With the low interest rate at 7%, tenants are finding that it might be cheaper to buy than rent. Under the current conditions, a monthly bond instalment on a R1m property, which is transfer duty free, is just below R8k. At this point, many tenants might be approaching their landlords about a possible offer to purchase the property they've been renting.
It also raises the need for clarity around the agent's commission clause, often included in the rental agreement.
A Property24 reader recently noted what they called a 'double commission' clause in their rental lease agreement and wanted to know if this was acceptable.
"What is the general practice on this score? Our rental agent has put this clause into our lease, and we are not comfortable about the 'double commission'?" the reader wanted to know.
An example of this clause would read: “In the event that the tenant/occupier in terms of the lease agreement purchases the property, @@@@ Agency will be entitled to a 5% (Plus VAT) agent’s commission on the sale of the property, based on the selling price and payable by the Landlord”
We asked TPN Credit Bureau, SA's largest credit bureau specialising in vetting tenants for rental properties if the rental agent is allowed to include a clause stating that if the tenant wants to buy the property, they would have to pay the agent a percentage commission?
TPN Managing Director Michelle Dickens says, "Absolutely! Mandates and lease agreements contain an effective cause clause for this reason. In fact, it is contained in both the mandate and the lease agreement so that the landlord is contracted to pay commission to the estate agent should a sale result from the lease agreement between the landlord and the tenant.
Legal Expert Simon Dippenaar explains although it is a widespread practice that these clauses appear in lease agreements, he says "it is deemed unconstitutional unless the agent can show that it is the effective cause of the sale".
Dippenaar says "a contractual clause alone may not constitute effective cause, without active participation by the agent". Active participation would obviously mean the marketing and vetting done to secure the initial tenant, who has now turned into a buyer.
Dickens highlights that the percentages for the commission do however need to be agreed upon as there is no law regulating this.
"None the less, an agency cannot tie the landlord into paying a commission for a sale not made to the occupying tenant, this would be unfair as the agency would not be the cause of the sale," says Dickens.
Wietz Viljoen, WVA-INC outlines that the Estate Agent's Affairs Board (EAAB) Code of Conduct does not allow this clause to be enforced, specifically in the case of Landlords not having access to other agents, "unless agreed to in writing by the Landlord".
"What is allowed and enforceable is to create an ordinary open mandate in this manner from which the estate agency can eventually benefit. As the Consumer Protection Act applies to the relationship between landlords and agents and requires open and fair dealing by service providers, the agency should point out this clause to the landlord, failing which it may constitute grounds for the landlord to deny that he is bound by that provision," explains Viljoen.
"In other words, an owner who gives a mandate to an agency to obtain a tenant, is not obliged to accept such a clause in a lease agreement and must delete as part of the agreement. If, however, the Landlord signs the lease agreement with such a clause included, he/she will be bound to the payment of the commission to the agency in the event of a sale. There is an obligation on the agent to discuss and disclose the provisions of such a clause."
Dippenaar says, "My advice to any landlord is to read the lease agreement carefully, and where necessary amend the commission clause to ensure that the rental agent was the effective cause and can prove active participation in the conclusion of the sale of the property to the tenant. The landlord must object at the time of signing the lease and must request the clause be deleted otherwise.
"If the rental agent is the effective cause, they will be due commission”, which can in turn be negotiated should a
sale actually take place, adds Dippenaar.
Here's a breakdown what payments tenants and landlords are responsible for:
What the landlord pays for
If you are merely sourcing a tenant, you will pay an agency fee of around 8% to 10% of the value of the lease, but if you include a management portion, there will be an additional monthly cost. Landlords also need to factor in the cost of maintenance and rates on the value of the property, and levies in the case of sectional title.
Landlords also need to note the commission payable on the renewal of the lease.
Dickens says, "The TPN LeasePack makes provision for a Mandate which is the agreement between the rental agent and the landlord and has an effective cause clause stating that as the agent was the effective cause of the procurement of the lease, the agent is entitled to a commission.
She says it is often agreed where the lease is renewed that the procurement commission is reduced upon each subsequent year of renewal.
“For example, 8% of the rental amount in year one, 6% in year two and 5% in year three. A vast majority of procurement mandates include commission that is charged as the first months’ rent – which is 8 % of the annual rental and then adjusted on a sliding scale per year of renewal."
Dickens also warns about the use of the rental deposit for renewal commission or commission in terms of sale of the property.
"You cannot off-set the deposit for commission owed by the landlord to the agent. The tenant’s deposit is held in trust for the tenant and cannot be utilised for any other purpose without the tenant’s permission."
What the tenant pays for
Deposits of one to two times the monthly rental is common. On a R15 000 per month rental, that means that you need up to R30 000 to put down as a deposit and will also have to pay for the credit verification and lease fees, which could amount to around R1.5k to R2k, depending on the agency - once-off.
At the end of the lease, the capital sum plus interest must be refunded to the tenant subject to the landlord being able to deduct reasonable cost of repairs or unpaid rent from it.
The landlord must provide a property in a fit and habitable state and the tenant must keep it in a good condition including maintaining the garden and pool as provided for in the lease. A watertight lease and an incoming inspection are essential to agree on the state of the property upfront. At the end of the lease, an outgoing inspection must be undertaken to determine whether any funds can be deducted from the deposit. The tenant may not make any alterations without the express written permission of the landlord either.
*Article sourced from Property 24*
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