South Africa: Sale In Execution Regulations Remain Anti-Competitive Despite Era Of Consumer Protection

Last Updated: 15 May 2013
Article by Jennifer Smit

Sale in execution regulations remain anti-competitive despite era of consumer protection

Distressed sales and bank repossessed sales in execution continue to be a desirable option for most bargain hunters such as savvy first time home owners and investors across the country.

Discounted prices on these properties, together with benefits such as 100% bonds being made available and low attorney costs, are some of the main attributes.

But despite this era of consumer protection, no one but the "bargain hunter" really benefits when these properties go under the hammer.

The main reason being that only Sheriffs of the High Court may currently conduct sales in execution of immovable properties. This prevents entirely any involvement on the part of debtor to increase the potential commercial value of the property to be realised.

Another party who suffers misfortune under the current regulations for prosecuting civil claims in the High Court is the claimant, otherwise known as the execution creditor.

On the formulation of the sale in execution regulations as they presently stand, and after the trouble and expense of successfully obtaining judgment in its favour, the claimant is left at the mercy of these regulations to attempt to make some sort of recovery against the defaulter, or execution debtor. The money raised is often not enough to cover the judgment debt in full.

The requirements of the sale in execution regulations

The regulations stipulate, among other requirements that the sale must be

  • conducted by a Sheriff (being the Messenger of the Court and the only party authorised to carry into effect the execution process pursuant to any judgment)
  • advertised in a newspaper circulating in the district in which the property is situated, and in the Government Gazette, not less than 5 days and not more than 15 days prior to the sale (which is not a great deal of marketing exposure);
  • conducted at the Sheriff's offices, and not at the premises in question;
  • without reserve;
  • managed according to the terms and conditions prepared by the execution creditor which correspond substantially with Form 21 of the Rules of Court.
  • These terms and conditions
  • require payment of a deposit of 10% of the purchase price in cash on the date of sale with the balance against transfer being secured at a later date (imagine producing, in cash, 10% of even R1million which is not an unlikely amount to be arrived at in the context of a sale in execution);
  • stipulate that in the event of a breach on the part of the purchaser, the sale may only be cancelled by a Judge on the production of a report by the Sheriff after the due notice to the purchaser (this entails a substantive application to Court to have the sale set aside);
  • do not contain a "voetstoots" provision; require that the property should be sold to the highest bidder for an amount of more than R1,00.

There is much one can say about the shortcomings of this procedure. This is especially true from the perspective of the execution debtor whose property is being sold without any opportunity afforded to engage, for instance, an auctioneer for purposes of conducting the auction in the hope of realising a better sale price.

Consumer Protection Act affects all auctions

The South African landscape changed drastically in 2011 when the Consumer Protection Act was introduced which stipulated a host of regulations affecting all auctions - including sales in execution.

The implication thereof was that all of the rules applicable to auctions convened by specialist commercial auctioneering houses which have all of the necessary skill, expertise, infrastructure and wherewithal, are now also applicable to Sheriffs.

What was already a difficult landscape, has become even more plagued with regulation. The plight of the Sheriffs in this regard appears to have been overlooked by the CPA regulations which glibly incorporated sales in execution

These regulations are burdensome and in several aspects irreconcilable with sales in execution as implemented in ordinary auctions. These regulations for instance do not cater for the role which a Sheriff would play in the context of an auction – the Sheriff is the custodian of the Court, not the agent of the execution creditor or the execution debtor.

In a standard commercial auction, the auctioneer is appointed on behalf of the seller to sell the item in question. The CPA regulations operate from this premise entirely, and fail to cater for the sheriff's unique position in the context of an auction. This distinction introduces nuances which have created huge uncertainty as to the legitimacy of sales undertaken by Sheriffs. The sales are thus, on a number of levels open to attack if they are non-compliant with the regulations.

The plight of the Sheriff

The plight of the Sheriff is exacerbated by the fact that whilst auctioneers are entitled to hefty commissions, the Sheriff is and remains restricted to the maximum commission percentages payable under the tariff guidelines contained in the Act. Being 6% on the first R30 000,00 of the proceeds of the sale, 3˝% on the balance thereof, subject to a maximum commission of R8750 (excluding VAT) in total. This is not a lot of money in the context of the sale of an immovable property, certainly hardly an incentive.

No reserve price

Probably the chief amongst current frustrations with the formulation of the existing regulations is the inability on the part of the execution creditor to implement a reserve price.

Sales in execution are uniformly recognised as an opportunity for bargain hunters to snatch a deal. It is highly unlikely that a property will ever realise its market value at a sale in execution.

Often an execution creditor is a banking institution with a mortgage bond registered over the immovable property as its security for the debt. Thus the only asset against which the execution creditor is in a position to execute and make a recovery is the immovable property in question.

If the property is sold for far less than its market value, it is extremely unlikely that the debt in question will be extinguished. In order to protect its interests, execution creditors have been known, as a matter of practice to attend the sales in execution which they have convened, in order to bid and purchase the property at a suitably low price.

The execution creditor then has to take transfer of the property, preserve and maintain the property whilst it markets it in the hope that in due course it will be able to sell it for a better value. In the process, the execution creditor incurs any transfer duty and associated transfer costs which are payable, and in addition to carrying on its business as (for instance) a lending institution, it must now preserve a property portfolio which it did not seek to establish in the first instance. This is grossly unfair.

A reserve price may not be the ultimate answer to all of the problems with the existing process, but it would be able to assist in a situation where for instance a third party approaches the execution creditor and makes an offer to purchase the property. I have just such a situation where a serious proposal has been made to purchase the property at a market related value. The offer is in all likelihood the best value which will ever be received in respect of the property in question. The execution creditor is however not in a position to entertain offers in respect of the property. The only person who can willingly concede to the sale of the property is the execution debtor who is seldom, in these circumstances, cooperative.

No commercial incentive

The only avenue available is the sale in execution process, and without being able to implement a reserve price, claimants will simply never be able to achieve the price which has been offered to it on the open market. Certainly if this interested buyer attends the sale in execution independently, what possible commercial incentive would the buyer have to bid at that value or higher?

No beneficial outcome is achieved in a situation where a sale in execution realises less than market value for the property

  • the execution debtor is out of pocket because his judgment was not settled in full, and the only asset which he had was sold for less than it was worth (even if he deserves this miserable outcome) – this means that the execution debtor may be faced with subsequent garnishee orders in order to settle the balance; and
  • the execution creditor has his hands tied behind his back whilst the only asset which he might hope to make a recovery against, is flogged before his eyes for an amount exceeding R1,00.

Only bargain hunters benefit

To add a sting to the tail, Sheriffs sales in execution have been known to be fertile ground for syndication with buyers colluding and agreeing not to bid against each other in the hope that the price is not driven up.

The only party therefore benefiting from this outcome is the bargain hunter.

It is a travesty that a procedure exists which effectively and arbitrarily deprives an execution creditor of the right to make a proper recovery against the only assets against which it might make a recovery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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