Updated: Mar 22
Article by Nikita Pienaar
Warning: the following article contains a lot of technical information, and we do not recommend you use these methods without first consulting with our team of experts. These methods can be dangerous and very costly if the correct steps and proper legal documentation are not in place. This article is intended to educate and inform.
Usufruct & Bare Dominium
Full ownership of property consists of two rights, namely the right of ownership (bare dominium) and the right to use (usufruct). These rights are split between two people/entities; one would have the use, and the other would have the ownership.
Usufruct is one of the many laws used to transfer property ownership from one entity to another. As property investors, it is essential to grasp the various laws, as not every sale and opportunity will be the same, nor will they always follow the "normal" sales process we have grown to know.
How to calculate Usufruct & Bare Dominium
NB: It is important to note that these calculations and values are just for illustrative purposes. We are experts in the field, so please allow us to assist you when calculating the correct values.
Determine the fair market value of the property
Annual value = 12% of the capital value
Estimation of life expectancy (The age should always be factored with the next birthday after the date when the new holder acquired the right)
Fair Value of the Property x 12% x life expectancy = Bare Dominium
Determine the fair market value of the property minus the Bare Dominium
If the property gets rented, who declares the income?
The person who holds the Usufruct, known as the Usufructuary, has the right to use the property and enjoy the profits and benefits, provided the property is not damaged or modified in any way.
The Usufructuary is not obligated to live on the property during the agreed period. They are within their rights to rent the property out to someone else and gain a rental income from it. The Usufructuary must then declare the income in their personal income tax return.
While the Usufructuary may rent out the property, it may not be sold or left to another person.
At the end of the agreed period, the Usufructuary must give the property back to the rightful owner or heir.
Alienation of Land Act Agreements
This is another law that we often use to take over the ownership of a property from distressed buyers.
This is a great law to use if you want to take over a bonded property from a Seller but do not currently have the transfer fees. But be aware this is not a formal "transfer" of the property.
With an ALA transaction, you will sign an instalment sale agreement with a Trust, where the Trust pays off the purchase price to the purchaser. The Trust can take "occupation" of the property immediately and get the rental income. However, the bond and the property remain in the Seller's name.
The land must be intended to be used for residential purposes, which includes a Sectional Title unit.
Transferring property with an instalment sale
The purchase price gets paid to the Seller for a period of more than 12 months, and the instalments will usually cover the Seller's bond payments. There is no obligation to pay a deposit, but it may be advisable to include a deposit to cover a possible estate agent's commission, if applicable.
The transfer will only be registered to the new owner (Trust) after the total purchase price has been paid to the Seller.
Once the bond is paid off, it means the total purchase price is settled and then only will the transfer will take place.
Some other important details of an ALA transaction:
The Trust must buy the property at market value.
The sale agreements should be recorded against the Title Deed of the property by registration in the Deeds Office within 90 days of the signature of the sale agreement.
The Seller may not receive any payment in terms of the agreement before the title deed registration in the Deeds Office.
The bank where the bond is held has to be informed of the sale of this contract. This will ensure that the Seller cannot take out any other bonds over the property or sell the property without the buyer's (Trustee's) consent.
If a buyer of land in instalments has already paid 50% or more of the purchase price, the buyer may demand that the Seller pays a transfer to them.
The buyer will take over the payment of the mortgage bond, as well as the rates and levies of the property.
It is important to remember that when registering the contract, you want the property to be vacant so you can place a tenant. You do not want the Seller, who could not afford the bond, to be your tenant because there is a great chance that they will default on the rental payment.
What if the buyer purchases a property with a more significant market value than the outstanding bond it is taking over?
The difference will be brought in as a deposit and paid by creating a loan account for the Seller in the Buyer's Trust. The Trust then pays the Seller an amount equal to their bond instalments.
Using the purchase price paid by the buyer to the Seller, along with a deposit, the buyer can take over the property upon registration of the Alienation of Land Act Agreements, and all the Seller's obligations in terms of the mortgage bond registered over the property, including the monthly bond instalments. The buyer must simultaneously pay the balance of the purchase price to the Seller.
As you can see from all of the details shared, there are several ways in which you can purchase/take ownership of a property, depending on the circumstances. But, as we mentioned, these are not laws that we recommend you use without the guidance of our trained professionals.
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