It seems that the outcry in the press was unfounded. One of our correspondents, Christiaan Jansen, provided us with this information on the 20th July 2011:

I went to have a look at the “MUNICIPAL PROPERTY RATES AMENDMENT BILL” as it seemed this might have a big effect on us going forward. The point of contention seems to be all about point 2(o):

( o) the substitution for the definition of “residential property”
of the following definition:
“‘residential property’ means property of which the
primary use or permitted use is for residential purposes,
excluding such property used to accommodate persons other
than the owner for gain;”;

The deputy minister for the department responsible (Cooperative Governance and Traditional Affairs) Yunus Carrim appeared on the Money Show on Talk Radio 702 last night to clarify the confusion caused by our objective friends in the media:

http://www.702.co.za/onair/heardonair.asp?action=presentersearch&presenterid=46
THE MONEY SHOW 18 July 2011 6:10 PM
Municipal property rates
Yunus Carrim has clarified that people who rent out second properties will not be charged commercial rates. Only businesses that are run from residences will be subject to commercial rates.
Guest: Yunus Carrim
Organisation: Cooperative Governance and Traditional Affairs
Position: Deputy Minister

The deputy minister also said that they would clarify the wording of this draught bill before it is sent to department – there would also still be a lot of consultation before this ever gets approved into law.

In the end this just goes to show that we should take note of what is reported in the media but always try and find out the whole story ourselves before making up our mind or taking action…

This is an extract from Ben Groot Attorneys August newsletter ( contact  Ben Groot Attorneys)

This month, we discuss the proposed Local Government: Municipal Property Rates Amendment Bill (“the bill”), which has been published for comment in the Government Gazette, and which has received quite a bit of media attention. We do not intend to comment on the bill and whether it will be good or bad, but merely want to advise landlords on how best to protect themselves against it, should it come into operation in future.

Currently the act defines “property” as being “immovable property registered in the name of a person, including, in the case of a sectional title scheme, a sectional title unit registered in the name of a person” The proposed bill intends to insert a definition for business property, being “( a) property used for the activity of buying, selling or trading in commodities or services and includes any office or other accommodation on the same property, the use of which is incidental to such activity; or (b) property on which the administration of the business of private or public entities takes place;"

Under the proposed new definition, the provision of rental accommodation obviously constitutes a service, hence the comments from various bodies that properties being let out will be levied according to business use, which is on a substantially higher scale than residential properties. Government, however, has denied this interpretation, and said that it merely intends to levy rates against bed-and-breakfast establishments, small hotels and the like. Whether that is indeed the case, remains to be seen.

Whether or not the amendment is passed in its current form, or again amended before it comes into operation, the important question remains as to how a landlord can protect him- or herself against these type of rates and other levy increases.

In terms of common law, a landlord is responsible for any rates, levies, taxes or the like, levied on the property or the rental income. Therefore, the landlord is normally responsible for any municipal rates and levies.

These standard provisions, may, however, be changed if agreed to between the parties, in other words in the lease agreement. Therefore, if a lease agreement is silent on who is responsible for the payment of municipal rates or any other levies or taxes on the property, the landlord will be liable for those costs.

Accordingly, it is important for landlords to protect themselves against possible future rates increases or other levies or taxes that may be implemented, so as to realise the expected income from the property being rented out.

Therefore, a proper clause dealing not only with rates and taxes, but also any possible future rates, taxes or levies is to be included in the lease agreement. And, because most tenants will not now agree to an addendum to the existing leases (although one can try), it is important to include such a clause in any future lease agreements. Further, it will then be of the utmost importance to ensure that, should a current tenant remain in occupation of the leased premises at the end of the current lease term, the new lease agreement is signed.

Should you require any assistance with drafting such a clause for your existing lease agreements, do not hesitate to contact us.

We are a young, vibrant attorneys’ firm based in Cape Town’s Northern Suburbs. We specialise in Labour Law, Law of Landlord and Tenant, Sectional Titles, Collections and Insolvency. Our mission is to provide a legal service to our clients which is ethical, reasonably priced and commercially viable.

If you have concerns in any of the abovementioned areas, please contact us. We will strive to assist you in resolving your problem with passion. That is why our motto is “Your matter – Our passion”.

Prospective purchasers for small businesses are often of the opinion that bank funding to finance the purchase will be as easy as opening a savings account.

A bank manager once told me that the bank is not keen to own and operate businesses therefore they are not keen put themselves at risk to finance businesses. Banks will rather finance fixed property or motor vehicles which has a resalable second-hand value.  Businesses often own assets which has a very low or even no second-hand value.

To purchase a business which has no goodwill will be of no use. Such a business may tend to pose more of a risk in its lease and other liabilities and has no value other than the second-hand value of it's equipment and assets.  On the other hand, if you pay for goodwill and the business fails after the purchase, every cent that you have paid for goodwill is lost. This is the reason why banks will never finance goodwill. Determine the value of a business ………click here

With a financing application, the bank will only consider the business’ income in the application if the business has financial statements for at least 2 years, management statements for the interim period after the last financial statements and 12 months bank statements to proof cash flow and income. A proper cash flow projection for the business for the next 12 months might also be a condition of the bank. They will usually ask for a signed sale agreement indicating the conditions of the sale. Banks will normally not approve business finance to an amount exceeding 50% of the asset value of a business. 

Should the purchaser not be able to provide all of the above, the bank will only consider his application on grounds of other income and surety.

The typical buyer for a small business will either be a cash buyer, or someone who has access to surplus funds on an existing home loan.

