July 2011

On 9 June 2011, the Department of Co-operative Governance and Traditional Affairs gazetted the "Local Government: Municipal Property Rates Amendment Bill". The Bill was published "in response to complaints from the public and some municipalities over the years about the lack of clarity of aspects of the original Act and difficulties in implementing it." The date for final comments was 22 July 2011.

About a week ago, the media picked up on the Bill, and the definition of residential property, which reads as follows: "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."

So, on the face of it, but-to-let property is included in the definition, and the media reports about the increase in rates were warranted. But, the comments, and sometimes inference, that Government was acting in a sinister way by trying to sneak the Bill through by only "giving one week for comments", were not.

Widespread consultation preceded the gazetting of the Bill. Public hearings were held in April last year in all the provinces, and were attended by stakeholders such as ratepayers' organisations, agricultural unions, business chambers, state owned enterprises, community organisations, traditional leaders, municipalities, and individual ratepayers. And the publication of the Bill in the Government Gazette did not take place "last week", but on 9 June 2011.

Some of the reports/comments on the implications of the definition of residential property were:

• That it could sound the death knell for the residential rental property market.
• Warning that the amendments pose a serious threat for the rest of the housing market - and could put property prices under serious pressure.
• That people renting property would probably also have to pay more.
• That investors who bought property to let could flood the market with their properties because the additional expense no longer makes it worthwhile to let the property, as yields would drop. These units could further swamp the property market, which already has a significant oversupply of houses. Prices would come under pressure.
• That owners could try to pass the rate increases on to tenants, making rentals unaffordable.

And, organisations such as the DA and AfriForum issued press statements condemning the proposed amendments.

The reaction of YDL's database ranged from fears that this signalled a shift in Government policy with regards to property investors, and that it was a precursor to Zimbabwean style land grab policies, with investors wanting to sell their assets, to others saying that they'll simply pass on the increases to their tenants. Others felt that they'd pass half the increases on, and absorb the other half.

Another argument put forward by a member of the public, Linda Horsfield, was that the amendments would contravene the constitution. Section 229 (2) (a) states that the power of a municipality to impose rates on property may not be exercised in a way which materially and unreasonably prejudices national economic policies. As many lease agreements contain a clause that the tenant is liable for any increase in rates, the proposal would send rentals sky-rocketing and prevent tenants from saving enough to be able to purchase their own home in future. Section 26 (2) of the constitution states that everyone has the right to have access to adequate housing, and that the state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of this right. "Imposing a punitive wealth tax on private individuals who are providing accommodation which the various levels of government are not able to do certainly does not achieve the progressive realisation of the right to access adequate housing."

The point was also made that government policies would be misaligned. For example, the UDZ incentives give tax relief for inner city developers/owners, whilst the proposed change in the rates regime would act as a disincentive.

Some made the point that the amendments would decrease rental stock even further (buy-to-let purchases have already dropped from 25% to 7%, according to the FNB Property Barometer), so forcing government to supplement rental accommodation (also for the middle class).

Pierre Heistein, convenor of the UCT Applied Economics for Smart Decision Making Short Course, argues that "the problem is not that the government would like to raise taxes, or spread wealth. The problem is the contradiction of its own policies. On one hand, it loosens monetary policy and reduces income tax, to allow greater spending and investment, but on the other it loads us with complicated road tolls, and now increased housing tax. At the end of the day, it is not just an inconvenient shaving of wealth from the rich, but a choking grip on the flow of the entire economy that will go on to affect all of its cornerstones, including consumption, employment, education and growth."

However, only 18 July 2011, Deputy Minister Yunus Carrim issued a statement in response to the widespread condemnation. He said "We understand, especially in these difficult economic times, and with increases in the cost of municipal services, that house-owners are anxious about property rates. But contrary to media reports on the draft Bill, people who own more than one residential property will not have to pay commercial rates on their additional residential properties. The intention is to ensure that guest-houses, bed-and-breakfast establishments, small hotels and the like pay commercial rates. If necessary, we will amend the draft to make this clearer before submitting the Bill to parliament."

"Essentially, the Municipal Property Rates Act is being amended to make property rating simpler, more transparent, more uniform and easier to implement."

