Property transfers: who gets the interest?
Buying a property is an involved and often daunting process, even if you're an experienced buyer. Probably the last thing on your mind is the interest your money earns while it is held in trust until the transfer is finalised.
Interest certainly wasn't top of mind for Gareth and Jenny Richards when they handed R2.6 million to self-employed conveyancer Lana Ebersöhn to pay for their home in Langebaan on the Cape West Coast last year.
But the following clause in the offer to purchase had not escaped the couple's attention: "The purchase price shall be payable to the transferring attorney ... to be held in a special interest-bearing trust account ... until date of registration of transfer ... with all interest to accrue to the purchaser, save for an administration and finance charge fee not exceeding R100."
Although the interest rate wasn't stipulated in the offer to purchase, the Richards expected to earn about R17 700 while their money was invested for the two months they assumed it would take for the transfer to be effected. (Their money had been earning R11 500 a month in a money market fund, which was paying interest of about 5.3 percent a year. In two months, they would have earned R23 000.) So you can imagine the Richards' shock when they were offered a paltry R369 in interest - or 0.01 percent - for the two months that their money was invested by Ebersöhn.
When the couple questioned Ebersöhn about this apparent error, they were told it was "the correct amount of interest ... calculated in accordance with the rules between the Law Society and the banks. It is totally out of our control."
Trust account banking is regulated by the Attorneys Act. The Act says that unless you specifically instruct an attorney in writing that the interest earned on money that the attorney holds on your behalf is for your benefit, it accrues to the Attorneys Fidelity Fund (see "Where does the interest go?", below).
Ulrik Strandvik, conveyancer and director of Gunstons Attorneys in Cape Town, says you, as a buyer, must instruct a conveyancer to invest your money on your behalf if you want to receive the interest. "Although the offer to purchase may state that the deposit is to be paid to the attorney and interest is to accrue to the purchaser, it is important that the purchaser gives the attorney written instruction to invest the funds," he says.
It is standard practice for a conveyancer to have the buyer sign an "instruction to invest" document, Strandvik says.
He says a conveyancer is entitled to charge you a fee for administering your investment. This takes the form of an administration fee, or a percentage of the capital invested, or a percentage of the interest earned. However, not all attorneys charge a fee for administration.
It would be unethical for a conveyancer not to draw your attention to a clause in an offer to purchase relating to how your money is invested, he says.
The interest rate that applies to money invested on your behalf is negotiated by the conveyancer and the bank. It is usually based on call rates and on how much is invested, Strandvik says.
When the Richards questioned Ebersöhn about the interest they earned, she referred them to Absa's Vredenburg branch, which gave them a schedule of the interest rates that apparently applied in Saldanha, Vredenburg and Langebaan. According to the schedule, investments of more than R100 000 would earn interest at a rate of 1.1 percent a year. But the Richards were offered interest of about 0.08 percent a year.
Ebersöhn says when she queried this with Absa, she was told the interest rates had changed and that the bank had informed only its larger clients.
Absa says the Richards' money was invested in a call account that Ebersöhn opened via internet banking, "where a generic system rate of 0.01 percent was applied". Arrie Rautenbach, head of retail markets at Absa, says Absa was not notified by Ebersöhn that the account was a section 78(2A) account (see "Types of trust accounts", below).
"The general practice in Absa for attorneys is that they indicate which accounts are opened in terms of section 78(2A), and the third-party details [the purchaser's details] are captured under the account name. The rates on these accounts are negotiated based on the portfolio holding of the attorney.
"Absa also offers a fully automated Attorney Management System (AMS) where attorneys can open, manage and close section 78(2A) trust accounts online. Mrs Ebersöhn, however, is not a user of AMS."
Ebersöhn says up until now Absa has prevented her from using AMS, and the bank told her that her business was too small to be accepted on the system.
Richards says he and his wife want only what is due to them. He says he holds Absa morally liable for having had the benefit of his money and Ebersöhn liable for unprofessional conduct. He has laid a complaint against her with the Cape Law Society (CLS) for failing to show due care when investing his money. He says Ebersöhn had a duty to ensure that the return on his investment was fair and reasonable.
"When money is held in trust, a trustee is expected to show a greater duty of care to those funds than they would to their own money. Do you expect me to believe that if she had an investment of this magnitude, she would place her own money without asking what interest she would receive?"
Richards has issued Ebersöhn with a demand for payment of R12 000 in lieu of the interest he believes he should have earned. This is the maximum amount that can be claimed in the Small Claims Court. Ebersöhn believes she is not liable.
Frank Dorey, acting director of the CLS, says the matter has been referred to the society's disciplinary committee for consideration at its meeting next month.
