Buyers beware of the “subject to bond approval” clause.

For the majority of people, buying a property involves applying for a home loan. As a result, bond approval is catered for within an offer to purchase through a suspensive condition. Once this condition is met, the contract comes into force, but when is such a condition deemed to have been fulfilled?

What constitutes bond approval?

What does Bond approval in principle mean? The bond approval process can commence once all the credit and FICA requirements are met. The bank will initially provide Approval in Principle. This means that the bond value has been approved but is still subject to the bank finding value in the property and the loan amount requested.

Since the inception of the National Credit Act however, the suspensive condition is only deemed to have been met once a full quotation has been received from the bank which lays out all the terms and conditions that relate to the loan. Thus, where an application for a loan is financially not viable for an individual, he or she has a statutory right not to accept the quotation. This statutory right cannot be undermined by a contractual provision in a deed of sale. The court in Basson v Remini and Another 1992(2) SA 322 (N) held that a suspensive condition is only fulfilled once the loan agreement has been accepted. Therefore, it is advisable that a deed of sale provides that a suspensive condition is only fulfilled once the quotation has been accepted by the purchaser.

An offer to purchase will make provision for this process within a specified timeframe (typically 3 weeks). Some contracts include the option for this timeframe to be extended and it is important to note whether this is an automatic extension process or whether it is at the discretion of the seller or estate agent.

In theory, it seems simple to identify when a suspensive condition relating to bond approval has been fulfilled, but in practice there are a few additional complications that can arise such as a bond being granted but with an unfavourable interest rate, or not for the full amount requested or required by the buyer.

The bond approval process can begin once all the relevant documents have been submitted to the bank. A property valuation will need to be conducted and all the credit and FICA requirements will need to be met in order for the bank to approve the loan.

Insufficient loan amount

In some cases, a bond may be approved but for a lower amount than a buyer needs to proceed with the sale.

The buyer may then be given a timeframe within which to raise the remaining funds. However, if this is not achieved, the suspensive condition is considered not to have been met despite the bond approval and thus, the contract of sale is null and void.

Unfavourable interest rate

This scenario can cause issues for the buyer as, in principle, the suspensive condition has been fulfilled with the bond required to purchase the property being approved.

Protection against this unfavourable situation can be included in the offer to purchase. For example, an added clause in the contract can stipulate that a particular interest rate needs to be obtained. If this is not the case, the buyer may in any event reject the bank’s loan offer (based on the National Credit Act, this needs to be done within 5 days of the quotation being received) and cancel the offer to purchase.

Of course, it can be complicated to set an exact interest rate and therefore, in practice, a ballpark interest rate (above prime) will be included to offer guidance in these cases.

Careful consideration of terms of the contract of sale, and seeking the advice of professionals prior to signing can go a long way to ensuring a smooth and beneficial transfer for both buyer and seller.

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Written by Wessel de Kock

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