Bankers and municipal councils be mindful of reversionary rights
12 Sep 2019
The Constitutional Court case, Ethekwini Municipality vs Mountahaven Pty Ltd (CCT05/2018) explored reversionary rights and prescription. The Municipality asked the court to compel Mounthaven to re-transfer the property back to it, based on a reversionary clause in the original deed of sale and subsequent deed of transfer.
The constitutional court dismissed the Municipalities application. Here are the facts of the matter:
The Municipality and Mounthaven concluded a sale agreement on 24 May 1985. In August 1986, the property was transferred to Mounthaven subject to the following special conditions recorded under clause C in the deed of transfer. The applicable conditions of clause C is summarized as follows:
- The purchaser shall erect buildings to a value of R100 000,00 within two years from the date of sale, failing which municipal taxes payable to the Verulam Town Council by the Purchaser or his successors in title, shall be charged on the value of the buildings which would have been deemed to be constructed.
- If at the expiry of a period of three (3) years from the date of sale, the Purchaser has failed to complete the buildings, ownership of the property shall revert to the Seller against payment by the Seller to the Purchaser of all payments made on account of the purchase price less any costs incurred by the Seller in obtaining re-transfer of the property.
Mounthaven did not erect and complete the buildings within three years of the date of sale. The Municipality brought the application to compel re-transfer of the property in the High Court of KwaZulu-Natal in 2014. The Municipalities application was dismissed at the High Court, as the Court believed that the registered Reversionary Right contained in the Deed of Transfer constituted a ‘debt’ that had become prescribed under the Prescription Act, and that the application for a re-transfer thus had to be dismissed.
The Municipality applied to the Supreme Court of Appeal, which upheld this decision.
The Municipality applied to the Constitutional Court for leave to appeal, presenting the argument that prescription presents a possible bar to access to the courts under section 34 of the Constitution. In addition, it stated that the Supreme Court of Appeal judgment has created uncertainty about standard reversionary clauses that are utilised by many municipalities to advance development projects, and that its decision has serious consequences on these organs of state and the public in general.
The Municipality further contended before the Constitutional Court that:
- It’s claim for the re-transfer of the property to it, is not a ‘debt’ under the Prescription Act;
- The Reversionary Right under the deed of transfer is a limited real right in the property, not subject to prescription; and, alternatively;
- It is a claim secured by a mortgage bond that only prescribes after 30 years under the Prescription Act.
The Constitutional Court considered these submissions:
Is the claim a ‘debt’?
The court looked at the dictionary meaning of ‘debt’ as an obligation to pay money, deliver goods, or render services that would prescribe within three years under the Prescription Act. A claim to transfer immovable property in the name of another is a claim to perform an obligation to deliver goods in the form of immovable property. The Court found that the claim for a reversionary transfer was a ‘debt’ in the dictionary sense and thus this was a claim for a debt.
A real right?
The Municipality argued that this ‘obligation’ to deliver the immovable property derived from a real, not personal, right. Real rights are concerned with the relationship between a person and a thing, not with the relationship between persons as in the case of personal rights. Real rights gave rise to competencies, not correlative personal obligations that translate into a ‘debt’ for the purposes of prescription. Because of that real rights cannot prescribe.
The Constitutional Court disagreed.
The Court looked at the test to determine whether a right is real, as opposed to being personal. It stated that two requirements must be met for a right to be real:
- the person who created the right must have intended the present owner as well as successors in title to be bound; and
- the right must result in a subtraction from the dominium of the land against which it is registered.
The Court held that Municipality did not pass the first hurdle as clause C (2) in the Deed of Transfer, as summarised above, contained no provision that it is binding on the successors-in-title, unlike the express provision to that effect in clause C (1).
The Municipality further argued that the registration of the reversionary clause under clause C (2) in terms of the Deeds Registries Act made this clause a real right.
The Court referred to Section 63 of the Deeds Registries Act and stated that the registration of the reversionary clause was proper in terms of this section, as being complementary or ancillary to the transfer of ownership of the property to Mounthaven. But registration of this reversionary right, in conjunction with a real right, does not convert an ordinary personal right into a real right.
The reversionary clause creates a reversionary right for the Municipality. That a reversionary right has the effect of restricting the landowner’s exercise or full enjoyment of his right of ownership, does not in any way detract from its true character as a personal but not a real right:
The Court further stated that an owner’s right of disposal of their property may for instance be restricted by a prohibition on alienation, a right of pre-emption, a reversionary right, or an option. Such rights are only binding on a landowner in their personal capacity since their successors in title are by no means involved if the landowner fulfils their obligations. These personal rights are registered on account of established practices or usage in spite of the prohibition on the registration of personal rights in the Deed Registries Act. It follows that though registrable; a reversionary right is not by mere reason of registration in any way elevated from a personal right to a real right.
Is the claim secured by a mortgage bond?
The Constitutional Court did not agree with the argument that the registration of the reversionary right created a mortgage bond to secure compliance with its provisions, which only prescribed after thirty years. The court stated that a mortgage bond creates accessory liability as security for compliance with a principal debt. In this instance the principal debt was that Mounthaven was required to complete the buildings within three years from the date of sale. The accessory obligation was that Mounthaven was liable to re-transfer the property to the Municipality in the event of non-compliance. The period for compliance with the principal debt or obligation to complete the buildings lapsed because of prescription, so did the accessory obligation.
The Constitutional Court thus dismissed the Municipalities application for re-transfer of the property, as its claim had prescribed in 1991, three years after the buildings were to have been completed on the property.
- Just what the High Court prescribed – A party may call up a Guarantee in instances where more than three years had passed since the date of the underlying contractual breach
- Arbitration awards issued in terms of the Labour Relations Act do not prescribe