More:  Determine the value of a business ………click here

As we always try to source properties with the highest possible rental yield for our investors, it was inevitable to include repossessed property to our offerings. The low purchase prices compared to market related rent makes so much sense. The downside is that in the case of sectional title property, the pattern of nonpayment of bonds will be mirrored in the nonpayment of levies to the Body Corporate. I even made the mistake of selling a unit in a complex where the Body Corporate was under administration. This was a mistake on my side as I accepted the seller’s word that all was sound with the body corporate. Fortunately the transaction could be cancelled and I have learnt my lesson.

Our experience is that with the larger sectional title developments the outstanding levies rapidly accumulate to hundreds of thousands or even into a million rands, but when managed properly by the trustees and the support of a good managing agent they are usually able to save the finances of the Body Corporate.  

It therefore makes sense to purchase repossessed sectional title property at below market value even if the body corporate experience financial strain. The following deciding factors could be of value:

1.       Did the balance of the outstanding levies increase or decrease during the past 6 months?

2.       Is there a month end surplus on the trade account of the body corporate?

3.       Were capital investments of the body corporate increased or at least stable during the past year?

It might sound weird for a body corporate to suffer from arrears and to have positive results on the above criteria, but it is fairly possible to obtain such in the larger developments. I recently sold a unit in a complex where the outstanding balance older than 90 days was R800 000 plus, but the balance on their investment account was increasing monthly, with a current balance of R270 000 and they closed books during the past six months with a monthly surplus of R50 000 on average.

A further remedy is that when the sale of property on auction eventually happens, all outstanding levies to the property must be paid before transfer in the deeds office takes place. Though a lengthy process, it slowly shrinks the older balances on the outstanding levies account.

Being aware of the risk and bearing the above in mind, there are excellent buys in distressed properties at present.

Michelle Dickens wrote on the subject on her TPN Rentblog
http://tpnrent.blogspot.com/2010/12/landlords-silent-risk-complex-in-red.html

Surely the Consumer Protection Act Regulations which comes into effect in April this year will change the normal ways of doing business as we know it. It appears as even the payment of referral commission for qualified leads as being practiced at present will be against the law and that the term of lease agreements could be one sided reduced to a 20 days’ notice period.

It will have a definite effect on the future drafting of contracts and lease agreements. It is best for us in the industry to seek the assistance of attorneys experienced in the field and who are presently studying the existing and proposed legislation.

Download a copy of the Consumer Protection Act,2008 (Act 68 of 2008) here

Download the Proposed Consumer Protection Regulations, 2010: For public comment here


Marlon Shevelew is specialising in this field at present. View his web page on the CPA

Michelle Dickens, MD of TPN wrote a comment in her rent blog on the subject.
 

Have you noticed in the media what has happened to some property investment companies and syndication schemes in the present economical times? ..............Why? These businesses went bankrupt because the companies held no equity in their developments themselves. They typically sourced capital from investors to apply it to property developments and even bonded the remaining balance of their assets to the banks. When the economy was showing strong growth, these companies made very nice profits for themselves from the equity of their investors. When the economy turned down, the equity in these property investments were diminished and the first to loose their capital were the investors.

When you invest in your own property, you are in control of your investment. Your equity (capital Investment) is in your own property and the surety (property title) is registered in your own name. You cannot loose because you are part of an investment scheme where the fund or syndication has lost its equity.


How many people do you know who are wealthy from having invested in annuities or cash deposits?
and then.......... How many wealthy people do you know that don't own property?

There was a time when agencies charged 10% commission. As agencies were constantly recruiting new agents to increase their market share, competition in the industry was created from within. As more agents were competing for the same stock, one of the issues that occurred was commission rates that were being discounted to obtain listings. Another issue was that agents listed property deliberately over market value just to obtain the mandates.
About 6 years ago, commissions were at 7.5% when the IEAA tried to fix this rate for their members, while 5% is pretty much the norm at present. Some privateers advertise ridiculously low commissions, but they don't remain in the market for long and they never create the possibility of a budget to go big. Every business has operational costs to cover and employees have to make a living from the business. The lower the commission rate, the more strenuous it becomes for a business to survive especially in the present economical times and when lower priced property is moved.

In order to compensate for low earnings from low priced properties, one might consider to apply a minimum commission of R25000 to R30 000 per transaction, irrespective of price for all properties sold below R600 000. (It is the same work to sell a property for R300 000 than it is to sell for R900 000). By properly explaining this principal to both sellers and purchasers, you should not find any resistance in applying it. This principal ensures that the agency can maintain your businesses' profitability and that you do not suffer an imbalance between income and operational cost.

View Source Articles & Legislation  

Due to recent changes and interpretations of the following legislation:
DEBT COLLECTORS ACT, 1998 (ACT 114 OF 1998)
as amended by the Judicial Matters Amendment Act , 2005(Act 22 of 2005)
and the Judicial Matters Amendment Act, 2008(Act 66 of 2008) 
everyone who is rendering a debt collectors function, have to be registered with The Council for Debt Collectors. Overdue payments of leases (not paid by the 1st of a month) are viewed as debt and collecting such from tenants falls within the scope of debt collecting.
Estate Agents are not Debt Collectors. We at InCommercial Property Services found a solution to this by signing up with the credit bureau Tenant Profile Network (TPN), who is also registered as Debt Collectors. They render the service of Debt Collecting on behalf of their subscribers in the Estate Agency industry. Any requests for late payments are done through TPN instead as from our estate agency offices. TPN do however also list payment patterns of tenants to their credit profile. For this reason, the future payment pattern of rent payments will have a direct effect on the tenants rating at the credit bureaus. View www.tpn.co.za

View Source Articles & Legislation