Buying property as a juristic person under the NCA

[duncan drennan]

I was waiting for this one, I was actually expecting trusts to pop up, but CCs are probably less complicated than trusts.

TW notes that the NCA does not apply to mortgage credit agreements where the loan is registered in the name of a close corporation, private company or trust with more than two trustees.

"True to the Townhouse Warehouse culture, we are offering all investors who purchase a unit from our next launch (Los Alamos) onwards a free registered Close Corporation. This will enable the investor to purchase and apply for a bond in the name of the Close Corporation," writes TW.

Clients are told that if their bond applications are unsuccessful, a CC registration fee of R295 will be deducted if they request their deposit to be refunded. "The CC will however remain the property of the investor," notes TW.

FNB head of retail credit Mike MacMillan says that close corporations are excluded from the ambit of the NCA, so the specific affordability and over indebted aspects that currently need to be analysed and investigated by the banks to be compliant with the Act, do not apply.

Full article on MoneyWeb

Is this correct? The guy at FNB seems to believe that juristic persons fall outside of the ambit of the act.

4. (1) Subject to sections 5 and 6 (deals with incidental credit agreements and juristic persons), this Act applies to every credit agreement between parties dealing at arm's length and made within, or having an effect within, the Republic, except-

(a) a credit agreement in terms of which the consumer is-

(i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7(1) (currently set at R1 000 000.00);

----

Limited application of Act when consumer is juristic person

6. The following provisions of this Act do not apply to a credit agreement or proposed credit agreement in terms of which the consumer is a juristic person:

(a) Chapter 4 - Parts C and D;

(b) Chapter 5 - Part A- section 89 (2)(b);

(c) Chapter 5 - Part A- section 90(2)(o); and

(d) Chapter 5 - Part C.

Chapter 1 of the National Credit Act

CH4 Part C relates to credit marketing practices
CH4 Part D relates to over-indebtedness and reckless credit.
CH5 Part C relates to consumer's liability, interest, charges and fees.

[Dave A]

FNB head of retail credit Mike MacMillan says that close corporations are excluded from the ambit of the NCA, so the specific affordability and over indebted aspects that currently need to be analysed and investigated by the banks to be compliant with the Act, do not apply.

The only flaw in that statement by my understanding is the failure to mention the R1 million asset requirement.

[Eugene]

Juristic Persons above or equal to the Section 7(1) threshold (R1 million) are excluded from the NCA. Should the asset value or annual turnover of a consumer who is a juristic person equal or exceed the Section 7 (1) threshold then the Act will not apply. Should the consumer consist of more than one related juristic person regard is had to the combined value.

Juristic persons are deemed to be related if:
• One of them has direct 'or indirect control over the whole or part of the business of the other; or
• Another person has direct or indirect control over both of them.

"Juristic person" includes a partnership, association or other body of persons, corporate or unincorporated, or a trust if- .
• there are three or more individual trustees; or
• the trustee is a juristic person

In the above scenario according to the report townhouses are sold around R500 000.00 which falls short from the section 7(1) threshold. If you buy a shelf CC and the only asset would be the townhouse of less than 1 mil, for sure you fall within the ambit if the NCA. If you buy property in excess of R1 mil it is a different story as it will fall outside the NCA. I will look into the fineprint and do some investigation...

See post 8 below for more details.

[Eugene]

Strangely enough I could not access the websites www.townhousewarehouse.com or www.townhousewarehouse.co.za when Googled.

Seems that they are also operating under www.mortgagewarehouse.co.za

I however saw the following on the cached page (dated 13 August 2007): Disclaimer:
Please note that TownHouse WareHouse is only a marketing institution on behalf of property developers and under no circumstances do we make any representation as to a prospective buyers ability to receive a loan from a financial institution. We have no legal obligation at all until a valid offer to purchase has been signed by both the purchaser and the developer. Any legal obligation from our part will be limited that to that of an estate agent only. All warranties will be provided by the developer and this web site does not serve as an annexure to any offer to purchase signed between a purchaser and a developer. TownHouse WareHouse does not guarantee the availability of any property published on our web site.

By the way, I also note that they are operating a type of MILLIONAIRES CLUB - anyone see lights flashing?

[Dave A]

There used to be a nightclub called Millionaires in Durban years ago which definitely did have flashing lights

But back on topic - From the story quoted by Duncan

The company also has a scheme called the Millionaires Club, where clients earn cash and other incentives for successfully introducing new investors.

I expect it was inevitable that the NCA would spawn new industries. Some to execute parts of it, and others to circumvent it.

[duncan drennan]

The only flaw in that statement by my understanding is the failure to mention the R1 million asset requirement.

This is the thing that also first popped into my mind, and I thought, well obviously he is wrong, but then I went to double check in the NCA. That is when this stood out,

4. (1) Subject to sections 5 and 6

which says that certain sections of the act do not apply, which I read to mean at all, regardless of asset value. Now, what I don't know is what the content of those excluded sections are, but they do include the bits about reckless credit and over indebtedness � so I'm not really sure what to make of that.

[Dave A]

Hmm. You know what - I'm starting to wonder if we're going about this the wrong way to really get a handle on this beast.

I think what we need is a decision tree or more. Probably the best tool for this is the wiki.

We take different starting points, such as

• type of service/product,
• how it is paid/financed, and
• the nature of the debtor

and then work through all the dividing decision branches from there.

Otherwise I think I'm going to go insane.

