Contract Law: Applying the abstract theory in property transfers
05 Aug 2019
In transactions where immovable property is sold and transferred, ownership will only be transferred when there is an agreement of sale (which may be regarded as the “underlying transaction”) and upon registration of the deed of transfer.
There are two theories that relate to the transfer of property, namely the causal theory and the abstract theory. South-African law follows and applies the abstract theory.
We may differentiate between the abstract and causal theory when it concerns how real rights are transferred. At the centre of this difference; is the relationship between obligatory agreements (being the causa), delivery (when dealing with movable objects) or registration (when dealing with immovables), and the intention of transfer of ownership.
In terms of the causal theory, for there to be a valid transfer of ownership in a property, there is a prerequisite which must be fulfilled, which is that the underlying legal transaction or iusta causa must be valid.
According to the abstract theory, the validity of the transfer of ownership is not dependent on the validity of the underlying transaction giving rise to such transfer, for example a sale or donation. In terms of this theory, there are two requirements which must be satisfied for the passing or transfer of ownership in immovable property.
These requirements are as follows:
- There must be delivery – in terms of immovable property, this requirement will be satisfied when the transfer is registered in the deeds registry.
- A valid, real agreement must exist before delivery occurs – this is fulfilled when a mutual intention exists between the parties; for the transferor to intend to transfer ownership in the property, and for the transferee to have the intention to become the owner of the property.
It is important to highlight that if the real agreement is invalid or defective in any way, ownership in the property will not pass, even if registration has occurred.
Our courts are often confronted with the question of whether transfer has occurred with regards to immovable property, especially where the underlying agreement to the transaction is invalid.
Considering the case law
We may consider three cases for the purposes of considering the abstract theory, those being; Toffee v Prudential Building Society and Others, Legator McKenna Inc. and Another v Shea and Others and Absa Bank Limited v Moore and Another.
The Toffee case dealt with land which was sold and transferred to an individual who was alleged by the seller to be an Asiatic.
In casu, the applicant entered a written deed of sale and had sold and transferred certain property to the second respondent. The purchase price was paid to the applicant, and the property was subsequently transferred to the second respondent on the 9th of January 1943.
The applicant believed that she was induced to enter this transaction by fraudulent means and misrepresentations made by the second respondent, as she concealed the fact that she was precluded by the law from acquiring ownership and being a lawful owner of immovable property, and until the 15th of February 1943, she was not aware of the second respondent’s status.
The second respondent mortgaged the property on the 9th of January 1943, as security for a loan to the first respondent, and the mortgage bond was duly registered. The second respondent subsequently failed to comply with payments under the bond, causing the first respondent (being the mortgage bond holder) to obtain judgment against the second respondent, which entitled them to levy execution against the property. The sale in execution was to be held on the 6th of July 1944.
The applicant also instituted action against the second respondent, for an order cancelling the deed of sale between the first and second respondent, as well as to re-transfer the property into the applicant’s name.
The relief which was claimed in the petition in this case is based on fraudulent misrepresentation, which would render the contract voidable and capable of being repudiated at the instance of the defrauded party, after being notified of such fraud.
The court was of the view that the first respondent became mortgagee more than a month before the applicant was aware of the supposed fraud. The court applied the case of United Shoe Machinery Company of Canada v Brunet, which stated that unless and until a defrauded party makes the choice to repudiate, either by word or by action, the contract shall remain valid and enforceable. Further, it was stated that the contract will support the transfer of ownership in the property.
The court found that supposed fraud was discovered on the 15th of February 1943, but that the first respondent became the mortgagee more than a month before the applicant had notice of the fraud. The court held that the applicant could not claim for the interdict of the sale, as the mortgagee (first respondent) had acquired rights in the property before the applicant had elected to repudiate and had failed to prove a clear right in the property.
The second case which we may consider is the McKenna case. The applicant was appointed as the curator bonis of the respondent, after she was severely injured in a car accident. After his appointment, but before being issued with letters of curatorship, the applicant considered an offer to purchase the respondent’s property.
The applicant inserted the words “subject to the consent of the Master” into the offer to purchase and accepted. The property was then transferred from the respondent’s name into the purchaser’s name.
The respondent recovered from her injuries, to the point where she was declared capable of managing her own affairs, and wished to re-claim her property, on the basis that the sale which occurred was invalid due to it being concluded prior to the applicant being issued the letters of curatorship, in terms of Section 72(1) (d) of the Administration of Estates Act 66 of 1965.
The High Court had found in favour of the respondent. The applicant appealed the High Court’s decision. The Supreme Court of Appeal found that by the applicant inserting the above phrase into the offer to purchase, he had made a counter-offer to the purchasers.
Further, the court held that there was non-compliance with the formalities of Section 2 of the Alienation of Land Act 68 of 1981, as no agreement of sale had come into existence due to there not being an implied acceptance of the counter-offer. This in turn rendered the agreement for the sale of the property as invalid.
The Supreme Court of Appeal considered the abstract and causal theories of transfer, and concluded that the abstract theory is applicable to both movable and immovable property, and that there are two requirements for ownership to be validly transferred, namely:
- There must be delivery;
- There must be a real agreement.
The Supreme Court of Appeal held that; the applicant had not entered into a valid agreement with the purchasers as he made the sale of the property subject to a suspensive condition – that the sale was subject to the master’s approval, the applicant failed to make a condition of sale, and further that the purchasers did not expressly accept such offer.