"The only policy shifts in the Bill are:

• Properties used for trading in and hunting of game will be regarded as agricultural property and subject to rates in the interests of equity and fairness.
• There needs to be greater uniformity across municipalities in rating houses owned by recipients of old-age pensions and disability grants.
• Aspects of public service infrastructure will be excluded from property rates because of their contribution to the country's developmental needs."

Latest media reports have taken the line that Government is now trying to backtrack as a result of the uproar.

However, this is probably slightly disingenuous. Government clearly erred in that their drafting was sloppy, as measured against their stated intention. Their intention is to include certain types of residential property that are used for commercial purposes such as guest houses, and not buy-to-let properties. But, the definition does not manifest their intention. As such, the outcry was - on the face of it - justified (except for the allegations that Government tried to sneak the legislation through Parliament). But, Government makes the very valid point that the media and commentators never bothered to check with them as to their intention (audi alteram partem?), and that the uproar could have been avoided. Commentators say that the Bill contains many other examples of poor drafting, so creating uncertainty and/or negative implications for property owners and municipalities.

Taking Government at its word, a tightening of the definition to exclude buy-to-let properties is thus expected. Until the new definition is published, some questions will remain. The latest media reports asks Government for clarity as to how holiday homes, which are let from time to time, will be affected by the amendment, as well as the status of blocks of flats and townhouse developments owned by individual investors.

Malanshof, Randburg (scroll below to see photo)
This was a purchase of a 3 bed 2 bath house in the middle class suburb of Malanshof, situated close to the Randburg Hoërskool. The property was purchased for R895,000, and sold for R1.3m. The property was sold within 2 weeks of purchase. The whole process, including transfer to the buyer, took just 2.5 months.

The investor’s net profit ratio was 16.07% over 2.5 months, meaning a return of over 75% per annum (assuming that the proceeds could have been reinvested at the same rate of return, but without taking compounding into account).

But, the investor funded all costs from a facility. His total interest bill came to R11,997. His profit was R167,042. Therefore, his return on equity over 2.5 months was a staggering 1,392.39%! (167,042/11,997). Annualised, his return would have been 6,683.47%!!

Had the investor funded the purchase by means of a 90% bond, his net return on equity would have been over 70%, in just 2.5 months. Annualised, his return would have been over 330%! (based on the same assumptions as above).

Blairgowrie, Randburg (scroll below to see photo)
We bought a 3 bed 2 bath house for R810,000, and sold it for R1,150,000. The transfer to the buyer took place 4 months after purchase.

Our investor made a net profit of R124,337, with a net profit ratio of 13.23% over 4 months. Annualised, this means a return of almost 40%!

But the investor funded the purchase from her primary home loan, so her interest cost came to R18,783. This means a return on equity of 661.98% over 4 months (124,337/18,783). Annualised, her return would have been 1,985% (assuming that the profit was re-invested at the same rate of return).

Had the investor funded the purchase by means of a 90% bond, her net return on equity would have been 67.68%, over just 4 months. Annualised, her return would have been over 200%! (based on the same assumptions as above).

Sundowner, Randburg (scroll below to see photo)
We bought a 4 bed 2 bath house for R837,500 . After spending R306,221 on substantial renovations, we sold the property for R1,700,000. The transfer to the buyer took place just under 12 months from date of purchase.

Our investor made a profit of R223,819, with a net profit ratio of 25,4% over this period.

But the investor funded 85% of the original purchase with a mortgage loan. Her total cash contribution, inclusive of all costs, and interest charges, was therefore R465,898. This means a net return on equity of 48%! Whilst this return is not as spectacular as the first two examples, it remains a very decent return. At YDL we would simply ask the question, “where else can you expect to get a 50% return on your money?”

General comments
Buy-to-let properties can be bought at yields of 8 to 10%, meaning that your property should be cash flow positive from Day 1, or slightly negative, depending on how the deal is financed!

But, as reported elsewhere in the newsletter, the number of sales in execution has fallen substantially over the last year. So, such stock is drying up.

