Petzer, Du Toit & Ramulifho

LOSING YOUR HOUSE BUT NOT LOSING YOUR PROFIT

With interest rates rising and the full implementation of the National Credit Act making it more difficult to access credit the number of house owners in financial trouble will no doubt increase. It is a sad and unfortunate event to lose your home by virtue of a sale in execution as a result of your failure to pay the mortgage bond installments. This is even more traumatic if the immovable property sold in execution is the family home and the entire family is obliged to vacate the property. It is of course a commercial reality that mortgagees have to protect their interests and have to take steps in order to mitigate their loss. In a recent judgment the rights and duties of a mortgagee were examined with regard to the collection of rentals and the payment of surplus profits in the event of the mortgagor falling into arrears with the bond installments.

In the matter of Absa Bank Ltd versus Bisnath NO and others 2007(2) SA 583 (D) the plaintiff obtained judgment against the defendants on a mortgage bond. As there were insufficient bids at the sale in execution, the plaintiff “bought in” the property but later sold it on to a third party. Thereafter the defendants claimed from the plaintiff compensation for rental not collected by the plaintiff after judgment but before the property was sold in execution. The defendants also claimed a credit in respect of the proceeds of the sale which the plaintiff received when the property was subsequently sold to a third party.

The Honourable Judge Swain dismissed the claim for compensation for rental not collected but upheld the claim for the defendants to be credited with the proceeds of the sale of the property to a third party. The court held that after litis contestatio (the close of pleadings) in proceedings for the calling up of a mortgage bond, the mortgagee possessed a real right in and to the fruits of the property still in existence or to be gathered thereafter. In applying this to the facts of the present case the plaintiff, after judgment was granted and possessed a real right in and to the rentals to be collected in respect of the property. The defendants were at that stage no longer entitled to collect the rentals as they had been prior to judgment being granted. Turning to the proceeds of the sale of the property to a third party, the court said that the mortgagee was entitled to buy in the property at the sale in execution and set off the amount due under the bond against the purchase price. In the present case, at the time when the plaintiff sold the property to a third party it retained its status as the mortgagee and consequently was bound to restore to the defendants the proceeds of the sale. The plaintiff was accordingly obliged to credit the defendants account with the amount of the proceeds of the subsequent sale of the property to a third party. In considering the mortgagee’s obligation to collect all the fruits of the property such as rents and profits and to account for them to the mortgagor either by handing them over to him or applying them in reduction of the debt, the court summarized the rules with reference to the relevant authorities as follows:

• The fruits of the mortgaged property are in principle subject to the mortgage even where this is not expressly provided for in the bond;

• The mortgagor as owner is entitled to gather, enjoy and dispose of the fruits so that the mortgagee’s real right extends only to such fruits still in existence on the insolvency of the mortgagor, or at litis contestatio in proceedings for the calling up of the mortgage;

• Fruits gathered after sequestration or litis contestatio are subject to the mortgage to the extent necessary to satisfy the secured debt. The parties may deviate from this position by inserting appropriate provisions in the bond.

The court stated that what is immediately apparent is that after litis contestatio in proceedings for the calling up of the mortgage bond, the mortgagee possesses a real right in and to the fruits of the property still in existence or to be gathered thereafter. A drastic change in the regime governing the respective rights of the party to collect the rental was therefore effected by the judgment granted against the defendants. The court held in short, that in the absence of any right on the part of the defendants to receive the rentals, how can there be any obligation imposed upon the plaintiff to compensate the defendants for any rentals that are not collected as a result of negligence while the plaintiff pursues its real right to collect such rentals?

With regard to the surplus profits made by the plaintiff as a result of the subsequent sale of this property to a third party, the plaintiff’s counsel argued that if another party had purchased the property at the sale in execution and then sold the property, the defendants would not have been entitled to the proceeds of the subsequent sale and there was no reason to treat the proceeds of the sale by the plaintiff any differently. The court held that there is a significant difference between the rights of the plaintiff to the proceeds of such a sale and those of a third party. The court held that where there is a balance outstanding, the mortgagee is obliged to credit the proceeds of a subsequent sale of the property to the mortgagor’s account for the following reasons:

• Although the general rule is that the purchaser who has paid the purchase price at a sale in execution obtains a clean title to the ownership of the property and obtains the property free of the real security the court could not see how this can prevail where the mortgagee is the purchaser. If this were so the anomalous position will arise that the mortgagee would be entitled to the property free of the mortgage bond held by itself over the property. The mortgage bond would not have been destroyed by merger by virtue of the fact that the mortgagee would not become the owner of the burdened property as a sale in execution does not pass ownership of the property.

• Consequently, after the sale in execution the mortgage bond remains in place and the mortgagee retains its status as such;

• An agreement in terms of which the mortgagee may keep the property as his where the mortgagor is in default is known as pactum commissorium and is illegal and unenforceable. In a similar vein an agreement that the proceeds of the mortgaged property are to go to the mortgagee whether such proceeds are more or less than the debt is illegal, since such an agreement is similar if not identical to a pactum commissorium.

• It is therefore clear that the mortgagee is bound to restore the proceeds of the sale of the pledged property as well as any surplus over and above the amount due.

This is good news for cash-strapped judgment debtors since it is now settled law that bondholders must credit the proceeds of the sale of a mortgaged property as well as any surplus over and above the amount due to the judgment debtor’s bond account.