Introduction
A valid and enforceable agreement for the sale of immovable property (“agreement”) must be in writing and signed by the seller and the purchaser. It is therefore important for the purchaser, before signing an offer to purchase, to determine the individual or entity which is to take transfer of the property. This decision is particularly important after an offer to purchase has been accepted by the seller and becomes a written agreement. A purchaser cannot thereafter substitute the individual or entity which is to take transfer of the property without the consent of the seller. This article shall briefly explore the contextual background of this matter and conclude with the consideration of the various options.
Contextual Background
Nominee Clause
Purchasers could previously make use of what was commonly called a nominee clause, in terms of which the purchaser would be allowed between thirty to sixty days to nominate an alternative individual or entity to take transfer of the property in lieu of the purchaser. As a consequence of the abuse of this practice by property speculators in the pursuit of avoiding transfer fees and/or transfer duty, the South African Revenue Service (‘’SARS’’) amended the applicable legislation to provide that a nomination had to be made within 24 (twenty-four) hours of the agreement of sale being signed, or else the sale would be regarded as separate transactions each attracting respective transfer fees.
Tri-partite Agreements
In terms of a tri-partite agreement, person A would sell the property to person B and prior to taking transfer from person A, person B would sell the property to person C. In the pursuit of avoiding transfer duty and fees on the separate transactions, persons A, B and C would enter into a tri-partite agreement in terms of which the agreement between persons A and B as well as the agreement between persons B and C are cancelled and replaced with a new agreement in terms of which person A sells directly to person C (and person B is entitled to any profit between the two selling prices). The difficulty with this arrangement is that it requires the co-operation of persons A, B and C; yet only person B derives benefit: –
- Person A still receives what he/she would have received in terms of the original agreement with person B; and
- Person C still pays what he/she would have paid in terms of the original agreement with person B. In addition, if the Tri-partite Agreement is not drafted properly there is still the risk that SARS could impose transfer taxes on both transactions.
Transfer Options
Individuals (natural persons)
The purchased immovable property of persons married in community of property is registered in the joint estate of the spouses. Any further transactions with the property (selling it or registering a mortgage bond) will require the written consent of spouses. When preparing a last will and testament or undergoing a divorce, one must appreciate that each spouse is deemed to own a half share in the property which he/she is entitled to leave to different beneficiaries. Therefore, due consideration should be given to the practical and social complications this may have for the beneficiaries.
Persons married out of community of property or married according to Muslim rites, have the options of registering a purchased property in either spouse’s name or in both spouse’s name. If the property to be purchased shall be used as a primary residence, upon its sale, individuals shall qualify for a primary residence exclusion from capital gains tax of up to R 2 Million. Therefore, purchasing a family home in the name of a natural person is the most commercially savvy option.
Companies
A company is a legal entity that has a separate legal personality from its shareholders and/or directors. Therefore, a change in shareholders and/or directors has no impact on the company’s ownership of immovable property. This makes a company a good vehicle for holding immovable property that is required for business purposes.
Notwithstanding this benefit, a company is subject to stringent administrative burdens and attracts relatively larger tax rates. A company qualifies for various tax deductions for its operations, yet holding immovable property in the name of a company is costly and therefore should be avoided unless the property is to be used for business purposes.
Close Corporations
Close corporations have long been a popular entity for holding a variety of immovable property. It was similar in structure to a company but on a smaller scale. The administration of a close corporation was much simpler than that of a company and therefore was cheaper to maintain.
The Companies Act 71 of 2008 (the “Act”) effectively discontinued the establishment of new close corporations and only existing close corporations, registered prior to the commencement of the Act, could still be considered as a vehicle for property ownership. More importantly, existing close corporations are effectively akin to private companies and therefore should be avoided as a means of holding immovable property unless the property is used for business purposes.
Trusts
Deeds office practice is to register immovable property in the name of: ‘’The Trustees for the time being of XYZ Trust’’. The trustees then hold and administer the property for the benefit of the beneficiaries in accordance with the trust deed which has to be registered with the Master of the High Court.
To acquire immovable property, it must be noted that the trustees are not allowed to act on behalf of the trust before the Master of the High Court has issued letters of authority authorising them to do so. Any actions by the trustees prior to the date of issue of the letters of authority are void. The trustees must therefore make sure that the letters of authority, authorising them to act have been issued before they can enter into any sale agreement on behalf of the trust.
It should further be noted that if the letters of authority authorise, for instance, three trustees to act, all three trustees must sign all documentation on behalf of the trust for it to be valid. Should only one or two trustees sign without the express prior written authorisation of the other trustees, the transaction is null and void. Trusts are often the ideal entity for holding assets such as a family holiday home, intended to stay in the family regardless of the passing on of individual members of the family.
Partnerships
There is provision in the Deeds Registries Act 47 of 1937 for immovable property to be registered so as to identify it as property belonging to a partnership. The property will be registered in the names of the individual partners but qualified by adding the words ‘’trading together in partnership as XYZ partnership”, after their names.
A benefit of registering property in this manner is that on the dissolution of the partnership, the property or properties that formed part of the assets of the dissolved partnership, can be transferred back to individual former partners free of the payment of transfer duty.
As noted from the above, previously, different rates of transfer duty applied to different entities and this played a major role in the selection of the entity to take transfer. This is no longer the case and purchasers can concentrate on the intention with the purchase of immovable property when considering the entity to take transfer.
Raymond Scott and Fezile Nqiwa
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. (E&OE)