Retirement housing: SCA ruling casts doubt on protection of life rights buyers

People who buy life rights in a retirement development might not have the level of protection they thought they had in the event that the developer of the scheme goes into liquidation.

This follows a Supreme Court of Appeal (SCA) judgment overturning part of a Western Cape High Court judgment that found that six purchasers of life rights in the St Leger Retirement Hotel located in Muizenberg in Cape Town had a valid claim in terms of Section 6(4) of the Housing Development Schemes for Retired Persons Act (HDSA) for the refund of the purchase price entrusted to a legal practitioner, where the practitioner had paid the entrusted amount to the developer of the scheme prior to the developer’s insolvency.

The appeal was lodged by legal firm Herold Gie & Broadhead Inc (HGB) against a judgment in favour of retirees Richard Timothy Harris, Phyllis Mary Early, Oscar Walter and Alan Leaonard, Harvie Broadhurst, Annelisie Jansen van Rensburg-Hattingh and Michele Ann Wallis.

SCA Judge Nambiha Dambuza, with SCA judges Caroline Nicholls and Nolwazi Mabindla-Boqwana and acting SCA judges Ronel Tolmay and Nobulawo Mbhele concurring, said on payment of the purchase price, the purchasers took occupation of their units during the period June 2009 to November 2011.

During June and July 2009, the purchasers authorised HGB in writing to pay to the developer all the moneys that had been entrusted to it as the purchase price in respect of the life rights and HGB accordingly released the funds to the developer.

However, in a letter dated 24 October 2014, the purchasers cancelled their life rights agreements and each demanded a refund of their purchase price.

The purchasers alleged that:

• They had not been furnished with the certificates of compliance contemplated under sections of both the HDSA and the National Building Regulations Standards Act (NRBA); and
• The developer failed to inform them, prior to the conclusion of the agreement, that use and occupation of the retirement hotel as contemplated in the agreement would not be “legally possible” despite being aware that the required certificates could not be issued.

The developer was placed under provisional sequestration on 17 February 2016 and an order of final sequestration was granted on 9 March 2016.

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Claiming refunds

The purchasers subsequently lodged their claims for a refund of the purchase price with the trustees of the insolvent developer’s estate but only received concurrent dividends.

In October 2017, the purchasers instituted action proceedings against HGB, claiming a refund of the purchase prices which had been paid into HGB’s trust account.

The purchasers’ claims for reimbursement of the purchase prices were founded on the provisions of Section 6(4) of the HDSA, which they claimed entitles a purchaser in a scheme developed in terms of the HDSA to a refund of the purchase price held in a legal practitioner’s trust account, where the developer of the scheme becomes insolvent.

The purchasers also pleaded that when the developer became insolvent:

• It had not met its obligation to furnish them with the relevant certificates;
• They cancelled their life rights agreements, as communicated in the letter dated 24 October 2014 from their attorneys, Biccari Bollo Mariano Incorporated; and
• They were not “bound” by the written authority to HGB to release the funds which each of them had signed.

HGB filed a special plea claiming that the purchasers’ claims had prescribed because the purchasers instructed HGB to pay the purchase prices to the developer during June and July 2009 and HGB had immediately acted on the instructions but the summons were served on HGB on 4 October 2017, more than three years after the claimed debts had arisen.

Judge Dambuza said of relevance in this appeal is the plea by HGB that Section 6(4) of the HDSA finds no application in this case because by the time the trust became insolvent they had paid to the developer all the moneys that had been entrusted to them by the purchasers and there were therefore no moneys “kept in trust”, as specified in Section 6(4) of the HDSA.

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High court conclusion ‘inconsistent’ with the law

However, Judge Dambuza said the high court’s conclusion that the purchasers were HGB’s trust creditors is inconsistent with the language of Section 6(3)(a) of the HDSA.

“Under that section, the purchase price is entrusted to the practitioner, ‘to be kept for the benefit of the developer …’, she said.

Judge Dambuza said consequently it is the developer rather than the purchaser that is the practitioners’ trust creditor.

She added that ordinarily, on sequestration of the developer, the purchase price funds would become part of the developer’s insolvent estate and, had this not been the case, it would have been unnecessary to protect the purchasers from the creditors as provided for in Section 6(4) of the HDSA.

Dambuza referred to the high court separating three technical questions for prior determination as points of law in terms of the Uniform Rules of Court following a request by the parties.

She said the high court determined all three questions in favour of the purchasers and found that the argument made by HGB that the purchasers could not rely on Section 6(4) of the HDSA was inconsistent with the purpose of a section of the HDSA that was enacted to protect elderly persons against “possible exploitation or misfortune by a developer”.

Judge Dambuza said the conclusion reached by the high court was also premised on a section of the Attorneys Act related to the regulation of attorneys’ trust accounts and found that the purchasers were the trust creditors of HGB.

“Consequently, by releasing to the developer the entrusted moneys that were the equivalent of the purchase prices entrusted to it by purchasers, HGB had ‘violated an entrustment under … the HDSA’.”

Judge Dambuza said the court held that Section 6(4) of the HDSA confers a statutory right of action on the purchasers to claim reimbursement of the purchase price in the circumstances.

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Prescription

However, Judge Dambuza said in this case HGB filed a special plea of prescription that remains undetermined while the purchasers pleaded their cancellation of the life rights agreements and HGB further sought to repel the claim for repayment by relying on the authorisations to release the purchase price.

“It seems to me that the separated questions [on points of law] might be inextricably linked to these issues.

“Furthermore, the first question is framed in a complicated manner. Apart from this, the factual context and the legal framework within which the identified points of law arise in this case are complex, and have not received much consideration by our courts.

“It would have been more convenient to have all the issues fully ventilated in the same hearing.

“Nevertheless, we are constrained to considering the appeal on the issues determined by the high court,” she said.

Judge Dambuza added that there are some guiding principles that were not ventilated in the high court in relation to the pleading in this case because of the manner in which the issues were dealt with in the high court, and it would be improper to decide this issue on appeal.

She said the decision of the high court on this issue must also be set aside and the issue must be properly considered together with the rest of the contested issues.

Judge Dambuza said the appeal is consequently upheld with costs, but referred the matter back to the high court for determination of the remaining issues.

This article was republished from Moneyweb. Read the original here.