The number of distressed property owners in South Africa is still on the rise and residential properties are still being repossessed by banks and other creditors at a rate that is almost unprecedented in the country’s history, says Tony Clarke, MD of Rawson Properties.

“This situation can put the tenants in such properties at risk: they can lose their homes as a result of their landlords being unable to meet their regular monthly bond repayments. The Roman Dutch legal principal on which SA law about this matter has traditionally been based is “huur gaan voor koop”. This means the tenant’s lease and welfare take precedence over other considerations. If property owners are falling behind in their bond repayments banks are expected to show restraint concerning evicting the tenant, at least initially, and are expected to find some other solution.

“In practice, what happens is that, when it is clear that bondholders can’t meet their obligations, banks will apply for court orders authorising repossession of the properties and the sheriff will then put them up for auction on the date advertised.

“At the first auction the home will be sold on condition that the lease continues to be honoured by the buyer. If, however, the bank finds the bids at the auction to be unacceptably low, it can then ask for a second auction, with no conditions attached. The tenant in these situations will have to negotiate a lease with the new owner, failing which he has to vacate the property.”

The whole question of tenants’ rights and tenants suffering if evicted through no fault of their own has recently received attention in the US Congress, says Clarke.

Faced with the large number of homes on which bondholders have fallen behind in their payments, President Obama, in May, signed the “Helping Families Save Their Homes Act”.

This specified that tenants of any repossessed homes have to be given 90 days to find alternative accommodation. This new law will remain in operation only until December 2012 – by when, it is believed, the US economy will have recovered sufficiently to make repossessions a fairly rare occurrence.

Clarke says some form of legislation of this kind might be acceptable in South Africa, but such a law could be used by a defaulting bondholder to extend the period during which he remains in possession of the home: he has only to produce a signed lease, possibly with a fictitious tenant, to delay the auction by three months.

“It has been suggested that no bondholder should be allowed to sign a lease without getting it approved by the financial institution. In theory this would seem to be a good idea. In practice I cannot see it being a workable proposition because the bank does not have the time and resources to go about approving hundreds of leases,” says Clarke.

In the circumstances, says Clarke, to protect themselves, tenants signing new leases should insist that the owner gives them written confirmation that they have been conscientious and thorough in maintaining the bond repayments up to the date on which they take occupation.

“A check of this kind will often reveal that some bondholders are not reliable landlords and are in danger of losing their properties – avoid them at all costs,” says Clarke.