyancer that the corporation is appropriately registered and the directors authorised to act.

As a general rule, banks usually advance debt of up to fifty percent of the purchase price of the property to foreign purchasers. Any foreign purchaser needs to obtain advice on the exchange control implications of the purchase.

It is noted that in recent years there has been substantial debate regarding the restriction of foreign ownership of property in the RSA but no law in this regard has been promulgated as at July 2014. However the Promotion and Protection of Investment Bill of 2013 is soon to be considered by the Cabinet and, if the Bill is passed into law, will in all probability have adverse consequences for foreign ownership of property.

 

Title to real estate

Title to real estate

Investigation of title - the buyer/tenant’s lawyer will investigate title, carry out searches of public registers, raise enquiries of the seller/landlord and review and, where necessary, negotiate the contract and any draft lease. The buyer/tenant meanwhile may commission a building survey, sometimes an environmental survey and will complete her financial arrangements. The buyer/tenant’s lawyer will produce a report on the title for the buyer/tenant.

Transfer of title - beneficial title passes immediately on registration of transfer of the property in the deeds Registry.

When purchasing property in a rural area, a purchaser is advised to determine whether the property is subject to a land claim or a potential land claim.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually negotiated between the parties and their lawyers with the assistance of an estate agent. Once the parties have agreed the essential terms of an agreement these have to be reduced to writing in order to be enforceable. The parties may elect to sign binding or non-binding heads of agreement which are subject to the signature of a comprehensive sale agreement within a specified time period alternatively the parties will move directly to signing a comprehensive sale agreement. In general terms, a residential sale agreement is prepared by the seller’s estate agent and amended by the purchaser’s lawyer. Sale agreements pertaining to commercial properties are usually prepared by the parties’ lawyers.

Title Deed - the transfer of property must be by deed. The deeds Registry have prescribed the form of deed that must be used which is prepared by the conveyancer. There is only one conveyancer appointed to attend to the transfer of the property and in the normal course the seller appoints this conveyancer.

Contracts - once the parties sign a formal contract they are committed to perform at a specified future date. Registration may sometimes be conditional on other events such as obtaining planning permission or completion of building works. Usually, if one or more of the conditions is or are not satisfied by a certain date then either party can withdraw from the transaction.

Before registration – the conveyancer will obtain a certificate from the local authority confirming that all rates and taxes on the property have been paid up to date. Caution must be exercised as the local authority need only recover the arrear rates and taxes for the last two years. If there are any arrears older than that the purchaser may be liable to pay these. The conveyancer will also obtain a transfer duty receipt from the South African Revenue Services (SARS) which certificate confirms that the purchaser has paid the relevant transfer duty or value added tax alternatively that the transfer of the property is exempt from such duty or tax.

Registration - takes place when the conveyancer submits all the relevant documentation to the Registrar of deeds once the purchaser has paid or secured by way of guarantee the purchase price. Possession of the property can occur at any time subject to agreement between the parties.

Leases - the tenant’s lawyer will investigate title, carry out searches of public registers, raise enquiries of the landlord and review and where necessary negotiate the agreement for lease and any draft lease. The tenant meanwhile will commission a building survey, sometimes an environmental survey and will complete his financial arrangements. The tenant’s lawyer will produce a report on the title for the tenant. Once the parties sign a formal agreement for lease they are committed to complete at a specified future date. Completion may sometimes be conditional on other events such as obtaining of a landlord's consent, obtaining of planning permission or completion of building works. Usually, if one or more of the conditions is or are not satisfied by a certain date then either party can withdraw from the transaction.

Assignment of whole - this is usually permitted with the landlord’s consent as long as certain conditions are met to safeguard the value of the landlord’s investment.

Sub-letting of the whole - this is commonly permitted with landlord’s consent subject to conditions.

Sub-letting of part - this is less common and usually only permitted where the design of the building allows a floor plate to be conveniently divided and is usually permitted within companies forming a Group without the landlord’s consent.

Mortgaging of the whole - this is usually permitted without consent.

