Too quick to execute – how does SA’s new rules on sale in execution compare internationally?

July 22nd, 2016
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Under the hammer

By Douglas Shaw

In January, the Rules Board submitted new rules for comment on the execution of immovable properties, an area of law where South Africa’s (SA) laws badly lag the rest of the world (www.justice.gov.za, accessed 30-6-2016). There is considerable improvement to r 46 (partly through the new r 46A), though there is still a long way to go. There are essential two issues:

  • When should a property be allowed to be sold?
  • If it is to be sold, how can it be sold for the proper, market price?

Most people, including the Rules Board, do not understand just how bad SA banks are compared to other countries. The table on the next page shows the figures which are truly shocking.

Country Number of bonds Annual number of executions per 1 000 bonds
Average over ten years Increase of SA over countries
SA 1 800 000 2,4 0%
Spain 6 768 000 2,5 -5%
United States (US) 80 600 000 1,9 28%
South Korea 47 600 000 1,8 34%
France 15 000 000 0,6 298%
Hungary 1 188 000 0,6 329%
Bulgaria 115 200 0,4 512%
United Kingdom (UK) 11 300 000 0,3 800%
Cyprus 255 584 0,1 4261%
Denmark 2 420 000 0,04 5681%
Singapore 792 000 0,01 18820%

 

As we can see from the table above, only countries that have had major crises in recent years – like Spain and the US – can approach the extreme level of executions in SA where we have not even had a significant financial crisis. European countries who have, in fact, also had something of a crisis in the last ten years still have execution rates an eighth to a quarter of that in SA. This applies to developing Eastern European nations and Western European countries alike. There is no reason we should not, by improving our law, become like Denmark or Singapore though at the current time we, without conscience, currently sell 50 times as many properties per 10 000 bonds as they do in Singapore. (While default rates are a bit higher in SA than in some of these countries, these differences explain very little of the huge differences in execution rates. The difference in the lack of legal restrictions on irresponsible bank practices explain most of it.) Denmark has a comparable number of bonds as we do, yet SA sells 60 times more homes in execution than Denmark. This is an inexcusable difference. In addition, SA banks continue to sell properties for an average of around 60% of the real price in contrast to the rest of the world (in Korea, for example, they get 90%). In the UK, the US, Australia or New Zealand, banks can rightly be sued for the difference if they sell for less than market price. (This may indeed be the case in SA, but this has not yet been tested in the courts. The law of delict will apply and the statutory defence is unlikely to apply in this case.)

The improvements in the rules include a removal (in the January version) of the prohibition of reserve prices that previously applied (which no other country had) and lacked any coherent rationale. Now, in the April version, we have provisions that allow the court to set a reserve price. However, it is not compulsory (see r 46A(9) discussed below) so properties may still be sold without reserve.

The rule also – for the first time – requires in the application for execution, that the market price is provided by the applicant (which will usually be a bank) (r 46A(5)(a)). This is a big improvement as this is a precondition for ensuring properties are normally sold for around that price. South African properties sell for sizably lower percentages of their value than in other countries. Significant numbers are sold for negligible sums, even as low as R 1 000. Many believe that criminal syndicates are involved in these transactions. Unfortunately, our rules have not explicitly outlawed such transactions, and still, sadly, do not.

It is also commendable that the local authority municipal rates amounts must now be disclosed (r 46A(5)(c)). South Africa’s low prices in execution sales are partly due to the inability of buyers to know what the municipal rates account might be. This will solve this problem. There is still the problem of buyers not being able to view the property. Rule 46 allows the Sheriff to enter the property by force for various reasons. If this is to be allowed, then there is no reason why a day should not be allocated where potential buyers could see the property. This would also raise prices. In sub-rule 7A of Form 21, a deposit of 10% is required; this is too much and deters buyers who are otherwise capable of later securing a bond. The Board should consider deposits of 2% with an upper limit of R 10 000 or so. These amounts should only cover the Sheriff’s marginal costs of adding a property to a pre-existing auction, which are small. Otherwise they should be kept small to encourage more buyers.

The new rules also make a whole lot of micro improvements that are welcome. However, this may be at the expense of dealing with the ‘elephant in the room’. The major failings of SA foreclosure law, compared to its peers in the international arena, have not yet been addressed.

Rule 46(2)(c) integrates into the rule, the judgment of the Constitutional Court in Gundwana v Steko Development and Others 2011 (3) SA 608 (CC) that a registrar cannot issue a writ of execution by himself. There must have been judicial supervision. One wonders why the judgment in Jaftha v Schoeman and Others; Van Rooyen v Stoltz and Others 2005 (2) SA 140 (CC) at para 59, that execution must only be as a last resort was not also so integrated as that would have been helpful in setting a new and improved mind set into the proceedings.

The rules give a procedure for opposing execution procedures, but there is still not much protection in the rule for the unrepresented and indigent defendant against whom an order will be given in default.

Sub-rule 46A(8)(2) has missed a great opportunity. This rule should require the court not to grant execution when other options are available. The failure to do this in our law, is why our execution rate is greater than that of other countries, developed and developing. Foremost in that list of options would be a requirement to reschedule if the debtor has affordability. This has been the law in England for almost 50 years, and yet we still do not have this law. If the debtor has lost a job and is a year in arrears and then gets a new long term job, there is no reason to execute. Courts in England will not allow execution in these circumstances and will instruct the arrears to be capitalised and the bond contract to continue with a slightly higher premium. We desperately need such a provision in our law. I have seen hundreds of applications for execution against owners in this country who can now afford their mortgage where the banks say ‘pay the whole arrears or we will execute’, which is often impossible. This is hardly consistent with the Constitutional Court’s dictum that it should be a ‘last resort’.

