Tenants should take care not to sign on with a distressed landlord, says Rawson MD

The number of distressed property owners in South Africa is still on the rise and residential properties are still being “taken back” by banks (and other creditors) at a rate that is almost unprecedented in the history of our country, says Tony Clarke, MD of Rawson Properties.

This situation, he says, can put the tenants in such properties at risk: they can lose their homes as a result of their landlords being unable to meet his regular monthly bond repayments.

The Cape Dutch legal principal on which SA law regarding this matter has traditionally been based, says Clarke, is “huur gaan voor koop”. This means that the tenant’s lease and welfare take precedence over other considerations. If the owner of the property is falling behind in his bond repayments the bank is expected to show restraint, at least initially as regards evicting the tenant and is expected to find some other solution.

In practice, says Clarke, what happens is that, when it is clear that the bondholder cannot meet his obligations, the bank will apply for a court order authorising the repossession of the home and the sheriff will then put it up for auction on the date advertised.

“At this first auction the home will be sold on the condition that the lease continues to be honoured by the buyer. If, however, the bank finds the bids at the auction to be unacceptably low, they can then ask for a second auction, with no conditions attached. The tenant in these situations will have to negotiate a lease with the new owner, failing which he has to vacate the property.”

The whole question of tenants’ rights and tenants’ suffering if evicted through no fault of their own has recently received attention in the US Congress, says Clarke.

Faced with the large number of homes on which the bondholders have fallen behind in their payments, President Obama, in May, signed the “Helping Families Save Their Homes Act”.

This specified that tenants of any repossessed homes have to be given 90 days to find alternative accommodation. This new law will remain in operation only until December 2012 – by when, it is believed, the US economy will have recovered sufficiently to make repossessions a fairly rare occurrence.

Clarke said that some form of legislation of this kind might be acceptable in South Africa but, he pointed out, such a law could be used by a defaulting bondholder to extend the period during which he remains in possession of the home: he has only to produce a signed lease, possibly with a fictitious tenant, to delay the auction by three months.

It has been suggested, says Clarke, that no bondholder should be allowed to sign a lease without getting it approved by the mortgagee.

“In theory this would seem to be a good idea. In practice I cannot see it being a workable proposition because the bank does not have the time and resources to go about approving vast numbers of leases,” said Clarke.

In the circumstances, said Clarke, to protect themselves, tenants signing a new lease should insist that the owner gives them written confirmation that up to the date on which they take occupation that he has been conscientious and thorough in maintaining his bond repayments.

“A check of this kind will often reveal that some bondholders are not reliable landlords and are in danger of losing their properties – avoid them at all costs.”

Article by: www.rawsonproperties.com