The Benefit Of A Section 20 Transaction vs A Normal Offer To Purchase

In property transactions within developments, many practitioners and purchasers are familiar with the traditional Offer to Purchase (OTP) structure. However, in certain developments there is an alternative mechanism that can provide significant benefits to both the developer and the purchaser: a Section 20 transaction in terms of the Alienation of Land Act 68 of 1981.

Understanding the difference between these two approaches can be critical when structuring property transactions within a development.

What is a Section 20 Transaction?

Section 20 of the Alienation of Land Act 68 of 1981 regulates the sale of a unit in a development scheme before the scheme is formally opened or before the sectional plan has been registered.

In essence, it allows a developer to sell a future sectional title unit, even though the sectional title register has not yet been opened at the deeds office.

This means that the purchaser is buying the right to obtain transfer of the unit once the sectional title scheme is registered.

The Traditional Offer to Purchase (OTP)

In a normal OTP transaction:

• The property already exists as a registrable unit or erf.
• Transfer can proceed once the conditions of the agreement are fulfilled.
• There is no dependency on the opening of a sectional title register or future scheme registration.

Key Benefits of a Section 20 Structure

1. Enables Early Sales in Developments

A major advantage is that developers can secure buyers before the development is completed.

This improves:

• cash flow
• development feasibility
• the ability to obtain development finance

Banks and financiers often prefer seeing strong pre-sales in a development, which Section 20 transactions facilitate.

2. Certainty for Purchasers

Purchasers can secure a unit at an early stage and often at a more favourable price compared to purchasing once the development is completed.

Early purchasers frequently benefit from:

• launch pricing
• capital appreciation during construction
• better unit selection

3. Legal Protection Built Into the Legislation

Section 20 imposes strict formal requirements to protect purchasers.

These typically include:

• detailed disclosure regarding the development
• identification of the proposed unit
• protection of the purchaser's rights pending registration of the sectional title scheme.

These provisions are specifically designed to prevent abuse in off-plan developments.

4. Structured Development Process

The Section 20 framework ensures that the development process follows a clear legal path, typically involving:

• approval of building plans
• preparation of the sectional plan
• opening of the sectional title register
• transfer of the units.

This structured process provides predictability for both developers and purchasers.

When Should Section 20 Be Used?

A Section 20 agreement is particularly appropriate when:

• a new sectional title development is being launched;
• the sectional title register has not yet been opened;
• the developer wants to sell units off-plan.

Once the scheme is registered, transactions revert to the more traditional OTP structure.

Final Thoughts

While a traditional OTP remains the most common mechanism for property transfers, Section 20 transactions are an essential legal tool in the development space. When properly structured, they create a balanced framework that allows developers to launch projects while still protecting purchasers.

For developers, investors, and practitioners involved in sectional title developments, understanding the benefits of Section 20 transactions can unlock opportunities and ensure that developments are structured both efficiently and legally soundly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.