Red flag Conveyancing

Bridging Finance

The following changes were made to the 2010/2011 policy, which came into force on 1 July 2010:

Before facilitating any bridging finance and signing any undertaking in this regard, please check the above-mentioned clauses in the policy.

Please also note the guidelines below:

Warning

Please take note: The Board has resolved to, in the near future, increase the deductibles payable in respect of conveyancing matters to the same level as the deductibles payable in respect of prescribed MVA matters (as set out the Scheme Policy, Schedule A, clause 8.5.1, Column A ). The deductible will therefore be R35 000 for a sole practitioner, rising to R315 000 for 14 partners/directors or more.

Unauthorised and/or premature payments of trust money.

35 of the 438 conveyancing claims (28%) registered by the AIIF in the first nine months of the 2011 insurance year arose out of unauthorised payments of trust money.

The issue of unauthorised payments of trust money is an extremely serious one. The courts have over the past few years been particularly unsympathetic towards practitioners who do not deal with funds held in trust with caution.

 (For the SCA’s view on the duties of practitioners when dealing with trust money, see Hirschowitz Flionis v Bartlett and Another 2006(3) SA 575 SCA and Du Preez and Others v Zwiegers (2008 (4) SA 627 SCA.)

But see also the judgment of Du Plessis J in Jaco Johan Roestof v Cliffe Dekker Hofmeyr Inc, Case No 34306/2010, North Gauteng High Court, which was handed down on 15 December 2011.

There are various reasons for this type of payment, inter alia, the conveyancer/secretary pays the proceeds of the sale, the deposit or purchase price or part thereof:

1. to the incorrect party, after registration (sometimes because of fraud on the part of the payee);
2. to the seller/developer/third party, before registration of transfer, without the written permission of the   purchaser;
3. to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but fails to  properly advise the purchaser of the risks of doing so;
4. to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but fails to ensure that the necessary protections for the purchaser are in place.

Below are examples of actual cases where this has allegedly occurred:

1.    Payment to the incorrect party after registration as a result of fraud on the part of the payee.

This seems to be a growing trend. Please see the details of a recent matter which we have had to consider below (Case 1):

We have also very recently been informed by a well-known firm that their office was contacted by their client (the seller) who stated that she saw that her transaction was on prep in the Deeds Office and that she would like to change their banking details.

Fortunately the conveyancing secretary was sharp enough to realise that the voice of the person telephoning was not that of the client. She requested the “client” to come into the offices with her identity document. This did not happen, as it was clearly a hoax.

The following week they received yet another call from a woman attempting to give telephonic instructions to change the banking details of another client. Fortunately there was excellent communication and risk management in this conveyancer’s office. They were fully prepared and did not fall prey to this attempted hoax either.

Lessons learned:  In this particular case, the fraudster clearly had inside information about the transaction. The problem is that it is difficult to pinpoint how the information was obtained and by whom.  It could have come from within the conveyancer’s practice or perhaps from the sellers themselves. There is also possible collusion on the part of an employee of Y bank.
Do you think that the conveyancer acted reasonably? Did he do all that he could to protect his own and his clients’ interests?
What might he, with the benefit of hindsight have done to prevent this fraud?
There are precautions that might have been taken, particularly if the conveyancer had been aware of the prevalence of scams such as this one:

1. He could have insisted that the clients both come into his offices to sign written confirmation of the change in the payment instruction. (Unless he could personally verify the identity of both clients, he should also have insisted that they again produce their identity documents) and
2. He could have insisted that Mrs M produce documentary proof relating to the new bank account or
3. If for some reason neither a) nor b) were possible, then at the very least, he should have verified the e-mail address from which the instruction was received and telephoned Mr M to ensure that he agreed with his wife’s instructions to change the banking details. (As an additional precaution, he could also have telephoned Mrs M to confirm that the initial call and instruction had indeed come from her).
4. It may seem overly cautious to suggest that both husband and wife need to verify the instruction. We have on numerous occasions had to deal with claims where one of the spouses gave instructions to the attorney contrary to the wishes of the other. There have been several cases where the husband has brought a woman pretending to be his wife, to sign documents in the attorney’s office. This is just one of the reasons why it is essential to properly “FICA” all clients.

One of the dangers of failing to obtain documentary proof of the new bank account is that, where an internet transfer is done, the bank will not compare the account number with the name of the account holder. If the account details are incorrect the error will not necessarily be picked up.

In some other matters in this first category:

2.    Payment to the seller/developer/estate agent/third party, before registration of transfer, without the written permission of the purchaser.

3.    Payment to the seller/developer/estate agent/third party, before registration of transfer, with the permission of the purchaser, but failure to  properly advise the purchaser of the risks of doing so;

4.    Payment to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but failure to ensure that the necessary protections for the purchaser are in place.

In another such matter:

Given the prevalence of these incorrect payments of trust money and particularly of inventive and often convincing fraudsters, we urge all conveyancers and conveyancing staff to be extra vigilant in carrying out their duties in relation to money held in trust.

Ann Bertelsmann

Risk Manager

Attorneys Insurance Indemnity Fund

This email address is being protected from spambots. You need JavaScript enabled to view it.
 

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 thatyou 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.