Red Flag Areas in Conveyancing Practice

1. Payment of deposit/purchase price to seller/developer before transfer is registered. (Risk of seller’s insolvency)
   
   Never pay over the deposit and/or purchase price until the transfer has been registered and you have ensured that all undertakings etc have been met.
   
   It is also advisable to warn purchasers against improving the property before registration.
   
   Before advising the seller to cancel the agreement of sale (on the basis that the sale did not comply with the provisions of the Subdivision of Agricultural Land Act) the conveyancer failed to ascertain that the land was exempt from the provisions of the aforementioned Act and that the consent of the Minister of Agriculture was not required. In this regard see the judgment in Stalwo (Pty) Ltd v Wary Holding (Pty) Ltd 2007 SCA 133 RSA.
   
   
2. Payment of proceeds of sale to a third party who is not authorised to act on behalf of a seller/paying over proceeds on the instructions of a third party
   
   Be very wary of situations where anyone other than the seller gives instructions regarding the payment of the proceeds of the sale. Always obtain the seller’s written and verified instructions if the proceeds are to be paid to or on the instructions of anyone else.
   
   
3. Failure to study and familiarise oneself with the terms and conditions of the Agreement of Sale e.g. remedies provided for in the event of a breach, the procedure to be followed for cancellation, method of payment of the purchase price, suspensive conditions, payment of commission etc.
   
   This is a very important area, which has led to a number of claims against conveyancers.
   
   Ensure that all conditions have been met before transferring the property. Ensure that the seller is advised of his rights in the case of a breach and that the correct remedies are applied.
   
   
4. Failure to confirm instructions in writing, to reduce variations of the agreement to writing and to record essential facts which have been agreed upon verbally.
   
   All material terms and instructions should be recorded in writing.
   
   
5. Failure to provide guarantees timeously or in an acceptable form resulting in the seller cancelling the contract. Paying guarantees prematurely (i.e. before registration)
   
   The conveyancer failed to establish that the seller’s bond was a single facility account. The bank paid the guarantee directly into the seller’s account and the conveyancer only became aware of this once the seller had withdrawn a large portion of the proceeds, before registration. It was alleged that both the transferring and the bond attorneys were at fault.
   
   
6. Undue delays in passing transfer, opening a Sectional Title register etc.
   
   Give clients realistic time periods for transfer, so that there are no unrealistic expectations. Timeously advise clients of unavoidable delays. Prepare documents with great care to avoid delays at the Deeds Office.
   
   
7. Failure to ensure that transfer/bond documents are signed in front of the conveyancer (or at the very least a trained, reliable paralegal) so that identity of signatories can be verified.
   
   All documents must be signed in the Conveyancer’s presence, once the identity (and where necessary, the authority) of the signatory has been confirmed.
   
   
8. Failure to clarify and reduce to writing the relationship with third parties, for example estate agents.
   
   In one of our matters, the recipient of a standard letter sent out by a conveyancer inviting tenders on a property, subsequently alleged that he had had a mandate to sell the property and claimed commission on the sale. The conveyancer had regarded the claimant as an interested developer. The problem was made worse by the fact that the conveyancer had not received (or responded to) a letter from the claimant setting out the terms of his alleged mandate.
   
   
9. Problems with the financial aspects of a transaction especially VAT, Transfer Duty, Capital Gains Tax, currency of purchase price etc.
   
   Ensure that you establish the status of the parties to the agreement of sale and whether transfer duty or Vat applies or if the transaction is zero-rated. Be extra vigilant when dealing with parties in/from other countries. Where a purchaser acquires immovable property from any person who is not a resident of South Africa, the purchaser must withhold from the amount due to the non-resident seller, an amount equal to 5% of the amount due where the seller is a natural person, 7.5% of the amount due where the seller is a company and 10% of the amount due in the case of a trust.
   
   The withholding tax is an advance payment in respect of the tax ultimately payable by the non-resident seller when it submits its tax return to SARS. The section introduces onerous responsibility on conveyancers entitled to any remuneration in respect of their services in connection with the disposal of the immovable property by the non-resident seller. The conveyancers are legally obliged to inform the purchaser in writing of the fact that the seller is not a resident for tax purposes and that the withholding tax provisions apply.
   
