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Buyers at Auctions Beware!

Rademeyer v Viljoen and Another (69/11) [2011] ZASCA 189 (3 November 2011)

This recent court case highlighted one of the potential risks of purchasing property at an auction.

The buyer bought three farms (which were owned by a trust) at an auction. One of the conditions contained in the auctioneer’s agreement of sale stated that the purchaser had to pay a deposit of 20% of the purchase price in cash on the day of the sale. The balance of the purchase price was to be secured byguarantees. The purchaser paid the deposit in the sum of R900,000.00 on the day of the sale.

The agreement of sale contained a further condition which stated that the purchaser could cancel the sale if it transpired that any land claims by third parties existed in respect of the land. This condition also stated that in such circumstances (i.e where the purchaser cancelled the sale because of the existence of land claims) the deposit would be repaid to the purchaser.

Unbeknown to the purchaser the seller was in financial difficulty at the time of the sale. After the sale the purchaser discovered that there were in fact land claims and cancelled the sale and claimed repayment of the deposit. At that stage the auctioneer had already paid the deposit to the seller and the seller had paid the R900,000.00 to its creditors. The seller was accordingly unable to repay the deposit and the purchaser instituted legal action against the seller for the repayment thereof.

One of the main grounds on which the purchaser relied was that the auctioneer should not have paid the deposit to the seller and that it should have been kept in trust pending registration of transfer. In other words the purchaser claimed that the deposit should not have been paid to the seller until the property was registered in the purchaser’s name.

The court held that the deed of sale did not state that the deposit had to be held in trust pending transfer and in fact stated that it was payable to the seller (prior to transfer). Under the circumstances the auctioneer had acted correctly in paying the deposit to the seller.

The purchaser accordingly only had a claim against the insolvent trust (the seller) for repayment of the deposit. the nett result was that the purchaser lost R700,000.00 of the R900,000.00 deposit which he had paid (only R200,000.00 was recovered from the insolvent trust). In addition the purchaser lost his court case in both the High Court and the Supreme Court of Appeal. He accordingly had to pay his own legal costs and the costs of the other side an this must have run into many hundreds of thousands of rand.

When purchasing property at an auction always ensure that the conditions of sale state that any deposit which is payable will be held in a trust account pending transfer of the property into the name of the purchaser.

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