Unlocking the door to reserve prices in sales of execution (As published in De Rebus May 2021)
On 22 December 2017, r 46A of the Uniform Rules of Court (Uniform Rules) was amended to provide, inter alia, for a discretion for courts to set a reserve price for a sale in execution. More than two years have passed since the implementation of these regulations and there is still much uncertainty and inconsistency with the application of this provision. In particular, there is confusion as to what factors the court should consider when determining a reserve price and which assessments should be undertaken when calculating such a figure. Moreover, there is great concern and uncertainty of the process that follows when a reserve price is not met at the Sheriff’s sale in execution. This article accordingly seeks to highlight some of the challenges with r 46A in respect of the setting of reserve prices for sales in execution and further seeks to provide some suggestions on how the current process may be improved.
The calculation of a reserve price
As indicated, r 46A provides the court with the discretion to set a reserve price for a sale in execution. Unfortunately, the provision does not go any further in guiding the court as to how such a determination is to be made. Rule 46A(9) merely provides that the court must consider the market value and municipal rates of the property. No mention is made to other factors applicable for a forced sale, such as –
- transfer costs;
- potential eviction costs;
- holding or insurance fees;
- sheriff fees;
- legal practitioner fees; and
- other contingency costs.
Consequently, there has been some confusion among legal practitioners, banks and courts as to how a reserve price is to be calculated, what factors are to be considered, and what a fair reserve price should be.
Since the implementation of r 46A, the court has generally set high reserve price in line with the market value or forced sale value of the property (see C Singh ‘A consideration of r 46A (9) and the setting of court set reserve prices for sales in execution’ 2019 (Dec) DR 8). In most instances, these properties are not sold at the sale in execution due to the high reserve price. This accordingly results in the matter having to be referred back to the court for the court to reconsider the reserve price. I submit that such a process and delay is detrimental to both the debtor and creditor as its results in increased litigation and municipal costs, disinterest in the property, and the deterioration of the dwelling.
Accordingly, such scenarios should be avoided and a just and equitable balance needs to the struck by the court when determining a reserve price ensuring that the interests of debtors, creditors and other interested parties are protected.
When determining a reserve price, the court should step into the shoes of a reasonable bidder or purchaser and consider what price they would willingly bid for the property under distressed or forced market conditions. I submit that a diligent purchaser at a sale in execution considers several factors before bidding for a property at a sale in execution, these include, inter alia, general transfer and conveyancing fees, costs of resale of the property, such as estate agents commission, electrical and compliance certificates, maintenance, upgrading or renovation costs, and possible eviction costs. These factors are currently not considered by the court when determining a reserve price.
Accordingly, it is suggested that a uniform procedure be established for the determination of a fair reserve price (see C Singh A critical analysis of the home mortgage foreclosure requirements and procedure in South Africa and proposals for legislative reform (PhD thesis, University of KwaZulu-Natal, 2018) (https://researchspace.ukzn.ac.za, accessed 4-4-2021)). It is recommended that a reserve price should be approximately 70% of the forced sale value (FSV) of the property minus outstanding rates and taxes. For example, a property with a forced sale value of R 1 million, with outstanding arrear rates of R 50 000, the reserve price of the property should be calculated using the conservative formula: (FSV x 70%) – rates. In our example, a reserve price of R 650 000 would be estimated as (R 1 million x 70%) – R 50 000 = R 650 000).
The question must, however, be asked whether or not the idea of having a court set the reserve price is favourable in the South African economy. I submit that while the setting of a reserve price may potentially resolve the problem of homes being sold at low prices, the disclosure of a reserve price by the court may reduce the potential selling price of the property at the sale in execution, as buyers will reduce their bidding prices in accordance with the court-set reserve price. On the other hand, should the court set the reserve too high and the amount cannot be met, buyers will detach themselves from these sales and this may result in some homes becoming non-equitable, and will leave mortgagees without any security.
