Thinking of buying a bank repossessed property? Read this first.

Buyers of repossessed property can benefit, as banks tend to sell these properties for less than the open market value, to recover their costs quickly.

Around the Block reader, Nolene, asks: I’m interested in buying a bank repossessed property, but the problem is that the tenants have refused to move out since 2020. Is it wise to go through all the effort? The value of this property is R1.1m but the bank is willing to take an offer of R650,000. What troubles me is hearing that it’s the buyer’s problem to get rid of stubborn tenants. Please advise.

Marlon Shevelew, director at Marlon Shevelew and Associates Inc., says that the decision to purchase a bank repossessed property is commercial. There are often cases that arise where the legal position would appear to be straightforward, but in practice, the situation is much less clear. “Purchasing a repossessed property is one of these situations. What follows will be a discussion of some of the factors to bear in mind when trying to make this evaluation, and determining whether it is a worthwhile purchase to make,” he says.

Marlon Shevelew

Shevelew explains that there are several factors [permutations], which can impact on the desirability of a property. First, it is possible that tenants are not in unlawful possession or occupation of the property. If this is the case, evictions become substantially more complicated, since the central requirement of effecting an eviction is to demonstrate that the tenant is occupying the property unlawfully.

If there are lawful tenants, then their lease agreement must be honoured by anyone purchasing the property, as a result of the doctrine of huur gaat voor koop, loosely translated to mean an existing lease trumps a subsequent sale, or unless the property is sold at a sale in execution without a lease.

Furthermore, Shevelew says that if tenants have a valid lease, then this lease could always be cancelled in the event that the tenants fall behind on rental, or when the lease ends.

“It is a positive thing to have a tenant if the property is an investment. However, if the purpose of purchasing the property is primarily residential, then having a tenant who remains in the property, and who insists on remaining, can be is problematic.”

The eviction process must be taken into account when the tenant needs to be evicted, whether the tenant is in unlawful occupation because the lease has been cancelled, or because the property was sold free of lease at a sale in execution.

How does a bank repossessed property work in legal terms?

According to Shevelew, foreclosure by banks is a process with many stages:

  • There is the pre-litigation stage where banks engage with the borrowers/homeowners to attempt to assist them prior to instituting legal proceedings. This could entail, for example, offering to help them sell the property or extending the term of the loan – if the borrowers are creditworthy.
  • If the borrowers’ situation (arrears) is not resolved, the banks will begin litigation by issuing a letter of demand, a notice in terms of section 129 of the National Credit Act of 34 of 2005. In this notice, the borrowers are advised that they are in arrears, that they can apply for debt review, and the other statutory mechanisms of which they can avail themselves. They are also given time to rectify their breach and informed that if they do not do so, the bank will institute legal proceedings.
  • If the borrowers do not apply for debt review, and do not bring the arrears up to date, then summons will be issued, wherein the banks normally claim payment of the amount owing (in terms of the acceleration clause, which is inevitably contained in the loan agreement), and for the property to be declared specially executable.
  • Once summons is served, the legal route follows until judgment is granted (if the arrears are not settled prior or some arrangement made). Once judgment is granted (along with a declaration that the property be declared specially executable), then the banks arrange a sale in execution where the property is auctioned by the sheriff.
  • Until the auction is held, the bank can attempt to sell the property, and the purchase of the property in this situation will be on the terms agreed upon by the parties. Often, the bank will include in the agreement of sale that it is the responsibility of the purchaser to evict any occupiers. In such a case, the purchaser will be bound by any existing leases, and will have to cancel such lease lawfully, or wait for the lease to come to an end before beginning the eviction process.
  • When the property is sold by the sheriff, if the tenants’ lease predates the registration of the bond, then the property must be sold subject to the lease. In such a case, the doctrine of huur gaat voor koop determines that the tenants’ rights survive the sale, and the bank’s rights to recover their money are subject to the lease. If the lease was concluded after the bond was registered, then the property must first be put up for sale subject to the lease. Shevelew says that if the proceeds are not sufficient to discharge the borrowers’ indebtedness, then the bank can direct the sheriff to proceed to sell the property free of the lease. The position is set out in the following excerpt from Wille’s Principles 9th Edition, page 638: “The owner of hypothecated land may grant a lease over mortgaged land without the consent of the mortgage creditor but subject to the prior mortgage. When the property is sold in execution or upon insolvency, it must be put up for sale subject to the lease first, except in cases where it is apparent that the proceeds of the sale would be insufficient. If the highest offer is insufficient to satisfy the claim of the mortgage creditor, the property is sold free of the lease. [63] Van Bynkershoek Obs Turn I 563; Dreyer’s Trustee v Lutley (1884) 3 SC 59; Reed’s Trustee v Reed (1885) 5 EDC 23; Wiber v Mahodini (1904) 21 SC 645; Timm v Kay 1954 (4) SA 585 (T); Moldenhauer v De Beer 1959 (1) SA 890 (E); Shell Rhodesia (Pvt) Ltd v Eliasov NO 1979 (3) SA 915 (R) at 917, 921; United Building Society Ltd v Du Plessis 1990 (3) SA 75 (W) at 80; Lubbe v Volkskas Bpk 1992 (3) SA 868 (A) at 875; Velcich v Land & Agricultural Bank of South Africa 1996 (1) SA 17 (A) at 20-1.”

