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“Diligence is the mother of good fortune” (Miguel de Cervantes)

Another warning to do your homework before you buy or develop property comes from a recent High Court decision to set aside a municipality’s approval of building plans.

From sea-view balconies to walled-in courtyards

• A 17-storey inner city building incorporated residential apartments on its higher floors, the municipality having passed plans for several apartments to be constructed with balconies or windows overlooking the common boundary with a neighbouring building.  Some of these apartments provided city and sea views over the top of that building.
• Subsequently the developers of the neighbouring building obtained municipal authority to build several levels upwards, flush against the common boundary, right up against those apartments with balconies and only 3 metres from those apartments with windows.
• The effect of the added levels would have been “to change the character of the areas that were designed to be balconies into small courtyards confined between towering walls”.
• When they realised what was happening the affected apartment owners, who had not been given notice of the building plan application, rushed to court and obtained an interdict to stop construction pending a judicial review of the plan approval.
• On review, the Court set aside the approval of the building plans and ordered the municipality to reconsider them.  In other words, Round 1 goes to the apartment owners, but the jury is still out on whether they or the neighbouring developer will ultimately emerge as the victors here.

Lessons for buyers:  Legal restrictions and “legitimate expectations”

Note that this case, as the Court put it, was “not about any alleged right to a view.  It arises out of allegations concerning what the applicants contend would be the unduly intrusive and objectionable character of an aspect of the building extension”.

What follows is a very simplified summary of a very complicated subject, not helped by some very divergent court decisions in the past.   So take full legal advice on your particular circumstances.  But work on the basis that you have no automatic entitlement to retain amenities like privacy, access to light, views and the like, so to stop your neighbour from building to your prejudice you will generally have to prove either –

• That the building is in contravention of a legal restriction – think title deed conditions, town planning/zoning/building restrictions and the like; or
• That the building, although complying with all legal restrictions, is “so unattractive or intrusive that it exceeds the legitimate expectations of the parties”.

What won this round for the apartment owners was the Court’s finding that the municipal officials had, through a misunderstanding of the law, “failed to consider and address the question whether a reasonable and informed purchaser ….. would foresee that the regulating authority, having approved balconies along the common boundary would permit the development of the adjoining erf in such a manner as to effectively destroy the utility of the balconies as such, and with the degree of overbearing intrusiveness that allowing a three storey solid wall to be built up hard against them would unavoidably occasion.”

That was a close shave for the apartment owners, so the important thing is to do your due diligence before buying a property.  Factor in that your neighbour may in the future decide to take full advantage of his/her rights to develop and build, and if that happens you will find it difficult to complain.  In this case for example the apartment owners “might reasonably have expected the views from those apartments to be blocked by future development ….. if regard were had to what was permitted in terms of the applicable zoning scheme regulations”.

A lesson for developers

Although generally it should be enough that your proposed new construction/development complies with all “legal restrictions”, there are exceptions.  Make no assumptions here; they could be both mistaken and expensive.

The tax authorities levy a tax on transfers of immovable property either in the form of VAT or transfer duty. It is not always clear in which cases VAT and in which transfer duty will be payable.

The question arises as to which is payable : VAT or Transfer Duty?

The answer will depend on the nature of the particular transaction and the status of the parties. If a person is registered for VAT, such a person is called a VAT VENDOR. He, she or it is then obliged to levy a premium of 14% on every sale /service rendered in his business and to pay this premium (called “VAT OUTPUT TAX”) over to the Receiver at the end of the relevant VAT cycle.

To determine whether VAT is payable in a property transaction, we need to ask 2 questions, namely:

• Is the seller registered (or obliged to be registered) for VAT, and
• Is this transaction in the course and furtherance of the seller’s business?

If the answer to both questions is yes, VAT related questions should be asked (VAT will likely be payable). If the answer is no, transfer duty will be payable on the transaction.

For example: If A, who sells a house for R600 000,00 to B and A is a property developer whose business it is to build and sell houses, and the house he is selling to B is sold in the scope and furtherance of his business, then, provided he is also a VAT vendor, VAT will be payable by him in the transaction and not transfer duty. However, if A sold his private residence (not a house he built with the intention of selling it), it is not part of his business. Even if he is a registered VAT vendor, in this case he is not a vendor for purposes of this transaction. Transfer duty will therefore be payable, not VAT.

It is important to note that, in transactions where VAT is payable, the Receiver demands the amount due from the SELLER, not from the purchaser.

The seller must therefore ensure that the sale price he negotiates includes the 14% VAT, alternatively he must expressly arrange with the purchaser that the purchaser will, in addition to the purchase price, also be liable to pay to the seller an additional 14%.

The ultimate responsibility to pay the Receiver vests with the seller, and he cannot pass this responsibility on to the purchaser. In the case of transfer duty being payable, the purchaser (unless the parties agree otherwise) is liable, in addition to the purchase price, to pay the amount of transfer duty due. This amount is usually paid over to the conveyancer, who then ensures that the transfer duty is paid to the Receiver and a transfer duty receipt (which must be lodged in the deeds office) is obtained.

