How the Debt Collectors Act applies to estate agents
Posted on Mon, Feb 07, 2011
The Debt Collectors Act of 1998 (DCA) is arguably South Africa’s most boring piece of legislation. Only the most resolute legal experts will attempt to wade through its 27 sections and try to intelligently interpret its numerous sub-sections. Nonetheless, it is an important addition to the suite of laws aimed at regulating finance. The DCA looks at how trust accounts are to be managed, prescribes maximum fees or recoveries that a registered debt collector may charge for the collection of debt and defines who may act as a debt collector. The rationale is noble; to protect the public from unscrupulous debt collection practices and excessive collection costs.
Case study:
In 2009 the DCA did, for the briefest moment in time, achieve a place in the limelight, albeit for rather controversial reasons. A ruling by the Council for Debt Collectors sparked heated debate amongst estate agents, letting agents and property managers.
The Council ruled in favour of the plaintiff, Mr Irvine, charging that Brunello Property Managers CC had acted in contravention of the Act by charging exorbitant fees for telephone calls, letters of demand and other costs without being a registered debt collector. Brunello was fined R10 000 plus costs for operating as a debt collector without being registered as such.
In their schedule of functions, estate agents are required to collect levies and rentals on behalf of clients. Most charge defaulters with penalties for costs incurred in the debt recovery process, on letters sent, and phone calls made. They have done so thinking that this falls under the auspices of the Estate Agency Affairs (EAA) Act. Many agents do not believe they are subject to the conditions in the Debt Collectors Act of 1998.
The Council differed with this view. It was of the opinion that the EAA Act was promulgated to exercise control over estate agents in their functions as such. The Debt Collectors Act, on the other hand, was enacted to monitor debt collectors and their functions.
The EAA Act does not entitle estate agents to recover overdue debts. When an estate agent begins collecting debts as an ancillary function to acting as an estate agent, that agent becomes a debt collector subject to the DCA.
Distinction:
The Council drew a distinction between an estate agent who receives rentals or levies (monies due) on a regular basis and that of collecting arrear rentals or levies (monies overdue).
So an agent simply collecting rentals or levies when they fall due on behalf of a landlord or body-corporate is not a debt collector in terms of the DCA and is acting under the EAA Act. In essence, the dividing line is where an estate agent collects arrear rentals and levies which are “debts”. From that point onward the agent is performing work reserved for attorneys and debt collectors.
Notwithstanding the media coverage of Irvine v Brunello, high levels of ignorance about the DCA remain. Some estate agents are oblivious to the existence of the act. Others who know it exists do not consider the activity of collecting rent as falling under the ambit of that legislation. The DCA is very specific that anyone who for reward collects debt should be registered under this act. The reward does not apply to the normal commission payment the landlord pays the estate agent (or agency) in terms of the lease agreement. It does apply however, to an estate agent who charges penalties and/or collection fees for outstanding rent (overdue monies). Such an agent will certainly need to register under the act.
Starting out as a rental agency:
Prudent assessment of the financial viability and long-term sustainability of opening a rental agency is a necessity. Questions you need to ask: Are other rental agents operating in the same area? How many properties are needed to cover our overheads and how quickly will we be able to build such a rental portfolio? Will we focus on short-term rental (holiday accommodation), long-term contracts or a mix of both?
A common mistake made by new rental agents is not considering all the costs in managing a property on behalf of a landlord. Andre Holtshausen, a chartered accountant and CEO of PayProp, explains. “A typical 10% commission on a R4000/m rental provides just R400/m. That is your total income, before paying for overheads, for all the time and effort in managing that specific property. Administration, correspondence or interaction with the tenant, landlord, maintenance companies and body corporates must all be taken into account in order to price your service properly. The upside is that the commission on a rental portfolio results in annuity income (if you look after your portfolio properly). This is in contrast to the once off commission on the sale of a property. Businesses with regular, strong annuity income grow in value and can be sold, if required. If commission is a percentage of the rental, you will receive, at the very least, a CPI related annual increase provided that the economy continues on an even growth path.”
Summary
In summary, estate agents who need to collect arrear rentals or levies now have three options:
1. Refer the debt to an attorney for collection;
2. Contract a registered debt collector to collect the debt; or
3. Register themselves as debt collectors in terms of the Act.
The South African Property Owners Association (SAPOA) is of the opinion that estate agents and managing agents should be exempted from the Act by specific mention. This stems from the sentiment that estate agents are subject to a code of conduct and operate trust accounts regulated by the Estate Agency Affairs Act and the Board established in terms of that Act.
If, in the future, estate agents are exempted from the Debt Collectors Act, the Estate Agency Affairs Act could be amended to include limitations on the types of fees estate agents may charge in collecting debt.
The legislation may be boring, but penalties are stiff. SAPOA recommends that until further clarity is obtained, all estate agents, property managers and managing agents, who undertake debt collection work, register with the Council as debt collectors.
To apply and for registration fees for companies, close corporations, directors and company officers go to the Council’s website www.debtcol-council.co.za.
Dieter Deppisch
Head: Property Data Research
Knowledge Factory