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29 Sep 2020

Buying a Business? Make Sure the Seller Publishes Notice of the Sale

With our economy in trouble and the ongoing pandemic and lockdown damaging more and more businesses by the day, sales by distressed companies and traders are likely to rocket.

If you are a prospective buyer here, be aware of one particular danger lurking in the wings for you.

Follow this rule to protect yourself – before you buy any business, its goodwill or assets forming part of the business, take legal advice as to whether or not the sale must first be advertised in terms of section 34 the Insolvency Act. You stand to lose both the business and the purchase price if section 34 requires the sale to be advertised and it isn’t.

Your risk is that if an unadvertised sale is challenged by a liquidator/trustee (or by a creditor if there is no liquidation/sequestration) within 6 months of the sale, it is likely to be declared void. In that event, you will be lucky to get even a portion of your purchase price back – with the seller in financial difficulty your concurrent claim is probably worthless.

As a creditor…

The advertising requirement is designed to protect you as a creditor from having to claim from a debtor which suddenly becomes a worthless shell having quietly sold away its business and/or assets beyond your reach.

Note that you only have protection if you have instituted proceedings against your debtor “for the purpose of enforcing [your] claim” before the transfer of the business – a good reason not to drag your heels when suing a recalcitrant debtor.

When advertisement isn’t necessary

The sale will only be valid without advertisement if –

  • The sale was made “in the ordinary course of business” (unlikely where the business subsequently fails), or
  • It was made for “securing the payment of a debt” (unlikely to be under your control as buyer), or
  • The seller wasn’t a “trader”.  As “trader” is widely defined in the Act, and as the onus of proof here is squarely on the buyer, that’s not going to be easily proved. As we shall see below, you can be a “trader” in property as much as in any other commodity.

As a general rule therefore, it is safest to insist on the sale being properly advertised before you pay out the purchase price, but there are grey areas and pitfalls here so take specific advice. Note also that the Act’s requirements for the timing and manner of advertisement are strict and must be followed to the letter.

As a recent High Court case shows, as a buyer (in this case of a property business) you could lose everything if you lose sight of this very real danger…

An R8m claim and a property transfer (and bond) set aside

  • A property owner bought and developed a property firstly into a shopping centre and later into a shopping centre with 11 sectional title units.
  • Whilst being sued by a creditor for R8m, the owner sold a section to a buyer and transferred it to him, and a bank registered a bond over the property.
  • The creditor obtained judgement against the owner only to find that it had been placed into liquidation. It asked the High Court to set aside the sale on the basis that the sale had not been advertised in terms of section 34 and was therefore void.
  • The buyer countered by denying that it was a “trader” as defined in the Insolvency Act. Its core business, it said, was to acquire and then rent out properties, “its business objective was not the buying and selling property per se as its stock in trade”.
  • Finding on the facts that the owner was indeed a “trader” when it sold the property to the buyer, the Court set aside the sale, the transfer to the buyer, and the bank’s mortgage bond.

This article was written by Jack Crook and published recently by LawDotNews. We credit the original author.

25 Sep 2020

Boer Soek ‘n Vrou – where agricultural land and true love meet

Did you know that in terms of the Subdivision of Agricultural Land Act (70 of 1970), 2 or more people cannot jointly own land which is zoned as agricultural, whether in undivided shares or otherwise, without first getting the consent of the Minister of Agriculture. The only exception is if the 2 prospective owners are married in Community of Property – because then there is one estate, and in law, really only one owner.

What do you do when a unmarried couple enters into a deed of sale to buy such land and gets their bond approved, only to be told the bad news?

They get married in Community of Property!

True story. We received the Deed of Sale on Friday, and the buyers got married on Sunday afternoon. Problem solved!

Naturally we do not advocate this as a solution in all cases, but if you really want to own a farm, you do what you must do!

Kind regards,

Robert Krautkramer

Miltons Matsemela Inc.

23 Sep 2020

CASE LAW UPDATE: Neighbours support neighbours — the duty of lateral support

The duty lateral support is a reciprocal duty owed between neighbouring landowners. What this duty entails is that a landowner cannot do anything at the boundary of their property which may cause damage to the adjoining landowner’s property. This legal principle was recently confirmed by the Supreme Court of Appeal in the case of Petropulos & Another v Dias 2020 (5) SA 65 (SCA), and expanded upon to include a duty to support the buildings on the neighbouring land. Here is a summary of the case:

Ms P and Mr D owned adjoining properties in Camps Bay which were located on a steep sloping mountain. They shared a boundary and all the properties surrounding Ms P’s, except her own, had already been built on. In March 2008 Ms P and a neighbour, a certain Mr V, each undertook excavations on their respective properties near the boundary of Mr D’s property. Ms P was preparing to build a sizeable home, requiring substantial excavation and a retaining wall to offer support, whereas Mr V intended to only build a garage. In May 2008, the wall on Mr D’s property and the ground beneath it collapsed during the construction of the top retaining wall on the property of Ms P.

