2583853 LAWS2009A – Theme 3 Real and Personal Security.pdf

Introductory concepts - Nature of Security Interest Perfromence Performance: stipulates what will the debtor do (perform) and is generally based on a per contract basis. - Specific performance: form of performance promised by the debtor. - Alternate performance: stipulated equivalent performance. S...

Introductory concepts - Nature of Security Interest Perfromence Performance: stipulates what will the debtor do (perform) and is generally based on a per contract basis. - Specific performance: form of performance promised by the debtor. - Alternate performance: stipulated equivalent performance. Security Security: is done to ensure creditor receives performance. There are two types of security: 1. Real security: Right to apply proceeds from Debtor’s property in satisfaction of Creditor’s claim to the exclusion of the claims of other creditors. - Examples of Real securities by formal act: - Mortgage bond (immovable property); - Pledge (movable property); - Notarial bond (movable property); - Cession in securitatem debiti (incorporeal property). - Examples of Real securities by operation in law: - Lien (movable & immovable); - Landlord’s tacit hypothec (movable). 2. Personal security: Right to have third person carry out agreed performance. - Examples of personal securities by contract in law: - Suretyship. - Lien. So-called ‘general mortgage’ - A general mortgage is a security instrument that hypothecates all of the debtor’s property. - The only recognised type of “general mortgage” is a general notarial bond that hypothecates all of the debtor’s moveable property. There are very limited security benefits with a general notarial bond. - Any term in a mortgage bond that that hypothecates all of the debtor’s property is invalid. Deed Registry Act 1937 (section 53(1)) states: - The Registrar shall not attest any mortgage bond which: (a) Purports to bind movable property; or (b) Contains a general clause: Purporting to bind generally all the immovable or movable property or both of the debtor; and - The Registrar shall not register: Any notarial bond which purports to bind immovable property. 2583853 LAWS2009A – Theme 3: Real and Personal Security 1 Distinguishing feature of all Security - Security interest is always ‘accessory’ to ‘principal obligation’. - Validity, existence or enforceability of security right is directly dependent on validity of principal obligation. - However, Validity of principal obligation not dependent on validity of security interest. But consider the cases below: Panamo Properties v Land & Agricultural Development Bank FACTS: Creditor Bank gave debtor P loan. Loan secured by mortgage bond over P’s land. Bank argued loan was illegal for contravening Bank’s governing legislation but that mortgage still valid because Bank had claim in unjustified enrichment. ISSUE: Did invalidity of loan mean mortgage invalid? HELD: Loan was illegal and unenforceable. However, Bank had claim in unjustified enrichment. The mortgage bond stated it was ‘continuous covering bond as security for P’s liability towards Bank for whatsoever reason’. The mortgage was valid. Tattersall v Nedcor Bank FACTS: Debtors bought land. Debtors borrowed money from bank to develop land. Loan secured by mortgage bond over land. Previous landowner obtained court order re-transferring land and cancelling mortgage bond. Bank sued debtors for repayment of loan. ISSUE: Was duty to repay loan extinguished by cancellation of mortgage bond? HELD: Debtors liable to repay loan. Cancellation of bond only extinguished Bank’s security. - Security is valid if principal obligation is not in existence as yet or not enforceable as yet when security created but this is subject to suspensive condition - Suspensive condition: that principal obligation comes into existence / becomes enforceable. - Thus the operation of security interest suspended until principal obligation comes into existence/ becomes enforceable. What can be secured? - Any obligation arising from contract or any other cause. - Securable obligation includes payment of money or performance of an act. - A creditor may secure entire obligation or only part of obligation. 