Chestnut Hill Investments v 169 Stamford Hill Road  JOL 18330(D) - Guarantees: Due date not stipulated in contract - When must it be furnished?
If an agreement of sale of immovable property makes no provision for a guarantee date, and the purchaser stalls in furnishing it, what must be done before the seller can cancel the agreement?
In terms of the law the seller/conveyancer needs to place the purchaser in mora, give him reasonable time to rectify the breach and if he then does not rectify the breach, he can cancel. No surprises here - this has been the law all along. But see how this turned out in practice, in the Durban case of Chestnut Hill Investments v 169 Stamford Hill Road  JOL 18330(D).
The seller in this case cancelled - or rather purported to cancel - the agreement due to the purchaser's failure to provide an acceptable guarantee for the purchase price after being placed on terms to do so. But the purchaser argued that the purported cancellation was not effective and applied to court for a declaratory order that the agreement was still valid and binding and that it was entitled to transfer of the property.
For those of you in a hurry, I will not keep up the suspense: The court (Southwood, AJ) found that the seller did succeed "albeit in a confused and inept way" in putting the purchaser in mora, and did effectively cancel the agreement. (I thought the 'inept' comment somewhat unfair, given the facts, but it is true that we must all remember the finer nuances of law that we sometimes overlook in the pressure of everyday conveyancing life.)
A brief discussion of the case follows below, but in the meantime here is a summary of the lessons that I learned from the case:
- Those who draft agreements of sale for immovable property must remember to insert a due date for furnishing of guarantees. If such a date is not furnished it causes tremendous difficulties and could, like in the case under discussion, result in costly and lengthy litigation.
- An attorney dealing with an agreement which makes no provision for a guarantee and where the purchaser fails to provide the required guarantee will first need to clearly place the purchaser in mora. If a purchaser is not duly placed in mora, any subsequent cancellation letter is void.
- Remember not to ask for the guarantee too soon: This may be premature and jeopardise all further attempts to enforce or cancel the agreement. In the unfortunate event of an agreement not making provision for a due date for guarantee, the prevailing law is as set out in Hammer vs Klein 1951 (2) SA 101 (A), as discussed, interpreted and applied by various subsequent cases.
- Be sure to study the breach clause in the relevant agreement and make sure of full compliance when sending "place you in breach" letters or cancellation letters to a party to the contract.
This position is highly unsatisfactory viewed from a transfer conveyancer's prospective. Be it as it may, this is the prevailing law, and a good reason for ensuring that due dates for guarantees are inserted into the agreement.
Summary of case
- On 1 July 2004 the company known as 169 Stamford Hill Road ("S") sold remaining extent of erf 1436 Durban to Chestnut Hill Investments ("C") 150 Pty Ltd.
- The agreement provides for a purchase price of R950,000 and paragraph 2.2 states the purchase price is to be provided by obtaining a loan from an acceptable financial institutions " … which the parties record has already been obtained". Nowhere in clause 2 is any specific mention made of a guarantee for payment of the purchase price.
- Paragraph 4 of the agreement reads as follows:
- The seller appoints conveyancers, J ... to attend to the registration of transfer.
- The property must be transferred to the purchaser as soon as possible after the purchaser has delivered the guarantee referred to in 2 and paid the costs referred to in 4.3.
- The purchaser shall pay the costs of the transfer, including transfer duty or VAT (if applicable) within seven (7) days after being called upon to do so by the conveyancers.
- The parties shall, on request by the conveyancers, sign any documents required in connection with the registration of transfer.
- The seller appoints conveyancers, J ... to attend to the registration of transfer.
- Note that clause 4.2 states there is a reference to a guarantee in clause 2, but clause 2 does not mention such a guarantee.
- Clause 11 of the agreement reads as follows:
"11. CANCELLATION FOR BREACH
11.1 Should either party commit a breach of this agreement and fail to remedy the breach three (3) days after receiving written notice to do so, then the other party will be entitled, without prejudice to any other remedy it may have, to cancel the agreement by giving written notice to that effect to the other party.
(No notice will be required if the purchaser fails to furnish the guarantee referred to in 2.1). (my emphasis).