The second situation in which execution should not be allowed is where the house is worth more than 20% more than the loan. In my own experience in practice I have seen senior citizen’s houses taken from them for a R 100 000 debt when the property is worth R 2 million. This should never happen. Until the debt reaches 80% of the house value, there should be no execution. The bank is not at risk. They will get all the interest back in the end, when the property is eventually sold, as long as it’s sold for market value, as it should be. Most times, the people will pay back the arrears long before they reach that point.

Other countries (eg, Scotland and Hungary) also have options to convert properties to rental with the ownership transferring to the bank at market price or slightly lower should the owner so wish. The banks can sell on the properties to investment funds specialising in this kind of situation or the state can arrange its own fund. Redemption rights are possible on a reasonable basis. Allowing for developers to convert the property to smaller units is another option.

Thirdly, although the decision in Nkata v FirstRand Bank Limited and Others (The Socio-Economic Rights Institute of South Africa as Amicus Curiae(CC) (unreported case no CCT73/2015, 21-4-2016) (Moseneke DCJ) was only released a few days before the rules board released these rules, there is a need for the decision therein to be incorporated in these rules. No execution may take place if the arrears (not the accelerated amount) are fully paid up before either the execution judgment or the sale in execution. The court and Sheriff must respectively be required to check this before they grant judgment or sell the property.

What is evident then, from the last three examples, is that the rules, even the new ones, and our current practice, are still not remotely consistent with the decision in the Jaftha matter only to use sale in execution as a last resort.

Because our law, including these new rules, fails to constrain the aggressive behaviour of banks, we have a rate of sale in execution vastly higher than the rest of the world. To get the rate into line with the rest of the world and with our Constitution we need to delineate the situations in which execution is not allowed.

Going back to the issue of the price the property should be sold for, sub-rule 9 (r 46A) seems to be trying to do the right thing but never quite gets there. Sub-rule 9(a) provides that a reserve price may be set by the court. But why should a court not have to set a reserve price and why that price should ever not be the market price (nett rates perhaps if we continue with the current legal obligation of the buyer to pay the rates. The alternative is to sell for market price and for the Sheriff to pay the rates from the proceeds before paying the balance to the bank up to the bond and then the remainder to the erstwhile owner.) of the property? A cynic might conclude that the purpose of this section is to allow the banks to set the price at the amount due on the loan, suitably inflated behind the value of an unaccountable certificate of balance without any regard whatsoever to the interest of the ordinary people of SA. Sub-rule 9 may be used to do the right thing, but there is no guarantee. More likely courts will continue with business as usual: Selling properties for next to nothing on the whim of the bank.

Sub-rule 9(c) allows for a sensible process of decreasing price from the market price if the property does not sell but it does not guarantee such as process. It would be much better to put in place a process such as that in Malaysia and South Korea where the property starts at market price and decreases by 10% or 5% each period such as every three months, then allow the court to depart from it in exceptional circumstances by application of either party.

Form 21 at 3, incredibly, still allows for bids of R 1 000. I am not sure how long ago this would have been the right minimum price, but it was long before anyone reading this was born. This is vastly outdated. It should read that the minimum price a property can sell for is say 85% of its market value as valued by the relevant rule. This is the rule in Ghana and there are comparable rules in Germany (the rule in Germany appears only to be for the first auction. There are similar rules for the auction of ships in various countries) and around the world. If it is the incremental bid that is intended at this point then this should be said explicitly and an absolute minimum price should be inserted elsewhere. In any case R 1 000 is still too little, R 50 000 would be more appropriate as a minium increased bid at an auction, and then R 20 000 as the property nears its market price.

The most glaring omission, however, is that while r 46(12) has been subject to major change, the other major egregious r 46(10) has not been touched. Still properties must be sold by Sheriffs, the people least qualified of all, to sell property and, in this country especially, least likely to secure a market price. Why have the Board not incorporated the working models of places like Australia, which is an effective system, where estate agents sell the properties at least in the first instance. This has been put to the Board in January. This has the advantage that buyers do not know the property is in execution and do not expect a discount. Another way to do this is require the court to grant a time to sell order of three to six months to the owner where the owner is ordered to put the property on the market and try and sell it, only if this does not work, will the property be sold by the Sheriff.

The main problem may be that the Rules Board does not understand just how far SA repossession law and the ‘gung ho’ behaviour of our banks that is the inevitable result, is out of synch with the rest of the world.

The main reason for the difference is that we allow our banks to destroy the lives our citizens with impunity. More than 100 000 lives ruined since the Constitution. Other countries do not. This must not continue. South Africa calls on the Rules Board to address the main issues and seriously reform our law rather than tinkering with minor issues.

Douglas Shaw BSc (Hons) (Heriot Watt UK) BA (Hons) BA (Ord) (Open University (UK)) LLB (Unisa) MLIA (Dip) MCP is an advocate in Johannesburg.

This article was first published in De Rebus in 2016 (Aug) DR 32.