2583853 LAWS2009A – Theme 3: Real and Personal Security 2 Mortgage Bonds What is a mortgage bond? - Mortgage bond is a document specially hypothecates immovable property. - Security is only created when registered against property title. - Mortgagor (debtor) is owner of the immovable property and registers the mortgage bond over his property against his debt. He is the grantor of security interest. - Mortgagee (creditor) is the mortgage right holder (‘mortgagee’, ‘creditor’, ‘bondholder’). Form of mortgage bond - There is generally no prescribed form for mortgage bond. Only prescribed forms for: - Collateral and surety mortgage bonds: Deeds Registries Regulations (‘DRR’). - Sectional mortgage bond: Sectional Titles Act, 1986 regulations. - Contractual terms of mortgage bond determined by banking custom, conveyancing practice, common law, and legislation. Multiple debtors or creditors - Where two or more debtors liable to perform principal obligation debtors can pass one mortgage bond. All the debtors must have each an item of immovable property secured by this one bond. - When more than one creditor – one bond can be passed in favour of all of creditors relating to the same debt. Cannot have one bond to secure two or more debts due to more than one creditor. - ‘Global mortgage’ is where single bond over all of a mortgagor’s immovable property is not permitted. - An exception is a compromise bond where all immovable are bonded simultaneously. And each immovable property is described in a separate paragraph stating the Title Deed number of the immovable property. Registration of a mortgage bond - Registration must be prepared by conveyancer. - The Conveyancer is solely responsible for validity and correctness of bond. - Registration done by execution before Registrar of Deeds. - Execution done by the Mortgagor personally; or by the conveyancer on the mortgagor’s power of attorney. - The registrar records details of mortgage in register and indorses title deed. Juristic nature of mortgage bond - Two jural acts involved: 1. Contract creating mortgage (law of contract); 2. Registration (law of property). - Registration creates constructive knowledge, whereby, all other creditors informed mortgagee has real right of security over mortgagor’s property. 2583853 LAWS2009A – Theme 3: Real and Personal Security 3 Typical terms of mortgage agreement include clauses… - Obliging mortgagor to insure buildings and improvements. - Entitling mortgagee to hold title deed for duration of bond. - Foreclosing debt on mortgagor’s breach: - Accelerating repayment of capital and interest; - Entitling mortgagee to sue for: Recovery of debt or Execution of mortgaged property. Property that may be mortgaged - Any immovable property capable of being private property. - Corporeal and incorporeal immovable property. Examples: - sectional title unit, - share in land, - limited real right in land, E.g. registered long lease, mineral right, servitude. - Mortgagee cannot mortgage his/her own property. Key features of security interest 1. Mortgagor cannot adversely affect security interest - Mortgagor cannot without mortgagee’s consent, exercise ownership in ways that infringe / detrimentally affect mortgagee's security interest. - Deeds Registry Act - mortgagor cannot without mortgagee’s written consent: - Transfer ownership in mortgaged property. - Register over mortgaged property: Personal servitude; or Praedial servitude. - Real rights registered in contravention of Deeds Registries Act subordinate to mortgagee’s rights. - Mortgagor can lease property without mortgagee’s consent; however, the Mortgage bond can require mortgagee’s consent for leases. - Lessee’s rights are subordinate to mortgagee’s rights: - Lease is effectively terminated if highest bid at sale in execution is insufficient to cover mortgage debt. - Mortgagor can register additional mortgages; however, Mortgage bond can deny later mortgages. - Earlier mortgages (first) rank in preference to later (second etc.) mortgages. 2. Mortgagee’s right to immediate execution - Judgment debts are recovered by ‘execution’ (sale in execution by Sheriff). - Generally, judgment creditors must first exhaust judgment debtor’s movable property before executing debtor’s immovable property. - Mortgagee right to immediate execution against mortgaged property. This right arises from common law and/or bond. - Mortgagee cannot take/sell property but needs: - Sue mortgagor; - Court judgment on mortgage debt; - Court order allowing immediate execution 2583853 LAWS2009A – Theme 3: Real and Personal Security 4 3. Mortgagee’s preferential claim to property’s proceeds - Mortgaged property can be: - Attached by other creditors; - Part of mortgagor’s insolvent estate. - Mortgagee has preferential claim to proceeds of sale in execution. - Mortgagee receives proceeds from sale (less costs of execution). - Any surplus distributed among other creditors. - Mortgagee is a ‘secured creditor’ of mortgagor’s insolvent estate. - Mortgagee right to claim proceeds of mortgaged property first applied to satisfy mortgage debt. - Any surplus distributed among ordinary creditors. 