One of the most popular methods by which South Africans purchase immovable property is through a loan from a bank. This process involves a mortgage bond being registered over the immovable property as security by the bank to ensure that if a person fails to pay back the loan, the bank can rely on this as security in order to claim any outstanding money owed to them.

Due to current economic conditions, many South Africans are however struggling to meet the payments required on such home loans. In such instances where a debtor fails to meet the required monthly repayments, the question which is subsequently raised is whether a bank can be allowed to sell the debtor’s property at any price?

This pertinent question was raised in the matter on Nkwane v Nkwane and Others (36700/2016) [2018] ZAGPPHC 153 (22 March 2018). In this matter, the court was required to determine the constitutionality of Rule 46(12) of the High Court Rules which enables a creditor to attach and sell a debtor’s home without a reserve price being set. Because of this Rule, the bank can sell the property for any amount and then claim what it can for the outstanding debt.

Repossessed homes were sold for as little as R10 at auctions. This is possible because of court Rules which allowed properties to be sold at a price below or without a reserve price.

After proceedings had already begun, the Rules which were the subject of the dispute were amended in December 2017. In terms of the amended Rules, a court can set a reserve price in certain circumstances but should consider some factors before making such a determination.

The changes made to the Rules require the court to consider alternative options and if the property is the owner’s prime residence before selling the property on auction to cover the outstanding debt before issuing a warrant. This change made in terms of the Rules Board for Courts of Law Act of 1985, is set out in Rule 46A of the Uniform Rules of Court, and simply provides for a court to set a reserve price when a property is to be sold in execution. Rule 46A is a new addition to Rule 46. This Rule aims to regulate the manner in which a property is declared executable. The aforementioned steps are the process which a bank needs to follow when applying to court to declare a defendant’s primary residence executable.

Before reaching a decision, the court considered four main issues, explained below:

  1. Will a reserve price result in a home being sold for a higher price?
  2. Does a sale without a reserve price constitute an arbitrary deprivation of property?
  3. Does the fact that the Rules were subsequently amended mean that the previous Rules were defective?
  4. Do the Rules infringe upon the right to adequate housing?
  5. The decision will be appealed.

Also, the change in Rules gives effect to the Constitutional Court ruling in Jaftha v Schoeman and Others (8617/01) [2003] ZAWCHC 26; [2003] 3 All SA 690 (C) (25 June 2003), which declared that banks should only sell at auction as a last resort and should find alternative ways to sell repossessed properties.

Struggling debtors are protected in several ways by The National Credit Act 34 of 2005 (the “NCA”). The mortgage debtor can, for instance, apply for debt review and then possibly receive a new, more affordable payment plan.

The NCA, unfortunately, does not provide protection during the actual sale of the debtor’s property. Therefore, new Rules are welcomed with open arms to close all loopholes.

20 July 2018