   If they know, or ought reasonably to have known, that the seller is not a resident for tax purposes, the conveyancer will be jointly liable for the payment of the amount which the purchaser is required to withhold, except that the liability is limited to the amount of remuneration or other payment receivable in respect of such services. The withholding tax provisions are only applicable where the value of the property exceeds R2 million. NB: For a useful discussion of this aspect, please refer to the article by Hesma Strydom in Bulletin 2/2008.
   
   
10. Failure to obtain the consent of the Minister in terms of S 3(1)(e) of the sub-division of Agricultural Land Act 70 of 1970
    
    In one of our matters, the conveyancer drafted an agreement of sale, which was entered into prior to the parties’ having obtained the consent of the Minister of Agriculture. On the basis that he was not bound by the agreement, the seller, sold the property to another purchaser. The original purchaser claimed damages from the conveyancer.
    
    
11. Creation of a conflict of interest situation, when acting for both purchaser and seller and a dispute arises
    
    Remember that the transferring attorney is duty bound to safeguard the interests of both seller and purchaser, especially when one of the parties is not represented.
    
    
12. Failure to comply with the requirements for sales of immovable property in instalments in terms of the Alienation of Land Act.
    
    In one of our matters, an option clause, drawn by the conveyancer was unenforceable as it did not sufficiently describe the property as required by Section 2 (1) of the Alienation of Land Act, read together with the Sectional Title Act.
    
    
13. Proceeding with a foreclosure when the judgment debtor has made arrangements with the bank/failure to communicate properly with the judgment creditor (bank, body corporate etc)
    
    Before carrying out such a drastic step, ensure that you are aware of all developments.
    
    
14. Failure to observe specific conditions on the Title Deed/failure to ensure that conditions on the deed of sale are carried over on to the Title Deed.
    
    This happens more often than one would expect and great care should be taken
    
    The conveyancer failed to properly supervise his secretary or check the documents before signature. She had omitted the Homeowners’ Rules that appeared in the Deeds of Sale from the Title Deeds.
    
    
15. Furnishing of undertakings (including bridging finance matters.)
    
    In practice, attorneys sometimes give undertakings on behalf of and on the instructions of their clients. These undertakings promise to pay an amount of money on the happening of a future event.
    
    The legal implications and consequences for attorneys giving such undertakings were underestimated until the decision in Ridon v Van der Spuy & Partners (Weskaap Inc) 2002 (2) SA 121 (C). In the light of that decision, it is imperative that great care be given in the wording of such a document.
    
    It must be clear that the undertaking is only given in a representative capacity and that the attorney/firm does not assume personal liability for the payment should it not be honoured. Where possible, the undertaking should be given and signed by the client himself, where not, the attorney should obtain an irrevocable authorisation from the client.With regard to bridging finance matters, please refer to Hesma Strydom’s article on the topic in Bulletin 4/2008.
    
    See also the policy changes and guidelines under the heading Bridging Finance above.
    
    
16. Payment of the proceeds of a sale to an incorrect party.
    
    Again it is essential to know what documents and instructions are on the file before paying out. We have had several instances where the conveyancer has forgotten about paying the Receiver, the bridging finance company or the estate agent’s commission.
    
    
17. Inadequate supervision of paralegals.
    
    Of late, there have been many more claims where the employee is inadequately supervised by the conveyancer. This leads to numerous mistakes as well as giving the employee an opportunity to act fraudulently/dishonestly. Many bridging finance claims have arisen because of the lack of supervision.
    
    
18. Use of bridging finance companies.
    
    With regard to bridging finance matters, please refer to Hesma Strydom’s article on the topic in Bulletin 4/2008.
    
    Remember that you are at a greater risk if you obtain bridging finance for the seller or estate agent. If the sale is cancelled, there is a strong possibility that the seller or agent will not repay the debt.
    
    Try to restrict your firm to only obtaining bridging finance for necessary finances that would enable you to register the transfer.
    
    See also the policy changes and guidelines under the heading Bridging Finance above.
    
    
19. Lack of communication between the various attorneys (transfer, bond registration and cancellation) and bank departments in the transfer process.
    