But, according to the FNB Property Barometer, 25% of buyers are selling in order to downscale, as they are suffering financial pressure. Properties through other channels are available, but typically at lesser discounts.

However, even at lower discounts, excellent buy-to-let deals are available, even at purchase prices of 75% to 85% of market value. As reported elsewhere in this newsletter (FNB Property Barometer), rental demand is expected to be quite solid over the short to medium term. Talk to YDL today to find out how we can help you to access these opportunities.

Having said that, the debt levels of South African consumers are very high, and the market remains vulnerable to external shocks, and/or interest rate hikes, so more distressed stock could come onto the market if and when that happens. But, this is not certain, so we’d urge investors to join the YDL Property Partner Programme now.

Contact YDL now for a free consultation where we will explain how we can help you to obtain similar deals. Call us on 011 465 7356 or email us on info@ydl.co.za, or sms us on 083 389 0321, or click here for a free consultation.

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Summary of these deals

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According to the National Credit Regulator’s consumer credit market report for 2010, there were about 1.8 million mortgage accounts with a total outstanding balance of R760 billion at the end of December last year. For the quarter to March 2010, 87.76 percent of the mortgage accounts were up to date, and this improved to 89.08 percent for the quarter to December 2010.

The proportion of accounts more than 120 days in arrears was five percent, or 90 760, for the quarter to March 2010, and this improved to 4.74 percent, or 85 920, for the quarter to December 2010.

Of the four major banks – Absa, First National Bank (FNB), Nedbank and Standard Bank – only Standard reported that sales in execution increased over the past year.

“The financial stress consumers are facing has led to more sales in execution, and we expect this to continue for some time,” Funeka Ntombeka, the director of home loans at Standard Bank, says.

But figures from Lightstone, a company that researches the property market, show an overall decrease in sales in execution over the six months to March this year.

Gavin Opperman, the chief executive of Absa retail bank, says while there are still heavily entrenched debtors with poor credit profiles, more consumers are beginning to meet their debt repayments.

According to FNB, sales in execution account for only 0.5 percent of the bank’s home loan client base.

“About 92 percent of our home loan accounts are in good standing. While the number of arrear accounts that are scheduled to proceed to sales in execution varies at 20 to 30 per day, this number often falls to zero as non-performing loans are processed and then cleared,” Vincent Tadden, the head of collections for FNB Home Loans, says.

More homeowners are settling their home loan accounts before a sale in execution or are making arrangements to pay off their arrears over a reasonable period of time, Tadden says.

John Loos, a strategist for FNB Home Loans, says the FNB Estate Agent Survey provides an idea of the extent of homeowners selling “voluntarily” due to financial stress.

“As at the first quarter of 2011, consumers selling in order to downscale due to financial pressure was estimated at 22 percent of total sales. Although this is lower than in the second quarter of 2009, when the percentage of consumers selling due to financial pressure peaked at 24 percent, it remains a high statistic,” he says.

Consumers are finding ways to stay in their homes and are negotiating repayment terms with banks as opposed to selling their homes or facing a sale in execution, Loos says.

Debi Misura, the general manager of Nedbank’s home loans collections and recoveries department, says the number of sales in execution has dropped significantly as a result of the bank’s interventions to help distressed homeowners.

Rael Levitt, the chief executive of Auction Alliance, says the banks are aggressively using their own channels, instead of sales in execution, to sell the properties of homeowners who can no longer afford their mortgage bond repayments.

Levitt says the banks are more cautious than they were in previous years about granting residential mortgage bonds, particularly at the lower end of the market, because consumers’ debt levels are high and lower-income consumers are more likely to default on their loans.

A Constitutional Court ruling earlier this year declared that only a judge can authorise a sale in execution (see “Judge must weigh up the facts before ordering a sale in execution”, below).

Levitt says that previously, when a judgment was taken against a defaulting homeowner, the registrar of the High Court could order a sale in execution. “Now the court will have to make an evaluation of the facts of each case before deciding whether or not to order a sale in execution,” he says.

However, the improvement in the number of people who are managing to keep up with their home loan repayments could be derailed by changes in the economy.

