The risk of playing banker – The National Credit Act

Purchasers have increasing difficulty to obtain financing for the purchase of farms and other agricultural land. Many sellers of these properties consider granting the purchaser a bond for the purchase amount, to be paid off over a period of time. Worse, some accept an acknowledgement of indebtedness and consent to judgment as sufficient protection, prior to shaking hands and signing off on the transfer agreements.

Previously, the mere registration of the bond or the notice confirming the instalment sale of a property registered at the Deeds Office was sufficient. Together with the required written agreement it constituted protection to the incidental money lender in the event of a defaulting purchaser.

The National Credit Act has changed everything. The Act provides, inter alia, that in any credit agreement where the credit amount exceeds R500 000 (five hundred thousand Rand), the lender is to be registered as a credit provider. This includes the occasional private farm seller, even if it is a once-off arrangement with no intention by the seller to provide credit to any other person ever again. Failure to register as a credit provider prior to a transaction that can be defined as a “credit transaction” is a transgression of the Act.

Should the credit provider not be registered and the purchaser defaults on the payment agreement, section 89(5) of the National Credit Act is unequivocally prescriptive on how the courts are to deal with such circumstances. The credit agreement is void as from the date it was entered into. The credit provider must refund all payments made in terms of the agreement together with stipulated interest. Most importantly, all purported rights of the credit provider to recover any money paid or the goods that were delivered to the consumer, are cancelled, or the property forfeited to the state, unless a court finds that such forfeiture will unjustly enrich the purchaser.

Many sellers, and even attorneys, are either unaware of this provision or blatantly flaunt the requirement as they “trust” the purchaser and “know” that the full repayment will be made, including the interest. The problem only manifests when the worst case scenario does occur and the well-known and trusted purchaser defaults on the payments. Many of the sellers who acted as credit providers relied on such repayments and interest either to fund another farm purchase or worse, their retirement.

The Constitutional Court recently considered the validity of this section of the National Credit Act and specifically of the clause relating to forfeiture of the property to the state in the light of the Bill of Rights, regarding the right not to be arbitrarily deprived of property and the so-called Limitation clause. J van der Westhuizen delivered a majority judgement on 10 December 2012 which declared the arbitrary forfeiture of property to the state prescribed in section 89(5)(c) of the National Credit Act to be inconsistent with section 25(1) of the constitution, and thus invalid.

This judgement should, however, sound an urgent alarm to any and all unregistered credit-providing farm sellers. The intention of the National Credit Act is to discourage the provision of credit outside the framework set by the legislature. The Act thus has to punish those that do not comply with the requirements thereof, and the punishment is severe.

Should the farm seller therefore not have registered as a credit provider, and the purchaser defaults on his payments, such seller is at risk – a very real and serious risk. Unless a court orders that the circumstances will unjustly enrich the purchaser, such seller may not only forfeit all payments and interest, but will have to obtain a court order that the seller is entitled to recover the farm from the defaulting purchaser.

If the credit agreement is unlawful as from inception in terms of the National Credit Act, the agreement cannot be enforced and the defaulting party cannot be compelled to perform. In our law, pursuance of such agreement must then be made in terms of unjustified enrichment, and specifically the conditio ob turpem vel iniustam causam. In short, the requirements are that the ownership must have passed with transfer, transfer must have taken place in terms of an unlawful agreement, and the claimant must tender back everything received.

However, to be successful the claimant must be able to prove that he acted free of turpitude and show that the actions were not dishonourable. The banker-playing credit-providing farm seller might not forfeit the farm as the court’s discretion has been unconstitutionally curtailed in section 89(5)(c), but is still far from the position he could have been in had he simply registered as a credit provider.

Civil obedience regarding the legislation of the country creates a stable, safe, just and equitable society with a strong economy and an affinity with investors. Compliance with the National Credit Act not only ensures confidence in immovable property as an investment, but will protect those who want to play banker.

For further reading see National Credit Regulator vs Fillippus Albertus Opperman and others, case number CCT34/12 [2012] ZACC 29 and case law quoted by both the majority judgement and descending judgment written by J Cameron.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. —