The court further held that where both parties to an invalid agreement have performed in full, neither party can recover performance where the lawful purpose has been achieved. Therefore, the respondent could not claim for transfer of the property, as all that the parties intended, to the sale of the property, had been achieved. The transfer to the purchasers was regarded as valid, and the applicant’s appeal was upheld.
The final case is Absa Bank v Moore. In this case, the Moores owed money to ABSA. This debt was secured by way of five mortgage bonds being registered over their property in ABSA’s favour. The Moores fell into arrears in payment of their instalments under the bond and other debts, and applied for an extension of their home loan, which ABSA declined due to their bad credit rating.
The Moores came across an advertisement placed by a Mr. Brusson, which offered a loan, provided that the consumer had property to secure the loan. In terms of this loan, the Moores’ property would be subject to a bond as security for the loan. The Moores proceeded to sign three agreements; an offer to purchase (where a Mr. Kabini obtained ownership in the property – unbeknown to the Moores), a deed of sale (in terms of which Mr. Kabini would sell the property back to the Moores, the price payable in instalments), and a memorandum of the agreement which regulated the relationship between the Moores, Brusson and Mr. Kabini (and further required the Moores to pay monthly instalments and administrative fees to it).
After the sale of the property, ABSA provided a loan to Mr. Kabini for the means of purchasing the property from the Moores. Mr.Kabini’s debt was secured by a mortgage bond which was registered over the property. The Moore’s five mortgage bonds over the property were also cancelled.
When Mr. Kabini defaulted on the bond repayments, ABSA sought to obtain default judgment against him, which would in turn allow ABSA to sell the property in execution of the debt that the Mr. Kabini owed to the bank. The Moores, upon discovering that their property was to be sold in execution, thereafter instituted an urgent action to prevent the sale.
The Moores also proceeded to make an application to the High Court for an order stating that they were entitled to the return of their property, submitting that they had no intention of transferring ownership to Mr. Kabini, as they simply applied for a loan from Brusson.
The High Court held that the memorandum of agreement which was concluded between the Moores and Brusson, the offer to purchase, and the sale agreement concluded between the Moores and Mr. Kabini, were unlawful and of no force and effect. This led the court to order the Moore’s five mortgage bonds to be reinstated.
ABSA appealed the High Court decision. The Supreme Court of Appeal held that the Brusson agreements were void and invalid as a result of fraud, further that ownership was not transferred due to the Moores’ lack of genuine intention to transfer ownership. The mortgage bond registered at the investor’s instance was also found to be invalid.
Further, the Supreme Court of Appeal mentioned that claims may be brought against the conveyancer who is responsible for the registration of the bond. The court referred to Regulation 15A (1) of the Deeds Registries Act, which provides that a conveyancer who prepares a document for the purpose of registration and who signs the prescribed certificate accepts the responsibility for the accuracy of the facts mentioned in the document, by virtue of their signature.
Regulation 15A (1) refers to Regulation 44A of the Deeds Registry Act, which sets out the conveyancer is required to provide, and further repeats that the conveyancer is responsible for the facts certified.
Regulation 44A states that an individual who signs the preparation certificates prescribed by Regulations 43 and 44 (1) of the accepts, in terms of section 15A (1) and (2) of the Act, responsibility for the correctness of the facts stated in the deeds or documents concerned, or which are relevant in connection with the registration or filing of those documents.
This means that in the case of a deed of transfer or certificate of title to land, the conveyancer bears the responsibility to ensure that all the applicable conditions of title contained in or endorsed upon the owner’s copy of the title deed, together with any applicable proclaimed township conditions, have been correctly brought forward in that deed of transfer or certificate of title to land. Where a claim is sought, the conveyancer will be held liable to pay the full bond amount in such claim, and not just the amount of costs.
On appeal to the Constitutional Court, ABSA appealed against the SCA’s decision to grant restitution of the property to the Moores unconditionally. The Constitutional Court dismissed this application for leave to appeal and upheld the findings of the SCA, with the view that the five mortgage bonds were lawfully cancelled by virtue of our law which deals with payment of debts, irrespective of the fraud that occurred.
It is important to note that the Constitutional Court applied the case of Legator McKenna Inc. v Shea in its decision, stating that where registration of transfer is given effect by fraudulent means, ownership in such property will not pass.
After consideration of the important cases as mentioned above, we may deduce the following important points:
- The Toffee case shows us that prior to the McKenna judgment and the applicability of the abstract theory, the position in South African law relating to an agreement for sale of a property was, where an individual is induced to enter into an agreement for the sale of immovable property, and such property is sold to an innocent third party, ownership cannot be reclaimed. The contract is kept open at the defrauded party’s own risk, until such party declares that contract as void, the agreement of sale will support the transfer of ownership and will remain valid and binding as if such was never tainted with fraud.
- Until the McKenna case, the legal position regarding which theory applied to the transfer of immovable property was uncertain. The court confirmed that the abstract theory will be applicable to both movable and immovable property, and that provided parties to a sale of land agreement had the intention to transfer the property from one to the other, which then forms a real agreement, registration and transfer of the property will be valid.
- The court confirmed the McKenna SCA decision in the Absa Bank v Moore case, where it was held that where a sale of land was effected by fraudulent means, where the owner did not intend to transfer ownership of the property, transfer of ownership will not be deemed valid.
Toffee v Prudential Building Society and Others (1944)
Legator McKenna Inc. and Another v Shea and Others 2010 (1) SA 35 (SCA)
Absa Bank Limited v Moore and Another 2017 (1) SA 255 (CC)
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