4. Mortgagor’s right to release of property when principal obligation discharged - Mortgage is accessory to principal obligation, that means once principal obligation discharged the security obligation terminates. - When principal debt paid in full, mortgagor may demand Registrar of Deeds cancel bond. - Mortgage interest is indivisible – partial discharge of principal obligation does not result in partial termination of security interest. - Mortgagee cannot keep mortgage as security for any other debts incurred by mortgagor’s while mortgage in force. Statutory protection of mortgagor from eviction - A new owner (buyer sale in execution) right to evict unlawful occupiers (including former mortgagor). - Prevention of Illegal Eviction and Unlawful Occupation of Land Act (‘PIE’) limits new owner’s right to evict mortgagor. - PIE only protects ‘residential’ occupier not ‘business only’ occupier. Common types of mortgage bond - Standard mortgage bond; - Standard building bond; - Kustingbrief; - Covering bond; - Collateral bond; - Surety Bond; - Indemnity bond; - Participation bond. 2583853 LAWS2009A – Theme 3: Real and Personal Security 5 Pledge of Movables Requirements for pledge of movables - Right of security over movable property created by delivery (the pledge) of pledged property to creditor. - Pledge remains effective for as long as the creditor retains possession of the property. Nature of Pledgee’s security interest - Creditor’s security interest similar to mortgagee’s interest: - Pledgor may not alienate the property. - Pledgee has preferent claim to proceeds of the property. - Difference from mortgage: - Parate executie (Immediate execution) clause in pledge agreement. When pledger’s default, pledgee may sell the pledged property privately, ‘without recourse to the court’. Note: From Bock v Duburoro Investments (Pty) Ltd - Parate executie clause void in mortgage bond. - Parate executie clause valid in pledge, however, debtor has right to ‘seek protection of court’ if in carrying out the agreement and effecting sale, acted in way that prejudices debtor’s rights. 2583853 LAWS2009A – Theme 3: Real and Personal Security 6 Notarial Bond Nature and form of Notarial Bond - Security interest in movable property created by registration of a notarial bond in Deeds Registry. - Notarial bond is attested by a notary public. - Two types: 1. General notarial bond; 2. Specific notarial bond. Security by Means of Movable Property Act - Notarial bonds are governed by Security by Means of Movable Property Act, (‘SMPA’) - Before SMPA, notarial bond (except KwaZulu-Natal) gave bondholder limited rights: - Mortgagor could dispose of property free of bondholder’s right, provided the 3rd party had no prior notice of bondholder’s rights. - If another creditor attached property, mortgagee could not prevent sale in execution and not entitled to proceeds of the sale. - When mortgagor insolvent the bondholder ranked before unsecured creditors. 1. Special notarial bond A special notarial bond: - Hypothecates corporeal movable property. - Property specified and described in ‘readily recognizable’ manner. - Notarial bond is registered. Property deemed to have been pledged to mortgagee: - Even though not actually delivered; - As effectually as if property was expressly pledged. - As if property was delivered to mortgagee. Security interest is the ‘subject of any encumbrance resting upon property on the date of registration’. (a) SMPA makes law on notarial bonds uniform in South Africa (all provinces same law as KwaZulu Natal). (b) Effect of notarial bond: i. Bondholder’s rights stronger than another creditor executing against debtor; ii. On debtor’s insolvency, bondholder’s claim ranks before other creditors (except enrichment lien). (c) Hypothecated property in possession of person other than mortgagee excluded from landlord’s hypothec, however, except when landlord’s hypothec perfected before bond registered. (d) Common law rules regarding pledge also applicable to notarial bond. (e) Property must be described ‘in a way which rendered it readily recognizable’. (f) A prior notarial bond has preference. (g) SMPA applies only to notarial bonds registered after 7 May 1993. 2583853 LAWS2009A – Theme 3: Real and Personal Security 7 Bokomo v Standard Bank van SA Bpk FACTS: Notarial bond registered over Debtor’s property in favour of Bank. Debtor sold hypothecated property to Bokomo. Creditor attaches property per judgment against Debtor. HELD: Per SPMA bondholder has real right over hypothecated property as though it was pledged. Common law rule that acquisition of ownership by mortgagor after pledge validates it, also applies to SPMA pledges. As pledgee, creditor’s right to property stronger than Bokomo. Farmsecure Grains v Du Toit HELD: Holder of special notarial bond over movable property has ‘possession less pledge’. Unlike general notarial bond, unnecessary for bondholder of special notarial bond to ‘perfect’ security by taking possession or control of the property. (a) General notarial bond - A general notarial bond is a notarial bond that hypothecates movable property generally. - Mortgagor can dispose of the property