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August 6, 2018
Property sales: Sellers, beware of double commission
September 3, 2018

The dangers of not building in time

If you have recently bought a vacant plot within a development with the intention to build a house there, be aware that your purchase agreement probably contains a clause setting a fixed time for you to build on the plot. If the owner does not build within the specified time, the developer may be entitled to impose certain penalties.

The recent High Court case of Bondev Midrand (Pty) Limited v Ndlangamandla NO and Others (38221/2015) [2016] ZAGPPHC 939 illustrates the implications.

The facts:

The first purchasers of the property bought the property from the developer in January 2009 for a sum of R560 000.00. A term of the sale, recorded in the title deed, obliged the buyer to erect a dwelling on the vacant plot within 18 months after signature, failing which the developer will be entitled, but not obliged, to claim retransfer of the property at the cost of the buyer, against repayment of the original purchase price, without interest. This period could also be extended at the discretion of the developer.

The first purchasers failed to erect a dwelling on the property within the specified period. However, in 2012 the developer allowed the first purchasers to sell the property, provided that the second purchaser would be obliged to build within 12 months after signature. The second purchaser also failed to build within the specified time.

In 2013 the second purchaser sold the property to a trust, the respondents in this case, for R840 000.00. Prior to taking transfer, the developer and the respondents entered into a written agreement that the respondents would erect a dwelling on the vacant plot within 9 months after signature, failing which the developer would be entitled to demand retransfer of the property against payment of the original purchase price of R560 000.00 (not the R840 000.00 the respondents paid for the plot).

The respondents failed to build within the specified time and the developer applied to court for an order for transfer of the property to the developer. The developer was entitled to transfer against payment of the original purchase price of R560 000.00, but nevertheless offered to repay the full purchase price of R840 000.00, which the court called a “rather gracious gesture”.

The outcome:

The respondents raised the defence that the agreement to build within 9 months was in contravention of the provisions of the Consumer Protection Act 68 of 2008 (“the Act”) against unfair, unreasonable or unjust contract terms. The court held that there was no such contravention, on the following grounds:

  1. There was no “transaction” as defined in the Act between the developer and the respondents: the respondents did not buy the property from the developer and the rights and obligation flowing from the agreement between them cannot be said to be “goods or services” supplied by the developer to the respondents.
  2. The agreement was not “unfair, unreasonable or unjust”: there was no suggestion that the respondents were coerced into signing the agreement – they understood what they were committing to; and that there was no suggestion that the Trust was not able to build within 9 months.

The respondents further raised the defence that the agreement was against public policy. The court rejected this argument on the basis that, in general, parties should comply with contractual obligations that had been freely and voluntarily undertaken.

The court ordered the respondents to retransfer the property to the developer. The respondents lost the vacant plot, all capital appreciation, and 3 years’ interest on the capital appreciation. The respondents also had to pay 75% of the legal costs of the developer.

Conclusion: It is important to consult a legal representative to understand all the potential consequences and to manage all the potential risks attached to an agreement of sale.