Language requirement – there are eleven official languages in RSA but English is utilised the most.

Governance of lease signature/administration – any lease that is registered must be signed by way of Notarial deed and in the presence of Notary Public.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - broadly speaking, there are two main lease types being long leases where a once off payment is paid on the grant of the lease and only a nominal annual rent is payable and shorter leases where the annual rent is at full market value. See section “Leasehold” for further details.

Alterations/modifications - alterations are usually permitted with the landlord's consent with no consent being required for installation of internal removable partitioning.

Assignment and sub-letting - see section “Transfer of ownership of leased property (alienation) within "Structure of a real estate transaction".

Destruction/reinstatement - see section “Insurance” below for the position where the property is destroyed by an insured risk or uninsured risk. Commonly the tenant must reinstate any alterations at the end of the term and return the premises to the landlord in accordance with the repairing covenants, fair wear and tear excepted. The tenant is not normally compensated for improvements.

Duration of lease - the duration of the lease is for the parties to agree. There are no limitations on this.

Termination - leases will usually provide that the landlord can terminate the lease for non payment of rent and material breaches of covenant by the tenant. Short leases (see section “Leasehold“ for further detail) will also include an ability for the landlord to terminate if the tenant is insolvent, enters into administration or there are other specified indications of financial difficulties. Termination is a very complicated area. In simple terms, if the landlord intends to terminate the lease for breach of covenant it must comply with procedure detailed in the lease agreement before it can do so. Even if the landlord has lawfully terminated it may not re-enter the premises and change the locks without a court order. The tenant can, in all cases, dispute the landlord’s right to terminate.

Insurance - a landlord usually insures the building and recovers a contribution of the cost of insurance from the tenants. Rent is usually suspended if the premises are destroyed by an insured risk until expiry of the period of loss of rent insurance. It is normally the landlord's responsibility to reinstate following damage by an insured risk and often there may be rights to break if reinstatement is not carried out within a specified period. If the property is damaged by an uninsured risk then the landlord usually elects, within a certain period, whether or not it wants to reinstate the premises. If it elects not to reinstate the premises then the lease will terminate. If it elects to reinstate then the rent will be suspended. Provided the landlord does reinstate the premises within a specified period the tenant will then be obliged to take occupation of the reinstated building and to resume paying rent.

Rent review - rent is commonly reviewed upwards at a fixed percentage on an annual basis. Recently it has become more common that the rent and the percentage of the increase are reviewed every five years to match the market conditions.

Repair/decoration/furnishing - Lease of whole building - Repair and decoration are usually the tenant's responsibility. However, to entice a tenant to sign a long term lease a landlord may offer a contribution per square metre for the tenant’s installation costs. Lease of part of a building – the tenant is usually responsible for internal repairs and decoration. The landlord normally carries out structural repairs of the whole building and repair and decoration of the common parts, recovering the cost from the tenant through the operation of a service charge.

Service charge - if a landlord repairs the structure and common parts or provides any services to the tenants, the lease usually includes a service charge regime under which certain costs can be recovered by the landlord from the tenants. The proportion of service charge payable by each tenant is usually calculated by reference to the area occupied by the tenant compared to the building/estate as a whole.

Tenant’s duties - the tenant has numerous obligations in the lease (such as keeping the premises repaired and decorated, complying will all statues affecting the property etc).

Termination/break clauses - it is possible to negotiate early termination rights in favour of either the landlord or the tenant. Tenant’s break clauses are more common and are usually conditional on the rent being paid and the premises being returned to the landlord without any occupiers.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - rent deposits are the most common form of security and usually involve placing a sum equal to two months' rent in an interest-bearing account which is charged to the landlord and which can be drawn against by the landlord in the event of default. The deposit is usually released on assignment or on the determination of the term. Some rent deposits also provide that the deposit is released once the tenant satisfies a specified financial test.

As an alternative to Lease deposits, bank guarantees can be provided by tenants as security for the performance of their obligations in terms of the lease agreement. These guarantees usually involve placing a sum equal to two months' rent with a financial institution who in turn issues the guarantee in favour of the landlord. The landlord can present the guarantee for payment in the event that the tenant defaults in terms of the lease agreement.

