The recent case of Social Housing Regulatory Authority v Free State Social Housing Company and Others [2019] ZAFSHC 240 highlighted the precarious position of the property developer in a social housing project in South Africa. In 2019, the Social Housing Regulatory Authority (“SHRA”) had to apply for administration of one of its accredited social housing institutions (“SHIs”), namely the Free State Social Housing Company (“Freshco”), after investigations uncovered widespread irregularities. The investigations were in response to a liquidation application launched by property developer, Calgro, against Freshco for failure to pay its debt. Calgro is currently listed as a creditor against Freshco and therefore may only receive a portion of the outstanding amount should Freshco be liquidated. It is critical that the payment flows for the property developer are secured to reduce the risk of this type of arrangement.
An accredited SHI (a non-profit, governmental authority or housing co-operative) can apply for a social grant from the SHRA for 70% of the development cost of the social housing project. The remainder of the funds must be sourced from debt financing or own equity. The SHI can appoint a developer to design and build the project. The SHI receives funding from the SHRA subject to completion of project phases and then the SHI pays the project developer.
The Social Housing Act, 16 of 2008 (“SHA”), does not make provision for the role of the property developer In a social housing project. It does refer to an Other Delivery Agent (“ODA”) that could be a private company but its role would go beyond design and construction of a project. Instead, it would also include the management of the social housing unit. In addition the ODA is required to include a 20% equity stake to finance the project. The option of being an ODA therefore may be a viable option for a number of property developers in terms of the onerous role of property management and the financing obligations.
The SHA Regulations provides for the SHRA to “accredit service providers who provide services to social housing institutions aimed at organisational development, building of capacity and institutional support in respect of which grants may be made directly to such service providers pursuant to section 11(3)(a) of the Act.” Arguably a property developer could be regarded as a “service provider” to a SHI. The SHRA is obliged to publish a list of accredited service providers in the government gazette and may publish lists in respect of different categories of service providers. However, it appears that the SHRA has made no such publication of a list of accredited service providers in a government gazette and does not have a list of “accredited service providers” on its website.
Therefore the only way that the property developer can protect its right to receive payment is in terms of the contractual arrangements. The property developer would enter into a “development agreement” with the SHI to receive payment from the project. In addition, the property developer should ensure that it is a party to the social grant agreement with the SHRA and has a right to receive disbursements for the successful completion for the various phases of construction directly from the SHRA.
Further reading: IOL, Cape Argus