Inflationary pressures are mounting on the back of rising energy costs and food prices. Employment and consumer confidence fell in the first quarter of this year compared with the fourth quarter of 2010, Jacques du Toit, the senior property analyst for Absa, says.

JUDGE MUST WEIGH UP THE FACTS BEFORE ORDERING A SALE IN EXECUTION

In April, the Constitutional Court ruled in the case of Elsie Gundwana versus Nedcor and Steko Development.

Gundwana had asked the court to rule on whether a registrar of the High Court may, in the course of granting a default judgment against a borrower, grant an order for the sale in execution of a mortgaged property.

In 1995, Gundwana bought a plot of land in George for R52 000. She paid R25 000, with the balance in the form of a mortgage bond from Nedcor.

Gundwana fell behind with her monthly repayments during 2003.

In November 2003, the registrar of the Western Cape High Court granted Nedcor a default judgment against Gundwana for the amount of R33 543, together with a further order that declared that the property be sold in execution to recover that amount.

However, Nedcor did not act on the sale in execution order for about four years. During this time, Gundwana made irregular payments on her mortgage bond.

In August 2007, Gundwana learned that the sale in execution was to take place that month. When Gundwana contacted the bank, she was told that she was in arrears for the amount of R5 268 and that the total outstanding amount was R23 779.

Gundwana told the bank she would pay the arrears as soon as possible. On August 13, 2007, she paid R2 000 to the bank in the belief that she had averted the sale in execution.

On August 15, 2007, the property was sold in execution to Steko Development.

On April 23, 2008, Steko launched an application in the George magistrate’s court to have Gundwana evicted. The eviction order was granted on June 3, 2008.

According to the Supreme Court Act, a default judgment may be granted in the High Court by the registrar of the court. However, there is no explicit reference in the Supreme Court Act to orders to declare a sale in execution for a mortgaged property specially executable.

The Constitutional Court’s ruling says that the registrar of the court can issue a default judgment, but then the case must go to a judge for a sale in execution order to be granted.

According to law firm Shepstone & Wylie, the Constitutional Court’s ruling in the Gundwana case means that a bank should do the following to obtain a sale-in-execution order:

* After a summons for a judgment has been served by the creditor and no notice of intention to defend has been entered by the homeowner, the plaintiff (the bank) must set the default judgment before a judge; and

* The bank must file a supporting affidavit to the default judgment that sets out:

* The facts of the matter;

* The reasons that a sale in execution should be ordered on the mortgaged property;

* Whether the default judgment can be satisfied in a reasonable manner without involving the drastic consequences of selling the home; and

* Whether an alternative course should be considered before granting a sale in execution order.

Only where there is no alternative means to satisfy the default judgment, may a sale in execution order be granted.

CLARITY ON WHAT A CREDITOR MUST DO BEFORE A COURT WILL ORDER A SALE IN EXECUTION

The banks must meet certain requirements before they can sell your property if your home loan repayments are in arrears, and a recent High Court judgment has provided clarity on what is expected when a creditor applies to a court for a sale-in-execution order.

The judgment was handed down by the North Gauteng High Court in the case of First Rand Bank versus Folscher Bismarck.

The judgment means “there is now an onus on a creditor to provide the court with further information and documentation so that a judge will have all relevant information to make a decision on default judgment and execution”, Andrea Holder, an associate partner at law firm Shepstone & Wylie, says.

The judgment does not apply to a sale-in-execution application that involves immovable property owned by a company, close corporation or trust, she says.

Holder says that, according to the judgment, if you do not appear in court to defend yourself after you have been served with a summons and your creditor applies for a default judgment, the creditor must file an affidavit that states:

* The outstanding arrears at the date of the judgment;

* Whether or not the property was acquired with a state subsidy;

* Whether the property is used for commercial or residential purposes;

* Whether or not the property is occupied; and

* Whether or not the debt was incurred to acquire the property.

Any matter in which the amount claimed falls within the jurisdiction of a magistrate’s court must be referred to a magistrate’s court if the property is to be sold in execution.