11.2 Any notice sent to either parties pursuant to the agreement by way of a prepaid registered post addressed to the parties chosen domicilium shall be deemed to be received by the parties four (4) days after the posting thereof. Any notice delivered by hand shall be deemed to have been received on the day of such delivery".
- Note that this breach clause makes reference to the guarantee in clause 2.1, but clause 2.1 bears no such reference. For 11.1 to become operative, there must first be a breach of the agreement. Secondly the breach must be followed by written notice to remedy the breach; and thirdly the notice to remedy must be followed by three (3) days during which there is a failure to remedy the breach complained of. Only if these three events occur a right to cancellation of the agreement arises.
- The words "no notice will be required if the purchaser fails to furnish the guarantee referred to in 2.1" was found by the Court to mean that if the breach by the purchaser involved the purchaser being in mora due to non-delivery of the guarantee, it was not necessary to give three days in which to remedy the breach. In such a case (in other words as soon as the purchaser was in mora), the agreement could be cancelled by written notice.
- The court found that the following rationale existed for this special treatment (no notice required, as soon as in mora may cancel) relating to guarantee-breach:
"...payment of the purchase price is the most important obligation imposed on the purchaser, and failure to provide for payment by a guarantee is a breach of the purchaser's most fundamental obligation. Thus the words in brackets provide both an incentive to the purchaser to be prompt in ensuring performance of this most important obligation, and a means for the seller to escape more quickly from a purchaser who fails promptly to make a proper provision to pay."
- The court then discussed three cases which have a bearing on the matter, namely Hammer vs Klein 1951 (2) SA 101 (A), Linton vs Corser 1952 (3) SA 685 (A) and Wehr vs Botha 1965 (3) SA 46 (A). Even though an agreement does not expressly oblige a purchaser to provide a guarantee for the purchase price, and where no due date for it has been specified, the seller is entitled to ask for a guarantee (how else can he trust the purchaser to deliver payment against transfer?) but the seller cannot ask for this guarantee before a certain time in the transfer process.
- In the Hammer case the rule was laid down that the buyer's obligation to provide a guarantee depends upon the date on which the seller will be able to lodge the documents required for transfer in the Deed's Office. Linton's case tempered this rule somewhat by stating that there is no duty on the seller to inform the buyer of the exact date when he proposes to lodge. The rule is sufficiently complied with if it is obvious to the purchaser on the receipt of the demand, that the seller is in a position to take immediate steps to give transfer and will do so, as soon as he is furnished with a satisfactory guarantee. In Wehr vs Botha it was found that there may sometimes be good reason for a seller to call for a guarantee at an earlier stage, for example when a seller 'parts with any possession' before transfer or in case of another act which may cause him prejudice if he is not eventually paid.
- Despite the statement in clause 2.2 of the agreement that the loan had already been obtained, it became apparent to the transfer attorneys during the course of administering the transaction that the loan was still to be obtained from a company called Business Partners (Ltd). The conveyancers contacted Business Partners who informed them that it required the sale to be advertised in accordance with Section 34 of the Insolvency Act. The conveyancers did this shortly before 6 August 2006 despite expressing a view that Section 34 was not applicable and that S, the seller, had no contractual obligation to do so.
- On 6th August the conveyancers wrote to C (the purchaser) insisting that they receive written confirmation from Business Partners that all the requirements have been met and that they were ready to proceed with registration of a bond. They stated in their letter: "we can unfortunately not tolerate any further delays in registering and should the matter not be expedited, we will have no option but to give effect to the cancellation of the sale and give you notice to vacate the premises on a monthly tenancy." This letter does not contain an explicit demand for a guarantee and as such cannot be said to have placed the purchaser in mora.
- Also on 6 August 2004, the conveyancers received notification (the usual "letter from bond attorney to transferring attorney") from another firm of attorneys that they were attending to registration of the relevant mortgage bond.
- On 18 August 2004, the conveyancers wrote to the bond attorneys enclosing their draft deed and containing the usual conveyancing provisions. As the judge put it, "thus the arrangement for the registration of the mortgage bond and payment of the purchase price were put in hand".