to a bona fide third person free of the bondholder’s rights. - Bondholder cannot prevent sale in execution of property if attached by another creditor. - Bondholder has no preferential claim to proceeds of the sale. - On debtor’s insolvency: - Bond not a special notarial bond (per Insolvency Act); - Mortgagee only ranks before unsecured creditors. - Bondholder only acquires real rights of security once he ‘perfects’ his right of security, by obtaining possession of the mortgagor’s movable property. To do so, there must be a ‘perfection clause’ in the bond. - The perfection clause entitles the bondholder, when mortgagor defaults, to take possession of the movables over which the bond is registered - The perfection clause is ‘an agreement to constitute a pledge that is enforceable at the instance of the bondholder’. - Bondholder must apply to court for an order allowing the bondholder to take possession of the mortgagor’s movable property. Once the bondholder obtains possession, the bondholder has the right of a pledgee over the property. Contract Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd HELD: General notarial bond does not confer real right of security. Creditor cannot prevent debtor from alienating the assets or pledging them to another creditor. Creditor cannot ‘follow up’ assets held by an acquirer. Creditor cannot prevent judicial attachment. Bondholder not a secured creditor, only has preference over ordinary creditors. 2583853 LAWS2009A – Theme 3: Real and Personal Security 8 Cession in Securitatem Debiti Nature of Cession in Securitatem Debiti - Personal rights are very valuable, e.g.: right in respect of shares; right to payment in terms of insurance policy; instalment sale. - Personal rights can be objects of security, where holder of personal right can transfer it to another to secure his (or a third person’s) indebtedness. This form of security is called: Cession in Securitatem Debiti - cession as security or ‘pledge’ of a right. - Person transferring the right as security is the ‘cedent’ and person acquires the security interest is the ‘cessionary’. - Person liable to render performance which is the object of the ceded right is the ‘debtor’. Legal position of nature of cession in securitatem debiti Operates in the same way as a pledge of corporeal property, unless the parties agreed otherwise. - Cedent retains a limited form of ownership (the ‘reversionary interest’); - Cessionary receives a security interest. Consequences of cession in securitatem debiti The position of the cedent - Cedent retains a ‘reversionary interest’ in the ceded right, which entitles cedent to: - debtor’s performance once cedent has discharged his indebtedness to cessionary. - the balance of the proceeds of the ceded right if it is sold and the proceeds exceed the amount owned to cessionary. - exercise voting or other powers in respect of the right. - apply for sequestration of the debtor’s estate. - While the cession is in force, the cedent has no power to enforce the ceded right, unless agreed otherwise. - The cedent as ‘owner’ of a reversionary interest, may transfer it to a third party. - If cedent is sequestrated, the reversionary interest vests in the insolvent estate. - Upon satisfaction of the secured debt, the cessionary’s entitlement to a security interest is extinguished and that interest reverts automatically to the cedent, without the need for any re-cession by the cessionary. The position of the cessionary - Cessionary receives a security interest in respect of the ceded right. - Only cessionary can enforce the ceded right pending payment by the cedent. - If cedent defaults, cessionary in entitled to liquidate the security by selling and transferring the ceded right to a third person and applying the proceeds of the sale towards payment of the secured debt. - In the absence of a clause allowing parate executie, the cedent must first approach the court for an order authorising sale of the right in execution. - Any balance remaining after liquidation of the principal debt obviously enures to the benefit of the cedent. 2583853 LAWS2009A – Theme 3: Real and Personal Security 9 Suretyship (Personal Security) Nature of personal security - Personal security arises from a contract. - Creditor’s security is a right to compel a third person to perform when debtor fails to perform. - Personal security is a personal right. What is a suretyship? A contract between the ‘Creditor’ and the ‘Surety’; wherein surety agrees to ‘discharge’; the ‘principal debt’ (an obligation owed to the Creditor by the ‘Debtor’), if the Debtor fails to perform the principal debt. - A surety is accessory to the principal debt. - The existence of suretyship depends on existence of principle debt. - The validity of suretyship depends on validity of principle debt. - The liability of surety