Holder says that if the bank or creditor applies to the court for a warrant of execution after judgment is granted, the court must consider:

* Whether the mortgaged property is your home;

* How the debt was incurred;

* The arrears outstanding on the mortgage bond;

* The arrears on the date when judgment is sought;

* The total amount due in respect of which execution is sought;

* The payment history on the mortgage bond;

* Your financial strength and that of your creditor or bank; and

* The possibility that your debt may be paid within a reasonable period without your home having to be sold in execution.

When you are issued with a warrant for a sale-in-execution, your attention must specifically be drawn to the fact that you can apply to the courts to have the judgment rescinded, Holder says.

WHAT YOU CAN DO TO AVOID A FORCED SALE OF YOUR HOME

The banks have the following advice if you are in arrears with your mortgage bond repayments and want to avoid a sale in execution:

* Discuss repayment options with your bank that may enable you to keep your home or prevent you from incurring large losses should your home be sold via a sale in execution.

* Avoid legal action by acting early to structure an affordable repayment option. This will prevent your being blacklisted at a credit bureau or, in the worst-case scenario, having a debt judgment brought against you.

* If you are over-indebted with both short-term debt and mortgage bond debt, try to sell your property on the open market, rather than waiting until it must be sold in execution.

If you are having financial difficulty but have not yet defaulted on your home loan, you can consider fixing your loan interest rate, John Loos, a strategist for First National Bank (FNB) Home Loans, says.

This is helpful if you want to know exactly what you home loan repayments will be for the period that you fix your interest rate. But you will pay a premium for the benefit of fixing your rate.

“Interest rates always go up at some point; it is merely a question of when and by how much. Fixed rates can give you certainty over a portion of your cash flows for a set period of time,” Loos says.

Marius Marais, the chief executive of FNB Housing Finance, says that at the start of the fixed period the interest rate may be one to two percentage points higher than the prevailing variable rate.

“However, in the longer run, variable rates may increase much more than this. A fixed interest rate means that the monthly repayment will remain unchanged even when interest rates increase, allowing you to have a more stable monthly budget,” he says.

If you sold your home because you could not meet your home loan repayments, you should consider renting as opposed to buying a cheaper home, Loos says.

“Renting a home can have short-term cash flow benefits for cash-strapped households, because certain unexpected maintenance costs are borne by the landlord.

“Multi-year rental contracts will have a rental escalation clause, but this can be more certain than future interest rate fluctuations in the case of homeowners that use credit, and the rental option does not have any transfer costs.

“It is currently possible to rent a property where the monthly rental will be less than the monthly mortgage bond instalments on an equivalent home, he says.

Loos says that, when trading down due to financial stress, a smaller property in good condition, without luxuries such as a pool, is probably the way to go.

WHAT THE BANKS ARE DOING TO HELP HOMEOWNERS WHO CAN’T KEEP UP WITH THEIR MORTGAGE REPAYMENTS

The four major banks have programmes to help you if you are struggling to meet your mortgage bond repayments.

Absa. You can contact Absa’s debt solutions helpline (0861 227 353). Debt specialists will analyse your financial situation and devise a solution to ease your debt burden. This could include restructuring your home loan repayments, extending the term of your loan or helping you to sell your property.

Absa has a “Help you stay” option that allows you to pay back a minimum amount of your mortgage bond instalments every month over an agreed period. Not only does this enable you to pay lower instalments, it also frees up funds that you can use to pay off your other debts and cover your living expenses.

With Absa’s “Help you sell” option, the bank will help you to market your property via estate agencies and/or auctioneers.

First National Bank (FNB). Two years ago, FNB launched Quick Sell to help consumers who are so over-indebted that their only option is to sell their properties for the best price they can obtain.

If you use the Quick Sell option and the amount you receive from the sale is insufficient to cover what you owe the bank, FNB may give you a discount of up to 20 percent on your pre-sale outstanding loan amount. The discount depends on the extent of your arrears when you applied for Quick Sell.

Vincent Tadden, the head of collections for FNB’s home loans division, says that the discount is not guaranteed but is negotiated on an individual basis.

For example, if you owe R1 million on your home loan and your property is sold via Quick Sell for R800 000, the shortfall will be R200 000. If FNB grants you a discount of 15 percent, this will be calculated as 15 percent of R1 million, or R150 000. So the revised shortfall for which you will be liable is R50 000 (R200 000 – R150 000).