Subsequently, the underlying ground shifted, causing Mr D’s property to subside further downwards towards the excavation on Ms P’s property—resulting in extensive structural damage to Ms P’s property. More damage was also done to Mr V’s property and amid safety concerns, he was forced to abandon his property. Mr D subsequently instituted a claim for damages against Ms P and Mr V based on a breach of the duty to provide lateral support.

The court considered the following issues in turn:

  1. Whether, as argued by Ms P, a duty of lateral support is owed only to land in its natural state. The court confirmed in this instance that fairness and equity are important considerations in our neighbour law and affirmed prior case law to the effect that the principle of lateral support must be in line with the principle of ubuntu. The court expressed that the right to lateral support is reciprocal between neighbours and that this duty corresponds with the neighbour’s entitlement to such support. Finally, on the above issue, the court stated that the duty of lateral support is not limited to land in its natural state but includes the buildings on such land.
  2. After establishing that the duty of lateral support existed in these circumstances, the court had to decide whether the excavations on Ms P’s property had breached this duty. On the evidence presented by two geo-technical experts, the court found that Mr D had succeeded in establishing that the slope was mobilized because of Ms P’s failure to provide lateral support. Thus, Ms P had indeed breached the duty of lateral support owed to Mr D.
  3. The final question that the court had to decide was one of causation. Were the excavations on Ms P’s property closely enough linked to the harm suffered by Mr D for legal liability to ensue? To this end the court asked whether the slope would have mobilized but for the excavation. The court accepted that there was a direct correlation between the excavation and the slope failure and that causation had been proved. This was the final nail in the coffin for Ms P.

In conclusion, the judgement confirms that every landowner is entitled to the duty of lateral support and that this right is incidental to ownership of property and reciprocal in nature. This means that an owner who excavates, owes his neighbour a duty not to withdraw lateral support. Furthermore, it affirms that where subsidence or other destabilization occurs directly as a result of excavation on a neighbouring property, the owner of that land will be liable for a claim of damages, irrespective of negligence or intention.

Miltons Matsemela Inc

Tarryn Abrahams & Deon Welz

15 Sep 2020

Options to Renew Leases – Risks for Tenants and Landlords

Leases often give tenants an option to extend or renew at the end of the current term, and tenants who lose sight of the value and importance of such an option are flirting with disaster.

Tenants

In a nutshell, when the time comes to exercise your option do comply fully with the clause’s requirements. Make sure also that you understand and accept the exact wording of the renewal clause before you sign the lease. Drop the ball in either respect, and if your landlord wants you out for whatever reason, you will struggle to convince a court to come to your rescue by forcing an unwilling landlord to renew.

Four recent court cases – one in the Constitutional Court, two in the Supreme Court of Appeal (SCA) and one in the High Court illustrate, but before we get there here’s a quick note for landlords…

Landlords

This is of course also highly relevant to you – the last thing you want is for a poorly-worded clause to lumber you with an unwanted tenant, or an unrealistically low rental, or even just with a bitter and expensive legal fight over what the clause actually means. Nor, as we shall see below, do you want to run the risk of a court holding the terms of your lease to be so unfair as to be unenforceable.

First case: Non-compliance v unfairness, Ubuntu and public policy

  • As part of a black empowerment initiative, a business hiring out tools and building equipment to builders had set up four of its ex-employees in a franchise operation. The business premises were let to them by the building owner, a trust linked to the hiring business.
  • The leases were for 5 years and contained options to renew for a further 5 years, on the giving of notice six months before termination, and subject to the rental for the renewal period being agreed. A mechanism for the agreement of rental was set out in each lease. The franchise agreements were for 10 years, presumably indicating an anticipation of renewal.
  • The tenants didn’t exercise their options on time, and when they did try to do so, it wasn’t in the terms required by the lease.
  • When the landlord told two of the tenants to vacate (the others were offered a month to month temporary arrangement), they asked the High Court for an order allowing them to remain. They conceded that on the strict terms of the leases they would have no case but argued that on the basis of fairness and Ubuntu the leases should not be terminated.
  • After winning in the High Court but losing on appeal to the Supreme Court of Appeal, the tenants took their appeal to the Constitutional Court, explaining “that they were unsophisticated and not versed in the niceties of the law.”
  • The Court dismissed the appeal, holding that although Constitutional values such as Ubuntu (which encompasses values of fairness, reasonableness and justice), “form important considerations in the balancing exercise required to determine whether a contractual term, or its enforcement, is contrary to public policy … It is only where the enforcement of a contractual term would be so unfair, unreasonable or unjust so as to be contrary to public policy that a court may refuse to enforce it.”
  • In other words, the highest court in the land has held that if you want to avoid the strict terms of the lease you must show that they are against public policy. You can use constitutional values to do that because those values “underlie and inform the substantive law of contract” but the acid test remains – have you proved that enforcement of the lease’s terms would be contrary to public policy? The tenants in this case had, said the Court, failed to do so. They have 30 days to leave.

