INCIDENTAL SUBJECTS AFFECTING PROPERTY TRANSFERS: TRIPARTITE AGREEMENTS - PROCEDURES AND ADVANTAGES

If Seller A sells a property to Buyer B for R2 000 000.00 and, before transfer, B sells the same property to Buyer C for R2 200 000.00, there will have to be two transfers and transfer duty will be payable twice on each purchase price respectively. Section 5 (2)(a) of the Transfer Duty Act, however, allows for these two sales to be combined into one by what is known as a Tripartite Agreement. This is a special and somewhat complicated agreement which becomes a new original sale agreement between Seller A and Buyer C while Buyer B will become an Intermediary. Its effect, if properly drawn, will be as follows:

1. The original sales between A-B and B-C will be cancelled and the new agreement will replace them;
2. A will sell directly to C for the sum of R2 200 000.00. Provision can be made for B's profit of R200 000.00 to be available to him and for payment of both of the commissions due to the respective Agents.
3. Transfer duty will only be payable once by C. B benefits by escaping liability for transfer duty.
4. The transfer fees will only be payable once, by C. A fee for drawing the tripartite agreement and all attendances thereto (drawing declarations of cancellation, handling finances, etc), however, will be payable by B to the Conveyancer.
5. If the original Seller is a registered VAT vendor and the property is sold in the normal course of his business (a Bank selling a repossessed house, a Developer selling a new residence, for example), both Buyers will escape liability for the payment of transfer duty.

No doubt you have heard the rumour that tripartite agreements are "illegal". This is entirely untrue, but it seems to have arisen from a reluctance on the part of many attorneys to draw them. They are generally regarded as hot and dangerous contracts! The reason is that the Receiver can come back on the intermediary (Buyer B) for the payment of transfer duty if he is not satisfied with the terms of the agreement. They are also tricky contracts to draw as they combine two agreements into one.

In 1984 the Commissioner for Inland Revenue gave specific guidelines as to the circumstances in which tripartite agreements would be considered valid for the purposes of escaping transfer duty by the Intermediary. The new tripartite agreement must effectively cancel both the original contracts of sale. I have seen tripartite agreements which include the following clause:

If this contract should be cancelled or lapses for any reason, or if any suspensive conditions hereto are not duly fulfilled, then the original sales referred to in the preamble shall be revived between the parties.

The purpose of this clause is to protect the sale between A-B in case C cannot obtain a bond or otherwise defaults. SARS, however, regards such a clause as indicating that the tripartite agreement merely temporarily supplements or varies the original sales and does not effectively cancel them. SARS can then require transfer duty from both Buyers.

Likewise, if the tripartite agreement provides for any party to comply with any obligations under the cancelled sales (payment of interest, rates, etc), transfer duty will again be payable by both Buyers. The new contract must effectively cancel the original sales by completely extinguishing all obligations between the parties. It must provide solely for reciprocal obligations between Seller A and Buyer C. Any provision for obligations to or from Buyer B will be regarded once again by SARS as proof that the tripartite agreement merely supplements the original sales and does not cancel them.

What is the effect of this and why do many people shy away from tripartite agreements? The reason is simply that a properly drawn contract which completely cancels the original sales, leaves the Intermediary, Buyer B, with no protection or recourse against Seller A or Buyer C if the sale should fall through or be threatened in any way. If C should fail to pay his transfer costs or provide guarantees, B cannot put him on terms or seek to cancel the sale. Only A can do this. Recourse against any default by the Seller or Buyer can only be taken by the other party - B has no say in the matter and takes the role of a spectator. His advantage is that he escapes transfer duty and part of the Conveyancer's costs - his disadvantage is that he is vulnerable to any default on the part of either or both of the other parties. He must weigh up the risks. Most certainly the Agent and Conveyancer must advise him of the risks of signing a tripartite agreement as the intermediary party.

Tripartite agreements are, nevertheless, very useful where Agents or others wish to speculate by buying a property cheaply in a poor condition, for example, and then improving it for quick resale at a profit.

CREDIT:

Property Law Publications

John Gilchrist

082 904 1300