To illustrate by way of a simplified example, suppose the trustees for the time being of the Beta Trust (Beta Trust) enter into an agreement (Deed of Sale) with Alpha, a natural person, in terms of which, Alpha purchases from the Beta Trust certain immovable property for a purchase consideration of R10,500,000.00. In terms of the Deed of Sale, an amount of R10,000,000.00 of the purchase price would be paid upfront by Alpha, and the balance being R500,000.00 would be deferred and “financed” by the Beta Trust at an interest rate of 4% compounded per annum.
What the parties may not have considered, as is often the case, are the potential implications of the above transaction falling within the purview of the National Credit Act 34 of 2005 (NCA).
National Credit Act
For the above transaction to fall within the purview of the NCA, section 4(1) prescribes that the parties must have entered into a credit agreement dealing at arm’s length within, or having its effect within, the Republic of South Africa (Republic). Assuming that the Beta Trust and Alpha concluded the agreement at arm’s length in the Republic, the obvious point of departure would be ascertaining whether the above transaction fell within the definitional ambit of a credit agreement in terms of the NCA.
In terms of section 8(1)(b) read with section 8(4)(f) an agreement, irrespective of its form, but excluding the agreements contemplated in section 8(2), constitutes a credit agreement if:
(i) in terms of the agreement payment of an amount owed by one person to another is deferred; and
(ii) any charge, fee or interest is payable to the credit provider in respect of the deferred amount or is payable in terms of the agreement.
The terms ‘fee’, ‘charge’ and ‘interest’ are, however, not defined – nevertheless, the courts have provided useful insight with regard to how the terms ought to be interpreted respectively.
In Evans v Smith and Another the High Court held that the terms ‘fee’, ‘charge’ and ‘interest’ are intended to be of wide import. The court held that the terms ought to be construed so as to include any consideration payable in respect of any agreement, such as a loan, “in terms whereof payment of an amount owed by one person to another is deferred, or in terms of which consideration is charged by the grantor for the extension of credit” to the respective grantee. Therefore, provided that consideration was payable for the deferred amount or the credit extended, the transaction in question was said to have fallen within the purview of a credit agreement as contemplated in section 8(4)(f).
In Asmal v Essa, the Supreme Court of Appeal appeared to add a gloss on the principle laid down in Evans v Smith and Another, with respect to the consideration payable for the portion of the purchase price so deferred. The court held that for a charge or fee to fall within the ambit of section 8(4)(f), the parties to the credit agreement must both quantify as well as specify the manner in which the charge or fee will be paid. In that instance, E advanced A money to purchase certain medical equipment and, in return, A gave E a number of cheques. The amounts stipulated on the cheques included ‘a participating share of the profit’ that A would make pursuant to the resale of the said equipment – the amount of this share was, however, to be determined solely by A.
The court held that the ‘charge’ contemplated in section 8(4)(f) was an amount that was fixed, quantified and payable in a specific manner. Thus, the indeterminate profit share, for which no date of payment had been determined, and the value of which was determined solely at the discretion of one of the parties, fell beyond the purview of section 8(4)(f).
There appears to be a considerable degree of consensus among academics with respect to the types of transactions that fall within the ambit of section 8(4)(f). The prevailing view supports the conclusion that section 8(4)(f) includes, among other transactions, a sale of immovable property where payment of the purchase price is deferred but subject to interest. As a result, given that payment of the R500,000.00 portion of the purchase price would be deferred and that the Beta Trust would charge interest thereon, we submit that the above transaction would fall to be classified as a credit agreement in terms of section 8(4)(f).
The implications of the above transaction falling within the ambit of section 8(4)(f) depend, in large part, on the identity of the parties. If the Beta Trust is not a registered credit provider and Alpha is considered a consumer (which would ordinarily be the case in the present instance), the credit agreement would be rendered unlawful in terms of section 89(2)(d) and would be declared void from the date the agreement was entered into in terms of section 89(5)(a). If the Beta Trust was a registered credit provider the agreement would be lawful, but Alpha would be afforded all of the protections provided by the NCA to consumers which can be very onerous from the vantage point of the credit provider.
Avoiding the application of the NCA
Avoiding the application of the NCA can at times prove a tall order, nonetheless, the Beta Trust is not without options should circumstances necessitate selling the property in question. In order for the transaction between the Beta Trust and Alpha to fall beyond the purview of a section 8(4)(f) credit agreement, they would have to either alter the manner in which Alpha paid the interest to the Beta Trust or dispense with the obligation to pay interest altogether.
To this end, on the strength of the principle laid down in Asmal v Essa, one might advise the Beta Trust to make the interest payable an indeterminate and unfixed amount, in which the date of payment thereof is determined at the discretion of either party. As the court noted for the transaction to fall within the ambit of section 8(4)(f) “the parties must quantify the charge, fee or interest and specify the manner in which it is to be paid when they determine their contractual terms”. That said, it must, however, be borne in mind that despite the above remarks the ratio pertained to whether the indeterminate profit shares qualified as a ‘charge’. Therefore, it is by no means a foregone conclusion that by making the interest payable indeterminate and unspecified, that the Beta Trust would necessarily avoid the application of the NCA.
The parties could dispense with the obligation to pay interest and agree that only the purchase price would be payable. This approach finds support in the case of Voltex (Pty) Ltd v Chenleza and Others where an agreement made provision for the purchase price to be paid 30 days after the delivery date of the goods but did not require the buyer to pay anything other than the purchase price. In that instance the court held that the agreement in question did not fall within the ambit of section 8(4)(f) as there was no ‘fee’, ‘charge’ or ‘interest’ payable for the deferred amount.
Alternatively, should the Beta Trust be unwilling to forego charging interest, it could conclude the Deed of Sale with a juristic person (as defined). In terms of section 4(1)(a)(i) the NCA will not find application if the consumer is a juristic person whose asset value or annual turnover, together with the combined asset value or turnover of all related juristic persons, at the time the agreement is made, exceeds R1,000,000.00. Moreover, in terms of section 4(1)(b), should the deferral amount exceed R250,000.00 the NCA will not find application if the consumer is a juristic person, even if its asset value or annual turnover is below R1,000,000.00.
Although tough times have befallen the property market, market players must make do with the cards they have been dealt and innovate accordingly. That said, as we intimated in a previous alert, regard must be had to the manner in which the transaction is structured so as to avoid the application of the NCA and other cumbersome legislation.