Lawyers representing consumers facing home repossession have applauded a recent case in the Gauteng High Court that blocks lawyers trying to side-step court procedures by selling these homes for less than their market worth.
The February 2022 ruling by Judge Fisher slapped down the practice of banks’ lawyers approaching judges in chambers in an attempt to circumvent the reserve (floor) price requirement.
Until 2018, banks were frequently selling repossessed homes at well below market price, giving rise to suspicions that syndicates operating in the banks and sheriffs’ offices were engineering these sales so they could pick them up for a song. Some were sold for as little as R10, often leaving the defaulting borrower with a huge outstanding debt to the bank, and with no chance of receiving any equity built up in the home.
That changed in recent years when the Gauteng and Cape high courts ruled that repossessed homes must be sold with reserve prices in place in all but exceptional circumstances.
This followed a 2017 change in Court Rule 46A which requires the sheriff of the court to personally serve the execution notice on the debtor, and not to a neighbour or the debtor’s child as had happened in the past.
This was intended to provide the debtor with an opportunity to mount a legal defence. The change in the court rules also made provision for the court to impose a reserve price, with the sheriff reporting back to the court within five days if that price was not obtained at auction.
To circumvent this requirement, lawyers were found to be side-stepping the court by approaching judges in chambers when a reserve price was not obtained at auction to seek the judge’s blessing to sell the property at a lower price.
Protecting the consumer
The purpose of the reserve price is to protect the homeowner in default, as Judge Fisher explains in the judgment: “If a property is sold at a price which is significantly below the true market value, the homeowner is liable to lose the investment made in the property and still be left indebted to the bank for more than is fair.
“For most homeowners the investment in the mortgaged property is the largest and most important of their lives,” reads the judgment.
“The very purpose of rule 46A is to avoid a homeowner’s investment in his or her property from being unjustifiably impinged upon.
“One of its aims is to protect debtors by ensuring that homes are not sold in execution for prices which are not market related, as was a prevalent iniquity in the recent past.”
The applicant in the case was Changing Tides 17 (Pty) Limited, which argued that reserve prices could not be obtained in four properties it was attempting to sell at auction.
In all four cases, none of the required documents were served on the homeowner, and Rule 46 requires that when a reserve price is not obtained at auction, the sheriff must within five days submit a report to the court explaining why.
What is market value?
The court in the Changing Tides matter referred to the International Valuation Standards Council definition of market value: “Market value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.”
When a reserve price is not obtained at auction, lenders were approaching judges in chambers to prevail upon them to lower the reserve price.
But the fact that a property was not sold at the reserve price does not strike the right balance between the interests of consumers and creditor providers, as anticipated in the National Credit Act, says the judgment.
What if the sale was not adequately advertised or was held over a holiday period?
Judge Fisher goes on to note some troubling trends of lawyers foreclosing on properties without a date by which the homeowner has to respond, or sheriffs serving papers on tenants as ‘proof’ that the property is not the residence of the judgment debtor. This does not follow, since many homeowners rent out rooms to tenants. The court also found instances of sheriffs serving papers on the spouse of the debtor. “This fails to take account of the prevalence of divorce or spouses living apart,” reads the judgment.
Change in court rules supposedly brought an end to lender abuse
The change in court rules was initiated by Advocate Douglas Shaw and the Lungelo Lethu Human Rights Foundation, which has campaigned against abusive banking practices resulting in hundreds of thousands of people being evicted since the constitution came into effect.
The foundation’s CEO, King Sibiya, says in many cases it has investigated, the debtor was not in default.
“Banks played on consumers’ ignorance of court processes and snuck through an execution order to repossess and sell the property without ever informing them,” says Sibiya.
“The next step after that is eviction. We have cases of people being convicted of trespassing in their own homes, which is a criminal offence, even though they dutifully paid their mortgage loans. South Africa has a shocking history of abuse in this regard.
“We welcome this latest ruling in the Gauteng High Court as it reaffirms the court rules that we fought so hard to obtain, that no repossessed home can be sold without a reserve price and that the banks’ lawyers cannot subvert this legal requirement by having a quiet cup of tea with the judge in chambers.”
Commenting on the ruling, lawyer and consumer activist Leonard Benjamin says courts must exercise judicial oversight to consider whether allowing the sale to proceed at the lower price would still be a proportionate and justifiable violation of the execution debtor’s constitutional rights.
“An application to court, supported by the relevant information, is required. The execution debtor must be given notice to allow them to oppose the matter and protect their rights,” says Benjamin.
“It has been the norm for execution creditors to simply submit the matter to a judge to rubberstamp in chambers. As a consequence, properties have been transferred to execution purchasers at the lower price, without proper judicial oversight.”
Does this mean those transfers are automatically invalid?
Benjamin says these irregular transfers could be declared invalid, provided the debtor can show the court a verifiable plan to settle the judgment debt through less invasive means over the remaining term of the loan.
“They could also make a commitment to sell the property themselves, at least for the reserve price.
“When they [the homeowner] can sell the property for an amount that is more than the judgment debt or reserve price, persisting with execution can never be justified,” says Benjamin.
“Execution debtors should, accordingly, take advantage of the unexpected opportunity that has presented to them.”
Until 2011, it was possible for the court registrar to grant execution orders (to sell repossessed properties at sheriff auctions) without any judicial oversight. The practice was declared unconstitutional by the Constitutional Court.
“Although the declaration of invalidity was made retroactive the Constitutional Court stated specifically that it did not mean that all transfers arising from registrar judgments would automatically fall away, but that individual execution debtors would have to apply to set the judgment aside by showing that if the matter had been dealt with by a court rather than the registrar, the court would have not have granted an executability order,” says Benjamin.
International best practice
Shaw says the change in law requiring reserve prices has been a major victory for consumers, but lawyers for the banks have found a way to subvert that process.
“What they’re doing now is going back to court without a proper process and the court is allowing them to sell repossessed properties without a reserve price. This is not what the law allows.
“My preferred way of doing it is how they do it in the Far East where repossessed properties are sold at auction with a reserve price, and then dropping the price if the reserve is not reached.
“The Australians use estate agents and bring people to the auction and bid on repossessed properties to get as close to the reserve price as possible in a transparent sales process.”
Judge Fisher said the cases placed before her by Changing Tides “do not constitute applications and are irregular steps”.
“I decline to entertain them in chambers or at all and make no order in respect of any of them.”