[Eugene]

Duncan - you had me up most of the night pondering on this issue. Often we we try and understand a difficult piece of legislation we try to over-interpret of what is quite simple and sometimes miss the most obvious parts. I discussed the issue with a collegue of mine and it figures: 2 lawyers, 2 different opinions.

The application of the Act is regulated in terms of Sections 4, 5, 6 and 7 and is two pronged. It applies to certain persons and to certain credit agreements. A wide variety of credit agreements are covered by the Act. The Act applies with certain exemptions to inter alia an overdraft, credit card, personal loan, mortgage bond, secured loans, rendering .f service, purchase and sale, lease involving movables and credit guarantees.

The Act applies to all consumers who are natural persons irrespective of value & small juristic persons i.e. those with a turnover or asset value of less than R1 million. Section 1 defines a juristic person as including a partnership, association or other body of persons, corporate or unincorporated, or a trust if there are three or more individual trustees; or the trustee is itself a juristic person but excludes a stokvel.

A Section 9(1) large agreement is excluded if:
• The consumer is a juristic person
• The asset value or annual turnover of the consumer is below the Section 7(1) threshold.

A "large agreement" is explained in Section 9 (4). A credit agreement is deemed to be a large agreement if it is:
• a mortgage agreement; or
• any other credit transaction where the principal debt falls at or above the higher of Section 7 (1) (b) thresholds.

Furthermore, like you mentioned section 6 indicates that the following sections are not applicable to juristic persons:

(a) Chapter 4 - Parts C and D (dealing with credit marketing practises and over-indebtedness and recless credit);

(b) Chapter 5 - Part A - section 89 (2)(b) (make an offer to enter into a credit agreement, or induce a person to enter into a credit agreement, on the basis that the agreement will automatically come into existence unless the consumer declines the offer);

(c) Chapter 5 - Part A - section 90(2)(0) (the implication that interest rates are variable); and

(d) Chapter 5 - Part C (dealing with the consumers liabilities, charges and interest charged and maximum interest rates that may be charged).

Having looked at it, it seems that the loophole is section 4(1)(b) which states that a large agreement in terms of the NCA (sec 9(4)) is excluded if the transaction [mortgage] is less than 1 million. These guys may well be right in offering mortgages of R500 000 in a CC.

Interestingly when a person buys a CC and offers surety on behalf of the CC, then the surety (in the above scenario) will also fall outside the ambit of the NCA - see section 4(2)(c). If the banks will forfeit their priviledge of doing an assessment is another question...

Duncan, thanks for pointing this post out - it might be valable to consider in future property purchases. Will run the scenario through to some more of my collegues and see what their commenst are.

[duncan drennan]

Duncan - you had me up most of the night pondering on this issue.

I hope you get a chance to on your desk today

For clarity for everyone, here are the sections Eugene is talking about,

4. (1) Subject to sections 5 and 6 this Act applies to every credit agreement between parties dealing at arm's length and made within, or having an effect within, the Republic, except-

(b) a large agreement, as described in section 9(4), in terms of which the consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7(1);

So that part says that any large agreement by a juristic person is outside of the ambit of the NCA. This is the definition of a "large agreement"

9. (1) For all purposes of this Act, every credit agreement is characterised as a small agreement, an intermediate agreement, or a large agreement, as described in subsections (2), (3) and (4) respectively.

(4) A credit agreement is a large agreement if it is-

(a) a mortgage agreement; or

(b) any other credit transaction except a pawn transaction or a credit guarantee, and the principal debt under that transaction or guarantee falls at or above the higher of the thresholds established in terms of section 7(1)(b).

So a mortgage agreement is a "large agreement" regardless of the value. Hence, any mortgage agreement entered into by a juristic person falls outside of the ambit of the NCA. Eugene, is that correct?

[Eugene]

A mortgage is ALWAYS a "large agreement" as contemplated in the Act. It seems that if it is a juristic person, it will always fall outside of the Act - now beware: if you and your wife buys property (if you are married with an ANC) it will be construed as not dealing at an arm's lenght.

[duncan drennan]

What are the currently thresholds dealt with in Section 7(1)?

[Eugene]

Threshold required in terms of section 7(1)(a)

The threshold required to be determined in terms of section 7(1)(a) of the Act is R1 000 000.00.

Threshold requirement in terms of section 7(1)(b)

(1) The lower threshold required to be determined in terms of section 7(1)(b) of the Act is R15 000.00.

(2) The higher threshold required to be determined in terms of section 7(1)(b) of the Act is R250 000.00.

Threshold required in terms of section 10(1)

The threshold required to be determined in terms of section 10 (1)(b)(i) of the Act is RI5 000.00.

Threshold required in terms of section 42(1)

The threshold required to be determined in terms of section 42(1) of the Act is R500 000.00.

GG : NOTICE 713 OF 2006

[duncan drennan]

When you look at these two clauses, it almost seems like there is a typo.

4. (1) (a) (i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7(1);
--
4. (1) (b) a large agreement, as described in section 9(4), in terms of which the consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7(1);

[Eugene]

I agree Duncan and cannot understand the rationale behind it (apart from being a loophole). I will see if I can source some research papers done prior to the Act being introduced to see if one can understand why this provision was put in.

[duncan drennan]

Maybe it actually makes a lot of sense in that it empowers actual companies (i.e. people actually trying to carry on a trade) to purchase property. Think about a small startup that needs to invest in capital and premises. They have nothing (except debt) to begin with. The NCA could potentially stunt business growth if applied to this situation. The government (maybe?) has effectively said that a company can live or die by its own sword in this regard.