The shortfall between the price you realise for selling your property and the outstanding balance on your home loan is repayable over a period of up to 10 years, interest-free.

Nedbank. If you can afford to pay your current monthly home loan instalments or a portion thereof but you cannot afford to pay back the arrear amount, the bank will consider restructuring your home loan to enable you to keep your home, avoid legal action and pay off your mortgage bond at an affordable level.

If you are unable to pay even a reduced instalment, you can use the Nedbank assisted sales programme, where the bank uses estate agents to market and sell your property.

Standard Bank. If you are in financial difficulty, Standard Bank can offer you a structured payment arrangement to suit your budget.

Should rehabilitation not be a viable option, the bank offers the EasySell programme, which is designed to help you sell your property in order to avoid foreclosure.

Article by Neesa Moodley-Isaacs, IOL Property Finance
Click here to view the original article.

Supplier and consumer relationship

It is important to understand that landlords using property letting and management agents, are the consumers of such agents (who are the suppliers of services), and thus have certain enforceable rights against the agents, should they - for example - not provide quality service.

However, this article will not deal with the landlord/property manager relationship, but rather with certain aspects of the landlord/tenant relationship.

Who does the Act apply to?

If your tenant is a natural person, the CPA applies.

However, if your tenant is a juristic person with an asset value or turnover less than R2m per annum, the CPA applies, but not section 14, which deals with fixed term contracts (see below). For example, the 20 business day cancellation notice period will not apply to fixed term contracts.

If your tenant is a juristic entity with an asset value or turnover greater than R2m per annum, then the CPA does not apply.

When signing a lease with a juristic entity, you will therefore have to ascertain what your tenant’s asset value or turnover is, as it will affect the terms and conditions of your lease agreement. However, in practice, this might be difficult to verify.

Maximum duration of fixed term lease agreements

One of the most important parts of the Act regulating landlord/tenant relationships is section 14. It is, however, important to note that it does not apply to transactions between juristic persons, regardless of their annual turnover or asset value.

The section provides that fixed-term lease agreements must not exceed the maximum period prescribed by the Minister. The prescribed period in Regulation 5 (1) is 24 months. However, the Regulation then goes on to say that the maximum period of a fixed term agreement is 24 months from the date of signature by the consumer, "unless such longer period is expressly agreed with the consumer and the supplier can show a demonstrable financial benefit to the consumer". It is assumed that a rental at a discount to market value will be a demonstrable financial benefit to the consumer. However, in most cases, the duration of residential leases are typically for periods not exceeding 12 months, so it is not expected that this provision will have a material impact on residential leases.

Cancellation by the tenant

Despite any provision of the lease to the contrary, the tenant may cancel the lease agreement at any time, by giving the supplier (the landlord), 20 business days' written notice.

Upon cancellation of a lease agreement, the tenant remains liable to the landlord for any amounts owed to the landlord in terms of that agreement up to the date of cancellation. The landlord may impose a reasonable cancellation penalty and must credit the tenant with any amount that remains the property of the tenant as of the date of cancellation. The Regulations state that the cancellation penalty may not exceed a reasonable amount, taking into account:

1. the amount which the consumer is still liable for to the supplier up to the date of cancellation;
2. the value of the transaction up to cancellation;
3. the value of the goods which will remain in the possession of the consumer after cancellation;
4. the value of the goods that are returned to the supplier;
5. the duration of the consumer agreement as initially agreed;
6. losses suffered or benefits accrued by a consumer as a result of the consumer entering into the consumer agreement;
7. the nature of the goods or services that were reserved or booked;
8. the length of notice of cancellation provided by the consumer;
9. the reasonable potential for the service provider, acting diligently, to find an alternative consumer between the time of receiving the cancellation notice and the time of the cancelled reservation; and
10. the general practice of the relevant industry.

Notwithstanding the above, the supplier may not charge a penalty which would have the effect of negating the consumer's right to cancel a fixed term agreement.

