Many buyers and sellers of immovable property are not aware that their transaction may fall within the domain of the Competition Commission (the Commission) requiring the approval of the competition authorities prior to implementation thereof. Failure to notify the details of a property disposal in certain circumstances may have harsh monetary consequences for both parties to a transaction.
In terms of the Competition Act, 1998, a notification is required if:
(1) the transaction constitutes a merger; and
(2) meets the threshold of assets and turnover requirements set by the Minister of Trade and Industry in conjunction with the Commission.
Section 12 of the Competition Act defines a merger as occurring when "one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm." Furthermore, a merger may be achieved in any manner, including through the purchase or lease of shares, an interest or assets of the other firm in question.
It has become established law that certain immovable property may constitute "the whole or part of a business" for the purposes of merger control. For instance, the purchase of commercial property comprising lettable space may be construed as part of a business (letting enterprise). Where the purchaser is an existing player in the property market, the transaction may even raise competition concerns if the purchaser already owns property in the same geographic area.
Only so-called intermediate and large mergers require compulsory notification and approval before implementation thereof. To be classified as an intermediate merger, the following thresholds are to be met:
- The asset value of, or annual turnover attributable to the property being transferred, as recorded in financial statements for the preceding financial year must meet or exceed R30 million; and
- The amount above, when combined with the asset value or annual turnover (which ever is the highest) of the purchaser, meets or exceeds R200 million.
The Commission requires a filing fee in regard to intermediate and large mergers of R75 000 and R250 000 respectively.
The transaction may not be implemented unless and until approval is obtained. As this can take upwards of three months, one needs to take this delay into account at the outset of the transaction. It is not necessary to have a signed sale agreement in place before notifying and if time is of the essence, a memorandum of understanding or even a letter of intention is sufficient grounds to file a merger and "start the clock". However, the filing fee would typically not be reimbursed in the event of the parties failing to subsequently consummate the deed of sale.
The penalty fee for failing to comply with this legislation is a maximum of 10% of turnover. This penalty could be imposed on both the target and acquiring parties. In addition, the Commission could order the transaction to be unwound where the merger is found to substantially prevent or lessen competition. This may lead to unintended consequences that could severely prejudice both purchasers and mortgagees that financed the transaction.
It is thus vital for all parties in a commercial property transaction to take heed of this legislation and not to assume that it does not apply to them. Where the sale of the property constitutes "the whole or part of a business", clients should also consider the effect of such transactions on any employees in terms of section 197 of the Labour Relations Act 66 of 1995.
Simóne Franks and Chris Charter