Hundreds of dispossessed homeowners filed a class action suit in the South Gauteng High Court on Tuesday (February 10), claiming damages from the major banks for foreclosing and then selling their properties for a fraction of their market value.

The applicants attempted to have the case heard directly in the Constitutional Court in 2017, but the judges ruled it should be heard in the normal way in the High Court.

The dispossessed homeowners are asking to be recognised as a class of applicants with substantially the same complaints. Many are clients of the Lungelo Lethu Human Rights Foundation, which is an applicant in the case.

The court application asks the court to recognise several different classes:

Those whose properties were sold for more than 10% below market value since the Constitution came into effect in 1994;

Those whose properties were sold by the banks in a manner that was not a “last resort” as required by law;

Those who remain in debt to the bank after their properties were sold at prices below market value; and

Those who were overcharged on their bond fees in the course of legal action.

All the major banks are cited as respondents, as well as the National Credit Regulator, the SA Human Rights Commission and the Minister of Constitutional Development.

It is estimated that up to 100 000 South Africans have lost their properties through foreclosure since the Constitution came into effect.

Opt-out case

This is an opt-out class action, meaning that anyone who fits within one of the class categories is automatically assumed to be part of the action unless they specifically opt out.

It has been estimated that dispossessed homeowners have suffered a 35% loss of home equity through the foreclosure process, which means the banks could be facing claims of R60 billion or more.

Advocate Douglas Shaw, legal representative of the applicants, says the mortgage banks have routinely claimed they use foreclosure as a last resort, but the evidence suggests otherwise.

“Foreclosure, as it was practised by the banks in SA before the current reforms, was cruel and inhumane.”

“It has resulted in tens of thousands of families being rendered homeless at a time of financial distress, and most never recover from this. We are saying that the banks have violated the Constitution by arbitrarily depriving South Africans of their properties when alternative means of recovering their loans were available to them, and by stripping them of dignity.

“The result was a massive transfer of wealth to property speculators and the banks. This case is intended to right this wrong.”

King Sibiya, president of the Lungelo Lethu Human Rights Foundation, says the case is vital to restoring human rights and dignity for those stripped of their homes.

“Most of those affected are from poor communities. SA has a shocking history of property deprivation and eviction.

“In the 1980s it was the apartheid government that was doing the evicting, but this was child’s play compared to what the banks have managed to accomplish over the last 25 years. It is beyond argument that the banks have abused the court processes to have people thrown out of their homes, often for trivial arrears. The evidence is incontrovertible.

“Most of our applicants were not even informed that there was a judgment against them. They only found out when the new owner turned up with an eviction order. The banks are violating the human rights of their customers and they are abusing our court system. This must stop.”

Until December 2017, foreclosed properties were sold at sheriffs’ auctions without a reserve price, which resulted in some properties being sold for as little as R100 (and even R10), leaving the defaulting homeowner with a substantial debt to the bank.

The high courts in 2018 changed court rules to allow reserve prices to be imposed by judges. The widespread sale in execution of homes at below market price violates Constitutional rights against arbitrary deprivation of property, argue the applicants.

Many properties have been sold for “50% or even 90% less than they were worth,” according to the court papers.

Syndicates

It has long been claimed that criminal syndicates comprising bank representatives and property buyers operated unimpeded from the sheriffs’ offices, with bid rigging and unlawful sales in execution being rammed through even when the homeowners were in the process of appealing court judgments against them, or making arrangements to catch up on arrears.

Some of the applicants had their properties sold at auction for a fraction of their market worth even when they had better offers from private buyers.

Others had judgments issued against them even though they were up to date on their monthly mortgage instalments. Some attempted to have their arrears spread over the remaining term of the mortgage loans, a routine practice in the UK, but SA banks are seldom willing to do this, says Shaw.

Some of the applicants lost their houses even though they had rescission applications or appeals pending before the court – which should freeze any attempt to sell the property.

Many of those whose properties were sold in the foreclosure process lost most or all of the equity in the home – their life savings in most cases.

Focus

The applicants are asking that the court trial focus “on the questions of whether the witness’s property was sold for substantially less than value and whether the sale was a last resort and thus whether the bank is liable to that class and to avoid issues extraneous to those issues”.

Victory for the applicants would result in financial compensation for their losses, the rescinding of any judgments against them and the expunging of adverse listings with credit bureaus.

One of the deponents in the case, Innocent Gwisai, says banks have a common law duty of care to take reasonable measures to only sell as a last resort and to minimise the damage to the client when it does sell in execution (SIE). They also have an obligation to respect the right to housing and other constitutional rights such as property, dignity, just administrative action, and life.

The banks have shown a pervasive disregard for these rights over a prolonged period, even though they may have been in possession of a court order, says Gwisai.

At a Wits University presentation last year, on the problems surrounding sales in execution, Wits School of Law associate professor Jackie Dugard said courts were still pursuing SIEs on an ad hoc basis and there was no guidance regarding what reserve price to set in which circumstances.

“As a result, people are still losing their homes to sales in execution that are not the last resort and where there is an arbitrary/no reserve price set.”

Stephan van der Merwe, senior attorney at Stellenbosch University’s Law Clinic, says although SA has some excellent statutes and case law in defence of consumers, including the National Credit Act and the Consumer Protection Act, enforcement of these laws in the courts remains a problem.

“There is huge inequity between consumers and creditors when it comes to courts. Banks are able to outlast consumers when it comes to litigation because of their vast financial resources. Consumers rightfully complain that they are denied justice in a system so heavily weighted in favour of the banks.”

International trends

The class action suit comes at a time when judiciaries around the world are coming out in favour of distressed consumers.

Last year the European Union issued the Unfair Contract Terms Directive to tilt the scales of equity more in favour of consumers. This came after an avalanche of complaints that borrowers and consumers were being required to sign agreements heavily weighted in favour of creditors.

“Contract terms are unfair and, therefore, not binding on consumers if, contrary to the requirements of good faith, they cause significant imbalance in the parties’ rights and obligations to the detriment of the consumer,” says the EU directive.

Read:

Congratulations, your mortgage arrears have been extinguished

Forgive them their debts

Legal bias

Many South African consumers have complained of a legal bias towards creditors with regards to both unfair contract terms and the ability of deep-pocketed banks to out-litigate their customers in court.

Thousands of Europeans have lost their houses in recent years due to mortgage loans priced in Swiss francs. Some Polish homeowners ended up owing twice the original amount borrowed due to the doubling in value of the Swiss franc since 2008. The European Court of Justice last year ruled that local courts could substitute the terms of contract and allow payment in local currency.

In Romania, the Datio in Solutum (DIP) law allowed overindebted consumers to hand back their homes to the bank and walk away free of debt under certain circumstances, one of which was financial hardship. This point was routinely challenged by the banks in court.

Like many other European countries, many Romanians had taken out mortgage loans in Swiss francs. The Romanian Constitutional Court last year made it easier to plead financial hardship, and therefore satisfy the requirements of the DIP law, which means customers will have the choice of returning their homes to the bank free of debt, or adjusting the mortgage repayments on terms that are affordable to them.