A penalty fee of 10% has been bandied about, but this is not prescribed. The draft regulations indicated that the cancellation penalty may not exceed 10% of the value of the consideration that the consumer would have paid had the contract run its course. But, this provision was excluded from the final regulations.

In the event that neither the landlord nor the tenant prematurely terminates the lease and the agreement runs its course, it will be automatically continued on a month-to-month basis unless the tenant expressly directs the landlord to terminate the agreement on the expiry date or agrees to a renewal of the agreement for another fixed term.

The landlord may cancel the agreement 20 business days after giving written notice to the tenant of a material failure by the tenant to comply with the agreement, unless the tenant has rectified the failure within that time.

The landlord must notify the tenant in writing, not more than 80, nor less than 40, business days before the fixed term expiry date. This must include a notice of any material changes that would apply if the agreement is to be renewed, and the options that the tenant has. If the tenant does not agree to the renewal of the lease, or does not direct the landlord to terminate the agreement, the lease will automatically continue on a month-to-month basis. However, although not expressly stipulated in the Act, we would assume that it naturally follows that the landlord will have the right not to allow a continuation of the lease on a month-to-month basis, in the event that the landlord does not want to continue with the agreement after the expiry date?

It is not clear if the monthly tenancy will be subject to the same 20 business days' cancellation period, or whether the common law position of one calendar month's notice will apply. If any lawyers conversant with the CPA read this, please let us have your perspective. Our assumption is that 20 business days' notice will apply, as the month-to-month lease is a continuation of the fixed term lease, and that the same terms and conditions of the original fixed term lease will apply to the continuation. A 20 business day notice can be given during any time of the month, meaning that the landlord could have difficulty in letting the property immediately (for example, where notice is given during the middle of the month), as most tenants look for a place to stay from as the first of a month.

Implications of the new cancellation provisions

Before the CPA, landlords could hold tenants to the fixed term agreed in the contract, in the event of them attempting to terminate the lease before the expiry date. However, the common law duty to mitigate damages applied (de minimus non curat lex). Therefore, in practice, the landlord had to take reasonable steps to find another tenant for the remainder of the lease, and could not simply "sit back" and claim rental for the unexpired portion. Landlords should keep in mind that this common law duty still exists.

The main implication of the above is that a fixed term agreement may no longer provide the same level of certainty for landlords, who could lose money due to a cancellation, if they can't find a replacement tenant within the timeframe covered by the amount of the cancellation penalty.

It is our view that landlords should apply their minds to the issue of the cancellation penalty, and that they should - in the lease agreement - stipulate what the penalty will be. This will give certainty upfront (to both parties).

Does the CPA apply to leases entered into before the Act came into operation?

We've had some calls regarding whether the CPA applies to leases entered into before the Act came into operation. The CPA does not have retrospective working and therefore the above provisions will only apply to lease agreements entered into after 1 April 2011.

But, the provisions regarding cancellation and renewal will have some retrospective effect. Schedule 2, clause 3 (b) of the Act provides that the cancellation and renewal provisions will apply to leases entered into before the effective date of the Act, if the lease contemplates that the parties to it will be bound for a fixed term until a date that is on or after the second anniversary of the general effective date. So, the cancellation and renewal provisions of the Act will apply to fixed term leases if the period in that agreement expires or comes up for renewal on or after 01 April 2013.

Cancellation when direct marketing occurred

The CPA provides that a tenant who has entered into a lease agreement only as a result of direct marketing may cancel the lease agreement without penalty within 5 business days of signing the lease agreement. Direct marketing is defined as meaning "to approach a person, either in person or by mail or electronic communication, for the direct or indirect purpose of promoting or offering to supply, in the ordinary course of business, any goods or services to the person."

It is recommended that lease agreements include a clause notifying the tenant of this right, and specifying when the deposit and other payments made will be refunded. Where possible, try to sign lease agreements entered into due to direct marketing, as early as possible, so as to ensure that you'll have ample time to find another tenant should such a cancellation eventuate. Having said that, it is expected that most tenants will not use this right, except of course if they happened to have found a better or cheaper property during that time.