- On 17 August 2004, the conveyancers wrote to C asking for the company documents as well as a copy of the VAT registration certificate and other relevant conveyancing documents. They also said in their letter: "we call upon you in terms of clause 11 of the agreement which will be enforced should the above not be provided within three (3) days as stipulated in this clause." In other words, the conveyancers placed the purchaser in mora with regards to furnishing of personal documents required for conveyancing purposes.
- In the same letter, the conveyancers called for payment of costs "in terms of clause 4.2 of the Sale Agreement which indicates that we need payment of the transfer costs within seven (7) days from the date of this letter".
- On 2 September 2004, the conveyancers wrote to C stating that, despite an undertaking to that effect, the name and identity number of the person who would be signing documents on behalf of C had not yet been furnished and neither had costs of transfer been paid. The conveyancers gave three day's notice under clause 11.1 in regard to these items.
- On 9 September 2004, the conveyancers sent C various documents for signature and asked for their return duly signed and for payment of costs of transfer. Various telephone conversations took place and file notes confirm this.
- By 28 September 2004 the position was that documents had still not been completed and costs of transfer had still not been paid. The conveyancers wrote a letter to C pointing out these facts and stating that they had cancelled the agreement.
- This drew a reply from C's attorneys dated 30 September 2004. C's attorneys stated that the conveyancers had prematurely tried to force their client's hand and that their client would shortly be in a position to "attend to the necessary". It also confirmed that certain documents had been delivered.
- By 20 October 2004, the only acts still outstanding/necessary to enable lodgement at the Deed's Office were:
(a) C giving its VAT number to the conveyancers;
(b) payment by C of its share of rates; and
(c) C's completion of the documents needed to register the mortgage bond in favour of Business Partners.
- On 20 October 2004, the conveyancers faxed the bond attorneys and asked them to "please advise when we may receive the guarantee as required in our letter to you dated 18 October 2004". The conveyancers on the same day also faxed C stating that they were still waiting for the VAT number to get the transfer duty exemption certificate as well as payment of C's share of rates of R10,000.
- By 5 January the only outstanding items were the furnishing of C's VAT number and the furnishing of guarantee. C's representative had by then signed all documents required for registration of the bond, with the bond attorneys. By 5 January 2005 both transfer attorneys and bond attorneys were ready to lodge their bond documents.
- Then came the important letter in this case. On 5 January 2005, the conveyancers wrote to C the following letter:-
"We refer to the above and note that we are still not in receipt of your VAT number nor payment of the purchase price or guarantees securing same despite numerous requests, both written and telephonically.
This transaction has been going on for seven months and we are no closer to registering the transfer. We now have been instructed that the sale will be cancelled should we not receive payment of purchase price or guarantees securing same and your VAT registration number.
In this regard we draw your attention to clause 11.1 of the agreement of purchase and sale which reads as follows:
'should either party commit a breach of this agreement and fail to remedy the breach (3) three days after receiving written notice to do so, then the other party will be entitled, without prejudice to any other remedy it may have, to cancel the agreement by giving written notice to that effect to the other party' (no notice will be required if the purchaser fails to furnish the guarantee referred to in 2.1).
Due to your failure to comply with the above-mentioned clause, we have been instructed to give you notice as we hereby do that, unless you remedy such breach within three (3) days of date hereof, the seller shall have no alternative but to exercise its rights as set out in clause 11 of the aforesaid agreement and cancel the agreement.
We look forward to hearing from you as a matter of extreme emergency."
- (** Dear reader: do you see the problem with this letter? If not, then you and I may easily have made the same mistake: The conveyancer assumed the purchaser was already in breach and intended this to be the letter demanding rectification of breach. The purchaser was, however, not in breach, due to there being no specific due date for guarantee in the agreement, and due to it not having been placed in mora. The conveyancer should first have placed it in breach (by writing a letter demanding delivery of guarantee within a specified reasonable period. Only once the purchaser was in mora could the conveyancer write the 'breach letter' in terms of section 11 of the agreement.)
- On 6 January the conveyancers received the applicant's VAT number.
