“Buy land, they’re not making it anymore” (Mark Twain)
There are many benefits to the “buy and build” option when you decide to buy a house, but they come with some important cautions.
One of them is that buyers who fail to build on their plots by deadline risk penalty levies and/or buy-back (retransfer) clauses. We discuss a recent SCA case illustrating both the risk to buyers of a buy-back clause, and the need for developers to beware of losing their claims through prescription.
Buying a house is an important and exciting experience. One of the first decisions you must make is whether to buy an existing house (the “turnkey” option) or to buy from a developer on a “plot-and-plan” (“off-plan”) basis.
Which option is best for you only you can decide, but with the popularity of security estate living soaring and with the flexibility of creating your own dream home, off-plan is an increasingly attractive choice both for investment and for lifestyle.
Just remember that the many benefits of “buy and build” come with some important cautions. Apart from practical considerations, there are many legal pitfalls to watch for, so have your lawyer check the agreements (normally two – one to buy the plot and the other to build the house) before you sign anything.
The building deadline – benefit and risk
One area to be particularly aware of is the common requirement that you build on your new plot within a certain period of time. In fact as a buyer you should check for such a requirement – otherwise you could be subjected to years of construction activity in the estate with all the attendant noise, dust, inconvenience and security concerns.
Your risk is that, to enforce such time limits, developers commonly provide for defaulting buyers to be subject to penalty levies and/or buy-back/retransfer clauses entitling them to take back the plot.
A recent Supreme Court of Appeal (SCA) judgment provided strong warnings in this regard for both developers and buyers.
Developers – the perils of prescription
- Two buyers of plots in a large estate failed to build on them within the required 18 month period (this requirement was registered on their respective title deeds).
- Their sale agreements entitled the developer to take back the plots against repayment of the purchase price (without interest) and the developer asked the High Court to order re-transfer to it accordingly.
- The SCA on appeal held that the developer’s claims had prescribed (become unenforceable) because it had waited more than three years before taking legal action.
- The three year period applied, said the Court, because the developer’s right was a “personal right” not a “real right”. The difference between the two is of great interest to lawyers, but all that really counts for developers and buyers is that the developer should have enforced its retransfer right within three years of the deadline date by which the purchasers were required to have built a house.
Bottom line for developers: Don’t delay in enforcing buy-back clauses!
Buyers – developers can enforce buy-back clauses
An earlier High Court decision, involving the same developer and the same clause but another buyer, had held that the buy-back clause was “grossly unfair”, and that such clauses generally “do not pass constitutional muster”. Which led to speculation that buy-back clauses might be dead in the water.
Not so. The SCA commented that the High Court should not have considered the question of constitutionality at all in the particular circumstances of that case, so (for the time being at least) buy-back clauses remain enforceable.
Bottom line for buyers: You could lose your plot if you don’t build by deadline.