Buying to Build in a Development? Read This
There are many advantages to buying a vacant plot on which to build your dream house in a property development, but there are also potential risks to be managed. Discuss the pros and cons with your lawyer before you agree to anything.
“Build, or Lose the Plot”
A recent High Court case illustrates one such danger – not building on your plot within whatever time limit is specified. Often developers will impose penalty levies for such failure (the penalties must be reasonable, but will still hurt your pocket) but in this case the defaulting buyer stood to lose the whole property-
- In 2009 a buyer bought a residential plot in a large development for R560,000.
- A condition of the sale (recorded in the title deed) was that the buyer had to build a house within 18 months.
- If the buyer failed to build by the deadline, the developer could either extend the period or demand retransfer – in which latter event the buyer would get his money back, but without any interest.
- Twice, the property was on sold. Both times the sales lacked the developer’s permission as was required, but both times the developer regularised the sales by entering into new agreements with the buyers. The final buyer (in 2013) was a trust which had paid R840,000 to the second owner. The trust agreed with the developer to build within 9 months. The agreement was that if the buyer failed to build on time it would transfer the plot back to the developer against payment of the original R560,000 (not the R840,000 it had actually paid).
- The trust failed to build within 9 months and the developer asked the Court to order retransfer of the plot to it. It offered to repay the trust the full R840,000 it had paid to the second owner – a “rather gracious gesture” said the Court since the trust was only actually entitled to R560,000.
The outcome – “Bye-bye plot”
The trust’s defenses to the developer’s claim for retransfer all failed –
- The Court rejected the trust’s argument that the trustee signed the agreement without authority on factual grounds. In any event the trust had from day one been in default of the building requirement.
- Secondly the trust claimed protection under the CPA’s (Consumer Protection Act) unfairness provisions but the Court held that there had been no contravention –
- The CPA didn’t apply as there was no “transaction” (as defined in the CPA) between the developer and the trust, which had bought from an interim owner not from the developer; and anyway the obligation to build wasn’t “goods or services” supplied by the developer to the trust.
- Moreover, the agreement was not “unfair, unreasonable and/or unjust” – the trust wasn’t forced to sign, it understood what it was committing to, it was in a position to build, and there was no suggestion that the 9-month building period was unfair.
- Finally, the Court rejected the argument that the agreement violated public policy or was “contra bonos mores” (against good morals), commenting that “in general, parties should comply with contractual obligations that had been freely and voluntarily undertaken”.
The trust was therefore ordered to retransfer the property to the developer. It loses the plot itself, all capital appreciation in it, and 3 years’ interest on its R840,000.