- On 7 January the bond attorneys sent a guarantee dated 7 January 2005 to the conveyancers. The guarantee was for the right amount and contained the three usual conditions for transfer, namely (a) cancellation of all bonds (b) transfer into the name of the purchaser, and (c) registration of a new bond. However, it contained a fourth condition which read as follows:-
"1.4 Advertising of the sale in terms of Section 34 (of the Insolvency Act No 24 of 1936 and expiry of the thirty day period referred to therein)"
- On 10 January the conveyancers wrote to Business Partners, to C and to the bond attorneys. In the letter to the bond attorneys and to Business Partners they stated that they had already - despite their own views on the legal necessity of the matter - complied with this request months ago and that they were not prepared to re-advertise in terms of Section 34. They then said: "In the circumstances we do not accept your conditional guarantee and have confirmed the cancellation of the sale with Chestnut Hill Investments."
- The letter to "C" read:
"We refer to the above matter and attach herewith correspondence from Business Partners received from your bond attorneys and our reply thereto.
You will note we have received a conditional guarantee from Business Partners which does not accord with the agreement between our client and yourself and in the circumstances we confirm the cancellation of sale as per our previous correspondence."
- C received the letter addressed to it. C's attorneys wrote to the conveyancers on 11 January stating that C had acted in terms of the agreement and requesting that transfer be registered.
- On 13 January 2005 the conveyancers answered this letter as follows:-
"We refer to your fax of 11 January 2005.
The agreement was signed in excess of seven months ago and your client is the author of its own misfortune. Your client has been placed on terms on several occasions and the goal posts are always shifted, a situation which has now ended with the cancellation of the agreement.
Our client believes that it has validly cancelled the agreement and we suggest that you point us to the clause in the agreement wherein our client agrees to accept the conditional guarantee or for that matter any guarantee for payment of the purchase price. We further call on you to point us to the clause in the agreement wherein our client is obliged to place Section 34 advertisements which by the way were placed by our clients some months back and your client's mortgagee is now attempting to make it our client's responsibility to re-advertise due to your client's continual delay after the adverts were placed.
You request that we now proceed to transfer the property and we request that you advise how it is possible for us to do so in the light of clause 1.4 of the guarantee provided by Business Partners.
You are further referred to clause 2 of the guarantee entitling Business Partners to cancel the undertaking at their discretion which no seller will be prepared to accept and which simply means that the purchase price has not been secured.
Should your client wish to continue with it's allegations that the agreement is valid, we suggest that your client institutes appropriate proceedings which will be contested."
- The court, after a comprehensive deliberation and discussion of the legal issues at hand, found as follows:-
- On 5 January 2004, the conveyancers were in a position to lodge the transfer immediately upon receipt of a proper guarantee. At this stage therefore, the conveyancers on behalf of S were entitled to demand that a guarantee be furnished. This is what the court said:
"In terms of the principles explained in the decisions I have cited above, respondent was entitled to demand that the guarantee be furnished by a fixed time occurring a reasonable time after the demand so as to put the applicant in mora if it failed to comply with the demand. In the circumstances it would be putting form above substance to ignore the fact that the letter of 5 January 2005 actually demanded that applicant furnish a guarantee, which respondent was then entitled to do. It also demanded that the guarantee be furnished within three (3) days of applicant's receipt of the demand. Applicant received the demand on 6 January 2005, so the demand required the provision of the guarantee by the end of 9 January 2005. The correspondence I have quoted shows that when it received the demand, applicant knew that respondent was going to proceed to register the transfer without delay. If there was any doubt about this, it is dispelled by the last part of the last sentence of C's letter of 6 January 2005. If the three day period was reasonable in the circumstances and the applicant failed to comply with the demand and had not furnished the guarantee by the end of 9 January 2005, there is no reason why the applicant would not then have been in mora in regard to the furnishing of the guarantee."
- The court then considered whether the three day period was reasonable and found in the circumstances that the three day notice period was reasonable.
- It then considered the adequacy of the guarantee that was furnished, and found that the condition requiring the notice in terms of Section 34 rendered it to be not suitable to enable simultaneous transfer and payment. As a result it found that the guarantee did not comply with what the agreement demanded.
- The court then found that S succeeded "albeit in a confused and inapt way, in putting the applicant in mora by means of its letter of 5 January 2005. In terms of the letter the applicant, C was in mora as from 10 January 2005.
- Because C did not remedy the breach and was still in breach after 10 January 2005, the conveyancer's letter of cancellation on 10 January 2005 effectively cancelled the agreement.
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