conditional on debtor’s failure to perform. Elements for suretyship 1. Valid contract of suretyship: Suretyship Contract Requirements (a) Contractual capacity; - General principles of contractual capacity apply. - Tacitly emancipated minor need guardian’s consent. - Person married in community needs spouse’s consent. (b) Consensus between surety and creditor; - Generally a valid suretyship needs Creditor and surety to reach consensus. - What if person signs document without understanding / knowing document is a surety? Roomer v Wedge Steel (Pty) Ltd FACTS: Suretyship in clause in standard terms on credit application. R argued unaware of surety clause, only signed document as shareholder/director of debtor company. ISSUE: Did R agree to be surety? HELD: Applying reliance theory, R liable as surety. - What if party signed document under mistaken belief about meaning of document? Davids v ABSA Bank FACTS: Sureties signed unlimited suretyship. Sureties argued parties’ prior oral agreement liability only for fixed amount. Signed surety deed under mistaken belief liability was for fixed amount. ISSUE: Did sureties agree to unlimited suretyship? HELD: Sureties only liable for fixed amount, their mistaken belief regarding term of deed was iustus error. 2583853 LAWS2009A – Theme 3: Real and Personal Security 10  (c) Intent to be bound; - Surety invalid if person does not intend to be bound as surety. - Whether person intends to be bound depends on interpretation of the contract. Manufacturers Development Co v Repcar Holdings FACTS: Sureties claimed suretyship invalid because one ‘surety’ not signed surety deed. Deed stated: ‘I/we the undersigned …do each hereby bind ourselves as sureties. ISSUE: What was intention of persons signing deed? HELD: Each surety intended to contract separately. Industrial Development Corporation v See Bee Holdings FACTS: One person named in surety not signed. Surety Deed stated: ‘liability of each of us [shall] be limited to [stated percentages of principal debt]’ and ‘[if suretyship is not binding on one surety] it shall remain [binding on other sureties]’. ISSUE: Was contract invalid because one person not sign? HELD: Each signatory was bound as surety. (d) Formalities. - Terms ‘embodied in a written document’; - Signed by or on behalf of surety. The creditor’s signature not required. - Suretyship invalid if not comply with formalities. 2. Principal Debt - The debt must be a principal debt – payment of money, obligation etc. - Void principal debt means a void suretyship. - Conditional principal debt means a conditional surety obligation. - Principal debt arises in future means a suspended surety obligation. - Continuing suretyship is a surety for ‘any debt whatsoever’; or multiple debts from series of transactions. Nedbank v Van Zyl FACTS: Surety bound herself for debts owed by her husband to bank. Surety and debtor married in community with no assets outside joint estate. ISSUE: Was suretyship enforceable? HELD: Suretyship not enforceable. Person cannot stand surety for own debt. Standard Bank v Lombard FACTS: Sureties (members of partnership) argued suretyship unenforceable because partnership not separate legal person. Therefore, partners cannot stand surety for own debts. ISSUE: Is partner surety of own debt? HELD: Partners can be sureties for partnership debts. 2583853 LAWS2009A – Theme 3: Real and Personal Security 11  Du Toit v Barclays Nasionale Bank FACTS: Surety argued suretyship invalid because partners and partnership same persons so cannot stand surety for partnership debt. HELD: Principle in Standard Bank v Lombard confirmed. 3. Undertaking to satisfy Principal Debt (see guarantees) - Promise to discharge principal debt if debtor fails to discharge is surety (accessory) liability. - Promise for performance of obligation with same content as principal debt but not discharging principal debt is primary (independent) liability. - Promise to perform debtor’s obligation even if debt not default is primary liability. Sassoon Confirming & Acceptance Co v Barclays National Bank FACTS: S holder of K’s promissory note. Bank undertook ‘in the event’ S obtained judgment against K ‘arising out of any personal liability [K] may have incurred [regarding] promissory note’, Bank would pay S if judgment debt not settled in 7 days ‘the amount of such’ judgment debt [not exceeding amount of promissory note]. ISSUE: Was Bank’s undertaking a suretyship? HELD: Bank’s undertaking not suretyship but obligation to pay Hutchinson v Hylton Holdings & another FACTS: In contract between H and HH, S ‘guaranteed undertook ‘specific performance of this contract in my personal capacity’. HH non-existent person. S argued gave suretyship undertaking which was invalid because one cannot stand surety for non-existent debt. HELD: S’s undertaking was independent not suretyship. S was a principal debtor. Solomon NO v Spur Cool Corporation FACTS: Suretyship provided prime facie evidence of principal debt determined by creditor’s certificate. Real evidence showed principal debt less than certificate. ISSUE: Was surety liable for greater amount? HELD: Surety only liable for the lesser amount. 