Lending to a friend or selling property on credit. Must you register as a credit provider?
Category Top Property Tips
While it has, until now, seemed that the very strong consumer protections in the NCA (National Credit Act) was designed for commercial situations where credit is advanced by a "credit provider" businesses to "credit consumers", a recent Supreme Court of Appeal (SCA) decision has changed this.
In particular, whether the NCA also applies to non-commercial, once-off loans? Like a loan to a friend or relative? And what about property sales? Why should you be worried?
Where in the past, the various High Courts were split over whether you should be registered as a credit provider in the case of making a single loan or giving once-off credit, this SCA decision has clarified that, if you don't there may well be a danger that your agreement may be unlawful, could be declared void and you may have to write off the whole loan.
Take note, recent Supreme Court of Appeal Case
Briefly, the case involved a "family" fall out and a R2 million "time to pay" share purchase deal. A couple brought into their business a businessman who was "like a son" to them. He would eventually take over the business and over time became a substantial shareholder. Twelve years later however, there was a falling-out and mutual decision to part ways. It was agreed that the businessman would sell his interest in the business to the couple for R2m, repayable as a R500,000 deposit and monthly instalments of R30,000 p.m. Interest was payable on the deferred amount, and a mortgage bond registered over the couple's house as security. The businessman (as seller) registered as a credit provider (in order to get the mortgage bond registered in his favour) but only after the credit agreement was signed.
When the business ran into trouble the couple couldn't continue paying and the seller sued them for the outstanding balance of R1.13m. The couples' defence was that the agreements were null and void due to non-compliance with the NCA. The SCA held that the seller should have registered as a credit provider before the credit agreement was entered into. He didn't, and the agreement was therefore unlawful, and he lost his R1.13m.
Are you at risk? What is excluded from the registration requirement?
While there are many exclusions and situations of limited application such as "incidental" credit agreements, interest-free loans, larger corporates and agreements (with thresholds), and various dealings with "co-dependent" and "dependent" family, it seems best to first seek legal advice before entering into these transactions. More so, when you are "dealing at arm's length" which is always going to involve grey areas.
Sale of property with deferred payments
Legal experts believe that there is now particular danger for those who decide to sell their properties on a deferred payment or instalment sale basis rather than the standard "pay in full against transfer" basis. Watch out also for a normal "pay in full" deal morphing into a "pay me the rest later" sale when the buyer can only get a bank loan for part of the total price. In these instances, your sale may well have to comply with both the NCA's obligation to register as a credit provider and the strict requirements of the Alienation of Land Act. Specific legal advice is essential before you agree to any form of "deferred payment" property sale.
The bottom line
Unless and until the NCA is amended to make it clearer, less confusing and more pragmatic, legal professionals recommend that you tread carefully when it comes to lending money or giving credit - in relation to a property sale or otherwise, to anyone including family and friends. Rather, seek legal advice beforehand.
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