The effective release date of the Estate Agency Affairs Act 112 of 1976 (EAAA) clearly indicates that it was outdated. There has been significant change in economies, business laws and regulations, banking and other industries in the last 43 years and the revision of this legislation could be said to be long overdue.
The Property Practitioners Act 22 of 2019 (PPA), which replaced and repealed the Estate Agency Affairs Act 112 of 1976 (EAAA), was promulgated in the Government Gazette on 3 October 2019.
Application of the Act
The biggest change between the EAAA and PPA is the scope thereof. Where the EAAA was only applicable to estate agents, the PPA applies to everyone that meets the definition of a ‘property practitioner’ as outlined in section 1 of the PPA. This definition is much broader and covers numerous parties that were previously unaffected by the EAAA.
In short, the definition includes all natural or juristic persons directly or indirectly involved in the selling, purchasing, letting, renting, financing, managing and marketing of property on the instruction of any person or on their behalf.
This may seem simple, but when you look at the definition in more detail, you will note that even property valuers, auctioneers, people doing home inspections for purchasers before the sale, property managers, property developers, agents involved in the sale of timeshare as well as digital portals exhibiting properties (such as Property24) are included within the ambit of the PPA. Basically, if you are in any way involved in the selling or letting of property, you may fall within the scope of the PPA.
Exclusion from the Act
As the definition states that the activity must be on the instruction of another person or on their behalf, natural persons selling their own property are excluded from complying with the PPA. Other exclusions relate to a person who carries on any of these services not in the ordinary course of their business, as well as attorneys, candidate attorneys and sheriffs of the court.
The specific exclusion of attorneys and candidate attorneys from the definition of a property practitioner has far-reaching implications.
Under the EAAA, attorneys were allowed to register as estate agents. Consequently, many attorneys set up their businesses to render services as both an estate agency and a law firm. Under the PPA, this is no longer allowed. The business structures of the affected attorneys will have to be changed and it could even cause a loss of revenue for these firms.
Transformation and B-BBEE implications
In order to facilitate transformation in the property sector, the Act now includes an entire chapter on transformation. In accordance with this chapter, the Practitioners Regulatory Authority (previously the Estate Agency Affairs Board) must establish a property sector transformation fund which will be applied toward black economic empowerment programmes. All property practitioners, except for those with an annual turnover of less than R2,5 million, are required to comply with the Broad-Based Black Economic Empowerment Act and to obtain a Broad-Based Black Economic Empowerment (B-BBEE) certificate.
Accounting and audit implications
Although not always enforced, it was common practice among estate agents to include a clause in the sale contract stating that should the sale be cancelled for whatever reason, the commission is still payable to the agency. In terms of the PPA, this is no longer allowed. Commission is only allowed to be collected upon registration of the property.
This could necessitate a change in accounting policy for the recognition of revenue by property practitioners. The requirements of the relevant reporting standards in this regard would have to be complied with by the preparers of financial statements in the first financial year after the PPA becomes effective. Auditors will have to design and perform specific audit procedures to obtain sufficient appropriate audit evidence that this was appropriately treated in the financial statements that they are auditing.
More specific requirements have been added to the PPA in prescribing the requirements of accounting records to be maintained by practitioners, for example client mandates and advertising material. This will require auditors to ensure that audit procedures are designed and performed to assess compliance with these provisions.
As previously required in terms of the EAAA, all property practitioners are required to open a trust account and to have it, as well as the business financial statements, audited annually. With the definition of a property practitioner being expanded, this will have a significant impact on the accounting, corporate governance and compliance of parties that did not fall within the scope of the EAAA.
A bit of relief was however built into the PPA for small entities. The PPA allows for property practitioners with an annual turnover of less than R2,5 million to select an independent review on their business financial statements instead of an audit. Where the property practitioner trades as a company, the Companies Act 71 of 2008 should, however, also be considered. In terms of the Companies Act, a company holding fiduciary assets that exceeded R5 million at any point in time during the financial year will have to be audited. The decision to have the financial statements independently reviewed instead of audited should thus be carefully considered in terms of all laws and regulations affecting the entity.
The PPA also makes provision for certain classes of property practitioners to be exempt from opening trust accounts. These classes of property practitioners have not been published as yet. Property practitioners that do not fall within those classes of practitioners that are exempted but do not hold any trust monies can also apply for specific exemption from opening a trust account.
The two types of relief above should each be considered on its own. The relief in terms of the audit of the financial statements for small entities does not extend to the trust account, which would still have to be audited. Similarly, the exemption from opening a trust account does not exempt the property practitioner from having their business financial statements audited or independently reviewed. Professional guidance should be obtained where the property practitioner is unsure as to the application of the relief measures.
Another welcome change is with relation to the reporting deadlines imposed. In accordance with the EAAA auditors were required to report on the audit of the trust account to the Estate Agency Affairs Board within four months after the financial year end of the estate agency. This requirement has been relaxed a bit as the PPA requires that the property practitioner should submit the report to the Practitioners Regulatory Authority within six months of the year-end of the entity.
Other significant changes
In order to act as a property practitioner and enforce collection of remuneration the entity, as well as all employees of the entity that act as property practitioners, must have a valid fidelity fund certificate (FFC). Failure to comply with this could result in the practitioner being required to refund the remuneration received while they did not have an FFC. To ease the administrative burden on both the Property Regulatory Authority and the practitioners, the PPA makes provision that the FFC will now be valid for a period of three years. The FFC may, however, be withdrawn if the Practitioners Regulatory Authority sees it fit. In addition to the FCC, a property practitioner is now also required to have a valid tax clearance certificate as well as a B-BBEE certificate.
The responsibility of the seller of a property to disclose all the property defects has now been enacted. Although it was best practice to disclose these in the past, it was not a legal requirement.
Compliance with the PPA will be monitored by inspectors with wide-ranging powers of search and seizure. They will be able to enter business premises without a search warrant and to demand access to business records and, where needed, they can enlist the assistance of the SAPS who can use force to overcome resistance to gain entry. A search warrant is however required when the inspector wants access to the private residence of the property practitioner. Practitioners found to have breached the PPA can be liable for a fine of up to R200 000 or a maximum sentence of 10 years’ imprisonment.
The expansion of the definition of a property practitioner as well as the additional powers of the Practitioners Regulatory Authority may cause a lot of people sleepless nights. If you work in the property industry and were not previously required to comply with the EAAA, there is a possibility that you will now have to comply with the PPA. If you are unsure about the impact of the PPA on you or your business, it is advisable that you obtain advice from a qualified accounting professional or contact the Practitioners Regulatory Authority (previously the Estate Agency Affairs Board).
AUTHOR | Sindy Pretorius CA(SA), RA, National Technical Director at Moore South Africa