2583853 LAWS2009A – Theme 3: Real and Personal Security 12 Performance Guarantees - Performance guarantees are financial support if one or other party to underlying contract fails to perform. Two types – 1. ‘accessory guarantee’ or 2. ‘demand guarantee’. - Performance guarantees commonly given by banks or insurance companies (guarantee policies). 1. Accessory guarantee - Guarantor agrees to pay sum of money if debtor defaults in performance of underlying contract. - Guarantor’s liability depends on existence of debtor’s underlying obligation and debtor’s default of performance. - An accessory guarantee is an accessory liability. 2. Demand guarantee - Guarantor agrees to pay sum of money on demand by creditor. - Guarantor’s liability is independent of: existence of debtor’s underlying obligation and debtor’s default of performance. - Demand guarantee is an independent liability. Minister of Transport & Public Works v Zanbuild Construction FACTS: Guarantee described as ‘security for compliance of contractor’s performance of obligations [in construction contract]’. Guarantor guaranteed ‘the due and faithful performance by the contractor’. ISSUE: Accessory or demand guarantee? HELD: Contract was an accessory guarantee. First, above language type associated with suretyship. Second, guarantor’s limited liability to the amount owed by the contractor in terms of the construction contract. Surety’s liability - Scope is as agreed, thus they are strictly liable for what wording states. - Arises when the principal debtor defaults (But see benefit of excussion) - Liability of co-sureties are each for the full debt (But see benefit of division) - Liability as ‘surety and co-principal debtor’ will waive the excussion and division. Fedbond Nominees v Meier FACTS: Surety’s liability ‘limited to any shortfall that may be due after [creditor] exhausted its remedies against the debtor [for] amount due by debtor’. ISSUE: What was scope of surety’s liability? HELD: Surety only liable for what creditor could not recover after ‘exhaustion of remedies’ against debtor. ‘Exhaustion of remedies’ had broader meaning than ‘excussion’. 2583853 LAWS2009A – Theme 3: Real and Personal Security 13 SA Breweries Ltd v Van Zyl FACTS: V was surety of G in favour of S. S ceded principal debt to SAB. On day of cession G settled all debt to S. Later G bought goods from SAB and failed to pay. ISSUE: What was scope of surety’s liability to SAB? HELD: V’s liability to SAB limited to amount G owed S at time of cession. Defences of Surety Defences in rem - Surety has any defence in rem which debtor has against creditor. - Defences in rem available even if there is already a judgment against debtor. - Defence in rem – relates to the principal obligation itself - Lack of consensus, payment, non-fulfilment of condition, prescription, etc. - Defence in personam – personal privilege relating to only principal debtor - Contractual capacity, insolvency, statutory immunity. Ideal Finance Corporation v Coetzer FACTS: IFC obtained judgment against C the surety to hire-purchase buyer. IFC wanted financial inquiry to compel C to pay judgment debt. C argued that Hire-Purchase Act prevented inquiry to compel hire-purchase buyer to pay. ISSUE: Did C have defence under Hire-Purchase Act? HELD: The Act only provided a defence in personam to a ‘buyer’. The word ‘buyer’ in the Act did not include surety. Benefit of Excussion - Benefit of excussion is an implied term of suretyship. - Excussion refers to when creditor must first fully execute against debtor’s property before enforcing suretyship. - Defence must be raised before close of pleadings. - Limitations (exceptions) on benefit of Excussion will make Excussion impossible, examples: - Amod Moussa v Loterijman & Co– Creditor cannot obtain judgment against debtor because cannot be found or is outside the country. - Worthington v Wilson – creditor cannot obtain judgment against debtor because he enjoys statutory immunity. - Gaba v Ordra Trust & Investments– judgment is futile because debtor is insolvent. Benefit of Division - General rule is that co-sureties are jointly and severally liable. - Benefit of Division is the right to demand creditor divide principal debt between all co- sureties so each only pays pro rata share - applies where creditor claims full debt. - ‘Co-surety’ refers to any surety for same principal debtor and same principal debt. - Exceptions: Expressly renounced benefit; Binds self as ‘surety and co-principal debtor’; Division is impossible or impractical. 