When the safety of money depends on trust

When the safety of money depends on trust
In the property industry, role players must never forget that the sale and purchase of a property is a roller coaster of emotions for the people who may be selling a lifetime of memories or buying their dream home.

Author/Contact Pieter Niehaus
Publication The Legal Times
February 4, 2011


A home is often a family’s most valuable asset deserving careful protection. Some of that protection is contained in acts of parliament and regulations issued over the decades, to ensure that when the transfer of ownership in property is at stake, sellers and purchasers have a shield against unscrupulous behaviour.


Not all residential property transactions are the same. Conveyancing attorneys, estate agents, banks, mortgage originators and bridging finance institutions interact to ensure that the flow of funds is dealt with efficiently. Cases where the seller of a property purchases a new property and the purchaser simultaneously sells a property can lead to a scenario where nine transactions are linked in the deeds registry and three families’ financial hopes are in the hands of conveyancers and estate agents.


The Attorneys Act and the Estate Agency Affairs Act contain very strict provisions to manage clients’ trust monies. Property transactions often involve several hundred of thousands or even millions of rands and financial control is paramount. In a residential property sale agreement, a purchaser may be required to pay a deposit. The agreement should provide that the deposit, or even full purchase price, be paid into trust with either the estate agent or the conveyancing attorney. The agreement must also state whether the deposit will be invested in a separate interest bearing account pending transfer.


Both the Attorneys Act and the Estate Agency Affairs Act dictate how the funds must be managed and accounted for. In brief, if funds are paid into trust with an attorney or estate agent, those funds will be held in its trust unless specific instructions (such as those contained in the sale agreement) require the attorney or estate agent to invest the funds in a separate account for the benefit of the purchaser. In the latter case, the attorney or estate agent must open a separate interest bearing account with a reputable institution so that the deposit will accrue interest for the client’s benefit.

Trust money must be kept complete separately from the attorney’s or agent’s own money.

In contrast, where the funds are held in the attorney’s or estate agent’s own trust account, all interest that accrues on the trust monies must be paid over to either the Attorneys Fidelity Fund or Estate Agents Fidelity Fund to ensure that where misappropriation of funds by the agent or attorney do occur, the victims may be compensated for their losses from these funds.


Estate agents and attorneys must ensure that all this money is immediately paid into the trust fund and that their trust accounts and investment accounts are properly managed by having mandatory annual audits conducted by independent auditors. Also, complete financial records must be available and open for inspection by the Estate Agency Affairs Board or relevant Law Society. The acts therefore place great emphasis on ensuring that estate agents and attorneys act with the utmost good faith in relation to those trust monies as the funds are always received on account of a person in trust.


Where attorneys or estate agents act improperly in relation to trust funds, the relevant professional body will act to prevent further misconduct and to protect the client’s interest. These steps may include revoking the fidelity fund certificate issued to that firm or its directors, interdicting (temporarily or permanently) the estate agent or attorney from practising, and placing the trust and investment accounts under curatorship.


In addition, the Financial Institutions (Protection of Funds) Act, emphasises that where anyone deals with trust monies, they must so with the “utmost good faith…proper care and diligence” and such person may not ”…make use of the funds or…gain directly or indirectly any improper advantage…” whilst being the custodian of those funds.After all, trust always comes with highest level of responsibility.


( The Times )


LOSSES COVERED BY THE FUND
Typical losses covered by the Fund include the theft of money from deceased or insolvent estates, money held pending registration of the transfer of immovable property, or settlements in personal injury claims.
The Fund does not reimburse loss suffered as a result of negligence by a practitioner in the conduct of his/her practice. Business transactions are also not covered, or money handed to an attorney for investment purposes, nor loans to the attorney. Certain relationships such as family, business or partnership associations will preclude a person from claiming against the Fund.
Any person who believes that he/she has a claim against the Fund, should note the following:
1. Notice of the claim should be given to the Council of the Law Society concerned (i.e. in the province in which the practitioner practises) and to the Fund’s Board of Control within a period of three months after the claimant became aware of the theft, or by the exercise of reasonable care should have become aware of the theft (section 48(1)(a) of the Act).
2. Such proof as the Fund may reasonably require should be furnished within six months after receipt of a written demand requesting the submission of such proof (section 48(1)(b)).
3. In terms of section 49(1), the Fund may require a claimant to exhaust all available legal remedies against the practitioner concerned, and against any other persons liable in respect of the loss suffered, before having recourse to the Fund. However, the Board of Control is empowered to waive compliance with this requirement and claimants are therefore requested not to take any steps for the direct recovery of what is owed by a defaulting practitioner until such time as they are advised by the Fund to do so.
Claimants are strongly advised to ensure that in the interim period (i.e. before receipt of the Fund’s directions regarding action as particularised in 3 above), any rights of action which they might have do not become prescribed. Where claimants endeavour to recover directly from a defaulting practitioner, without having been directed by the Board of Control to do so, they will run the risk of not being able to recover costs incurred in the event of the practitioner’s estate being insolvent.
4.1 The claim should be made by the way of an affidavit in which the facts giving rise to the claim are fully set out. Such an affidavit will serve a dual purpose in that it will be used, firstly, for the purpose of proving a claim against the Fund, and secondly, to assist the South African Police Service in instituting a speedy and effective criminal investigation and prosecution against the defaulting attorney. In this regard, kindly follow the guidelines set out in the section entitled “Framework for a sworn affidavit in support of a claim” below.
4.2 The defaulting practitioner’s entire office file relating to the matter on which the claim is based (cover and contents) should accompany the affidavit.
5. Except where the Board of Control has directed that a formal enquiry in terms of the regulations framed under the Act should be held, consideration of the claim will be confined to the affidavit submitted. For this reason, therefore, any allegations in the affidavit in connection with amounts entrusted to the practitioner should, where possible, be corroborated by other means. In this regard, it is usual for the affidavit to be accompanied by a photocopy of the claimant’s ledger account or other relevant ledger accounts in the practitioner’s accounting records, which substantiate(s) the allegations in the affidavit. In addition, other evidence such as paid cheques, receipts or relevant correspondence should be submitted, and although photocopies will be accepted, the Fund will require the original documents where available, particularly paid cheques.
6. The Fund has a discretion to make a contribution towards the costs incurred by a claimant in establishing a claim against the Fund. As unnecessary correspondence and delays invariably result where a person who is not an attorney elects to attend to the submission of a claim, it is strongly recommended that a claimant should instruct an attorney to attend to the submission of a claim.
7. In terms of section 45(2), the Fund’s Board of Control has a discretion to pay interest on the amount of any admitted claim. In the event of such discretion being exercised, interest is normally paid from the date of first notification of a claim to the Fund’s offices. It is accordingly important for the Fund to be notified of a claim as soon as possible. Furthermore, failure to respond to any request from the Fund within a reasonable period of time may lead to such discretion being exercised less favourably.