Wording of lease agreements

Section 22 of the CPA provides that documents must be produced, provided or displayed to a consumer in plain language. For the purposes of the Act, a document is in plain language if it is reasonable to conclude that an ordinary consumer of the class of persons for whom the document is intended, with average literacy skills and minimal experience as a consumer of the relevant goods or services, could be expected to understand the content, significance and import of the document without undue effort, having regard to:

1. the context, comprehensiveness and consistency of the document;
2. the organisation, form and style of the document;
3. the vocabulary, usage and sentence structure of the document; and
4. the use of any illustrations, examples, headings or other aids to reading and understanding.

In other words, make sure that your lease agreement is in plain and simple language. And, perhaps insert a clause - or a separate undertaking to be signed by the tenant - stating that the lease was fully explained to him/her and that he/she understands it. However, such a clause on its own won't be sufficient - the lease must adhere to the "plain and simple" criteria specified above. But, it will be important to ensure that your lease still covers all aspects that are important to you, and that you don't weaken your lease when redrafting.

Weak economic times, and the fact that municipalities and parastatals are raising housing-related rates and tariffs is negative for home buying. However, this is not necessarily the case for the performance of the rental market, whose performance we expect to improve in the short to medium term.

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• South Africa’s economy expanded at a real seasonally adjusted annualised rate of 4,8% in the first quarter of 2011, which was the seventh consecutive quarter of uninterrupted economic growth since the start of the recovery in the third quarter of 2009. The economy is forecast to grow by a real 3,9% in 2011, supported by steady global growth and a further improvement in domestic demand.
• From an income, expenditure and debt point of view, households’ financial position showed some improvement in the first quarter of 2011. Real growth in disposable income and consumption was higher, while the ratio of debt to income dropped to below 77%. The cost of servicing debt as a percentage of income declined to its lowest level since the third quarter of 2005, These developments came on the back of above-inflation wage settlements, and continued low inflation and interest rates. However, labour market conditions remained tight, with consumer confidence slightly lower compared with a year ago. Although many consumers are still struggling with impaired credit records, which hamper their ability to take up credit, the number of credit-active consumers having a sound credit record continued to rise after bottoming in mid-2010.
• According to Absa’s calculations, growth in nominal house prices remained low, or was in negative territory in some segments of the market in the second quarter of 2011. In some instances prices were rising steadily on a quarterly and annual basis. With consumer price inflation picking up during the second quarter, some real house price declines occurred on a quarterly as well as a year-on-year basis in the past quarter.
• House price trends varied at a geographical level in the country’s provinces, metropolitan areas and major coastal regions. Price growth was evident on an annual as well as a quarterly basis in some regions in the second quarter of 2011. However, nominal price declines were recorded in a number of regions, while rising inflation caused prices to remain under pressure in real terms in the second quarter.
• The affordability of housing improved further in the first quarter of 2011, impacted by low house price growth, slightly lower interest rates and rising household disposable income in the quarter. This is according to the latest trends in the ratios of house prices and mortgage repayments to household disposable income.
• Based on house price trends in the first half of 2011, and prospects for the economy and household finances, nominal house price growth of between 1% and 2% is forecast for 2011, rising to about 4% in 2012. In consideration of the outlook for nominal price growth and the projection of consumer price inflation averaging 5% this year and 6% next year, house prices are set to decline in real terms in both 2011 and 2012.

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What is twitter? In a nutshell - Facebook connects you to the people you went to school with. Twitter connects you to the people you wished you went to school with.

Twitter is a website, which offers a social networking and microblogging service, enabling its users to send and read other users' messages called tweets. Tweets are text-based posts of up to 140 characters displayed on the user's profile page. Tweets are publicly visible by default, however senders can restrict message delivery to their friends list. Users may subscribe to other users' tweets—this is known as following and subscribers are known as followers. - adapted from Wikipedia.

There are a number of ways to follow YDL's tweets: Visit http://twitter.com/ydlproperty and follow us Visit http://www.ydl.co.za from time to time to view the updates on our homepage (as shown on the right) Visit http://yoono.com/ and download one of their applications to keep up to date with us Get the iphone or blackberry twitter app and follow us on the go If you have any questions about twitter or more information on following us - please mail us - twitter@ydl.co.za