A COURT'S INTERPRETATION OF THE TERMS PRE-APPROVAL OF A BOND, LOAN APPROVAL IN PRINCIPLE, BOND GRANTED, GUARANTEE AND UNDERTAKING

In a judgement handed down on 18 April 2007 by Judge Dlodlo in the Cape High Court (Wilja Reitz v Karen Dugmore Ström & Jawitz Properties (Pty) Ltd, CPD 3280/2007) the question for consideration was whether or not the Agreement of Sale concluded between the parties had indeed been validly cancelled. In answering this question, the Court considered the terms pre-approval of a bond, loan approval in principle, bond granted, guarantee and undertaking.

1.      THE RELEVANT FACTS

The Applicant launched an urgent application for a rule nisi compelling the First Respondent to sign relevant documents in pursuance of the sale of the First Respondent’s property to the Applicant. The Applicant also sought an interdict restraining the First Respondent from alienating or transferring the property to a third party.

During the course of November 2006 the Applicant made an offer for the First Respondent’s property which offer was accepted on 2 December 2006 and was made subject to certain conditions, inter alia that an amount of R1 800 000-00 be paid against transfer, secured by "undertakings acceptable to the seller’s conveyancer" and delivered to the conveyancer no later than 31 December 2006 (clause 1.2 of the Agreement of Sale). The date of delivery was subsequently amended to 31 January 2007 per a written addendum signed by all the parties to the Agreement of Sale.

The Applicant did not deliver the undertakings to the First Respondent’s attorney on or before 31 January 2007, as agreed.

The First Respondent cancelled the Agreement of Sale on 22 February 2007.

2. ISSUES IN DISPUTE

2.1. Whether the condition envisaged in Clause 1.2 of the Agreement of Sale was fulfilled before or after the cancellation of the Agreement of Sale by the First Respondent.

2.2. Whether the First Respondent's failure to cancel the Agreement of Sale timeously as well as the First Respondent’s attorney’s correspondence with the Applicant after the date of cancellation amounted to an election by the First Respondent to enforce the contract and thus waived her right to cancellation.

3. JUDGEMENT

3.1 Compliance with Clause 1.2 of the Agreement of Sale

The Applicant did not allege that she performed in terms of Clause 1.2 of the written Agreement of Sale (as amended). All that the Applicant alleged is that she had obtained bond approval for the amount of R1 800 000.00 on 8 February 2007.  That is, the Applicant did not distinguish between the terms "bond approval" and "undertaking".  The Court found that there is a marked difference between obtaining bond approval and delivering undertakings acceptable to the seller’s conveyancer which is what Clause 1.2 of the Agreement of Sale required.
The Court defined the applicable terms as follows:

The pre-approval of a bond application is a mere indication to the interested parties (sellers/estate agents etc) that the financial institution concerned would probably grant the Applicant a loan against security of a property to be mortgaged for the amount of the pre-approval.  Pre-approval hardly legally binds the financial institution in any manner towards anybody.

Similarly the granting of a bond in principle is done by a financial institution on information furnished by the purchaser and contained in the Deed of Sale.

A guarantee is issued by the financial institution only after it has satisfied itself that all conditions precedent to final approval of the application have been met or will be met.  At this stage the financial institution no longer places reliance on information supplied by the purchaser.  Some requirements are set internally by each financial institution.  The guarantee is a written undertaking to pay to the seller’s conveyancing attorney a specified amount of money on the happening of registration of the bond simultaneously with registration of transfer of the property subject to certain terms and conditions, the main whereof is (usually) that the guarantee may be revoked under certain circumstances provided that the beneficiary is advised of withdrawal before registration.

An undertaking is issued by the conveyancer once he/she is assured by its client (the financial institution) that they will receive the proceeds of the loan (or part thereof) in order to be able to pay the seller, otherwise he/she will not be in funds to pay the seller.  The undertaking takes the form of an original written document handed to the seller’s conveyancing attorney.  The document is substantially similar to the guarantee. Upon receipt of this written undertaking the transferring attorney will be in a position to proceed with the registration of a transfer and the bond attorney will simultaneously register a bond against the property.

The correct undertaking envisaged in Clause 1.2 of the Agreement of Sale between the parties was delivered allegedly on 23 February 2007.  This was after the cancellation of the Agreement of Sale by the First Respondent. 

