Passing of benefits and risks in purchasing and occupation of property
Introduction
It is important that a prospective property buyer understands the various terms of an offer to purchase before completing, signing and submitting one.
Possession, benefits and risks
The appropriate clause in an agreement of sale relating to possession and the passing of benefits reads customarily along these lines:
“All benefits and risks in the Property shall pass to the Purchaser/s upon registration of transfer of the Property into the name of the Purchaser/s, after which the Purchaser/s shall be liable, inter alia, for all rates and taxes and all other outgoings levied in respect of the Property. Any pre-payments made by the Seller/s in respect of any period subsequent to registration of transfer shall be refunded to the Seller/s.”
It is essential to have a clear understanding of the meaning of “possession”, “benefits” and “risks.”
“Possession” involves the passing of risks and benefits from the seller to the purchaser, which normally occurs upon the passing of ownership to the purchaser upon registration of transfer in his/her name.
However, though this is not customary, the parties may agree upon a date different to the date of registration of transfer in the purchaser’s name as the effective date of passing of risks and benefits. As from the date upon which possession passes to the purchaser, he/she has to accept the obligations and responsibilities that arise in respect of the property. It is reasonable that he/she should bear the risks, but also have the benefits. It also follows that the purchaser is compelled to pay rates and taxes from the date of possession. “Benefits” refer to any fruits accruing to the property.
Two examples would be: the earning of income from a tenant, and the increasing value of the property. “Risks” involve loss resulting from any damage to or destruction of the property, or any other disadvantage accruing to or affecting it, arising through any agent other than breach of contract or wrongful act or default of the seller. This would include such examples as an earthquake or fire. It follows naturally from the concurrent obligation of the seller to take due care of the property and maintain it properly until date of registration of transfer, that if the purchaser suffers any loss as a result of the seller not taking due care, the purchaser would have a claim against the seller.
Occupation
“Occupation” simply means the right to occupy the property, practically as a tenant, without facing any of the risks or deriving any of the benefits of actual ownership.
Let us make the point immediately that it is inadvisable to set the date of registration of transfer as the occupancy date, simply because that date is unknown and uncertain. Consequently the seller and the purchaser are unable to make specific and firm arrangements. A typical disruptive scenario is as follows: The conveyancer informs the purchaser that registration of transfer is expected on a particular date, and advises the purchaser to make moving arrangements accordingly. Then at the last minute the transfer documents are rejected by the Deeds Office due to some error or irregularity.
Suddenly, at the very last minute, registration of transfer has not occurred, and the purchaser cannot take occupation of the new property. This date of occupancy is, however, the same as the date of occupation of the purchaser’s old home by the new owner of that home. As a result, the purchaser is compelled by law to move out of his old home, having agreed that the new owner is entitled to move in that day. The purchaser now faces the impossible situation of having to move out of his old home, and having nowhere to go. The solution to this minefield of potential complications is for the purchaser and seller to agree on a specific occupation date, and to avoid at all costs using the date of registration of transfer. However, the aforesaid must be qualified.
The agreement of sale must provide that the right of the purchaser to take occupation on the agreed date recorded in the agreement is dependent on the purchaser having complied with all his / her obligations in terms of the agreement prior to the occupation date. This is important in that, should the purchaser, having taken occupation, fail to comply with his / her obligations in respect of the payment of the purchase price, the seller may cancel the agreement on account of such default, and should the purchaser refuse to vacate the property, the seller must institute legal action against the purchaser to have him / her ejected from the premises. This may be a lengthy and costly process, especially having regard to the provisions of the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act of 1998, which would apply to the purchaser in such event. The occupation date is the date on which the purchaser is effectively entitled to move in.
This date must be stipulated in the agreement of sale, either as the date of registration of transfer, or an alternative date as agreed on by both parties and stipulated in the agreement.
The following is typical example of the “Occupation” clause in an agreement of sale: “Occupation of the Property shall be given to the Purchaser/s at midday on the …………..If the date of occupation does not coincide with the date of registration of transfer of the Property into the name of the Purchaser/s, the party enjoying occupation of the Property whilst it is registered in the name of the other party shall, in consideration thereof and for the period of such occupation, pay to the other party occupational rental of R……………monthly in advance on the 1st day of each and every month from the date of occupation. No tenancy shall be created by the Purchaser/s taking occupation prior to registration of transfer, and the Purchaser/s shall vacate the Property upon cancellation of this agreement and independent from the cause of such cancellation. The Purchaser/s shall not be entitled to make any alterations or additions to the Property prior to the date of registration of transfer into his/her/their name/s, and shall not be entitled to any compensation for any improvements, alterations or additions effected by him/her/them. The Purchaser/s shall be liable for all water, electricity and gas, sanitary fees, refuse removal fees and other outgoings in respect of the Property consumed by him/her/them prior to the Property being registered in his/her/their name.”
Occupational interest
In arranging a date of occupancy other than the date of registration of transfer, occupational interest is involved. The best way for the purchaser to view the occupational interest issue is to regard it effectively as a “lease” for the period concerned.
This is because the purchaser is not yet the owner, and will not be until the date of registration of transfer. For the benefit of occupying the property before owning it, the purchaser must pay occupational interest as agreed with the seller. The converse can also occur, namely that registration of transfer occurs before the date of occupation. In that case the seller will have to pay occupational interest to the purchaser for the period between the date of registration of transfer and the date of occupation by the purchaser.
Apart from settling the date of occupation, agreement must be reached on the amount of occupational interest which should be charged. In either of the above cases (whether the occupational interest has to be paid by the purchaser or the seller) the amount of monthly occupational interest is usually calculated at one per cent of the purchase price of the property. So if a property is being purchased for R500 000, monthly occupational interest would be set at around R5 000. Customarily such occupational interest has to be paid monthly in advance.
Tenancy, alterations and additions
It is also normal practice for the occupation clause of an agreement of sale to stipulate that no tenancy shall be created by the purchaser taking occupation prior to the date of registration of transfer. There is no true lease agreement in force in such a case. In a lease agreement there are certain rights protecting tenants, and certain laws applicable to tenancy.
These do not apply in the case of occupational arrangements as stipulated in a normal agreement of sale. The agreement of sale normally also stipulates that during the period of occupancy prior to registration of transfer, the purchaser shall not be entitled to make any alterations or additions to the property, and shall not be entitled to compensation for any improvements, alterations or additions effected. Simply stated, the purchaser cannot make any improvements, alterations or additions to the property – even if he/she has taken occupation – until registration of transfer has been confirmed officially.
One has to appreciate that no-one can predict with 100% accuracy that registration of transfer will definitely occur, and one has to accept that this is not definite. The purchaser has to wait for confirmation of registration. It is only at that stage that the purchaser becomes the owner, and is then entitled to take such action.
As you can see, the big lesson for any prospective purchaser to learn is to exercise caution and patience before making hasty decisions and taking untimely action. Jumping the gun can prove to be a very costly exercise indeed!
Disclaimer: This article is for information purpose only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.