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How the Property Practitioners Act affects property developers

It’s tough to be a property developer in South Africa and it just got tougher with the acceptance of the Property Practitioners Act. Experienced property attorney Schalk van der Merwe wrote this article in which he takes a look at the consequences, intended or otherwise for property developers.

My Italian developer client once told me, in his Italian accent: “In-a Eetali, when-a you are a developer, they roll out da red-a carpet. In-a South Africa, they roll out da red-a tape!”

It is tough to be a property developer in South Africa. It just got tougher.

Apart from a myriad of other laws and regulations, developers are now subject to the Property Practitioners Act, 22 of 2019, which was published on 3 October 2019 and will come into operation on a day to be proclaimed by the President. While the stated intentions of the Act (with transformation of the industry, regulation of property practitioners and consumer protection at the forefront) are to be applauded, there seems to be a number of unintended consequences particularly for developers.

Related reading: EAAB CEO says act ushers in new era

The definition of a “property practitioner”, has now been extended to include property developers (with other new faces being bond originators, office managers, bridging finance institutions, auctioneers, property managers, agents selling time-share and so forth). The expanded definition would then also include all directors of a company, members of a CC and trustees of a trust which offers such services as property developer, in short being a person who sells any part or unit or section of a property or property development. Also included in the definition would then be a developer’s in-house marketing team.

What are the consequences, intended or otherwise?

The definition of a property practitioner

The full definition in par (b) reads as follows:
“includes any person who sells, by auction or otherwise, or markets, promotes or advertises any part, unit or section of, or rights or shares, including time share and fractional ownership, in a property or property development”.

It is clear that a developer who is in the business of developing residential or commercial property units for re-sale, would fall under paragraph (b) of the definition. Considering however the wording of the paragraph, ( “… any person who sells… or markets or promotes … any part, unit or section of a property or property development”), read with sections 2 and 3(h) of the Act, it appears to also include “build to let”- developers.

The question is whether, by virtue of the references to a “part, unit or section” of a property or development, this would exclude a developer who develops a property to be sold as a whole/single entity, say for instance an office block sold to a single user in a turn-key development?

The reference to “shares in a property” also raises questions. Would this mean that a developer who wants to syndicate its development and attract investors by offering shares would have to obtain an FFC before it can receive any monies from its investors?

Fidelity Fund Certificate

Chapter 8 of the Act deals with Fidelity Fund Certificates and provides that every property practitioner must be in possession of an FFC. Section 48 then provides that, if the practitioner is a company, close corporation, trust or partnership, every director/member/ trustee or partner must be issued with an FFC. Section 50 (b) (ii) and (iii) then disqualify these persons should they not comply with the prescribed standard of training, and/ or not have the practical experience determined by the Property Practitioners Regulating Authority.

Neither the prescribed standard of training nor the required practical experience is apparent from the Act, and I assume this will be regulated by regulations to be promulgated. The worrisome question is how this will be applied in a property development company, where the board in many instances consists of people who are specialists in their own right but not in the specific discipline of selling or letting property. For instance, they may be accountants, engineers or even only investors. How will this be accommodated?

BEE certificate

A property practitioner who is not in possession of “a valid BEE certificate” is disqualified from holding an FFC. As far as I can see, this would mean that all developers will at least have to appoint an accreditation agency to provide such a certificate. No BEE level of compliance is mentioned, and we will have to wait and see whether this will be prescribed in the regulations to follow.

Trust accounts

A property developer will be obliged to open a trust account. This will be quite handy for a developer who is marketing a future development, and wishes to take deposits from clients, something which in the past was reserved for attorneys and estate agents. Will the applicable provisions of the Alienation of Land Act 68 of 1981 be similarly amended? (Incidentally, section 54(1) requires every property practitioner to open and keep a trust account. The intention is apparently that this should only apply to a principal/owner of a business conducting the service of a property practitioner, and not each and every marketing agent in its employ; the section should be amended.)

Other issues include the following:

Tax Clearance Certificate – The Act prohibits the Regulating Authority from issuing an FFC to a person who is not in possession of a valid tax clearance certificate. In the world of property development, it often happens that disputes are raised with SARS on not only income tax, but also VAT. Pending resolution of these disputes, it may be that tax clearances are withheld by SARS. Will there be a process to accommodate this?

Withholding of payment – The issues raised  above, become even more relevant when one looks at the provisions of section 48 (4) (“any amount received in respect of or as a result of any property transaction” by a property practitioner acting without an FFC needs to be repaid) and 56(5) (“a conveyancer may not pay any remuneration or other monies to a property practitioner” not in possession of an FFC). Will these “other monies” include also the consideration paid by a buyer to the developer for the unit sold? In the case of a developer winding down its business, does it need to remain registered with an operative FFC simply because it has a few five units left in its development which for whatever reason does not sell, after having sold off the rest?

Appointing service providers – Section 58(1), prohibiting a property practitioner from obliging or encouraging a consumer to utilise the services of a particular service provider can be interpreted so as to prohibit the developer/ property practitioner from appointing for instance a specific attorney on a project as a whole, say a new sectional title scheme. Was this the intention? Similarly, developers would often prescribe that only certain subcontractors be employed, for instance to supply kitchens, carpets, tiles and so forth. Is this now also prohibited? If so, the results would be chaotic.

Insolvency – Section 59(1) provides that a property practitioner who commits an act of insolvency or “is insolvent”, is immediately disqualified to hold an FFC. This is questionable: an act of insolvency in terms of the Insolvency Act is simply prima facie proof of insolvency which still stands to be proven in court. Furthermore, the reference to “is insolvent” should refer to “sequestrated” or “declared insolvent by a court of law.”

Candidate property practitioners – The Act provides little guidance on the position of candidate property practitioners, other than in the definitions and section 64. The latter provides that a candidate property practitioner may not draft or complete any document or clause in a document relating to the sale or lease of a property. Although the heading of the section refers to “supervision”, and it is understood that the section was meant to say that a candidate may not without supervision perform these functions, the section does not say so. This provision will in particular be bothersome to many property developers, who has people in their employ who are simple “order takers”, not necessarily under the constant or direct supervision and control of the developer. How is it intended to train these candidates?

Duty of care

Lawyers acting for property developers should take note of the provisions of section 69(1), which provides that a property practitioner owes a buyer and seller a duty of care.  (Curiously, nothing is said about a lessor and lessee…)

The good news

There is good news too … I communicated the bulk of my concerns to advocate Jan Tladi of the Estate Agency Affairs Board.  According to him, most of these matters will indeed be dealt with in the regulations, which are in the process of being drafted. Furthermore, he pointed out that section 4 of the Act provides for applications for exemption – specifically by developers and other practitioners who are not involved in the day to day selling and letting of property. Exemption can be granted partially or fully, and made subject to certain conditions.

Furthermore, the required qualifications for practitioners will also be dealt with in the regulations, as will mentorship programs for candidates.

Lastly, I was assured that the question about the SARS clearance was discussed at length with SARS, who has indicated that this will be issued upon request, and not be withheld due to disputes.

End – This is a condensed version of an email newsletter that Schalk van der Merwe sent out earlier this week and is published here with his permission. Editor.