What is meant by real security?

corien newsletter depiction.inddReal security means that, on the basis of a creditor’s right against the debtor (principal debt), a creditor acquires a limited real right in the property of the debtor as security for the payment of the creditor’s right (principal debt) by the debtor. Real security differs from personal security in that a creditor does not acquire a limited real right in the property of the debtor in the case of personal security, but only acquires a creditor’s right against a third party as security for the payment of the principal debt by the debtor. Such a third party is normally surety of the debtor.

A requirement for real security is the existence of a valid and enforceable principal debt. The real security is accessory to the principal debt, in other words the real security is terminated automatically if the principal debt is paid in full.

If the object of security is moveable property, real security can be in the form of either pledge or notarial bond. In the case of pledge the object of pledge (corporeal or incorporeal moveable property) must be delivered by the pledgor (debtor) to the pledgee (creditor). Physical control of the pledge object is a requirement for the establishment and continuation of a limited real security right to the security object. The pledgee has the obligation to maintain the pledged property within reason and, on termination, to return the property to the pledgor. A notarial bond can be registered in respect of specified, corporeal moveable property of the debtor (mortgagor) in favour of the creditor (mortgagee) in the deeds registry. After registration of this bond, the mortgagee acquires a limited real right to the encumbered property without delivery thereof to the mortgagee.

Immoveable property of the debtor serves as the object of security in that a mortgage is granted by the debtor (mortgagor) to the creditor (mortgagee) and registered in the deeds registry. A mortgage is a liquid document which grants the mortgagee a limited real right in respect of the immoveable property of the mortgagee without the physical control of the property being passed to the mortgagee. More than one mortgage can be registered over the same immoveable property at the same time. Priority is given, in this case, to mortgagees in the order that the mortgages were registered (prior in tempore, prior in iure).

The pledge of the mortgagee (creditor) can, if the principal debt is not paid in full by the mortgagor or pledgor (debtor), have the security object sold in execution and is entitled to the proceeds of the sale in execution for payment of the principal debt. In the case of insolvency of the pledgor or mortgagor, the pledge or mortgagee acquires a preferent claim to the proceeds of the sale of the security object.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

What does a suspensive condition in a contract really mean?

corien newsletter depiction.inddMost people that have bought a property may have noticed a clause dealing with suspensive conditions in the contract of sale. Usually these conditions relate to deposits that need to be paid, financing that has to be procured and/or another property that needs to be sold before the sale can be confirmed. The interpretation appears straightforward enough – meet the requirements, and the contract is valid; fail to meet the requirements and the contract is invalid. But is it really that straightforward? And what are the consequences of non-compliance?

In layman’s terms a condition contained in a contract can be described as a provision that defers the obligation(s) of a party in the contract to the occurrence of some future uncertain event. This is usually termed a ‘suspensive condition’ or a ‘condition precedent’.

Legally a suspensive condition can be described as a condition, which suspends the operation or effect of one, or some, or all, of the obligations under a contract until the condition is fulfilled. If the condition is not fulfilled then no contract comes into existence. Once the condition is fulfilled, the contract and the mutual rights of the parties relate back to, and are deemed to have been in force from, the date of the signature of the agreement and not the date of the fulfilment of the condition.

The Supreme Court of Appeal recently confirmed that where a suspensive condition is not fulfilled timeously it lapses and the parties are not bound by it, even though one party has performed fully.

In the matter of Africast (Pty) Limited v Pangbourne Properties Limited the parties concluded a contract for the development of commercial property in an area in Gauteng. One of the suspensive conditions in the contract was that Pangbourne’s board of directors had to approve the contract and written approval had to be presented to Africast within seven working days from the date of conclusion of the contract. The contract was signed on 11 April 2007 and Pangbourne’s board of directors approved the contract on 20 April 2007, however the written approval was only provided on 25 April 2007 to Africast, which was after the required seven-day period. Pangbourne decided after 18 months that since the suspensive condition had not been met within the stipulated period, it was not bound by the contract and refused to deliver the required guarantees. At that stage buildings had already been constructed by Africast in terms of the agreement.

The Court confirmed Pangbourne’s view that since the suspensive condition in the contract had not been fulfilled timeously no contract had come into existence and that the contract had lapsed due to non-fulfilment of the suspensive condition. The Court came to this conclusion notwithstanding the fact that both parties had performed in terms of the agreement for some 18 months.

The most common appearance of suspensive conditions is in contracts involving the sale of immovable property such as a house, flat, plot, or farm. The conditions that are generally encountered in the contract of sale is that the sale is subject to the purchaser obtaining a bond from a financial institution and/or that the sale is subject to the purchaser selling his existing property within a certain period.

It is important to bear in mind that suspensive conditions are usually inserted in a contract for the benefit of one of the parties to the contract. In the abovementioned scenario, the suspensive conditions are included for the protection of the purchaser. Should the purchaser fail to obtain a bond and/or sell his existing property within the required period, the contract would not have any force or effect and the purchaser will not be bound to the terms and conditions of the contract. Non-fulfilment of a suspensive condition renders the contract void and should the parties still wish to continue with the sale, a new contract of sale must be concluded.

If a suspensive condition is included for the benefit of a particular party to a contract, such suspensive condition can be waived at any time prior to the lapsing of the time for the fulfilment of the suspensive condition by the party for whose benefit the condition was included. Having regard to the scenarios mentioned above, the purchaser may accordingly at any time before the lapsing of the period of the suspensive condition, inform the seller that he waives the suspensive condition and the contract is no longer subject thereto. This will then make the contract unconditional and the purchaser and seller will be bound to the terms of the contract.