Shevelew explains that once the repossessed property has been sold, the purchaser will have to take steps to negotiate with or evict any occupiers of the property, if the property was sold free of lease. Or, the purchaser will have to abide by the terms of the lease, if the property was sold subject to the lease.

Evictions in repossessed property

The multiple award-winning firm, Marlon Shevelew and Associates Inc., are specialists at handling evictions to protect and enforce the law to the fullest extent possible.

Shevelew briefly outlines the eviction process, as below:

Step 1: Any existing lease agreement must be cancelled or should expire before the process begins. If there is no valid lease and the tenants are occupying the property unlawfully, the eviction proceedings can commence.

Step 2: An application is brought in terms of the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998 (PIE) with a date on which the application is to be heard. That application is then served by the sheriff.

Step 3: In the intervening period before the date on which the main application is heard, another application is brought in terms of section 4(2) of PIE, for an order authorising the delivery of the required statutory notice on the unlawful occupiers.

Step 4: This notice is then served, and it sets out the date on which the application will be heard.

Step 5: The application can, at any time be opposed. If it is, then the occupiers should file affidavits setting out the grounds on which they seek to resist the eviction.

Step 6: The main application is then heard, whether it be opposed or unopposed, and the court makes an order, either refusing to grant the eviction (if there isn’t a proper case made out) or granting it and setting a date by which the occupiers must vacate.

Step 7: If the occupiers do not vacate by said date, the sheriff will evict them.

Pros and cons of buying repossessed property

Shevelew points out that when evicting unlawful occupiers, the property will, in many cases, not have been maintained. More often than not, the full extent of the neglect will only be fully apparent once the occupiers have vacated.

“Almost invariably, the occupiers will not have money, making it impossible to recover the cost of repairs. Furthermore, where tenants have to be evicted, arrears for utilities are often part of the situation, and these can be very high,” he adds.

For anyone thinking of buying a bank repossessed property, Shevelew says a distinction needs to be drawn between: (1) a property purchased at a sale in execution free of lease, and (2) a property purchased prior to an auction or at an auction but subject to a lease.

“Where a property is purchased subject to a lease or prior to an auction, the tenants will likely be entitled to remain, provided they comply with the lease provisions,” points out Shevelew.

Moreover, it will not be possible to unilaterally change the terms of that lease. The terms of the lease existing at the time will have to be honoured by the purchaser. “Only once the lease expires or is lawfully cancelled, can eviction proceedings be considered,” he says.

In a case where a repossessed property is sold free of lease, the purchaser is in a stronger position legally, since the right of occupation of the occupiers will have been terminated. Shevelew says that such a situation can appear quite inequitable, especially where a tenant is up to date with rental payments. Such types of apparently unfair situations can lead to hotly contested and dragged out legal proceedings.

Additionally, there are the aspect of costs and time involved in evictions. Litigation is expensive and is a lengthy and uncertain business. “This is because the legal landscape changes all the time and the approaches by judges vary widely,” says Shevelew.

Shevelew adds, “On top of this, there is also the fact that whenever a decision is made, it can be appealed by the unsuccessful party. The effectiveness of such tactics is an unfortunate side-product of the thoroughness required for our legal system (and its eventual results) to have the legitimacy it needs.”

“Purchasing a bank repossessed property is essentially a commercial decision.” Shevelew says. Potential buyers should ask themselves the question: Is the purchase price and the property attractive enough to be worth the uncertainties and extra hurdles set out above?

Shevelew adds that sound evaluation can only be properly made with competent legal advice. “Such legal advice must be given with all the relevant facts pertaining to the repossessed property, since each situation is different.”

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Edited by Gudrun Kaiser

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Safrea or its members.

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