According to the Guidelines for Conduct of Property Law Matters, found on the society's website (www.lssa.org.za), one of the duties that a conveyancer has to a buyer is to: "Invest all moneys paid by the purchaser towards the purchase price in an interest-bearing account in terms of section 78(2A) of the Attorneys Act, as is normally provided in the agreement of sale or, if not, with the written consent of the purchaser as stipulated in the said Act. Ensure that the requirements of the Act are complied with and remember that you have a duty of care in this regard."
Ebersöhn says she was informed by Peter Pearson, legal officer in the disciplinary department at the CLS, that "this matter is now much more than just a complaint against me. They have now involved Absa, as there are more firms (members) in the same position that I am."
Ebersöhn says she has provided proof to the CLS that the account "makes reference to section 78(2A), as well as the name of Mr Richards".
WHERE DOES THE INTEREST GO?
Buyer beware: unless you stipulate that you want to be paid the interest your money earns when you entrust it to a conveyancer, the interest may be paid to the Attorneys Fidelity Fund and, in effect, be used for attorneys' indemnity cover.
The Attorneys Fidelity Fund website (www.fidfund.co.za) says the fund and the legal profession have negotiated "special arrangements on a national basis with most of the commercial banks" for money invested in trust accounts where the interest is paid to the Attorneys Fidelity Fund.
"Where the interest is paid to the Attorneys Fidelity Fund" means these special rates apply only to money in attorneys' trust accounts or money invested on behalf of the fund. In other words, these rates do not apply to money invested on your behalf - and you will receive the interest earned on your money only if you explicitly instruct a conveyancer in writing to invest your money on your behalf.
Gareth Richards describes as "legalised theft" the fact that you could lose the interest your money earns.
"Why should attorneys effectively have their malpractice insurance paid by unsuspecting clients?"
Last year, Richards entrusted to conveyancer Lana Ebersöhn R2.6 million to be invested in an interest-bearing account until transfer was effected.
Ebersöhn invested Richards' money with Absa in an account where the interest was for his benefit, but where it earned only 0.08 percent. At the time, Absa was paying interest of 4.1 percent a year on amounts exceeding R1 million held in trust accounts where the interest is paid to the Attorneys Fidelity Fund.
Although attorneys' clients are not entitled to the same rates that the fund has negotiated with the banks, you may be forgiven for expecting your attorney to negotiate similar rates for you.
Andrew Stansfield, finance executive at the Attorneys Fidelity Fund, says it is not part of the mandate of the fund to negotiate interest rates on section 78(2A) client investments. "This query should be directed to the law societies in their capacity as regulators of the profession."
Stansfield says the interest paid to the fidelity fund is used to provide a base layer of professional indemnity insurance and to compensate you in the event that the money you entrust is stolen by an attorney.
The protection provided by the Attorneys Fidelity Fund is to encourage the public to use the services provided by legal practitioners with confidence.
Ulrik Strandvik, conveyancer and director of Gunstons Attorneys in Cape Town, says with trust accounts where the interest accrues to the Attorneys Fidelity Fund, attorneys pay the interest to their local law society. The law society then pays it over to the fund.
TYPES OF TRUST ACCOUNTS
The Attorneys Act provides for three types of bank accounts for money held in trust:
* Section 78(1) - current bank accounts;
* Section 78(2)(a) - investment accounts for trust money of various clients; and
* Section 78(2A) - investment accounts for client money.
Frank Dorey, acting director of the Cape Law Society, says interest that accrues in terms of sections 78(1) and 78(2)(a) is payable to the Attorneys Fidelity Fund, whereas interest that accrues in terms of section 78(2A) is payable to the person on whose behalf the funds are held.
Andrew Stansfield, finance executive at the Attorneys Fidelity Fund, says every practising attorney is obliged to channel all entrusted funds via a section 78(1) trust account, before opening individual section 72(2A) accounts for the benefit of clients. "This provides an audit trail."
He says an attorney may transfer a portion of the pooled balance in his or her section 78(1) account to a section 78(2)(a) account in order to improve the interest return to the fund.
Regardless of the type of trust account used, you can claim against the Attorneys Fidelity Fund should you suffer a loss if, for example, an attorney steals your money, Stansfield says.
ADVICE IF YOU'RE PUTTING DOWN A DEPOSIT
Ulrik Strandvik, a conveyancer and director of Gunstons Attorneys in Cape Town, has this advice for buyers who put down a deposit:
* Make sure that when you pay your deposit to the conveyancer - or as soon as possible thereafter - you sign an instruction to the conveyancer to invest your funds. The conveyancer should have a standard instruction form for the buyer to complete.
* Find out from the conveyancer the interest rate you will earn on your deposit so that there will not be any nasty surprises down the line.
The conveyancer may not be in a position to negotiate with the bank on your behalf, but some conveyancers have the option to invest with various banks and can shop around to invest with the one that offers the best interest rate.
* Ask your own attorney to check the offer to purchase before you sign it. He or she will be able to guide you as to what questions to ask the conveyancer about the deposit and how it will be invested.
Posted at 06:33AM Oct 05, 2012 by Editor in Market |