2583853 LAWS2009A – Theme 3: Real and Personal Security 14 Rights of surety 1. Securing own release or compelling performance by debtor Court may order debtor obtain surety’s release or perform principal debt where: - Debtor agreed to secure surety’s release by certain time or occurrence of event; - Debtor and creditor allow principal debt to remain undischarged for unreasonable time; - Debtor recklessly wasting assets or in failing financial circumstances possibility debtor eventually unable to pay principal debt; - Creditor obtained judgment against surety. Douglas C Wylde & Co v Burger FACTS: D claimed order that B obtain release from suretyship because i) term of parties’ agreement, and ii) B ‘in failing financial circumstances’ and ‘reasonable grounds’ for fearing B unable to perform principal obligation. HELD: B must secure release of D from surety, and if failed to do so, B must discharge principal debt. 2. Reimbursement from debtor Right of Recourse - Right of recourse is to recover from debtor amount paid (plus reasonable costs) to creditor. - Right of recourse arises automatically when surety discharges part or whole principles debt. - Right of recourse is excluded when - surety neglected to raise defence in rem or - debtor paid because surety neglected to inform of payment. Cession of actions/benefits - Cession of benefits is to demand cession of creditor’s rights. - This right arises automatically when surety discharges part or whole principles debt. Even if co-sureties undertook liability independently or unaware of others. - This is an alternative to ‘right of recourse’ against debtor. 3. Reimbursement from co-surety - Co-surety’s right to claim reimbursement of payment to creditor from other co- sureties. - This right arises automatically when surety discharges part or whole principles debt. Even if co-sureties undertook liability independently or unaware of others. - Requirements: - Discharge of principal debt. - Other co-sureties must be solvent. - Must raise any defences in rem. - Must raise benefit of excussion (if available). 2583853 LAWS2009A – Theme 3: Real and Personal Security 15  Extent of Right to Reimbursement - All co-sureties contribute proportionate shares of principal debt. - Amount of contribution reduced proportionately by amount recovered from principal debtor. Strachan v Fawcett FACTS: Co-sureties for £ 2000. Co-surety S discharged debt. S recovered £ 500 from debtor. S claimed £ 1000 from co-surety F. HELD: F only liable for £ 750 (£ 2000 - £ 500 ÷ 2). ASA Investments v Smit FACTS: Surety under Deed A paid creditor portion of principal debt. Surety A claimed reimbursement of said portion from surety under Deed B. Surety B argued it was unfair for Surety A to claim reimbursement for part discharge of principal debt. HELD: Co-surety who pays part of principal debt cannot sue co-surety for reimbursement until principal debt fully discharged. Gerber v Wolson ISSUE: How reconcile claim of co-surety (cedent) – who renounced benefit of division - against other co-sureties – who have right of reimbursement against co-surety (cedent)? HELD: Cession of creditor’s action does not entitle co-surety (cedent) to claim more than other sureties’ proportionate shares of principal debt. 4. Right to creditor’s counter-performance - Surety’s right is to claim reciprocal counter performance from creditor. - This right arises when surety discharges principal obligation. - The consequence is creditor’s counter performance set-off against surety’s right of recourse against debtor. Alexander NO v Administrator Transvaal FACTS: X Co partially do work per building contract with A (building owner). X Co’s liquidator repudiated contract. A demand X Co’s surety complete work. A paid surety balance of contract price when surety completed work. X Co’s liquidator demands moneys paid to surety. ISSUE: Were moneys surety received part of insolvent estate? HELD: A was right to pay surety. 2583853 LAWS2009A – Theme 3: Real and Personal Security 16 Lien - Right of retention Lien - Security by operation of law? Security arises by reason of legal rule as there is: - No agreement between parties. - Automatically imposed by law. A landlords hypothec is also by operation of law. What is a lien? - A lien is a right of lienholder to retain physical control of another’s property; as security; until lienholder compensated. - Lien arises when lienholder, while in possession; expends money or labour on another’s property. 1. Enrichment lien - Enrichment lien is a limited real right. - Two types of enrichment lien: (a) Salvage lien – expenditure necessary to preserve property. (b) Improvement lien – expenditure either: enhances utility of property; or facilitates economic exploitation of property. - Basis of lien is the owner’s unjustified enrichment. There is no lien if enrichment is justified; and also no lien if no enrichment claim against owner. 