This article first appeared in Moneyweb.
A full bench of the Johannesburg High Court ruled on Wednesday that repossessed homes must be sold with a reserve price in all but exceptional circumstances. This puts an end to illegal bid-rigging by syndicates operating out of sheriffs’ auctions. It also means repossessed properties must be sold close to market price, rather than for R10 or R100, as has happened in the past.
The court also ruled that when banks bring legal action against defaulting clients, the money judgment and sale in execution order (allowing the property to be sold at auction) must be issued at the same time. Some banks argued that these should be split, though for reasons that were not always clear – other than that it suits the banks’ lawyers to milk a case for as much in fees as possible by having the same facts heard twice.
Standard Bank in its court papers argued that the money judgment issued separately from the sale in execution (SiE) order placed pressure on the defaulting client to catch up on arrears. The court took a different view and wants the matters heard together. This reduces the legal costs for consumers, but may make it more difficult to delay justice.
As Moneyweb previously reported, Gauteng judge president Dunstan Mlambo ordered a full bench of the High Court to decide on four cases involving Standard Bank and Absa. The full bench of three judges was asked to decide on several issues, including the setting of reserve prices to avoid homes being sold at auction for a trifling amount, and whether banks should be awarded a money judgment at the same time as an SiE order.
Court rules were recently changed to allow for judges to set reserve prices. However, some judges applied the new rules while others did not. This case was about setting a standard across the entire court.
Advocate Douglas Shaw, one of the architects of the recent change in court rules allowing for the imposition of reserve prices, says the ruling is a major victory for bank clients: “It is unbelievable in this day and age that the banks would continue to argue for the right to sell repossessed properties without a reserve price, but this is what they have done. This ruling changes that by forcing judges to impose reserve prices except in exceptional circumstances.
“A second major victory for mortgage bond holders is that once you pay off your arrears, your mortgage contract automatically revives, and this is not something that is at the discretion of the banks.”
In its papers before the court, the Lungelo Lethu Human Rights Foundation (LLHRF), which defends people against eviction, says in hundreds of cases it has seen, there is nothing left for clients once a property is sold at sheriffs’ auctions. The practice of allowing properties to be sold without a reserve price meant these auctions became nesting grounds for bid-rigging syndicates, who have been able to pick up properties for a pittance and then on-sell them for massive profits. Once the lawyers had taken their share of the spoils, the plate was licked clean, leaving nothing for the dispossessed homeowner.
The court ruled that the power to reinstate a credit agreement lies with the consumer, not the credit provider, once the arrears and “reasonable” costs have been settled.
King Sibiya, co-founder of the LLHRF, says the ruling will make it extremely difficult for banks to evict clients from their primary residences. Eviction, be it voluntary or by force, is the inevitable consequence of an SiE order. He says upwards of 100 000 families have been evicted from their homes since the Constitution came into effect. “In their papers before the court, the banks claimed they use sale in execution orders only as a last resort. We say they are lying, and we presented abundant evidence to prove they are lying.”
The court also dismissed the banks’ claims that by setting a reserve price, there would be less interest from prospective buyers. “A reserve price will balance the misalignment between the banks and the debtors where execution orders are granted,” says the court ruling. “It ensures that the debtor is not worse off due to unrealistically low prices being obtained and accepted at sales in execution.”
Says Sibiya: “This ruling makes it more difficult to evict people from their primary residences, and the setting of reserve prices means they get to keep most of the equity in the home that they have built up over the years.”
The Legal Resources Centre, which represented the LLHRF in the case, says in a statement “we are hopeful that the setting of reserve prices in sales in execution will stop the practice of homes being sold on auction for next-to-nothing and create the possibility of a debtor recovering some money from the sale.”
Though the ruling applies to the South Gauteng High Court, other courts around the country will be under pressure to apply the same judicial standards.
The court made no ruling on at what level reserve prices should be set, other than to say that information about market valuations must be placed before the court when a bank is seeking judgment against a client. The reserve price will be based on all relevant information placed before the court.