The Court accordingly held that the approval of the Applicant’s bond did not constitute compliance with the provisions of Clause 1.2 of the Agreement of Sale (as amended).

3.2    Waiver of right to cancel

As a point of departure it was held that it is trite law that a delay in canceling a contract does not per se mean that a person so entitled loses such an entitlement to do so (Mahabeer v Sharma NO and Another 1985 (3) SA 729 (A)).

The Court held that the failure on the part of the First Respondent to cancel the Agreement of Sale timeously as well as the writing by the First Respondent’s attorney to the Applicant beyond the date of cancellation, provided justification for the Applicant’s argument that the First Respondent elected to perform the contract and thus waived her right to cancellation. 

The Applicant referred to Segal v Mazzur 1920 CPD 634 at 644 to 645 where the following is set out:

“Whether he has made an election one way or the other is a question of fact to be decided by the evidence. If, with knowledge of the breach, he does an unequivocal act which necessarily implies that he has made an election one way, he will be held to have made his election that way; this is, however, not a rule of law, but a necessary inference of fact from his conduct” per Watermeyer AJ.

An election was described in Bekazaku Properties (Pty) Ltd v Pam Golding Properties 1996 (2) SA 537 (C) as a species of waiver and that therefore an election to pursue one remedy involves the waiver or abandonment of the other. The onus of establishing that the party seeking to rely on the breach has elected to affirm the contract is on the other party.

Clause 8 of the Agreement of Sale contained a cancellation clause in terms of which the Seller was entitled to cancel the agreement or to enforce the agreement in case of breach by the Purchaser.
The Applicant and First Respondent’s attorney exchanged various e-mails and faxes, even after the Applicant's non compliance with a condition precedent (delivery of the undertaking by 31 January 2007).

On 22 February 2007, the First Respondent’s attorney, on behalf and on the instructions of the First Respondent, cancelled the Agreement of Sale in writing.  The Applicant does not deny having received this fax, or the hand delivered letter of cancellation, on 22 February 2007.

On 26 February 2007, the Applicant sent an e-mail to the First Respondent’s attorney regarding payment of the transfer duty and on 26 February 2007, the First Respondent’s attorney responded to this e-mail as follows:

“Let me know when payment has been made to Robert’s office. I will then again approach my client and advise her accordingly with a view to her revoking the cancellation of the sale.”

On 13 March 2007, the Applicant faxed a signed offer under the heading “Addendum”, to the First Respondent’s attorneys, in which the following sentence is found:

“Whereas the contract was cancelled by the Seller and now stands to be reinstated by revocation of the cancellation”

This was never accepted by the First Respondent.

The Court held that the Applicant erroneously submitted that the First Respondent's attorney's e-mail dated 26 February 2007 amounted to waiver of the cancellation of the Agreement of Sale by the First Respondent.  In effect the First Respondent’s attorney in that e-mail stated that should it be shown that payment had in fact been made, “I would revert to the First Respondent and propose to her to revisit the question of cancellation” (the Court's own interpretation). This does not mean the First Respondent would necessarily agree to retreat from the position taken to cancel the Agreement of Sale. This certainly does not amount to proof that a person who is alleged to have waived a right or remedy (with full knowledge of the right or remedy) decided to abandon it (whether expressly or by conduct inconsistent with an intention of enforcing the said right or remedy).  Similarly, the First Respondent’s attorney’s writings do not deserve to be elevated to such a level that it can be said that the First Respondent thereby waived her right to cancel the Agreement of Sale due to failure on the part of the Applicant to deliver the undertakings mentioned in Clause 1.2.

The application was dismissed with costs.

 4. CONCLUSION

4.1. Take note of the marked differences in the terms pre-approval of a bond, loan approval in principle, bond granted, guarantee and undertaking.

4.2. The existence of a waiver of a right to cancellation must be inferred from the facts of a particular case.

4.3. The onus of establishing that the party seeking to rely on the breach has elected to affirm the contract is on the other party.

Should you require a copy of the above judgment, please send an e-mail to: Lorette@legaledge.co.za

Written by: Lorette Janse Van Rensburg

PETZER, DU TOIT & RAMULIFHO