If it has been established that the seller is:

• a VAT VENDOR;
• for purposes of THIS transaction (in other words, he is selling the property as part of his business);

then VAT is usually payable.

From a property point of view, there is only one type of transaction which has VAT exempt status: property that has previously been leased for residential purposes, and which property is now being sold.

For example:
C is a property developer and a registered VAT vendor. His business is to buy and sell property and also to lease property. Amongst other assets, he owns a flat which he rents out for residential purposes. Although C, the lessor, is a VAT vendor, VAT is not levied on the rental income derived from the flat. The reason for this is that rental derived from residential tenants such as in this example, is an exempt supply in terms of the Act.

Not only is the rental of a property let out for residential purposes exempt from VAT, but the purchase price derived from a subsequent sale of the rental property itself is also exempt from VAT.

So, notwithstanding the fact that he is a VAT vendor, if C sells the property which he previously let out for residential purposes, no VAT will be payable by the seller.

The purchaser of the flat will however be liable for transfer duty on the acquisition.

If a transaction is not VAT exempt, the next question to ask is whether the transaction is perhaps zero rated.

“Zero rated” means that VAT is payable on the transaction, but at the rate of 0%, not at the standard rate (currently 14%).
What is the difference between zero rating and VAT exempt? IF a transaction is VAT exempt, it falls outside of the “VAT net” altogether.

Accordingly transfer duty is payable and the position with regard to the particular transaction is the same as if the seller were never registered for VAT. If a transaction is zero rated, it still falls within the “VAT net” and all the provisions relating to VAT applies to the transaction, including the provision that the purchaser can still claim input tax credits in respect of the property concerned.

IN ORDER FOR A TRANSACTION TO BE ZERO RATED, THE FOLLOWING REQUIREMENTS HAVE TO BE MET :

• The seller must be a VAT vendor;
• The purchaser must be a VAT vendor;
• The thing that is sold must be a going concern (in other words, an existing, operating business);
• The agreement of sale must expressly state that a going concern (as opposed to merely an asset) is being sold.

Examples of transactions relating to property that will qualify for a zero rating are:

• Mr X sells his grocery store – he sells both the business and the building in which the shop is situated as part of the same transaction to the same purchaser.
• Mrs Y sells an office block owned by her. The offices are let out to various tenants and she effectively “sells” (cedes) the leases together with the building. The new purchaser will thus continue to derive rental income from the building.

It must be highlighted that unless there is a written agreement between the parties specifically stating that the enterprise is disposed of as a going concern, the zero rating cannot apply even if the transfer meets the requirements of a going concern.

Should this be the case however, the VAT Act does make provision for the parties to enter into a separate agreement with the original agreement with the separate agreement referring to the disposal of an enterprise as a going concern.

The contracting parties have to agree in writing that the enterprise will be supplied as an income-earning activity. Notwithstanding the latter, the mere mention of the words “Income Earning Activity” will prove to be insufficient in certain instances.

In the event of an Agreement of Sale that specifically states that a vacant building is disposed of as a going concern, the zero rate will not apply as the supply of a vacant building cannot constitute an income earning activity.

It will therefore prove to be insufficient to merely make mention of the words “Income Earning Activity” and “Going Concern” in the Agreement of Sale if the object of sale is not capable of being an income earning activity.

Should it then subsequently be found that an enterprise was not disposed of as a going concern, the purchase price has to be adjusted accordingly and the amount of VAT paid will be claimed as input tax by the purchaser and accounted for as output tax on the part of the Seller.

Where a purchaser proposes to be a registered vendor and it was subsequently found on date of supply that he was not registered as such, the Receiver will then require the Seller to pay over VAT on the proceeds of this transaction as for purposes of the Receiver the purchase price includes VAT.

It is therefore vital that the Agreement of Sale make provision for the protection of the Seller and it is suggested that a clause along the following lines can form part of the Agreement of Sale as a precautionary measure:

“The Purchaser will deliver to the Seller a copy of the Purchaser’s VAT 103 Notice of Registration form (within a specified amount of time). In the event of the Purchaser not being a registered vendor at the time of conclusion of this Agreement, the application of the zero rate will be subject to the Purchaser being a registered vendor on date of supply. It is further recorded by the parties that if VAT is payable on the transaction the amount of VAT so claimed will be refunded to the Seller by the Purchaser”.

If the PURCHASER is a VAT vendor and TRANSFER DUTY is payable in a transaction, then the purchaser could qualify for a notional input tax credit (i.e. a deemed input tax credit).

In other words, the purchaser could claim the TRANSFER DUTY that it paid on the transaction back from the Receiver, as if the amount were VAT paid by the purchaser on the acquisition. The VAT status of the purchaser is not relevant in determining whether VAT or transfer duty is payable in any transaction. It is only relevant to determine whether the purchaser will be so fortunate as to be able to claim his transfer duty back from the Receiver.

By Lisa Moore