Sectional Titles

Risk of mortgaging

More often than not mortgage bonds are registered over a section in a sectional title scheme without also mortgaging the exclusive use areas, which exclusive use areas are so closely linked to the section that the section cannot function independently from the said exclusive use areas, for example a balconies, patio’s, gardens, stoeps, just to mention but a few.

Should these exclusive use areas not also serve as security under a mortgage bond, an untenable situation arises when forfeiture occurs and the section is attached and sold in execution. It is obvious that the exclusive use areas must also be sold in execution, but this cannot happen if the exclusive use areas also did not serve as security under the bond.

The Registrars at the Annual Conference in 1994 resolved that it is not the duty of Registrar of Deeds to enforce the mortgaging of the exclusive use areas, which resolution I respectfully cannot concur with. It is submitted that should an examiner determine that there are exclusive use areas, such as those referred to above, he/she must draw the attention thereof to the conveyancer concerned, and disallow the registration of the bond over only the section.

Should the registration of the bond already be registered, the only way to rectify the omission is to cancel the bond and register a substituted bond. This practice, at its best, is extremely risky given the provisions of section 87 and 88 of the Insolvency Act 24 of 1936.

It is submitted that a collateral bond over the exclusive use areas would be a more viable option, and partially eliminate the risks as alluded to in the Insolvency Act, referred to supra.

It is contended that exclusive use areas, so closely linked with a section that they cannot survive independently, should be notarially tied to the section, however, the Sectional Title Act 95 of 1986 does not cater for this. A submission will be made in this regard at the next Sectional Title Regulation Board Meeting.

Reader Comments:

Ken Mustard 21/07/2011:

I have a client who owns, in the same complex, 5 units and 4 parking bays which are exclusive use areas. The bays are not adjacent to the units but form part of a block of parking bays. Under the above proposals, should he decide to mortgage one or more units, how would the parking bays be dealt with? Is the problem that is sought to be eliminated not more potential that actual and will not the proposed cure have the potential of doing more harm than the disease?

Donald Moore 22/07/2011:

I do not like the suggestion that the Deeds Office should take on the role of policing what needs to be mortgaged, but I do agree that the failure to mortgage an EUA that is an essential part of a section should be avoided. Really it is the responsibility of the conveyancer to bring the deficiency in the instructions he has from the bank to the attention of the bank. When the matter is in the Deeds Office it is really not the right time for this to be discovered.  When a conveyancer is instructed to register a mortgage bond the conveyancer should automatically check if there are EUAs that should also be mortgaged.  The nature of the EUA may make it clear.  A balcony or stoep or even a garden or yard area that is physically associated with the section must clearly be incorporated in the mortgage.  A garage or parking EUA may not be so clear but a simple enquiry to the client of estate agent or transfering attorney should give the answer. Conveyancers cannot hide behind the instructioons they have been given, they must apply their minds - after all they are professionally trained lawyers not just clerks!

Charles Pearson 22/07/2011:

I agree with Mr Moore. We sign lengthy SLA agreements with the banks wherein we undertake to protect the bank's interests. We accept instructions from the banks, thereby creating an Attorney/Client relationship which dictates that we should protect the rights of our client to the best of our abilities. The conveyancer attending to the registration of the bond should satisfy himself sufficiently as to whether an EUA should accompany the Unit. If he does not apply his mind and diligently searches for an EUA and the bank suffers damage because of such an oversight, he runs the risk of incurring a professional negligence claim.

Mark Schäfer 25/07/2011:

The situation mentioned by the writer is probably infrequent.  It is prevented by competent conveyancers and examiners who are awake and raise the correct note bringing the discrepancy to the conveyancer's attention. It sometimes happens that the exclusive use area or another section (eg a Garage) is acquired after the initial transaction when the bond is registered.  The solution in the event of forclosure is to re issue the writ to attach the other property registered in the debtor's name, or include it in the original attachment with an explanatory affidavit to the court so that the purchaser of the unit can also buy the EUA or Section subject to a tie condition and simultaneous transfer can take place.

Leave a comment:

Security Picture (click to change)
Word shown in picture:
menu close

Search Articles