Lawyers for Human Rights
Lawyers for Human Rights

Concerns raised over way repossessed homes are sold at public auctions

By Mbalenhle Budaza

Lawyers for Human Rights, together with many legal non-governmental organisations, have noted with growing concern the manner in which repossessed houses are sold at public auctions. The fact that a reserve price is not mandatory for sales in execution as well as the lack of judicial oversight over these processes has led to substantial consequences for the debtor, including those with constitutional implications.

With great anticipation on May 6 2016 Given Jua Nkwane, represented by Lawyers for Human Rights’ land and housing programme, launched an application before the high court, Gauteng Division, Pretoria. The application seeks to challenge the constitutionality of the Uniform Rules of Court insofar as it requires the sale of a person’s home to be conducted without a reserve price. The application further seeks to set aside the sale in execution of Nkwane’s home for a value less than 10% of its market value.

Background of the case

In 2011, Nkwane and his wife obtained a home loan from Standard Bank for the value of R380 000 and bought a house in Ga-Rankuwa, North West. For a period of two years, Nkwane religiously paid his monthly bond instalments. After separating from his wife in 2013, and therefore having to maintain two households, Nkwane fell into financial difficulty and defaulted on his instalments.

He immediately alerted Standard Bank to his financial struggles, which then offered to assist him with restructuring his debt for a period of six months. However, at the end of the programme and with the sudden loss of his employment, Nkwane was still not in a financial position to satisfy his monthly obligations to the bank. As a result, Standard Bank repossessed his home.

In October 2015, Nkwane’s house was sold in execution for R40 000 without reserve, where the market value of the property was at R380 000 Consequently, with his house sold for such an extremely low amount, Nkwane is left without a home and paralysed by the considerable outstanding debt to the bank, which he laments the unlikelihood of ever extinguishing within his lifetime.

Debtor held hostage by Uniform Rules of Court

Although there are legislative provisions in place to govern sales in execution, Rule 46 of the Uniform Rules of Court, and Rule 43 of the Magistrates’ Court Rules, allow for the property of the judgment debtor to be sold in execution to the highest bidder without a reserve price, and most alarmingly even if the debtor’s property is his or her primary residence.

This gap in the law has yielded harmful and absurd results, more often to the prejudice of the debtor. Intervention then becomes an imperative when formal compliance with the rules is not enough to ensure the rights of the debtor and creditor are fairly determined and substantially protected in the absence of a reserve price.

In the application before the high court, Nkwane argues that his constitutional rights to property and adequate housing are unjustifiably infringed by the arbitrary consequences of selling a property for far less than its worth. There is no rational connection between the purpose behind the repossession of the property, the subsequent sale thereof and the outcome of the sale. It can scarcely be submitted that the R40 000 did more than merely satisfy the bank’s legal and/or transfer costs – there was no beneficial outcome gained or recovery of debt by Standard Bank in selling Nkwane’s home. It is further argued that the lack of substantive judicial oversight over this process compromises his right to access a court of law and have his matter adjudicated fairly.

In comparison with other jurisdictions, South Africa has one of the highest percentages of defaulters losing their homes per year. It would therefore be a travesty should the current laws and procedures relating to sales in execution remain unaltered, in particular when with effect they unduly harm judgment debtors and arbitrarily deprive them of their constitutional rights and protections.

Mbalenhle Budaza is a candidate attorney at lawyers for human rights.

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    • jemevans

      If the law were to order that outstanding debt be written off after the sale of a repossessed property, the banks might pay closer attention to the market value before putting the property to auction.

    • Michael Beatty

      The question to be answered here is firstly, was the property sold to a third party, i.e somebody other than the mortgage holder, Standard Bank? If so, then yes, the property was sold at an egregiously absurd sum, and this matter needs to be addressed.
      The alternative question, is was the property bought in by the Bank? If that is the case, then the following may clear up any uncertainty about Commercial Banks buying in properties at lower prices than what the property may commercially be valued at: –
      – The Bank had a reserve price under which it would not have allowed the property to be sold.
      – any successful bidding on a property will result in the new owner being liable for auction cost sych as sheriffs commission, arrear rates and taxes, amongst others,
      – should there be no interest shown in the property on auction, it is not in the interest of the Bank to offer a bid for the reserve price, as commission will be charged on that bid value. What usually happens that a nominal offer is made, that will only cover the minimum auction costs, and no more. The Bank has no desire to lose more money on this loan. The property becomes a Property in Possession which the Bank will try to sell for as much as possible to cover what it can on the outstanding loan. Only after the final outstanding balance, after setting off the resold PIP will the Bank approach the original owner to settle his debt.
      Whether the Rules of Court are unconstitutional is a matter for debate.
      No doubt this will result in heated argument.

    • Alex J Nagel

      If as @disqus_RpfspucS9L:disqus correctly states that the bank may have purchased the property for resale then the Debtor still has a chance. It has been my experience though that properties are sold way below market value and way below the actual outstanding amount of the bond and without reserve. The property is the bank’s security and if they are prepared to sell it at these ridiculous prices it signifies that their valuations and the securities held are not worth the paper they are printed on

    • Nikhil Sham

      Mbalenhle, I am doing my LLM dissertation on this. How can I get into contact with you?

    • RSA.MommaCyndi

      It has to do with accounting. The bank cannot write off the debt if there is collateral. Banks are obliged to sell the property to protect the investors’ (anyone with savings) money (that they use). If they wrote off the debt, they would be in contravention of the banking act. Banks are simply custodians of the money that they receive. They have to prove that they showed due diligence in using that money.

      In most cases, the banks put a reserve price on the property. The reserve price is, where possible/plausible, the outstanding debt, plus the transfer costs, plus any legal costs (unlikely on a debt that has only been serviced for 2 years). The number one aim, however, is to get the debt off their books as soon as possible. If there are a number of properties, (especially in one area) that are up for auction, they have a better chance to just hope for the best they can get. Sometimes, it is just an oversight and the bank didn’t give the figure to the auctioneer.

      With hindsight, Mr Nkwane should have voluntarily sold his house when the original problem began. Two years worth of payments would not have taken him past paying off only the interest, but his credit rating would not have suffered, and he may even have got a small profit.

    • Mbali

      Hey Nikhil. You can email me at [email protected]

    • FiremanSam

      Why did the bank not sell the property at market value then take what the bank is owed and give balance to the original owner-Purchasing the house for R40,000 is a win fall profit -this is a case of seller beware