Application of the National Credit Act to property instalment sale agreements

 

“A buyer is interested in buying my flat. Her bank is not prepared to give her a loan because she is paying off a few personal loans, but she is prepared to enter into an instalment sale agreement to pay the purchase price in instalments over a period of time, much like a rental. I like the idea of at least getting a monthly income, but I am worried whether I can do this and charge interest on the instalments, particularly as it will take a few years for her to pay the price in full?”

The two primary pieces of legislation that should be considered in your situation are:

1. The Alienation of Land Act
2. The National Credit Act

The Alienation of Land Act regulates the requirements for the sale of immovable property where the purchaser agrees to pay the purchase price to the seller in more than two instalments over a period exceeding one year. 

The National Credit Act regulates credit agreements, i.e agreements that provides for: 

• A deferral of payment;  and
• A charge, levy or interest that is payable as a result of the deferral of payment. 

If an agreement therefore only provides for the deferment of the payment of capital, and no interest, fees or other charges are levied in respect thereof, then the National Credit Act does not apply to the sale agreement. Inflation of the purchase price over and above the market value of the property can be viewed as a charge or a fee which may make the National Credit Act applicable.

In your situation, should you therefore not charge any interest, charges or fees on the purchase price or you don’t inflate the purchase price above the market value the National Credit Act will not apply. 

However, should you wish to add interest, charges or fees on the purchase price or inflate the purchase price above the market value the National Credit Act will apply. The National Credit Act provides various forms of protection for consumers. In the context of an instalment sale agreement, the following then becomes relevant:

• The seller will have to investigate the purchaser’s ability to service the ‘debt’ ie. the instalments, or run the risk of it being regarded as reckless lending should the purchaser not be able to repay the debt.
• Also, even if the ‘credit’ was not recklessly provided, the purchaser may be able to access the remedies available to over-indebted persons under the National Credit Act, such as debt review where she cannot maintain the instalment payments.

As a seller contemplating an instalment sale agreement containing interest charges, it is important that you take careful note of the steps you have to take before concluding an instalment sale agreement and accordingly conduct the necessary investigations into the buyer’s ability to repay the debt.