The venues for sales in execution
Over the decades, there have been several allegations of abuse of process at sales in execution (see South African Human Rights Commission Report on the public hearing on housing, evictions and repossessions, 2008, www.sahrc.org.za, accessed 5-4-2021). The allegations of collusion and corruption during sales in execution have significantly tarnished the image of the judicial sale in execution process. Currently most sales in execution are still performed at the Sheriff’s office at the sole oversight of the Sheriff. There is no judicial oversight or governance over proceedings, and there still appears to be room for abuse of process, fraud and corruption at these sales.
I submit that the current sale in execution process is unfavourable and it is recommended that all sales should be performed at the court of execution (ie, the court in which the judgment was granted) as opposed to the Sheriff’s office. It is also recommended that the sale should occur by the Sheriff with the Registrar of the court present – the Sheriff being the auctioneer and the Registrar being the administrator of the auction proceedings. Further, it is suggested that all sales in execution should be listed on the court roll.
I submit that the introduction of judicial oversight in the sale in execution process will eradicate the potential for fraud and corruption. Moreover, it is contended that the Constitution and rules governing judicial oversight mandate the courts to play an active role in the sale in execution process. The involvement of the courts will allow for a more uniform process, which will prevent potential abuse. Such a process will allow for the openness and transparency of proceedings, mitigate the risk of fraud and corruption, as the sale will involve two independent court officials, and possibly increase the number of bidders at auctions as there is generally a larger audience at courts (see C Singh ‘To foreclose or not to foreclose: Revealing the “cracks” within the residential foreclosure process in South Africa’ (2019) 31(1) South African Mercantile Law Journal 145 and C Singh ‘Eeny, meeny, miny, moe, to which court will foreclosures go? A brief analysis of recent foreclosure proceedings and a consideration of the need for specialised foreclosure courts in SA’ 2019 (October) DR 31).
Court set reserves not met
In cases where the court reserve price is not reached at the Sheriff’s sale in execution, there is a lot of inconsistency as to whether or not this simply results in a ‘no-bid no-sale’, or whether the Sheriff is allowed to start the auction with fresh bidding until it reaches a bid as close as possible to the reserve price. In other words, if at the auction, after the Sheriffs reading of the conditions of sale and disclosure of the court reserve, there are no persons willing to bid at that reserve price, does this result in the sale simply being declared as a ‘no-bid no-sale’, or is the Sheriff permitted to allow bidders to place bids below the reserve and raise them up to or as high to the reserve (as with a normal traditional auction sale). This is particularly important as if the Sheriff opens the floor for bidding, the court can approve the highest reasonable bid from the sale, even if it is below the court set reserve. It also gives the court an indication of what buyers are prepared to pay for the property and this can be considered if a new reserve price is required to be set. Alternatively, if it is a simple ‘no-bid no-sale’, then there is no such information at hand.
At present, in cases where the initial court set reserve is not met at the sale in execution, an application in terms of
r 46(9) of the Uniform Rules is required to be made to have the reserve price reconsidered. In practice, such an application can take between six to eight months to be finalised. This results in extensive time delays and increased costs. If sales in execution are held at court, as recommended above, the matter can be set down immediately by the Registrar and the Sheriff. This process will be much quicker and more effective than the current process.
The burning question remains whether or not reserve prices should be set for a sale in execution. It must be accepted that sales in execution, which by their very nature are forced sales, will not always achieve market value prices. Auctions create an open sale environment allowing the property to be sold to the highest bidder, and the setting of high reserve prices may deter buyers from this traditional selling process. During a foreclosure the discretion is always with the judgment debtor on whether to voluntarily sell the property privately under normal market conditions, as opposed to having the property forcibly sold at a sale in execution. The general consensus is that banks only proceed to sale in execution as an absolute last resort in cases where there is no hope of rehabilitation, and non-cooperation by the debtor. Accordingly, the sale in execution is a valuable remedy in ensuring that creditor rights are protected and enforced, and alterations of its rules could prove damaging to the economy. It is thus vital that procedural checks are in place to ensure that all outcomes from the sale in execution process are in line with our constitutional values.