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By Ciresh Singh
Over the years there has been much concern about the lack of governance surrounding the sale in execution process. Several courts and academics have expressed concern that the sale in execution process allows for homes to be sold for a fraction of their true value. Further, there have been several allegations of collusion and corruption during sales in execution and this has tarnished the image of this process (see F Forde ‘Exposed: Levitt’s kickback racket’ Business Day 13 May 2016, and Report on the public hearing on housing, evictions and repossessions (2007) by the South African Human Rights Commission (www.sahrc.org.za, accessed 4-11-2019)). After a sale in execution the debtor is left helpless owing a huge shortfall on the mortgage debt and may possibly end up without a roof over their head. Accordingly, it has become necessary to consider whether the sale in execution process is the best way to satisfy a creditor’s judgment debt. In order to prevent the situation of homes being sold for less than their true value, r 46A of the Uniform Rules of Court was recently amended to allow courts the discretion to set a reserve price for a sale in execution – however, the question now exists, how low are the courts willing to go in setting a reserve price?
The position prior to r 46A
Prior to the implementation of r 46A, there were several instances of homes being sold far below the true value of the property. Nxazonke and Another v Absa Bank Ltd and Others (WCC) (unreported case no 18100/2012, 4-10-2012) (Davis J) is an example of where a sale in execution resulted in a home being sold for an unrealistically low price when compared to the true value of the property. In Nxazonke, the property was sold for R 10, when the municipal value of the property was R 81 000. The court held that the valuation of the property, and the fact that it was sold for R 10, inferred that there had been a simulated or fraudulent transaction and that in the absence of any plausible explanation there had been an abuse of process.
The fact that a property could be sold for R 10 highlighted a serious problem in the previous sale in execution process. Even if the court processes of judgment and the sale in execution were followed correctly, there still appeared to be room for abuse, as properties could still be sold for unrealistically low prices (see R Brits ‘Purging mortgage default’ (2013) 1 Stellenbosch Law Review 165). Research has revealed that up to 13 000 homes are sold in execution in South Africa every year, and these properties are usually sold for a third of their true market value (see D Shaw, ‘Too quick to execute – how does SA’s new rules on sale in execution compare internationally?’ 2016 (Aug) DR 32). As indicated, after the sale, the debtor will possibly be left homeless and becomes liable for any shortfall on the mortgage debt. If at the sale in execution the property is sold for a higher price, the debtor may receive the surplus after the settlement of the judgment debt and may use these funds to acquire alternative accommodation. Brits suggested that the sale in execution process could be improved and would be more constitutionally compliant if judicial approval would be added to the process. He further suggested that after a sale is concluded, an application must be made to court for the selling price to be approved before the property may be lawfully transferred (see R Brits ‘The “reinstatement” of credit agreements: Remarks in response to the 2014 amendment of section 129 (3) – (4) of the National Credit Act’ (2015) 48.1 De Jure 75). A judge would have to consider the value of the property and assess whether there is any indication of abuse or fraud.
The position after r 46A and the current challenges experienced
As a result of the many concerns expressed, the rules relating to the sale in execution process were amended by the Rules Board for Courts of Law. Rule 46A(9) of the Uniform Rules of Court now provides that the court ‘may’ set a ‘reserve price’ for a sale in execution. The amendment seeks to protect debtors by ensuring that homes are not sold for extremely low prices. The effect of the amendment is that if the sale fails to reach its court-set reserve price, that property will not be sold and the court will be required to set another reserve price for the property or consider alternatives. Rule 46A(9), however, fails to prescribe the exact factors the court should take into consideration when determining a reserve price or how the reserve price should be calculated.
Rule 46A(9) merely provides that the court must take into account, inter alia, the market value and municipal rates of the property. No mention is made of other factors applicable to a sale, such as transfer costs, eviction costs and holding costs. I submit that further guidance is required to enable a court to make a fair assessment and calculation of a sale in execution reserve price. This gap exposes a failure on the part of the legislature to provide guidance and clarity on the implementation of the foreclosure process. It is noted that the courts are currently setting reserve prices in accordance with the market value or forced sale value of the property. In most instances, these properties are not sold at a sale in execution due to the reserve price being too high. This accordingly results in the matter having to be referred back to court for the court to reconsider the reserve price. I submit that such a process and delay is detrimental to both the debtor and creditor as it results in increased litigation costs, disinterest in the property, and deterioration of the dwelling. The resulting question is: In order to set a reasonable reserve price for a property while striking a fair balance between the rights of the debtors and creditors, how low is the court willing to set a reserve price?
The question must further be asked whether the idea of setting a court-set reserve price is favourable in the South African economy. I submit that while the setting of a reserve price may potentially resolve the problem of homes being sold at low prices, the disclosure of a reserve price by the court may reduce the potential selling price of the property at the sale in execution, as buyers will reduce their bidding prices in accordance with the court-set reserve price. On the other hand, should the court-set reserve price be too high and not met, buyers will detach themselves from these sales and this may result in some homes becoming non-equitable, leaving mortgagees without any security.
Recommendations
Despite the potential cracks in r 46A(9) in failing to provide detailed guidelines to enable the court to calculate a reserve price, I submit that the amendment is favourable as it has the potential to remedy the current stigma attached to the sale in execution process. The sale in execution process has been tarnished with allegations and evidence of collusion and corruption. In addition to the current amendments, and as per with Brits (op cit), it is recommended that further judicial oversight is required in the sale in execution process. It is, therefore, suggested that all sales in execution should take place at court, in partnership with the Sheriff and the Registrar of the High Court (a specialised foreclosure court – see C Singh A critical analysis of the home mortgage foreclosure requirements and procedure in South Africa and proposals for legislative reform (unpublished PhD thesis, University of KwaZulu-Natal, 2018) and C Singh, ‘Eeny, meeny, miny, moe, to which court will foreclosures go? A brief analysis of recent foreclosure proceedings and a consideration of the need for specialised foreclosure courts in SA’ 2019 (Oct) DR 31). I submit that the introduction of judicial oversight in the sale in execution process will eradicate the potential for fraud and abuse of process. Further, it is contended that the Constitution and rules governing judicial oversight mandate the courts to play an active role in the sale in execution process. The involvement of the courts in the sale in execution process will allow for a more uniform process, which will prevent potential abuse. Despite the above amendments and proposals, it must be accepted that sales in execution, which by their very nature are forced sales, will not always achieve market value prices. Nevertheless, it is necessary that procedural checks are in place to ensure that all outcomes from the sale in execution process are in line with our constitutional values.
Ciresh Singh LLB LLM (UKZN) is a foreclosure legal adviser and a PhD candidate at the University of KwaZulu-Natal in Durban.
This article was first published in De Rebus in 2019 (Dec) DR 8.