2. Debtor-creditor lien - Debtor-creditor lien is a creditor’s right. - Arises in terms of contract that is either express or tacit. - Arises when lienholder incurred expenditure on property or while in possession of property. De Aguiar v Real People Housing FACTS: R sued D for eviction. Parties settle, agreeing D buy property. Term in settlement agreement D will vacate property if fails to pay price. D claimed enrichment lien when R sued for eviction again. HELD: Defence failed; D did not meet one requirement for lien. Requirements for a Lien (a) Continuous possession - Physical control of unbroken possession. - Voluntary loss of possession then the lien lost. - Fraud or involuntary loss of possession then the lien regained if repossesses lawfully. (b) Expenditure on property - Must be in possession at time of expenditure; - Enrichment lien only allows for necessary or useful expenses only. - Debtor-creditor lien allows for all agreed expenses. 2583853 LAWS2009A – Theme 3: Real and Personal Security 17 Scholtz v Faifer FACTS: In building contract, F agreed to supply materials and pay S instalments. S stopped building, claiming F failed to supply materials and pay. No work or workers on site for two months. S’s mistress occupy outbuilding on adjoining land belonging to F’s wife. F cancels contract, S claims reinstatement of possession, arguing has lien. HELD: S had no lien. Marinus v Taljaard FACTS: M contract T to repair truck. T allow M take truck after making part payment for repairs. Parties agreed truck returned later for free adjustments. T adjusted when truck returned month later. Parties argue over payment of balance. T claimed had lien over truck. HELD: T had no lien. Hamilton Paneelkloppers v Nkomo FACTS: H had lien over vehicle. Third party’s fraud caused H lose possession. H recover vehicle from owner when threaten owner with criminal prosecution. H claims lien when owner sues for vindication of property. HELD: H had no lien. Singh v Santam Insurance FACTS: Insurer M damaged S’s car. M claim indemnity for Insurer, fulfilling insurance claim of M for damage to S’s car, paid panelbeater for repairing S’s car. Insurer discovered M uninsured, claimed possession of S’s car, arguing had lien. HELD: Insurer did not have lien. Nature of lienholder’s security interest - Right to retain property: - Enrichment lien – against owner and other secured creditors. - Debtor-creditor – against debtor only (unless owner consented). - Preferent claim on owner’s insolvency: - Enrichment lien – secured creditor: - Proceeds of secured property; Amount owner enriched. - Rank before other secured creditor; - Debtor-creditor – unsecured creditor: - Ranks after secured creditor. - Amount agreed. - No right to use property. Substitution of other security - Court may order lienholder surrender possession in exchange for ‘adequate’ security. - Court must weigh equities: Owner’s right use and enjoyment of property; only intends to delay creditor’s claim. 2583853 LAWS2009A – Theme 3: Real and Personal Security 18 Landlord’s tacit hypothec Nature of landlords tacit hypothec - Right holder is the lessor of immovable property. - Right vests when rent is in arrears. - This right is to secure payment of unpaid rent. - Scope of hypothec is only movable property on premises. - Limited real right - only allowed once perfected. Property subject to hypothec - Moveable’s belonging to lessee - Moveable’s belonging to sub-lessee - Moveable’s belonging to 3rd parties provided on premises: - With 3rd party’s knowledge and consent, for indefinite use by lessee; - Failure to notify lessor, Lessor unaware of 3rd party’s ownership. - Moveable’s not subject to hypothec: - Property secured by notarial bond. - Property subject to instalment sale. Bloemfontein Municipality v Jacksons Ltd FACTS: Per instalment sale agreement J reserved ownership in furniture sold to S. J notified S’s landlord of ownership in furniture. J unaware S moved, B never notified of ownership. J sued S for breach, J’s attorneys found S’s new address. Action settled. B attached furniture when S not pay rent. S claim furniture’s return. HELD: Furniture subject to tacit hypothec can be sold in execution. Paradise Lost Properties v Standard Bank FACTS: 3rd party’s movable property on leased premises. Landlord previous received and read copy of contract between tenant and 3rd party. Contract contained clause reserving 3rd party ownership in movables on premises. HELD: Landlord had no hypothec over 3rd party’s property. Effect of hypothec - Limited real right arises upon ‘perfection’. - Attachment while on leased premises. - Preference to proceeds upon sale in execution. - Secured creditor on insolvency of lessee. 2583853 LAWS2009A – Theme 3: Real and Personal Security 19