Risks, benefits and occupation when purchasing a property | Legal Articles


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Risks, benefits and occupation when purchasing a property

The terms of an offer to purchase agreement

It is important that a prospective property buyer understands the various terms of an offer to purchase before completing, signing and submitting one.

Risk Benefit Possession
The appropriate clause in an agreement of sale relating to possession and the passing of benefits reads like this:

“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.”

Having a clear understanding of the meaning of “possession”, “benefits” and “risks” is essential to avoid any confusion.

Taking possession of a property

Possession (the passing of risks and benefits from seller to buyer) occurs when ownership of the property is given to the purchaser upon registration of transfer in his/her name. 

However, the parties may agree upon a different date than the one specified for the registration of transfer in the purchaser’s name as the effective date of passing of risks and benefits.

The date of possession of a property

From the date that the possession is passed on, the purchaser then has to accept the obligations and responsibilities that arise with regards to the property. 

Reasonably, they should bear the risks, but also have the benefits. The purchaser is compelled to pay rates and taxes from the date of possession.
Benefits relate to monetary gain that can be acquired from the property, for example, 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 that could affect the property. 

These risks can arise through any possible avenue except the damages that are associated with a breach of contract on the part of the seller. Such risks include earthquakes or fire damage.
It is the responsibility of the seller to ensure that the property is taken care of until the date of registration of transfer. 

This is because the purchaser will have a claim against the seller if the property is neglected and, as a result, damages occur and the purchaser suffers a loss.

Occupation of the property

Occupation implies that the tenant has a right to occupy the property without facing any of the risks or deriving any of the benefits of actual ownership. 

When setting the date of registration of transfer, it is not recommended to make it the same date as the occupancy date. 

This is because that date is unknown and uncertain, and would mean that the seller and the purchaser are unable to make specific and firm arrangements.
To illustrate, picture the scenario in which the conveyancer has informed the purchaser that registration of transfer is expected on a particular date, and so advises the purchaser to make moving arrangements. 

However, the transfer documents may be rejected by the Deeds Office at the last minute because of an error or irregularity. And so the registration of transfer cannot occur, and the purchaser cannot occupy the new property.
The date of occupancy is the same as the date of occupation of the purchaser’s old home by the new owner of that home, and so the purchaser is legally obliged to move out of his old home, having agreed that the new owner is entitled to move in that day. The purchaser now has nowhere to go.

Specific Occupation Date

A solution this problem would be for the purchaser and seller to agree on a specific occupation date, which will help avoid all costs that could come from using the date of registration of transfer.
In order to do so, the agreement of sale must stipulate that this right is afforded to the purchaser and is dependent on the purchaser having complied with all the obligations in terms of the agreement prior to the occupation date. 

In line with this agreement, should the purchase fail to comply with the obligations required of them, then the seller may cancel the agreement on the basis of this default. 

They must then institute legal action against the purchaser, if they refuse to vacate, in order to have them removed from the property. 

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” clause in an agreement of sale is typically as follows:

“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

Occupational interest is charged when the date of occupancy is different to the date of registration of transfer. Because the purchaser is not yet the owner of the property, they can view this as a lease until the date of registration of transfer. 

This can also be payable by the seller, if the registration of transfer occurs before the date of occupation.
The amount of occupational interest that should be charged should be agreed upon by both parties, but the amount is usually 1% of the purchase price and this is paid monthly in advance.

No Tenancy or Lease Agreement

In the occupation clause it specifies 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 even though the interest charges are viewed as such. 

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.
During the period of occupancy prior to registration of transfer, the purchaser is not entitled to make any alterations or additions to the property, and is not liable for compensation for any improvements, alterations or additions made.
Because it is impossible to predict whether or not the registration of transfer will occur until it actually does, purchases should thus exercise caution and patience before making decisions before their time.

Van Deventers & Van Deventers Incorporated - Conveyancing attorneys Cape Town

It is critical that the Offer to Purchase be drafted to protect the interests of both parties, being mindful that arrangements to do not always go according to plan.

Contact us for legal advice on the drafting of your Offer to Purchase documents.

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