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Protect yourself before entering into negotiations

Except in a few instances where the law requires contracts to be in writing, an oral contract is as binding as a written contract. When negotiating with someone with a view to entering into a contract, it is very important to place on record, at the outset, in writing, that there is to be no contract unless and until it has been reduced to writing and signed.

This will ensure that, when you have reached agreement in principle but nothing has yet been put in writing, you have a breathing space to reconsider whether you really want to do the deal on the terms that you have discussed. It also allows you to ensure that the written agreement contains provisions to safeguard your interests, which were probably not raised in your verbal discussions with the other party, such as clauses dealing with the consequences of a breach of contract.

If those safeguarding provisions cannot be agreed upon, then you can withdraw from the situation without any legal liability, since no binding contract yet exists.

PREVENTING DISPUTES AND DELAYS WHEN SELLING IMMOVABLE PROPERTY

In most commercial contracts, each of the parties incurs legal obligations. If I agree to sell an item of property to you and you agree to buy it, then my obligation is to deliver the property to you and your obligation is to pay the purchase price. Ownership passes to the purchaser, not when the agreement is entered into, but when the property is delivered.

Unless we agree otherwise, my performance (delivery) and your counter-performance (payment) must take place at the same time. This is straightforward when it comes to movable property. I can physically deliver the property to you, and you can simultaneously hand over the cash for the purchase price.

The purchase and sale of immovable property

The situation is more complex when what is bought and sold is immovable property, that is to say, land and buildings. Such property obviously can’t be physically delivered from the seller to the purchaser. Instead, “delivery” of the property takes place by registration of transfer. In other words, the property is transferred from the seller’s name into the purchaser’s name in the records kept in the Deeds Office. Only when this has been done does ownership pass to the purchaser.

How and when is the purchase price paid? Obviously, the seller of immovable property wants to be sure that he does not part with the property unless he has been fully paid and the purchaser wants to be sure that he doesn’t hand over the purchase price until the property has been registered into his name.

In practice, the purchaser gives the seller’s attorneys a guarantee from his bank that the bank will pay the purchase price to the seller’s attorneys as soon as transfer of the property is registered in the Deeds Office into the name of the purchaser.

But many things can go wrong. Let us consider the most obvious – the purchaser, having signed the contract and paid a small deposit, has trouble in arranging the necessary finance for the balance and adopts all manner of delaying tactics while he does the rounds of banks trying to persuade them to grant him a loan on the security of a mortgage over the property. Or perhaps he regrets having signed the contract and is now delaying matters at every opportunity, hoping that the purchaser will do something foolish and give him a pretext for cancelling the contract.

How can this situation be avoided?

For the seller of immovable property, the most important way of preempting such a problematic situation is to ensure that the contract of sale is expertly drawn, with a clearly stipulated time for the purchaser to furnish a bank guarantee and all other documents required for the transfer, plus contractual provisions giving the right to cancel (and claim damages) if the purchaser fails to meet his obligations timeously.

Furthermore, it is also highly desirable from the seller’s point of view that the contract stipulates that registration of transfer in the Deeds Office is to be effected by his conveyancers and not the purchaser’s conveyancers. The seller then knows exactly what stage has been reached in the registration process and the true reason for any delays and is not dependent on the information (or lack of information) emanating from the purchaser’s attorneys. A seller should therefore strenuously resist being talked into a contract which stipulates that registration of transfer is to be effected by the purchaser’s conveyancers.

When must the purchaser furnish a guarantee?

The contract must be absolutely explicit as to when the purchaser must furnish the guarantee for payment of the purchase price and the circumstances in which failure to do so will give the seller the right (if he wishes) to cancel the contract (and claim damages) or apply to court for an order compelling the purchaser to comply with his obligations.

If the terms of the contract are unclear in this regard, the parties could find themselves enmeshed in expensive and protracted litigation, as occurred in the recent case of Ronlou Property Development (Edms) Bpk v LF Lackay, heard in the Cape High Court. (Judgment in this case was given in July 2005 but has not yet been published in the law reports.) The dispute that arose in this case centred on the lack of clarity in the contract as to the time when the purchaser had to provide a guarantee for payment of the purchase price to enable transfer to go ahead.

Unfortunately, many contracts for the sale of land and buildings are signed by the parties on an estate agent’s standard form of contract. Such contracts are often unsatisfactory and lack precision on crucial aspects, such as those just mentioned. You should have your contract checked before you sign it and make any necessary amendments or additions, for once it has been signed, it can’t be changed without both parties’ consent.

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