Private Bonds: An Alternative Path to Property Ownership

In South Africa, property purchases are commonly financed by a mortgage bond financed by a bank. However, bank financing is not always available or suitable for every transaction. In those circumstances, a private bond can be registered instead.

What is a private bond?

A private bond is a mortgage bond registered in favour of a private individual, trust, company or other entity instead of a bank.

One of the most common forms of a private bond is a kustingbrief where the seller of the property finances the balance of the purchase price. The purchaser pays a deposit, and an agreement is entered into for the balance of the purchase price to be repaid over an agreed term.

To secure repayment, a loan agreement regulating the payment terms is entered into by the parties and a mortgage bond is registered by the purchaser against the property in favour of the seller or the private lender.

Benefits of a Private Bond

Making use of a private bond offers several benefits, namely:

1. A purchaser does not have to qualify for traditional bank finance;

2. The parties can negotiate more flexible repayment terms;

3. The transaction proceeds quicker without waiting on bond approval.

Risks for Sellers and Private Lenders

Although private bonds can facilitate transactions, sellers must understand the risks which can arise from private financing arrangements.

These may include:

1. The full purchase price is not received by the seller when the transfer is registered;

2. The cost and delay of enforcing payment if the borrower defaults;

3. Possible non-compliance with the National Credit Act.

Risk for Purchasers or Borrowers

Purchasers should also understand the risks associated with private financing arrangements.

These include:

1. Losing the property in the event of default on payments;

2. Acceleration clauses causing the full amount to become immediately due upon default;

3. Uncertainty when the lender passes away or becomes insolvent during the repayment period.

The National Credit Act

The National Credit Act 34 of 2005 (“NCA”) may apply to private bonds, depending on how the transaction is structured.

Where the NCA applies, the lender may be required to register as a credit provider. Non-compliance can have serious consequences including the possible unenforceability of the loan agreement.

Private bonds should be drafted and structured with legal guidance to ensure that the bond is valid and enforceable.

Conclusion

Private bonds provide a great alternative to traditional financing of immovable property. They also assist parties to conclude transactions that would otherwise not materialise.

As these arrangements carry significant financial and legal implications for the parties involved, obtaining legal guidance is prudent. Our attorneys are available to advise and assist with the registration of your private bond.

Written by: Caylee van Der Bergh
Moderated and approved by: Rohula Kgabu

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