By Prinesha Naidoo
This article was originally published on the Moneyweb website.
South Africa’s largest banks stand to face a R60 billion claim related to their conduct in attaching and selling the homes of defaulting debtors at prices below market value.
Advocate Douglas Shaw filed an application on Wednesday for direct access at the Constitutional Court (ConCourt) on behalf of 219 people nationwide and “the country as a whole”. It is to be argued that going through three courts (magistrates court, high court and supreme court of appeal) is inappropriate as the case is being brought by people who are “exceptionally poor” and have been made “even poorer by the unconstitutional actions of banks”.
Court papers shared with Moneyweb list Nedbank, Absa, FirstRand, Standard Bank, Changing Tides 17 – a trustee of the SA Home Loans Guarantee Trust – Investec, the National Credit Regulator, the South African Human Rights Commission, The Rules Board and the Minister of Justice and Constitutional Development as respondents.
The case seeks to establish whether South Africa’s current law of sale in execution – whereby properties are sold at a public auction held by a Sheriff of the Court – is unconstitutional. For a sale in execution to take place, a bank must first obtain a court order to attach and sell the property so as to recover home loan repayments that are in arrears.
Shaw argues in a 151-page application that this process is not constitutionally sound in that it allows properties to be sold for less than their market value “which is against the rights to property and housing”, as defined by the Constitution.
Furthermore, it terms a previous ConCourt order that stated that banks must only sell a property as a last resort “a dead letter”. Domestic banks are said to sell property five times more frequently than international norms and in some cases for only 50% of market value. As such, the applicants want the court to explain what is meant by “last resort”. Shaw argues that the high court should not issue an execution order if the loan can be rescheduled or if there is sufficient equity to allow for the resolution of payments in arrears, as well the possibility of renting the property out and using the proceeds to cover bond repayments and the ability of the owner to sell the property or have the site developed.
The papers refer to one case where a bank attached and sold a property thought to have been financed by R300 000 loan, when the actual loan amount was only R30 000. “Despite this being drawn to their attention, they went ahead and sold the property. They sold it for R236 000 when it was worth R700 000 at the time,” the papers state. “It is now common cause and the bank admitted it did so wrongfully. No compensation has been forthcoming from the bank to date. This is typical of bank ethics (or lack thereof). Even when there is a clear bank mistake, it is necessary to sue them in order to recover the funds. Most people do not have the resources. Therefore, regulation is necessary.” The former property owner is said to have lost out on the returns from a 14-unit development due to the bank error.
The applicants also want the court to order that no debt shall be reclaimable from a creditor when a property is sold for less than the value of the bond. They would also like to establish that attached properties may be sold by estate agents rather than the sheriff to maximise sales prices for the benefit of debtors and creditors.
Liability in delict
The case also seeks to hold the banks and home loan providers liable when they sell properties at prices far below their market value. “Banks are liable in delict (or tort) in all other countries studied for selling property for less than it is worth. It would be strange, with our Constitution, if we were the only country where banks could act with impunity regardless of the damage done,” the papers state. Shaw said these countries include England, Scotland, New Zealand and Australia.
In arriving at the R60 billion figure, he explained that around 100 000 homes have been sold in execution since 1994. It is estimated that 10% of these homes were sold for close to market value and as a last resort, with the remaining 90% sold below prevailing market values. “The average house price in today’s money is about R1 million and the average discount that properties have been sold for appears to be around 50% of market price. Thus, the damage done to these 100 000 people is expected to be R500 000 times 100 000, which is R50 billion.” The maximum damages that could be awarded if every person affected since 1994 joined the claim would be R60 billion, which is equivalent to around one year’s income generated by the big four banks, the papers sate.
The applicants also want the Director of Public Prosecution to look into the criminal liability of the directors of each respondent bank for “knowingly selling properties for less than their value after the Constitution was introduced”. It stipulates that a report should be presented to the court within six months.
The vast majority of claims are leveled against Absa, FNB, Nedbank and Standard Bank.
Prior to the filing of the court papers, representatives from FNB and Standard Bank told Moneyweb that they were aware of intentions to launch proceedings against various banks and that the allegations would be formally reviewed and addressed once brought tabled before a court.
Nedbank also confirmed it had seen a draft version of the papers, and that it would defend the matter.
Shaw said only some of the applicants in the case have paid him fees. In cases related to township homes, of which there are around 100, people have paid him R1 000 each. He said he has received 10% to 20% of “normal fees” for the work that he has done and is pursuing the case as he thinks it is right.