It is always prudent to tread carefully when entering into a contract that is subject to a suspensive condition. Be aware of the stipulated periods for compliance, for whose benefit the conditions are inserted and the requirements to prove compliance. If necessary, ensure you seek legal advice before you sign the contract and obtain advice before you waive any conditions that have been inserted for your benefit.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

What constitutes fair dismissal?

corien newsletter depiction.inddLabour law emphasises that every employee has the right not to be dismissed unfairly. This law defines the meaning of dismissal and when it may lawfully occur. Substantive and procedural fairness determines whether the dismissal was fair.

Dismissal means the following: The termination of a contract of employment with or without notice, and also if the employer fails to provide a fixed-term contract, or he does renew the contract, but on less favourable terms than the employee had reasonably expected.

Section 188 of the Labour Relations Act provides that dismissal is fair if the employer can prove that the dismissal is related to the employee’s conduct or capacity, or if it can be proven that the dismissal is based on the employer’s operational requirements. Dismissal is usually fair if a fair procedure was followed. Good practices are set out in legislation which outlines the discharge processes and must be taken into account.

Labour legislation provides for three different types of discharge, namely dismissal due to misconduct, poor performance or operational requirements. Certain procedures must be followed for each type of discharge. Employers sometimes confuse misconduct with poor performance. It is very important that the correct procedure is followed, but it is also necessary that the cause of the unsatisfactory behaviour is determined.

Misconduct is when the employee has violated certain rules such as rules against dishonesty or theft, or has refused to obey reasonable and lawful instructions. In these situations the employee has decided not to honour the code of conduct. The employee has knowingly violated a rule and therefore the person should be disciplined. This may result in written warnings and/or possible dismissal.

In contrast, poor performance involves situations where the employee is not in deliberate violation of any regulations but it may involve circumstances over which the employee may not necessarily have control. In this case other factors could be the cause of poor performance, such as lack of resources, inexperience, inadequate training or poor health. It is clear that the employee is not directly responsible for the behaviour and therefore disciplinary actions cannot be taken. The employee cannot be blamed for something like illness, therefore a counselling process is followed in lieu of a disciplinary hearing in order to find solutions for the poor performance.

The last type of dismissal is due to operational requirements. This type of discharge has to do with economic conditions, including a shortage of work or a lack of money. These are cases where the employer can no longer afford to retain a certain number of employees or new computers or sophisticated equipment have been acquired which renders a number of employees redundant. These are factors beyond the control of the employee and involves steps that the employer takes to protect his or her business from being ruined financially.

It is very important that the process contained in section 189 of the Labour Relations Act be followed here. This process requires the employer to engage with the employee in a meaningful way in order to negotiate and disclose certain information before dismissal can take place.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

Differences between liquidation and sequestration process

corien newsletter depiction.inddThe application for liquidation and sequestration processes are often confused. Many people think that the processes are the same. However, there is a big difference between these two processes.

A simple way to describe liquidation is that liquidation is the winding up of a firm by selling off its free (un-pledged) assets to convert them into cash to pay the firm’s unsecured creditors. Before a liquidation application can be issued in court, a founding affidavit needs to be drafted. This affidavit will include all the details of the Applicant and / or Respondent. The Applicant is the person who wants to liquidate the company and the Respondent is the company. In the case where the Applicant is the company, there will be no Respondent. The affidavit will also include any details of the company, employees and creditors. A bond of security also needs to be signed for the purpose of the Master of the High Court.

Once the application is issued, the only people who receive this notice is the South African Revenue Services (SARS), the Master of the High Court, employees of the company and any trade unions. As soon as this is done, a Master’s certificate is obtained verifying the application, and a provisional liquidation order is granted.  A return date is then set, and all creditors are notified of the provisional liquidation through registered post and by placing the provisional order in two local newspapers. Should the Applicant’s attorneys receive no notice of intention to defend the matter, a final liquidation order is granted. The order together with the application is sent to the Master of the High Court and a liquidator will be appointed.

Sequestration is the preferred option for the individual who has exhausted all other options of resolution, and is now in a position where even if all their assets are sold, they would be left with such a high shortfall that it would be unreasonable to expect them to recover from this loss. A sequestration involves a little more administration work before a court date can be obtained. Before the Notice of Motion and Founding Affidavit are drafted, a valuer needs to be appointed in order to value the Applicant or Respondent’s estate. This needs to be done in order to ascertain whether the debtor is indeed over-indebted, and whether he / she has enough assets to provide a benefit for all creditors involved.

In the matter of a voluntary sequestration, the Applicant will be the party whose estate is to be sequestrated. The valuer needs to value the property of the Applicant on a forced sale scale. This will be calculated by subtracting 20% of the actual value of the property.

As soon as the valuer has made an estimate for the Applicant / Respondent’s estate, a Statement of Debtor’s Affairs needs to be handed in to the Master of the High Court for inspection by all creditors. This needs to be done no less than 14 or more than 30 days before the court date. A Notice of Surrender needs to be sent through registered post to all creditors to inform them that the Statement of Debtor’s Affairs is available for inspection.

The Notice of Surrender needs to be posted in two local newspapers and the Government Gazette no less than 14, or more than 30 days before the court date. Once all of the above-mentioned requirement has been adhered to, the notice of surrender can be annexed to the Founding Affidavit and can be heard by the court, no Bond of Security is needed at this point. A sequestration can only be heard by the High Court, whereas a liquidation can be heard either by a Magistrate’s Court or by the High Court, depending on the merits of the case.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.