Second case: Renewal clause void for vagueness

For ten years a tenant occupied premises in terms of an original lease and agreed renewals. When it gave notice of a further renewal, the parties were unable to agree on a rental, the renewal clause providing that … “the rental and costs shall be mutually agreed upon in writing between the Landlord and the Tenant when the right of renewal is exercised”.

The landlord applied for eviction and the SCA held that the term was unenforceable, being merely an agreement to agree rather than containing any “legally enforceable obligations”. The renewal clause was void for vagueness and the tenant was given 14 calendar days to vacate.

Third case: No agreement on rental, too late to call in a third party

A tenant gave notice of renewal, the lease in this case providing that “the rental consideration will be determined by agreement between the parties based on the prevailing market rental’s applicable to the property”, and if they could not agree, a third party would determine it.

The lease, held the SCA, had terminated because the tenant had only tried to invoke the third party clause after the lease had lapsed. The rental must be fixed or agreed for the renewal to be valid.

Fourth case: No notice of renewal and no deadlock breaking mechanism

The tenant in this case failed to give notice of renewal on time, his attempts to negotiate an extension with the landlord failed, and the High Court ordered his eviction. The tenant’s argument that over the years it had become “customary” for the landlord just to remind him about an upcoming expiry and ask him if he wanted to renew was, said the Court, irrelevant because the clause itself was not “definite and complete”.

The clause provided “that the parties agree in writing to the rental, conditions and provisions of the proposed lease” and even if the tenant had given proper notice of an intention to renew, the parties would still have had to negotiate terms, and there was no “deadlock breaking mechanism” in the lease.

This article was written by Jack Crook and published recently by LawDotNews. We credit the original author.

08 Sep 2020

Property: Don’t Pay Double Commission!

With many property sellers allowing multiple estate agencies to market their properties in their attempts to sell during what is still (for the moment at least) a buyer’s market, now is perhaps a good time to remind both sellers and buyers of the double commission danger.

Consider this scenario – you mandate an agent who introduces a potential buyer to your property, but no acceptable offer results. Later on you bring another agent in, and this time the same buyer makes an acceptable offer. Which agent must you pay commission to – the agent who originally introduced the buyer to the property, or the agent who eventually closed the deal?

In a nutshell, an agent must be the “effective cause” of the sale to be entitled to commission and our law reports are replete with disputes between sellers and agents over who is and who isn’t the effective cause of a particular sale. As the High Court put it a few years ago: “Our Courts have repeatedly acknowledged how difficult it is, when there are competing estate agents, to determine who the effective cause of the sale that eventuates is.”

The big danger for the seller of course is being held liable to pay full commission to two estate agents. The factual disputes that arose in the High Court case in question illustrate…

R1.6m commission claimed

  • A property seller engaged agency A to sell the property, and later signed a sole and exclusive mandate with agency B to sell the property by auction.
  • One (unsuccessful) auction later, and after much negotiation and to-ing and fro-ing, the first agency (A) presented an offer from buyer C which the seller accepted.
  • Agency B claimed to have been the effective cause of the sale to C and sued the seller for R1.6m in auctioneer’s commission. The seller, at risk of paying (substantial) double commission, resisted vigorously.
  • Most of the relevant facts were in dispute, with A and B presenting the Court with substantially different versions of events in virtually every important respect. B’s application was dismissed by the Court on the ground that because of the critical disputes of fact it should have proceeded by way of “action” not “application” – a technical distinction of great interest to the legal fraternity but not relevant here.
  • What is highly relevant to sellers, buyers and agents is the ease with which the seller’s decision to engage the services of two agencies led to such bitter disputes of fact and law.

Sellers, Buyers and Agents: How to protect yourself

Sellers: As always, agree to nothing without legal advice, and insist on formal agency mandates. If you give mandates to multiple agencies, ask them each for a list of the prospective buyers they have introduced, and insist on the buyer indemnifying you against multiple commission claims (necessary because you might not know if your buyer has dealt with more than one agency). You may be advised in some cases to have the various agents give you a similar indemnity.

Buyers: Again, agree to nothing without advice! When viewing a property tell the agent if you have viewed it before with another agent and in particular if the offer/sale agreement you are asked to sign contains any warranties/indemnities, make sure it is safe to agree to them.

Agents: Don’t put your hard-earned commission at risk – avoid uncertainty and dispute with clear, properly-drawn mandates. Comply also with the EAAB’s Code of Conduct’s requirements on exposing a client to the risk of double commission.

This article is an edited version of an article published recently by LawDotNews, and we credit the original authors.

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