Surety – a company or individual may be required to guarantee the tenant's performance of its covenants and also be required to take a lease on identical terms in lieu of the tenant in the event of the tenant's insolvency.

Warranty – the landlord usually does not warrant that the premises are fit for the tenant’s purposes or that the tenant will obtain a license (if required). Accordingly, the tenant must satisfy itself before entering the lease; alternatively the lease should be conditional on the tenant completing its investigations in this regard.

 

Security of tenure

Security of tenure

In commercial leases, tenants enjoy security of tenure for the duration of the lease term only. At the end of the lease the tenant must vacate the property unless the parties have agreed to extend the lease and the rent to paid for the new period.

In residential property please refer to the section below regarding the Consumer Protection Act.

 

Taxes

Taxes

Advice should be sought regarding the tax implications of the sale or lease as these differ from transaction to transaction. What appears below is a general overview.

On purchase of property - transfer duty is a once off payment made by the buyer to SARS within six months of the date of the sale agreement failing which penalties will apply. The amount of transfer duty is determined by reference to the purchase price. There is no transfer duty or similar tax due by either party on the conclusion of a lease.

If Value Added Tax (VAT) is payable on the purchase of the property then transfer duty is not payable. If both parties are registered for VAT it is possible to zero rate the sale thereby avoiding the payment of VAT and transfer duty. In essence, the sale must amount to the sale of a going concern in order to be zero rated.

It is obligatory in certain circumstances for the parties to be registered for VAT. The owner is required to issue a valid VAT invoice and to pay the VAT over to SARS. Conversely, the tenant can claim the VAT from SARS.

Income tax - income tax is payable on rental income. However, a landlord can claim expenses against the tax based on the cost of maintenance of the building and, in certain cases, the interest on associated loans. Allowances may also be made for depreciation on plant, equipment and other elements of the building.

Mortgage – there are no taxes levied for the registration of a mortgage bond.

Capital gains tax - CGT is due by the owner on the sale of the property. It is important for the owner to keep detailed records of the cost of acquisition and any capital improvements undertaken during the term of ownership as these will impact on the CGT calculation.

Non-residents withholding tax - The Parties should be aware of an obligation on the part of the purchaser and the conveyancer to withhold part of the purchase price from the seller, if the seller is a Non-Resident and pay such withheld portion to SARS in terms of the relevant tax legislation.

The Consumer Protection Act (CPA) became law in April 2011. This is an important piece of consumer-friendly legislation that can have far reaching implications on sales and leases of property. The CPA applies to all transactions occurring with the RSA unless they are exempt in terms of the CPA. If the transaction is not undertaken in the ordinary course of the seller’s business then the CPA will not apply. The CPA also does not apply where the purchaser is a corporate entity that has an asset value or annual turnover of more than ZAR2 million.

If the CPA is applicable, then the sale and lease agreement must comply with requires of the CPA. These requirements include the type of language used in the drafting of agreements and the exclusion of unfair, unreasonable or unjust terms. It is also unlawful to attempt to exclude the application of the CPA if in fact the transaction should comply with the CPA.

One of the most significant impacts of the CPA is to compel the seller to make certain warranties in relation to the condition of the property.

If the property is sold as a consequence of direct marketing then within 5 days of the conclusion of the transaction the purchaser may cancel.

The CPA has far reaching implications for leases other than those between two corporate entities. The tenant may enjoy the right to cancel a fixed term contract for convenience on 20 business days’ notice. The landlord has various obligations regarding giving the tenant notice of the end of the term of a fixed term contract. If the property that is subject to a lease is sold and the purchaser was not made aware of this it may be argued that the purchaser is not bound to the lease which, if this argument is accepted by the courts, would represent a significant shift from the common law situation detailed in paragraph 2 of this document.

The CPA is a relatively new piece of legislation and unfortunately suffers from some inconsistent drafting. The courts and practitioners alike are slowly coming to grips with the implications of the CPA on property transactions.