In the property market, an Offer to Purchase (OTP) is a legally binding contract the moment both parties sign it. While most transactions proceed to the Deeds Office without issue, “buyer’s remorse” or financial instability can lead to a breach of contract.
When a buyer fails to meet their obligations, the seller isn’t just left with a “for sale” sign; they are armed with specific legal remedies under South African law.
1. What Constitutes a Breach?
A breach occurs when the buyer fails to fulfil any “material term” of the agreement. Common examples include:
- Failure to pay the deposit by the agreed-upon date.
- Failure to provide bank guarantees or proof of funding within the specified timeframe.
- Failing to provide necessary FICA documentation, which delays the transfer process.
- Repudiation: Explicitly stating they no longer intend to go through with the purchase without a legal excuse (like the failure of a suspensive condition).
2. The Critical “Notice to Perform” (Section 19)
Under the Alienation of Land Act, a seller cannot simply cancel the deal the moment a deadline is missed.
- The 7-Day Rule: Most sale agreements contain a breach clause requiring the seller to give the buyer written notice of the breach.
- The Demand: The seller must demand that the buyer “rectify” the breach within a specific period (usually 7 to 10 days).
- The Consequence: The notice must explicitly state what the seller will do if the buyer fails to comply (e.g., cancel the agreement or sue for damages).
3. The Seller’s Three Primary Remedies
If the notice period expires and the buyer still hasn’t performed, the seller has three main legal paths:
A. Specific Performance
The seller can approach the court to force the buyer to uphold the contract. This means the buyer is legally compelled to pay the purchase price and take transfer.
- When it’s used: Usually when the buyer is financially capable but simply changed their mind.
- The Downside: It can be a long, expensive High Court battle.
B. Cancellation and Damages
The most common route. The seller accepts that the deal is dead, cancels the agreement, and then sues the buyer for “damages.”
- Calculating Damages: If the seller eventually sells the house to someone else for R200,000 less than the original buyer’s price, the original buyer can be held liable for that R200,000 difference, plus interest and additional rates and taxes paid during the delay.
C. Forfeiture of the Deposit
Many sellers believe they automatically get to keep the buyer’s deposit if the deal falls through. This is not strictly true.
- The Penalty Act: Under the Conventional Penalties Act, the court (or the conveyancing attorney) can reduce the penalty if it is “out of proportion” to the actual loss suffered by the seller.
- However, a well-drafted contract usually allows the seller to retain the deposit in trust until the actual damages are calculated.
4. Occupational Rent
If the buyer has already moved into the property before the breach occurred, they are liable for occupational rent for the period they resided there. If they refuse to vacate after the contract is cancelled, the seller must start formal eviction proceedings, a process that can take months.
5. The “Estate Agent’s Commission” Trap
This is often the most painful consequence for a breaching buyer. In most South African OTPs, the clause regarding commission states that if the sale is cancelled due to a breach by the buyer, the buyer becomes liable to pay the estate agent’s full commission.
Since commission is often 5% to 7% of the purchase price, this can amount to hundreds of thousands of Rands, even though the house never changed hands.
6. Suspensive Conditions: The Legal “Escape Hatch”
It is important to note that if a buyer cannot get a bond or sell their own house, and the contract was “subject to” those conditions, this is not a breach. If the condition fails despite the buyer’s best efforts, the contract becomes “void ab initio” (void from the beginning), and the buyer is entitled to a full refund of their deposit.
Advice for Sellers
- Don’t release the deposit early: Ensure the deposit is held in an interest-bearing trust account by the conveyancer or the agency.
- Keep a paper trail: Ensure all communications regarding delays are recorded in writing to satisfy the “Notice to Perform” requirements.
by Jaques van den Ende