    Make sure that you obtain, read and retain on file, the most recent correspondence from all parties. Also make sure that you keep the other parties up to date on developments. In one such matter, the conveyancer was instructed by a bank to attend to the cancellation of a bond. On date of cancellation, the conveyancer had a system problem and was unable to notify the bank. The bond account had been settled in full by payment of a guarantee and the seller withdrew the money, as the account had not been closed by the bank, which had been unaware that the bond had already been cancelled.
    
    
20. Failure to draft the agreement of sale in accordance with the wishes of the parties/ the requirements of the relevant legislation or to advise the parties properly with regard to the provisions of the agreement.
    
    Numerous claims arise out of attorneys’ failure to correctly draft the agreement of sale. It is essential that you take cognisance of the requirements of all the legislation relevant to the particular transaction and ensure that the parties are aware of these and the agreement complies with them. It is risky to accept instructions in complicated matters in areas in which you do not have the relevant experience or expertise!
    
    
21. Failure to secure the purchase price resulting in a shortfall on transfer.
    
    If a deposit or the balance of the purchase price is payable in cash before registration, ensure that you do not lodge the transaction before you have confirmation that the balance of the purchase price was paid into your trust account and that it has cleared, (if it was a cheque payment it takes 10 days to clear).
    
    
22. Cancellation for breach
    
    In one of our claims, the conveyancer assisted the purchaser in attempting to negotiate the purchase price of an immovable property. In respect of Clause 11 of the Agreement of Sale (which had already been drafted by the seller’s attorney) the purchaser had to obtain a mortgage bond within 30 days of signature. The seller’s attorneys sent a letter reminding of the contents of clause11 to the conveyancer, who failed to remind the purchaser of this requirement. The conveyancer only received notification from the purchaser that a bond had been approved, one day after the expiry of the 30 day period stipulated in clause 11. He immediately communicated this to the seller’s attorneys, who advised that the sale had lapsed because of the late notification of the bond approval. The purchaser had to renegotiate the purchase price (for a higher amount) and thereafter claimed (inter alia) the difference from the conveyancer.
    
    
23. Failure to observe specific conditions on the title deeds/deeds search e.g. no subdivision allowed, existing servitudes, property has mineral rights, attachment on the property.
    
    In one of our matters, X bank instructed the conveyancer to register a second bond over a property and paid the money to the mortgagor on date of lodging (as opposed to date of registration) The documents were rejected on lodging and then it was discovered that there had been an earlier attachment of the property and the bond could not be registered. The conveyancer had failed to properly check the deeds office search, which would have revealed the attachment before lodging was attempted
    
    In another matter, there was a clause in an agreement of sale, in which the mineral rights were reserved in favour of the seller of the immovable property.
    
    The agreement was sent to the purchaser for signature and the latter amended the clause so that only one third of the mineral rights would be retained by the seller.
    
    The conveyancer did not notice the change and proceeded to register the property without the reservation of the full mineral rights.
    
    
24. Claims by estate agents
    
    In one of our claims, because of a dispute between the seller and the estate agent over commission, the conveyancer furnished a formal undertaking to retain an amount from the proceeds of the sale, pending the resolution of the dispute.
    
    The Seller then terminated the conveyancer’s mandate, leaving him unable to perform in terms of the undertaking.
    
    The agent demanded his commission from the conveyancer, on the basis of the undertaking, which was not worded to allow for a situation such as this one.Conveyancers should remember that there is no obligation on them to furnish an undertaking to an estate agent for payment of the commission. It is just a practice that has established itself over the years
    
    This claim also illustrates the importance of a correctly worded undertaking and the fact that attorneys should be very wary when giving undertakings.
    
    
25. Trust Property Control Act (trustee does not have the authority to bind the trust)
    
    In one such matter, the conveyancer, acting for the purchaser of an immovable property from a trust, failed to establish that the trustee had not been authorised to act on behalf of the trust. Before transfer, the trust sold the property to someone else for a substantially higher price and refused to be bound by the agreement with the first purchaser.
    
    

    Always request a copy of the Letters of Appointment and the Trust Deed (FICA). The Trust Deed will confirm the powers and the obligations of the trustee. It might contain a restriction on the sale of the property in question.