The 6 Golden Rules of concluding an agreement of sale

Part and parcel of negotiating the property deal is tying up the deal through the drafting and finalization of the agreement of sale.

In my opinion, the agreement of sale is the greatest investment tool ever invented and if you know what you are doing you can turn the offer into a blank cheque before you take transfer.

Being in the property development game, I am continually amazed at how many purchasers sign agreements of sale without even reading the document.

As much as the agent or seller tries to rush you into signing, the agreement of sale is a binding legal document that can either reap the unaware purchaser with dire consequences, or be manipulated into a powerful document that places the balance of power firmly in the purchaser's hands.

When I fill in any offer to purchase I have 2 fundamental objectives in mind:

1. to take on absolutely no contractual or property risk
2. to make as much money out of the property as I can before I take transfer.

Let me elaborate a little further before we actually apply ourselves to the contract listed under Example of changes I would make to an estate agents agreement of sale. As a purchaser, besides setting out the manner of payment and other prescribed formalities, you are not obliged in law or otherwise to give the seller or the agent anything. This means that any clauses that place obligations or burdens on the purchaser outside the payment of the purchase price must be eliminated. By removing these clauses you are eliminating the contractual risk in the deal.

As far as the risk in the property goes, never ever buy a property on the back of verbal promises from the seller or the agent. If they say that the property can be rezoned commercial, then make your offer subject to the rezoning. If they say you can build a double story despite a title deed restriction that only allows for a single story, then make your offer subject to the removal of the title deed restriction. By adding in the right clauses you are eliminating the property risk aspects in the deal.

I almost choked on my coffee recently reading an article in the newspaper written by an attorney who went on and on about the dangers and risk in property development. What he harped on about the most was how if you buy land and then don't get the rezoning or development rights then you basically lose all your money and you own a piece of property that you cant do anything with.

I was so flabbergasted by this that I actually sent an e-mail to the editor asking who in their right mind would ever buy a piece of land to develop without making it suspensive on first getting the rights in place.

As far as my intention to make as much money as I can out of the property before I take transfer, this is what turns the agreement of sale into a blank cheque. Firstly, if you follow my advice and only buy property subject to getting certain rights in place, once the rights are in place they may have enormous value to another purchaser.

To give you an example my development co was involved in a deal where we tied up a considerable chunk of land, but purchased it subject to getting plan approval to do a large-scale development on it. 18 months later the plans for the development were approved. During that time not only did the property increase in value by virtue of time, but also by virtue of the rights that were now attached to the land. Suddenly we were entertaining offers on the same piece of land at 4 times what we paid for it 18 months before.

The beauty of this though, is that we did not own the land, we simply controlled it through an agreement of sale which shows just how powerful this little document can be. Even if you are not a developer, if you are an investor in an upward moving market, whether it be at 5% per annum or 30% per annum you should try and delay transfer as long as possible. Besides increasing the value of the property, by delaying the transfer it also gives you more time to negotiate a better deal with the bank, to find investors if need be, and to find a good tenant.

In my book I discuss in detail what I call the 6 golden rules on how to conclude an agreement of sale that will work for you as the purchaser. Instead of taking you through the rules one by one, I thought it would be far more beneficial to take you through the contract under Example of changes I would make to an estate agents agreement of sale and show you how the 6 rules should apply.

Before we start lets have a look at what the 6 golden rules are:

1. There is no such thing as a standard agreement
2. Make sure the agreement of sale matches the property description and the description of the seller
3. Avoid paying a deposit
4. Make sure that suspensive conditions are suspensive
5. Buy yourself time
6. Mitigate the risk

These rules can of course overlap depending on the circumstances.

In my book I said that if you only remember one thing from reading the book it is Rule number 1, that there is no such thing as a standard agreement, and I would like to add to that that there is no such thing as a standard clause in an agreement. Whenever I fill in agreements of sale and start filling in and crossing out clauses, I always get this very uncomfortable look from the agent. The agents then usually make the fatal mistake of telling me that I cannot change the agreement because it is a standard agreement.

The next time an agent says this to you, please tell them that the law of contract in South Africa provides for freedom of contract. This means that besides a few prescribed formalities you are more than free and allowed to add and delete clauses as you please.

You can also remind the agent of the legal maxim, caveat subscriptor which means that the signatory of a document is deemed to have read and understood the document that they signed, and that you are therefore not prepared to sign anything that you are not comfortable with.

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