SELLING FIXED PROPERTY FRAUDULENTLY – THE CONSUMER PROTECTION ACT
Newsletter 2 - July 2011
In this newsletter, the following legal problem is analysed and compared to the Consumer Protection Act.
A purchases land from B, who is a property developer. B explains to A, that since the property market has been performing very poorly over the last few years, B will give A the opportunity to buy the land for a third of the market value of the vacant stand. The value of the stand is R300 000, as explained by B, but because of the economic circumstances A can buy the stand for R100 000. B explains further that he will buy the land from A for R300 000 after 4 years and A will make a profit of R200 000.
After 4 years, A realised that B had sold the stand for R300 000 to C, and did not inform A of the sale agreement and that the parties to that agreement are B and C. C paid for the stand after only 4 monthly instalments in cash equal to R200 000. C told B that he is unable to pay the outstanding amount because the true value of the stand is only R200 000. B informs A that A is only entitled to R100 000 profit.
A is not happy with the R100 000 profit, and argues that he should have sold the land to C, because he was the true owner of the vacant stand.
The above scenario is not fiction; this occurs quite frequently in practice in times of economic difficulties. It is interesting to note, however, that although A had bought the land for cash, B never delivered the land, or vacant stand, to A, because the parties never used the services of a conveyancer to register the ownership of the land in A’s name. In fact, B remains the rightful owner of the land, and he does not need A’s permission to sell the land to C. Is the Consumer Act relevant to this scenario?
The Consumer Act states clearly in regulation 15 what constitutes a “fraudulent public property syndication scheme”. In short, this regulation indicates statutory fraud when the seller explains to the purchaser by false pretence or otherwise that the property he is buying is worth more than its true market value.
It is noteworthy that the Act is relevant to all forms of public property syndication schemes, irrespective of whether the public property scheme is being sold by a company, trust, close corporation, partnership or sole proprietor, and or by any of their representatives. It is clear from our example that B sold the vacant stand for more than its true value, and promised a return of R200 000, which, in the first instance, he was unable to meet.
Part of regulation 15 refers to the number of disclosures that must be made by B when approaching A for money.
For example, B should have informed A that the money he received from A (the purchase price) would have been paid into a trust fund.
B must have clearly stated who controls the withdrawal of funds and for which purposes
(to allow for transfer of ownership or not);
that the investment in the vacant stand would have been a long term one of not less than 5
years;
that it was not the responsibility of B to find a buyer for the stand, but rather, A’s
responsibility; whether A had bought the property on condition of ownership or option of
ownership or that the ownership would be transferred into the syndication vehicle;
the method of how additional capital would be raised in the future;
who the syndication vehicle was; and that the valuation certificate of the value of the
stand should have been made available; etcetera.
In conclusion, although it was not the intention of B to promote a public property syndication scheme actively, his actions can be easily interpreted as a “fraudulent scheme” when the Consumer Act is applied to the above facts.
-The End-