Conveyancing and Property Transfers

 

 

A shortfall, also known as negative equity, occurs when a property is sold for a price that is less than the total outstanding debt on it. This debt includes the mortgage bond, accrued interest, legal fees, estate agent commission, and any outstanding rates and taxes or levies. The seller remains legally liable for this remaining balance.

Shortfalls are often a result of a decline in the property market, rising interest rates, or a property that was sold at a price below its market value (e.g., through a sale in execution or a distressed sale). It can also occur when a property owner has over-capitalized on renovations or has other financial obligations that exceed the property's value.

While both involve selling a property for less than what is owed, a shortfall is the result—the deficit amount—while a short sale is a type of sale. A short sale is a pre-negotiated agreement with the lender to sell the property for less than the amount of the mortgage, usually to avoid foreclosure. A shortfall can be the result of a short sale or a forced sale.

The shortfall is calculated by subtracting the net proceeds from the property sale from the total amount owed. The total debt includes the outstanding bond capital, all accrued interest up to the date of sale, legal and administrative costs, and any municipal or body corporate fees that needed to be settled for the transfer.

If you receive a summons, it is crucial to seek legal advice immediately. Under the National Credit Act, a credit provider must follow a strict legal process before a judgment can be granted. An attorney can help you challenge the fairness of the sale price or dispute unreasonable costs added to the debt. You have the right to defend the summons in court.

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Shortfall Matters

Understanding and Navigating Property Shortfalls in South African Law

The South African property market, like any other, is subject to fluctuations and economic pressures. For homeowners, a decline in property value can lead to a precarious financial situation known as a "shortfall." This occurs when the outstanding debt on a property surpasses its market value, leaving the seller liable for the difference upon sale. For legal practitioners at VDM Attorneys, a thorough understanding of the complexities surrounding property shortfalls is crucial to effectively advise and represent clients facing this challenging circumstance.

What is a Shortfall in Property Sales?

A shortfall, also referred to as "negative equity" or being "underwater," arises when the proceeds from the sale of a property are insufficient to cover all outstanding financial obligations tied to it. This debt is not limited to the remaining mortgage bond but also encompasses a range of other costs, including:

  • Legal Fees: Conveyancing costs associated with the transfer of the property.
  • Municipal Accounts: Arrear rates, taxes, water, and electricity charges.
  • Levies: Outstanding payments to a body corporate or homeowners' association.
  • Estate Agent's Commission: The fee due to the real estate agent for facilitating the sale.

This situation can arise from various factors, including financial distress compelling a sale in a depressed market or a general decline in property values since the initial purchase.

Key Factors Contributing to a Shortfall

Several economic and individual circumstances can contribute to a property shortfall:

  • Economic Conditions: A downturn in the economy, characterized by rising interest rates, inflation, and increased unemployment, can lead to a cooling of the property market. This can result in a stagnation or decline in property values, making it difficult for sellers to achieve a sale price that covers their outstanding debt.
  • Over-capitalization: Homeowners may invest in extensive renovations or improvements that are not reflected in the property's subsequent market value. This can be due to personal taste not aligning with broader market preferences or the improvements exceeding the price ceiling for the neighborhood.
  • Repossession and Forced Sales: When a homeowner defaults on their mortgage payments, the bank may initiate legal proceedings to repossess the property and sell it at a public auction. These sales in execution often yield prices significantly below market value, a primary contributor to substantial shortfalls. Recent changes in South African law, however, now allow for a court to set a reserve price for such auctions to mitigate this risk.
  • Accumulated Costs: The total debt on a property is often more than just the outstanding bond. Unpaid municipal accounts and levies, along with legal fees and estate agent commissions, must be settled before the property transfer can be finalized, adding to the overall financial burden.

Proactive Strategies for Dealing with a Shortfall

When a potential shortfall is identified, it is imperative for all parties involved – the property practitioner, the seller, and the conveyancer – to adopt a proactive and communicative approach. The conveyancer plays a pivotal role in negotiating with the relevant financial institutions and municipal bodies to find a workable solution.

Several options are available to address a shortfall:

  • Seller Pays the Difference: The most straightforward solution is for the seller to settle the shortfall amount in cash, allowing the transfer to proceed without further complications.
  • Acknowledgement of Debt: A common recourse is for the seller to sign an "Acknowledgement of Debt" with the bank. This allows the property transfer to be finalized, with the shortfall amount converted into an unsecured personal loan. It is important to note that this new loan may carry a higher interest rate than the original mortgage.
  • Bank-Assisted Sale Programs: Many South African banks have established programs to assist homeowners in financial distress. These programs, such as Standard Bank's "EasySell," can offer various forms of relief, including a reduction in the total debt, an interest-free repayment plan for the shortfall over a specified period, or other forms of financial assistance to facilitate a private sale.
  • Selling Privately: A private sale, as opposed to a sale in execution, typically achieves a higher price. By actively marketing the property, the seller can often reduce or even avoid a shortfall altogether.
  • Short Sale: In a short sale, the bank agrees to accept a sale price that is less than the outstanding mortgage amount. The bank may then choose to forgive the remaining debt or pursue a deficiency judgment against the seller for the shortfall.

Legal Implications and Considerations

The legal landscape surrounding property shortfalls in South Africa is intricate and requires careful navigation. Key legal aspects include:

  • Section 129 Notice: Before a bank can obtain a judgment for a shortfall, it is typically required to send a Section 129 notice under the National Credit Act, informing the homeowner of their default and their rights.
  • Challenging the Sale Price: Homeowners have the right to challenge the fairness of the sale price achieved in a sale in execution if they believe it was unreasonably low.
  • Default Judgment: Ignoring a summons for a shortfall can result in a default judgment being granted against the former homeowner, which can have severe financial consequences. It is therefore crucial to seek legal advice and respond to any legal notices promptly.
  • Default Judgment: Ignoring a summons for a shortfall can result in a default judgment being granted against the former homeowner, which can have severe financial consequences. It is therefore crucial to seek legal advice and respond to any legal notices promptly.
  • Judicial Oversight: South African courts now exercise judicial oversight in cases where a primary residence is to be sold in execution, ensuring that the rights of the homeowner are protected.

Property Shortfall Stress? Your Legal Shield Starts Here.

Navigating a property shortfall can be a daunting experience for any homeowner. As legal professionals, VDM Attorneys is equipped to provide expert guidance and representation throughout this process, from negotiating with banks to challenging unfair practices and ensuring that our clients' rights are upheld at every stage.